Corporate governance

Active ownership

Based on a conviction that investments in companies that are well managed from an corporate governance perspective will provide higher returns and lower risks in the long term, the Fund has chosen to pursue active ownership. In this context, active ownership refers to corporate governance and issues related to the companies’ responsibility for social and environmentally-related aspects of their operations, commonly known as ESG issues.

Many examples can be found to support the opposite case, that poorly managed companies lead to higher risk and lower returns. Furthermore, poorly managed companies limit the opportunities for other companies to conduct their own operations efficiently. The Fund’s total return is influenced mainly by the choice of strategic benchmark. Through active management and ownership influence, the Fund creates opportunities to further enhance return.

Corporate governance

Första AP-fonden’s commitment to corporate governance rests on the Fund’s right, as a shareholder in the companies, to vote on key issues at general meetings. The Fund exercises this right in the companies where the cost of involvement is proportionate to the influence the Fund can be expected to have. Aside from participating in and voting at general meetings, the Fund conducts discussions with companies and other shareholders prior to general meetings and participates in nominating committees when the opportunity arises.

Another way to exert an influence is by actively and openly informing companies and the public about the Fund’s position on significant issues. The opportunities to influence legislation and self-regulation in this area are also utilized. The Fund cooperates actively with other shareholders – both foreign and Swedish.

Several principles

In aiming to achieve the objectives for its work in the corporate governance area, the Fund has adopted seven principles (see the Fund’s ownership policy at www.ap1.se). The most important of these is mentioned above, the right of shareholders to vote and make proposals at general meetings. In addition, all shareholders must be treated equally – unless otherwise stated by law or the articles of association. It is in the best interests of the shareholders that companies do not set up obstacles to changes in ownership, which are an effective means for creating a dynamic business sector with higher returns for the shareholders and other stakeholders in a company. Election of board members is another issue to which the Fund devotes considerable resources, among other things by serving on or cooperating with nominating committees.

Share-related incentive schemes are an issue that is often put before shareholders for decision at general meetings. The ability to offer incentive schemes of this type as part of a total remuneration package is often beneficial. These schemes give companies a means for ensuring that the interests of the participants are as closely aligned as possible with shareholder expectations for a high long-term return and provide better scope to recruit and retain employees. However, it is vital that they are properly structured in order to have the desired effect. It is therefore imperative that incentive schemes are evaluated from a shareholder perspective and that the costs associated with them are reasonable and clearly reported.

Ethical and environmental responsibility

The Fund’s commitment to corporate environmental and social responsibility is based on the conventions ratified by the Swedish government and the international agreements linked to these conventions, such as the UN’s Global Compact and the OECD’s guidelines for multinational corporations.

Första AP-fonden’s view is that the companies are responsible for compliance with international conventions, regardless of whether these are directed to national governments, to individuals or to companies and organizations. Moreover, this responsibility also applies regardless of whether the countries in which these companies operate have signed the conventions or have weaker human rights legislation.

A well established process

Twice a year, the Fund’s entire portfolio is screened to identify companies that can be associated with infringement of international conventions. This is done with the help of an external consultant, GES Investment Services.

The Fund then engages in active dialogue with any companies found to be in breach of a convention. The goal is to bring about a lasting change in the company’s behaviour in order to prevent similar events in the future. This is based on a conviction that an investor has greater leverage to pressure a company by exerting its ownership influence through direct contact than by selling its shares. However, the Fund may decide to divest its holdings if the discussions do not produce the desired results.

By tying Första AP-fonden’s requirements to international conventions and by cooperating with others towards the same purpose, the Fund can contribute to international efforts to ensure that action is taken against infringement of conventions in the global financial market. This will also serve to give the conventions greater weight.

Aside from responding to suspected infringement of conventions, the Fund systematically reviews all of the Swedish companies in its portfolio. The goal of these discussions is to exert the Fund’s influence in urging its portfolio companies towards corporate environmental and social responsibility. The Fund is also active in a number of international asset manager initiatives to promote openness and transparency in issues related to ethical and environmental compliance.

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