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Fanuc

Progress on ESG

We had been seeking direct engagement with the company since 2010. However, we had little success until 2015, when a high-profile attack on the company by a hedge fund manager prompted a firm-wide review of its shareholder communication strategy. Our involvement in the development of the Japanese Corporate Governance Code over the past few years also had a positive influence on encouraging Japanese companies to open up to dialogue with investors.

What we did
Between 2010 and 2014, we expressed serious concerns over the company’s inefficient use of cash. In 2015 and early 2016, we visited the company twice and had detailed conversations with two of its board members. We discussed a range of environmental, social and governance improvements that could be made at the company. We raised our concerns about the limited availability of policies on talent management and labour rights, given the importance of incentivising the young researchers it employs in order for the company to maintain its competitive edge. Furthermore, we urged the company to draft and implement a code of conduct and associated policies that address the bribery and corruption risks the company is exposed to due to the high-value contracts associated with robotics products and services.

We visited four onsite factory units, including manufacturing, assembly and repair workshops, and its staff residential quarters, as well as recreational facilities. We had the opportunity to speak with the head of production engineering and the workers on duty. We examined the company’s waste management and ventilation systems and its new collaborative robot CR-35iA, which can work alongside humans.

Results
In 2015, the company decided to double its dividend pay-out ratio from 30% to 60%. It also made a commitment to maintain this level of pay-out for five years starting with the fiscal year ending March 2015. The company published its code of conduct online and agreed to draft associated guidance for its staff to strengthen its ethical practices globally. It is establishing a whistle-blowing system and described the challenges it faces when addressing data privacy issues in different jurisdictions. We shared best practice examples of sustainability reporting and human and labour rights policies to support the company’s work.

Fanuc has also put in place a clear accountability and talent development system. Young researchers can now get involved in the sales process, as well as in design and manufacturing, to enable them to plan and shape their own careers.

We will continue our discussion with the company on all ESG matters, including on improvements in the disclosure of its environmental performance to facilitate better peer benchmarking by stakeholders.

This communication is directed at professional recipients only. The activities referred to in this document are not regulated activities under the Financial Services and Markets Act. This document is for information purposes only. It pays no regard to any specific investment objectives, financial situation or particular needs of any specific recipient. Hermes Equity Ownership Services Limited (HEOS) does not provide investment advice and no action should be taken or omitted to be taken in reliance upon information in this document. Any opinions expressed may change. This document may include a list of HEOS clients.

Please note that inclusion on this list should not be construed as an endorsement of HEOS’ services. HEOS has its registered office at Lloyds Chambers, 1 Portsoken Street, London, E1 8HZ.

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Christine Chow Dr Christine Chow is responsible for the financial services, technology and extractive sectors in Asia ex-Japan. She has 19 years of experience in portfolio management, research and investment consulting. Christine's PhD thesis on shareholder engagement for responsible investment was short-listed for a UN award in Sweden for industry relevance and academic excellence. She is an adjunct associate professor in the Department of Finance at the Hong Kong University of Science and Technology. She is a governor of the London School of Economics and a member of the university’s investment committee. She was also a member of the greater China committee of the Hong Kong Retirement Funds Association between 2014-2016. Christine has worked at a number of multinational corporations such as Merrill Lynch, Schroders and Hewitt. In the 1990s, she was responsible for establishing strategic partnerships in fund management for the Schroders Group, especially in Mainland China. Christine is a graduate of the London School of Economics and the University of Melbourne. She also completed an executive education course on financial engineering at Stanford University.
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Engagement objectives:

Environmental: Improve environmental performance disclosure
Governance: Establish code of ethics
Stewardship: Improve shareholder communications