In February 2011, Nestlé, the Switzerland based nutrition, health and wellness giant, announced yet another year of strong top and bottom line performance, increasing investment in its brands, operations and people. Highlights included group sales of CHF 109.7bn, organic growth of 6.2 percent, real internal growth of 4.6 percent and a rise in underlying earnings per share of by 7.4 percent to CHF 3.32. Return on invested capital was 15.5 percent including goodwill. Such strong performance meant that the company was able to propose a dividend increase of 15.6 percent, and return CHF 15.5bn of cash to shareholders.

Nestlé's well-known products and brands may be the most visible aspect of the business. The firm's long term success, however, is built on the solid foundations of effective governance and its willingness to take a lead and to innovate, says Chairman Peter Brabeck-Letmathe – rather than being forced follow.

Setting the agenda
Indeed, Nestlé likes to set the agenda. Take its current stance on philanthropy. Chairman Peter Brabeck-Letmathe has said that philanthropy is not a suitable use of shareholders' funds for corporations. A better approach where possible is to align the interests of the company, its shareholders, and society, in doing good – creating shared value.

It is a concept followed by growing numbers of organisations, but a position that Nestlé arrive at some time ago. The company has already established a Creating Shared Value Advisory Board, publishes an annual report on its efforts in that arena, and has identified the most obvious areas where the firm's interests intersect with those of society, as nutrition, water and rural development. The company even runs a prize for creating shared value.

It is no surprise then to discover that Nestlé's lead on creating shared valued is mirrored in its overall approach to governance. In 2004, Brabeck-Letmathe gave a presentation in which he outlined the importance of governance in relation to enhancing shareholder value. In that presentation, he explained how some key decisions around governance were instrumental in creating the successful Nestlé business that exists today.

After the Second World War, Nestlé's executive management – the Chairman, the CEO and his team, were in the US, while the board of directors remained in Switzerland. The board wanted the management team to return, but they refused. Eventually, though, the board got its way, and the executive team returned in 1947.

This, says Brabeck-Letmathe, typifies the company's take on governance. The board asserting its independence and taking decisions, underpinned with integrity, that are in the long term interests of the firm.

In that same talk, Brabeck-Letmathe outlined his views on the function of good corporate governance, namely to: set a basic framework of principles for running the company; establish checks and balances and establish responsibilities; and organise flows of, and access to, information. Achieving these aims requires the right people, he added, and also adaptability. Make adjustments when necessary. Drive the process; do not let it drive you – these were Brabeck-Letmathe's watchwords.

“This proactive approach to good governance has again been demonstrated by the company's actions over the last few years,” says Brabeck-Letmathe. “I strongly believe that any company must continue to innovate and reinvent itself, and that applies as much to corporate governance as it does other aspects of the business. So, in 2007, for example, we conducted a shareholder survey and we asked our shareholders what they expected from Nestlé's corporate governance. Then, once we had got the results of the survey in 2008, effectively we rewrote our articles of association.”

It was a major step for a company like Nestlé to make. Especially as it might easily have continued as it was, without consulting its shareholders in this way, or making the fundamental changes it eventually did. The result of the process, though, was the introduction of number of very innovative concepts, says Brabeck-Letmathe.
“For example, we introduced the concept that this company has as its task long term sustainable value creation for shareholders, which clearly shows that we are not looking for short term profit optimisation. That was a major breakthrough,” he says. “Another major breakthrough, back in 2008, was that we were one of the first companies to produce a compensation report for the shareholders' consultative vote.”

It is essential, says Brabeck-Letmathe, that Nestlé remains at the leading edge on corporate governance. That means constantly updating the company's Articles of Association and introducing new elements, as required. It also means regularly canvassing the opinions of stakeholders, as well as the governance risk and compliance professionals and experts. Getting a sense check that the firm is still up to date on the issues involved.

“We are in constant contact with our shareholders,” he says. “As Chairman I do investor roundtables, chairman roundtables, one-to-one meetings, I am with companies that are consulting on shareholders votes, and we listen very carefully to what all these parties think about what modern corporate governance should look like.”

A focus on governance
Ask Brabeck-Letmathe what the new focus is and he quickly rattles off a list.

“Well I think for us it is going to be more about how the board works. For example, questions around how people are nominated to the board. How we are ensuring the succession of the board. Whether the different board committees are working efficiently or not. How we can assure that we have board independence. How we are managing the risks in the business. And then finally how the board is really actively participating in defining the long term strategy of the group.

“I think that it is those areas that will be the major governance focus in the coming years.”
In the UK, the Financial Reporting Council (FRC) has introduced a new code of conduct, the Stewardship Code, for institutional investors. Adopting a “comply or explain” approach the Code seeks to promote a better dialogue between shareholders and company boards, and covers issues such as activities taken to protect or enhance shareholder value, and voting policy.

It is certainly an area where there are issues that need addressing, admits Brabeck-Letmathe.

“I think the voting of institutional investors has become a very important aspect of corporate governance. In our case today, some 80 per cent of our shareholders are institutional shareholders, so you can imagine that this becomes a very important matter to us,” he says.

“Personally, I have some questions about this issue. It seems that these days, many of these institutional shareholders may be voting based on recommendations from consultants. If that is the case, effectively the voting decisions of many of the institutional shareholders are in the hands of just a small number of individuals, maybe only three or four people. And I have some doubts about whether that is a good thing, if it is the case.

“Because I think it is very important that each institutional shareholder makes up its own mind about the vote that it is going to cast, and not necessarily just follow the recommendations of a few external consultants.”
Ultimately, of course, says Brabeck-Letmathe, investing in effective corporate governance is not just good for its own sake, but over the long term it is good for business.

“The main reason for good corporate governance is to establish trust – the creation of trust in the company is very dependent on good corporate governance. It starts with your employees. Employees want to work for a company where they know that there is integrity. So corporate governance has to assure integrity,” says Brabeck-Letmathe.

“Then you have shareholders that prefer to invest in companies with good corporate governance, partners who believe very strongly in good corporate governance, and finally even the consumers are asking, more and more, what is the corporate governance like in the business, how is this company being run, is it an honest company, a well-controlled company?

And, as Brabeck-Letmathe noted in his 2004 presentation, you can have all the detailed rules you like but it is the people at the heart of the business, not the rules, that make the difference.

“Risk management, for example, is a hot topic at the moment. Yes, we have a compliance manager, we have compliance system, but at the end of the day it will always be an issue of people, and the leadership that you have in your company,” says Brabeck-Letmathe.

“The people will always look to see how the CEO and the board behave. Do they walk the talk? Or is there a mismatch between what is being said in the documents and what is being practised and experienced in the company. So it comes back to instilling the right values into both the management and the rest of the people in the company.”