Social ratings in a financial perspective: Case study on corporate restructurings

CORPORATE SOCIAL RESPONSIBILITY RATINGS

www.vigeo.com

SRIResearch

Social ratings in a financial perspective:

Case study on corporate restructurings

TBLI, Amsterdam,13 November 2009

2.

TBLI – 13 November 2009

Agenda

- Social ratings on restructuring- Weak overall performance

- Vigeo research methodology- Responsible restructuring: a material theme

Vigeo ratings on responsible restructurings

- Low restructuring risk + high restructuring skills could lead to better performance

- Staff costs / EBIT: an indicator of restructuring risk

Linking social ratings& financial indicators

3.


Vigeo research methodology:Definition of CSR

Corporate Social Responsibility is the commitment from the company management to take into account stakeholders expectations.

Managing impacts on stakeholders is a means to mitigate risks (on its reputation, human capital, operating efficiency, legal security) and ultimately is a source of opportunities and continuous improvement for the company.

CompanyStakeholders

4.


Vigeo research methodology:CSR domains under review

6 domains of Corporate Social Responsibility evaluated:

5.


Human Resources

HRS1.1 Promotion of labour relations

HRS1.2 Encouraging employee participation

HRS2.3 Responsible management of restructurings

HRS2.4 Career management and promotion of employability

HRS3.1 Quality of remuneration systems

HRS3.2 Improvement of health and safety conditions

HRS3.3 Respect and management of working hours

Vigeo research methodology:Sustainability drivers in the Human Resources domain

Material sustainability drivers identified within each sector

6.


Responsible corporate restructurings: A material issue in the current economic context

Restructuring: the crisis catalyst

0

10 000

20 000

30 000

40 000

50 000

60 000

70 000

80 000

Q1 - 2007 Q2 - 2007 Q3 - 2007 Q4 - 2007 Q1 - 2008 Q2 - 2008 Q3 - 2008 Q4 - 2008 Q1 - 20090

5

10

15

20

25

30

35

40

45

Number of Jobs Number of plans

Source: SG Equity Research, ERM

Out of 206 EU companies:

Since January 2007146 social plansby 126 companies

60% of companies in the universe under review have carried out restructurings since January 2007

Corporate restructurings, although inherent to the market economy, are amplified by the current economic crisis

A cause of concern for employees, companies and investors

7.


Managing restructurings responsibly : Extra costs or sound risk management ?

Avoiding social conflicts

Maintaining high productivity

Human Capital Operational

EfficiencyReputation

LegalSecurity

Ability to retain skills and know-how

Supportive social climate

Keeping employee motivation high

Avoiding legal liabilities

Maintaining positive brand image

Ability to attract new skills

Responsible management of restructurings:

In Vigeo’s opinion, benefits should outweigh extra costs through a better control of associated risks:

8.


How does Vigeo measure a responsible restructuring ?

Vigeo does not provide an opinion on the strategic relevance of the management’s decision to restructure

- to prevent and limit redundancies - to mitigate the negative effects on employees

employee representatives before / during restructuring processInform and consult

Put in place measures

Vigeo assesses companies' ability to :

OECD guidelines formultinationals

EU Directive on Collective Dismissals (98/59/EC)

ILO conventions(C 158, R 166)

9.


How does Vigeo measure a responsible restructuring ?

Vigeo analysts review…

…based on information from:

Extent of measures and processes implemented- Basic measures: severance pay, early retirement

- Advanced measures: support to internal/external mobility, business creation, re-training

Company policies and commitmentsLEADERSHIP

IMPLEMENTATION

Reporting and results achievedRESULTS

Corporate documentation and exchanges withcompaniesCOMPANIES

Information from trade unionsSTAKEHOLDERS

10.


Overall performance of companies is weak

Overall distribution of European companies by level of performance – responsible restructuring

Advanced9%

Strong14%

Average24%

Weak53%

Source: Vigeo

Average score: 31/100Maximum score 88/100Minimum score 0/100

European companies only partially achieve their objectives to manage restructurings responsibly

11.


Companies are more reactive than proactive

A v e r a g e s c o r e ( / 1 0 0 ) b y m a n a g e m e n t d im e n s io n

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

9 0

1 0 0

L e a d e r s h i p I m p l e m e n t a t i o n R e s u l t s

S o u r c e : V i g e o

Controversies on

3% of companies

Few framework policies or agreements show that companies fail to anticipate restructurings

Most companies do not implement significant measures to mitigate layoffs

Few companies go beyond legal compliance: focus on processes rather than results

12.


Performance by country

A v e ra g e sc o re b y c o u n try o f o rig in

0

5

1 0

1 5

2 0

2 5

3 0

3 5

4 0

4 5

5 0

Irela

nd

Luxe

mbo

urg

Por

tuga

l

Uni

ted

King

dom

Gre

ece

Aust

ria

Swed

en

Switz

erla

nd

Finl

and

Spai

n

Den

mar

k

Italy

Belg

ium

Ger

man

y

The

Net

herla

nds

Fran

ce

Nor

way

S o u rc e : V ig e o

High performing countries are marked by a consensus-driven model (Netherlands, Germany)

Low performing countries are marked by weak legal frameworks (UK, Ireland)

13.


Performance by sector

highly qualified labour

Highperforming

sectors

strong presence of

unions

historic role of the state

A v e ra g e s c o re b y s e c t o r

05

1 01 52 02 53 03 54 04 5

Trav

el &

Lei

sure

Food

& B

ever

age

Indu

stria

l Goo

ds &

Ser

vice

s

Fina

ncia

l Ser

vice

s

Per

sona

l Hou

seho

ld

Goo

ds

Tech

nolo

gy

Hea

lthca

re

Med

ia

Ret

ail

Oil

and

Gas

Insu

ranc

e

Tele

com

mun

icat

ions

Aut

omob

iles

& p

arts

Con

stru

ctio

n &

mat

eria

ls

Ban

ks

Bas

ic re

sour

ces

Che

mic

als

S o u r c e : V i g e o

14.


A link between a company’s ability to manage restructurings responsibly and to :

• Correlation of 0.6 between scores of the two criteria

• Correlation of 0.6 between scores of the two criteria

Social dialogue, career management and training are key

Constructive social dialogue Success in the consultation and negotiation with employee representatives

Ensuring employability Promoting mobilityMatching employment needs & skill requirements

Success in anticipating employment trends& Achieving internal and external reemployment

Promote labour relations

Promote career management and training

15.


Linking social ratings and financial indicators

Are there financial indicators enabling to foresee imminent restructurings?

Is a responsible management of restructurings solely an additional cost for companies or does it enable companies to better control the associated risks?

Is there a link between a company’s willingness and ability to undertakesocially responsible restructurings and its economic performance?

A joint research carried out by Vigeo and SG Securities introduces an innovative approach to this theme, combining both social and financialconsiderations.

16.


Staff costs/EBIT: an indicator of the likelihood of restructuring

Restructuring Plans and Staff costs / EBIT parallel evolution

0

5

10

15

20

25

30

35

40

45

Q1 - 2007 Q2 - 2007 Q3 - 2007 Q4 - 2007 Q1 - 2008 Q2 - 2008 Q3 - 2008 Q4 - 2008 Q1 - 20091.20

1.30

1.40

1.50

1.60

1.70

1.80

1.90

Number of plans Staff costs / EBIT

Source: SG Equity Research, Datastream/IBES for EBIT forward estimates – coverage: common universe SG-Vigeo, sample median, elimination of non significant data (negative EBIT)

Perfect parallelism

No time-lag

17.


Net Restructuring Risk = Risk (Staff costs / EBIT) / Restructuring skills

(qualitative score)

Net restructuring risk: a sectoral view over 2001-2008

Automobiles & Compo nents

Capital Goods

Commercial Services & Supplies

Energy

Foo d & Staples Retailing Ho tels Restaurants & LeisureM edia

Teleco mmunication Services

Transportatio n

Utilities

Co nsumer Durables & Apparel

Fo od Beverage & TobaccoHealth Care Equipment &

Services

Househo ld & Personal P roducts

M aterials

Pharmaceuticals & B io techno lo gy

Retailing

Semiconducto rs & Semiconducto r Equipment

So ftware & Services

Techno logy Hardware & Equipment

A VERAGE

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00

Restructuring Risk (Staff Costs / EB IT)

☺

Source: SG Equity Research

18.


Auto: high risk, low EBIT margins, good restructuring skills

Restructuring skills vs. restructuring risk

BMW

Continental

Daimler

FaureciaFiatMichelin

Peugeot Citroen PSA

Pirelli

Porsche

Renault

Valeo

Volkswagen (Pref.)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

Risk (Staff cost to EBIT)

Soc

ial P

erfo

rman

ce (V

igeo

)

Source: SG Equity Research, Vigeo, Companies => Restructuring Performance: defined as Vigeo score on restructuring ([0;100] scale) & Restructuring Risk defined as Staff costs / EBIT (EBIT multiple: historical data for 2001-2008 and SG estimates for 2009 YTD); Daimler included Chrisler until 2007

Low EBIT margins driving to unmanageably high fixed costs

Good restructuring skills, as the sector has a history of frequent downsizing

19.


Software: most exposed sector

Restructuring skills vs. restructuring risk

Alten Altran Technologies

Atos Origin

CapgeminiDassault Systèmes

Indra Sistemas SA

Logica

Sage Group

SAPSteria

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0

Risk (Staff cost to EBIT)

Soc

ial P

erfo

rman

ce (V

igeo

)

Source: SG Equity Research, Vigeo, Companies => Restructuring Performance: defined as Vigeo score on restructuring ([0;100] scale) & Restructuring Risk defined as Staff costs / EBIT (EBIT multiple: historical data for 2001-2008 and SG estimates for 2009 YTD)

Staff costs / EBIT > 8xDassault Systèmes, Indra and SAP: best net risk profiles

20.


Positive link to financial performance

Backtest 2007- 2009: restructuring risk and skills (perform ance)

90.0

95.0

100.0

105.0

110.0

115.0

déc-06 mars-07 ju in -07 sept-07 déc-07 mars-08 ju in -08 sept-08 déc-08 mars-09

Sector - Low R isk Secto r - H igh R isk Sector - Low Perf Secto r - H igh Perf

So urc e : SG Eq u ity Researc h , Vig eo

Investing in companies with either : good restructuring skills or a low restructuring risk

could OUTPERFORM

21.


Positive link to financial performance

D e t a ile d b a c k - t e s t : 2 0 0 7 - 2 0 0 9

9 0 .0

9 5 .0

1 0 0 .0

1 0 5 .0

1 1 0 .0

1 1 5 .0

d é c -0 6 m a rs -0 7 ju in -0 7 s e p t -0 7 d é c -0 7 m a rs -0 8 ju in -0 8 s e p t -0 8 d é c -0 8 m a rs -0 9S e c to r - L o w R is k - L o w P e r f S e c to r - L o w R is k - H ig h P e r fS e c to r - H ig h R is k - L o w P e r f S e c to r - H ig h R is k - H ig h P e r f

S o u r c e : S G E q u i t y R e s e a rc h

Mixing up Low restructuring risk with Good restructuring skills

could deliver an even BETTER PERFORMANCE

VIGEOLes Mercuriales - 40 rue Jean Jaurès93170 Bagnolet - FranceT: +33 1 49 72 46 00 - F: +33 1 49 72 46 10

www.vigeo.comCORPORATE SOCIAL RESPONSIBILITY RATINGS

PARISBRUXELLESMILANCASABLANCA Estelle Mironesco –

Director, SRI Research T +33 1 55 82 32 56 [email protected]

Economy & Finance

Social ratings in a financial perspective: Case study on corporate restructurings