Hermes EOS to raise shareholder concerns at Hon Hai AGM

Ahead of the Hon Hai Precision Industry (“Foxconn Technology”) AGM on Friday 22 June, Dr. Christine Chow, Director of Hermes EOS, highlights the issues that she will be raising with the Founder and Chair, Mr Terry Gou, and his senior team.

Hermes EOS has been engaging with Hon Hai since 2010 and we have been encouraged to see the company make progress on the areas of human capital management, transparency and communications and improved sustainability reporting.

All of which are instrumental in creating value for long-term shareholders. However, Hon Hai is now at a critical stage of transformation as it evolves from a traditional hardware manufacturing firm to a company that provides smart platforms and solutions. We are now asking the company to build on the progress and fully address the concerns of the shareholders that we represent.

Strategy

With this evolution of the business it is clear that Hon Hai needs a well-defined, long term strategy with clear targets which is articulated to shareholders in a transparent and in-depth way. We believe that the company can make improvements in this area, bringing it in line with the reporting provided by its peers. There are three key areas in which it can achieve this:

• We are asking Hon Hai to articulate more clearly the three, five and ten year vision of the business in regular interactions with investors.
• Secondly, we believe that Hon Hai should share the associated business targets and performance indicators it has set to achieve this vision so that shareholders can measure and benchmark performance.
• Thirdly, we encourage the business to provide enhanced financial disclosure of the various business segments so that shareholders can better evaluate the performance of the business units.

Regular interactions with the founder/chair/CEO are important to investors who are interested in understanding his vision and strategy for Hon Hai.

Governance

In order to fully support the business through these large-scale strategic changes and their implementation, Hon Hai needs a robust and a hands-on board. At present, the attendance of the founder and chair at board meetings stands at 45%, significantly below shareholders’ expectations, whilst one of the independent directors has only attended 36% of board meetings since joining the board in 2016[1].

We ask that Hon Hai communicates with its shareholders around succession planning of key executive positions including but not limited to the board chair and CEO, currently a combined position occupied by the founder. We believe that given the scale of the transformation anticipated, the board should consider separating the chair and CEO roles. We also need the company to articulate its Director nomination process so that shareholders can strengthen their confidence in the board, its effectiveness and accountability.

 Environment

The extreme weather effects of climate change are being felt across Taiwan with typhoons, rainfall and flooding all expected to increase in intensity. The environmental impact of Hon Hai is therefore of utmost importance and Hermes is proud to be leading the engagement on behalf of ClimateAction100+, an initiative with 279 global investors with USD $30 trillion in assets under management.

On behalf of this coalition, we are asking the boards and senior management to:

• Implement a governance framework which articulates the board’s accountability and oversight of climate change risks and opportunities.
• Take action to reduce greenhouse gas emissions across the value chain, consistent with the Paris Agreement. We are pleased to see a number of energy efficiency and emissions reduction efforts throughout the group, but are calling on management to tie these efforts to science-based targets with a clear strategy on how these will be met.
• Provide enhanced corporate disclosure in line with the final recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

Social

In light of the company’s track record on human capital management, we are concerned that the illegal overtime of student workers reported could go beyond isolated incidents and be indicative of more fundamental problems. The recent investigative report by China Labour Watch on Hengyang’s factory site appears to validate our concern.  We ask whether the company has appropriate policies and processes in place and how effectively they are implemented. We request that Hon Hai provides visibility into its accountability system of business leaders and demonstrates how inappropriate management behaviours are addressed.  We recommend the company conduct an urgent and comprehensive review on how business leaders are measured and remunerated, as we believe that performance indicators focused on driving top line growth and sales may lead to unsustainable pressure on employees.

We would like to see cultural change that ensures respect for policies and process not only for the sake of compliance, but also because they represent the values of the company and its respect for its employees.

Ahead of the Hon Hai Precision Industry (“Foxconn Technology”) AGM on Friday 22 June, Dr. Christine Chow, Director of Hermes EOS, highlights the issues that she will be raising with the Founder and Chair, Mr Terry Gou, and his senior team.

Hermes EOS has been engaging with Hon Hai since 2010 and we have been encouraged to see the company make progress on the areas of human capital management, transparency and communications and improved sustainability reporting.

All of which are instrumental in creating value for long-term shareholders. However, Hon Hai is now at a critical stage of transformation as it evolves from a traditional hardware manufacturing firm to a company that provides smart platforms and solutions. We are now asking the company to build on the progress and fully address the concerns of the shareholders that we represent.

Strategy

With this evolution of the business it is clear that Hon Hai needs a well-defined, long term strategy with clear targets which is articulated to shareholders in a transparent and in-depth way. We believe that the company can make improvements in this area, bringing it in line with the reporting provided by its peers. There are three key areas in which it can achieve this:

• We are asking Hon Hai to articulate more clearly the three, five and ten year vision of the business in regular interactions with investors.
• Secondly, we believe that Hon Hai should share the associated business targets and performance indicators it has set to achieve this vision so that shareholders can measure and benchmark performance.
• Thirdly, we encourage the business to provide enhanced financial disclosure of the various business segments so that shareholders can better evaluate the performance of the business units.

Regular interactions with the founder/chair/CEO are important to investors who are interested in understanding his vision and strategy for Hon Hai.

Governance

In order to fully support the business through these large-scale strategic changes and their implementation, Hon Hai needs a robust and a hands-on board. At present, the attendance of the founder and chair at board meetings stands at 45%, significantly below shareholders’ expectations, whilst one of the independent directors has only attended 36% of board meetings since joining the board in 2016[1].

We ask that Hon Hai communicates with its shareholders around succession planning of key executive positions including but not limited to the board chair and CEO, currently a combined position occupied by the founder. We believe that given the scale of the transformation anticipated, the board should consider separating the chair and CEO roles. We also need the company to articulate its Director nomination process so that shareholders can strengthen their confidence in the board, its effectiveness and accountability.

 Environment

The extreme weather effects of climate change are being felt across Taiwan with typhoons, rainfall and flooding all expected to increase in intensity. The environmental impact of Hon Hai is therefore of utmost importance and Hermes is proud to be leading the engagement on behalf of ClimateAction100+, an initiative with 279 global investors with USD $30 trillion in assets under management.

On behalf of this coalition, we are asking the boards and senior management to:

• Implement a governance framework which articulates the board’s accountability and oversight of climate change risks and opportunities.
• Take action to reduce greenhouse gas emissions across the value chain, consistent with the Paris Agreement. We are pleased to see a number of energy efficiency and emissions reduction efforts throughout the group, but are calling on management to tie these efforts to science-based targets with a clear strategy on how these will be met.
• Provide enhanced corporate disclosure in line with the final recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

Social

In light of the company’s track record on human capital management, we are concerned that the illegal overtime of student workers reported could go beyond isolated incidents and be indicative of more fundamental problems. The recent investigative report by China Labour Watch on Hengyang’s factory site appears to validate our concern.  We ask whether the company has appropriate policies and processes in place and how effectively they are implemented. We request that Hon Hai provides visibility into its accountability system of business leaders and demonstrates how inappropriate management behaviours are addressed.  We recommend the company conduct an urgent and comprehensive review on how business leaders are measured and remunerated, as we believe that performance indicators focused on driving top line growth and sales may lead to unsustainable pressure on employees.

We would like to see cultural change that ensures respect for policies and process not only for the sake of compliance, but also because they represent the values of the company and its respect for its employees.