Operations and results in 2007Corporate governance in 2007

Första AP-fonden is one of the 15 largest holders of equities in the Swedish market. As a result, the Fund takes part in preparations ahead of general shareholder meetings either directly in the nominating committees or in collaboration with other shareholders represented on these committees. The Fund also supports the Swedish system of self-regulation and is working actively to preserve it.

Together with the Swedish Companies Act this self-regulation, partly through the Swedish Code of Corporate Governance and active ownership, provides a foundation for good corporate governance. In the coming year the Code will be revised to require compliance even by smaller listed companies.

Första AP-fonden supports the inclusion of smaller companies in the Code, since it is important for confidence in the companies and the Swedish market as a whole, not least with regard to smaller companies. However, it is natural to expect these smaller companies to explain non-compliance with certain rules to a greater extent.

General shareholder meetings

In 2007 the Fund participated in virtually all shareholder meetings of the Swedish companies in which it has holdings. This means that the Fund was represented at 37 annual and 10 extra extraordinary shareholder meetings. The Fund was also represented on two nominating committees (Atlas Copco and Lundin Petroleum) ahead of the 2007 AGMs.

Carnegie

Following Carnegie's 2007 AGM, a serious overstatement of SEK 630 million was discovered in the company's trading positions. Among other things, this led to the calling of an extraordinary general meeting for the shareholders to vote on the board's proposal that the employees' profit share allocation not be affected by the overstatement - although they had benefited from it the year before.

At that time, Första AP-fonden proposed that no decision be made until the investigation launched by Swedish Financial Supervisory Authority (FSA) in response to the discovered overstatement was completed and more information about the circumstances was available. Despite this, the EGM approved the board's proposal.

A report commissioned by Första AP-fonden has shown that is it difficult for outsiders to evaluate corporate incentive schemes from a shareholder perspective. The Fund has therefore put forward requests at several general shareholder meetings that evaluations of this type be carried out by the company ahead of the 2008 AGM.

Prior to the 2008 AGM, the Fund had the opportunity to appoint a member to Carnegie's nominating committee. When the FSA published its findings and decision on Carnegie's trading operations, the conditions for the nominating committee's work changed considerably. At the same time that the company was undergoing changes in ownership, the nominating committee was forced to quickly prepare recommendations for what was essentially a whole new board of directors for election by the EGM.

After intensive deliberations the nominating committee could agree on the proposed candidates for election to the board, but could not reach consensus regarding the candidate for the chairman's post. The representatives for Första AP-fonden and Swedbank Robur felt that Carnegie's chairman should be independent, since it is imperative in Carnegie's current situation that the chairman is able, in every situation, to take decisions that benefit all shareholders without the temptation - or suspicion - of serving only the interests of the major shareholders.

As a result, Första AP-fonden and Swedbank Robur's representatives to the nominating committee chose to resign. At the EGM in November, Första AP-fonden voted in favour of all of the proposed board members but against the proposed chairman.

The EGM of Carnegie in November dealt with the question of how the employee profit sharing system would be affected by yet another overstatement. Once again, Första AP-fonden was of another opinion than Carnegie's board of directors and voted against the proposal. However, the EGM resolved to approve the Board proposal that the employee profit share allocation not be affected by profit write-offs amounting to SEK 630 million.

Evaluation of incentive schemes

Prior to the 2007 AGMs, the Fund conducted active discussions with many nominating committees and board chairmen of companies in which the Fund has holdings. Many of these discussions were concerned with the companies' incentive schemes.

Among other things, the Fund has underlined the importance of evaluating incentive initiatives from a shareholder perspective. To encourage this process, the Fund, in collaboration with a researcher at the Swedish Institute for Financial Research (SIFR) and the Stockholm School of Economics (Handelshögskolan), has carried out an evaluation of incentive schemes based on published data. A summary of the study can be found at www.ap1.se.

The conclusions of the study were many, among other things that the private wealth of corporate executives is strongly influenced by changes in the price of their own company's shares. However, it is not possible to discern what effects this has on their behaviour or the company's value, which can only be assessed on the basis of non-published data. It is therefore essential that the companies themselves evaluate the effects of their incentive schemes on factors such as the company's value.

Ahead of the 2008 AGMs, the Fund has put forward a demand that a number of these companies evaluate their incentive schemes. In the autumn of 2007 several companies completed ambitious evaluations and the Fund expects to see more of these.

Ethical and environmental compliance

Since 2002 Första AP-fonden has been working actively to influence companies that can be associated with infringement of international conventions. In many cases, the Fund's efforts have been successful despite limited resources.

At the beginning of 2007 an important new step was taken in this process through the formation of the Ethical Council, a collaborative effort between AP1, AP2, AP3 and AP4, to coordinate SRI analysis of environmental and ethical compliance in the foreign companies where the funds have holdings.

The purpose of the council is to more effectively leverage the funds' combined investment holdings in the companies. With combined net assets of more than SEK 900 billion, the Funds will have even greater scope to exert an influence. This joining of forces will also facilitate collaboration with other international stakeholders who are actively committed to ethical and environmental compliance.

As part of the Ethical Council's work, the Fund has also exercised its voting rights at seven American shareholder meetings in issues related to corporate social responsibility. The Fund has also participated in two international initiatives, EITI (Extractive Industries Transparency Initiative, for greater transparency in expenditure and revenue streams between all stakeholders in contracts related to exploitation of natural resources) and CDP (Carbon Disclosure Project), for greater transparency in corporate disclosure of information on Greenhouse Gas Emissions.

At the beginning of 2007 the Fund signed up to the UN's Principles for Responsible Investment (UN PRI).