Voting issue: corporate governance

Etica Sgr is generally inclined to vote in favour of the re-election of a Board of Directors and/or a Board of Statutory Auditors that has contributed to the achievement of sustainable economic and financial results and to improving the corporate social responsibility profile.

The main elements taken into account by Etica Sgr for the election of a Board of Directors are as follows:

• In the case of list-based voting^[1]:
  • The presence of a list that Etica Sgr helped to create;
  • The composition of the list of candidates in terms of: conflicts of interest, gender diversity, independence, separation of the roles of Chairman and Chief Executive Officer/Managing Director and the existence of a Sustainability Committee or similar body.
• In the case of separate voting^[2] for individual candidates:
  • The composition of the team of candidates in terms of: conflicts of interest, gender diversity, independence, separation of roles between the Chairman and the Chief Executive Officer/Managing Director, presence of a Sustainability Committee or similar body.

Consideration is also given to factors such as age diversity and the availability of candidates with specific skills in environmental, social and governance areas.

Etica Sgr may make use of specialist service providers to assess these elements.

Moreover, these elements may be adapted to specific, individual market requirements s, particularly but not exclusively in the case of Japan and the United States.

The presence of such elements is also relevant in relation to the election of a Board of Statutory Auditors.

The existence of these conditions is not only relevant when voting takes place, but may also constitute a topic for discussion when engaging in dialogue with companies.

[1] List-based voting is a system for electing corporate bodies that enables minority shareholders to be represented within the body to be elected. List-based voting enables shareholders to put together lists of their own candidates for the body to be elected, which is then made up of both candidates from the majority list and candidates from the minority list. List-based voting is mandatory in listed companies whilst it is optional in unlisted companies.

[2] Separate voting means voting for candidates for the corporate bodies individually. In separate voting, one vote is cast per candidate, rather than for all the candidates on one list.

Under current legislation, in most OECD countries, authorisation to purchase own shares must be sought from the shareholders’ meeting, which establishes the relative procedures for use and the time frame for this mandate.
In Italy, treasury shares may represent no more than one-fifth of the share capital. The voting rights associated with these shares are suspended, but the shares are included in the share capital for the purposes of calculating the quora required to validly constitute shareholders’ meetings and pass resolutions. As long as the shares remain the property of the company, the rights to profits and option rights are allocated pro rata with the other shares.
Own shares may be bought back for other purposes, for example to defend against hostile takeover bids or competitors. Treasury shares are also used for liquidity management and to service management stock option plans. With regard to this latter point, authorisation to purchase own shares could become a means of increasing the price of shares, and consequently the incentives linked to stock option plans.

The main elements taken into account by Etica Sgr when assessing a share buy-back plan are:

• Whether the plan identifies the business or strategic objectives of the plan:
  • The amount of shares to be bought back as a percentage of the share capital
• Whether the plan is linked to share incentive plans::
  • Assessment of the remuneration policy
  • The amount of shares to be bought back as a percentage of the share capital Etica Sgr may make use of specialist service providers to assess these elements.

Etica Sgr may make use of specialist service providers to assess these elements.

Share buy-backs may also be a topic for dialogue with companies, or put to the vote if there are shareholder motions on this issue.

The remuneration of directors and managers with strategic responsibilities should be determined in such a way as to attract, retain and motivate talented individuals who work to ensure the sustainability of the company in the medium to long term and for the benefit of those who contribute to its life. Etica Sgr monitors the remuneration policies of the companies in which it has voting rights.

The main elements taken into account by Etica Sgr when assessing a remuneration policy for directors and managers with strategic responsibilities relate to:

• the clarity with which the variable and fixed components of the total remuneration are reported;
• the clarity with which the indicators used as targets for short- and long-term variable components, where they exist, are identified and the level of transparency when communicating these targets;
• whether there are claw-back clauses for the variable remuneration component;
• the type of remuneration for independent or non-executive directors, which is preferably fixed and unrelated to company performance;
• in the case of a severance agreement for managers with strategic responsibilities, the duration thereof;
• whether there are discretionary elements when defining remuneration;
• whether there is a relationship between changes in compensation and company performance.

The following factors are also taken into consideration:
whether the targets for the variable short- and/or long-term components include ESG-type (environmental, social and governance) indicators;

• the vesting period for any options or shares allocated as a component of remuneration;
• publication of the ratio between the highest-paid employee’s salary and the average employee’s salary^[7];
• the use of a peer group as one of the elements to determine remuneration and transparency when disclosing the peer group’s components;
• the existence of an Appointments and Remuneration Committee or similar committee reporting to the Board of Directors;
• if an Appointments and Remuneration Committee or similar committee exists, the degree of independence thereof, measured in relation to the percentage of its members who are considered independent.

Etica Sgr may make use of specialist service providers to assess these elements.

Moreover, these elements may be adapted to the specific requirements of individual markets, particularly but not exclusively in the case of Japan and the United States.

The remuneration policy and its constituent elements may also be a topic for dialogue with companies, or put to the vote if there are shareholder motions on this issue.

[7] For this indicator, reference is made to indicator G4-54 of the Global Reporting Initiative (GRI) guidelines and/or the “Disclosure 102 – 38” indicator in the new GRI guidelines for Sustainability Reporting

Etica Sgr believes it is important to maintain a balance between the share of earnings allocated to shareholders (pay out) and the portion allocated to reserves. The latter is essential for the company’s medium to long term development. Etica Sgr favours balanced dividend policies, also considering the level of corporate debt, the investments made and the objectives set by the company in its multi-year business plans.

The main elements taken into account by Etica Sgr when assessing whether to approve the financial statements and the distribution of dividends relate to:

• approval of the financial statements
  • whether there is any doubt as to the quality and accuracy of the information provided;
  • the completeness of the information provided;
  • the willingness of the Board of Directors to provide what is considered to be important information;
  • whether there are any allegations of serious demonstrable alterations to the accounts.
• the distribution of dividends
  • the payout ratio^[11] at the Parent Company level;
  • the level of indebtedness of the Parent Company.

Etica Sgr may make use of specialist service providers to assess these elements.

The annual financial statements and the dividend policy may also be a topic for dialogue with companies, or put to the vote if there are shareholder motions on this issue.

[11] The payout ratio is the ratio of dividends paid out by the company to the net profit for the year of the Parent Company in the same year.

Etica Sgr believes that the term of the mandate granted to the independent auditor must be long enough to ensure the proper performance of its supervision and control functions.

The main elements taken into account by Etica Sgr when counting the votes relating to the mandate or the renewal of the mandate granted to an independent auditor relate to:

• the length of time the auditing company has already been in office for the company;
• the ratio of any remuneration received for advisory or other activities unrelated to auditing to that received for auditing activities.

Etica Sgr may make use of specialist service providers to assess these elements.

Moreover, these elements may be adapted to specific, individual market requirements s, particularly but not exclusively in the case of the United States.

The selection of the independent auditor may also be a topic for dialogue with companies, or put to the vote if there are shareholder motions on this issue.

Etica Sgr assesses the financial significance of tax risks and aims to make tax a priority topic for dialogue if there is a lack of transparency on this issue.

Etica Sgr aims to discuss, inter alia, the following issues (and to vote in favour of any shareholder motions in that respect):

• the publication of a tax policy;
• the inclusion of tax in the mandate of the Board of Directors;
• assessment of the tax risk;
• the publication of information on transactions and taxes paid at the level of the individual countries in which the company operates.

To ensure independent management it is important that no binding relationships exist with political parties, candidates for election and/or other pressure groups. Relations between companies and political parties may exist, e.g. to finance election campaigns.

Etica Sgr aims to discuss, inter alia, the following issues (and to vote in favour of any shareholder motions in that respect):

• the prohibition or regulation of donations to political parties and/or candidates for election;
• declaration of any involvement in lobbying.