We want to invest in companies where the entire board is effective and fully engaged in the affairs of the company; companies that are open and honest in their communications with all shareholders, and which acknowledge and learn from their mistakes. We believe directors should represent all stakeholders equally, and minority shareholders should be protected from abusive actions by controlling shareholders.
Our medium-term governance themes are board and management diversity and capital allocation. Sample engagement questions that may flow from these themes are provided below.
Current theme: Board and management diversity
- What percentage of the board is independent?
- How diverse is the board (gender, race, nationality, expertise…)?
- Is the diversity of the board aligned to that of the client base?
Current theme: Capital allocation
- What is the company doing to improve its cost of capital?
- How much is being invested in R&D and for future organic growth?
- What is the governance and decision making process for capital allocation?
European consumer durables and apparel company
The issue: The company, formed by a merger in 2017, was subject to media reports that board relations had completely broken down. The board of the merged group comprises eight members from each of the two legacy firms, with each side accusing the other of trying to exert undue influence. With the two sides unable to agree on a CEO, decision-making appeared to be deadlocked.
The engagement: We engaged with dissident shareholders who were frustrated with the pace of change post-merger, as well as with the widely reported clashes between the two camps on the board.
The result: We supported shareholder proposals to elect independent directors to the board. In the event, the proposed nominees received 44% and 34% support, respectively. Taking into account the 32% controlling stake of one of the legacy families, this was a significant level of support from minority shareholders seeking progress. The company has since committed to redoubling its efforts to integrate the two legacy firms.
Strategy alignment with the long termPriority
We believe long-term thinking leads to sustainable business models. As long-term investors, we expect companies and boards to articulate their vision for the company, and to take steps, including through their compensation arrangements, to align themselves with long-term outcomes.
Our medium-term theme for this priority is executive remuneration. Sample engagement questions are provided below.
Current theme: Executive remuneration
- How are executives incentivised?
- Is the information publicly disclosed, and is it easy to understand?
- Is executive remuneration in line with the company’s long-term strategy?
Global financial institution
The issue: This financial institution, which has received significant votes against remuneration in the past, was proposing to make changes to the vesting arrangements of long-term incentives that would benefit leavers in a manner not consistent with good market practice. We were also concerned about an ongoing pension disparity whereby board executives receive an annual contribution double that of the broader workforce.
The engagement: We had two meetings with the company’s remuneration committee chairman and representatives of the reward department in the lead up to the 2019 AGM. Although we recognised that the company had made some improvements to compensation practices, we made it clear that we still had concerns.
The result: We were among the 36% of shareholders who elected to vote against the remuneration report at the 2019 AGM. We have since engaged with the company again, and it has now committed to equalise pension arrangements from January 2020.
Human capital managementPriority
Effective management of human capital, including workplace standards, education and training, and diversity and gender equality, is critical to maintaining an engaged and productive workforce. Companies should ensure that they have appropriate policies and procedures in place to stay productive and competitive, as well as to protect the rights of their employees.
The medium-term theme of our engagement on human capital management is diversity. Sample questions we ask companies with which we engage are provided below.
Current theme: Diversity in the workplace
- What percentage of senior management is female?
- What programmes are in place to increase diversity?
- What are you doing to attract the right talent?
The issue: This company has had various issues with its management of human capital, including cabin crew working conditions and protracted negotiations with trade unions.
The engagement: We engaged with the company both separately and collectively with other investors, meeting with company representatives including the CEO, members of the Board of Directors and the general workforce, as well as union representatives. We also took negative voting action at AGMs.
The result: We have seen the necessary improvements in the company’s recognition of and dealings with unions.
We believe that a sustainable company should act in the interests of all of its stakeholders – not just a narrow group of providers of capital – in order to create value. Companies should strive to promote positive relationships with employees, supply chains and customers, as well as to understand their broader impacts on the communities in which they operate.
In the medium term, our focus for the stakeholder engagement priority is on cyber security. Below are some of the questions we ask in our engagement on this theme.
Current theme: Cyber security
- How often is cyber security discussed at the board level?
- Where does the biggest cyber security risk lie in the organisation?
- How have previous breaches been dealt with and escalated?
Global technology company
The issue: A global technology company headquartered in the US has had various issues around data privacy and content management.
The engagement: Our stewardship specialists have engaged with the company a number of times. The initial engagement focused on data privacy and the steps the company has taken. Follow-up engagements focused on content management, fact-checking, and monitoring third-party developers, as well as updates regarding data privacy.
The result: The company was responsive to the concerns we raised. We have seen the necessary improvements in the company’s recognition of these issues, including modifications to the charter of its audit committee to be clearer about specific risk oversight, and increased oversight at the board level on data privacy and content management.
We believe that the risks and opportunities related to climate change can have a material impact on profitability, balance sheet, and can directly impact the ability of companies to create long-term shareholder value. By embedding climate risk considerations into corporate strategy, companies can manage risk and exploit opportunities to create sustainable value for shareholders in the long term.
In the medium term, we are focusing our climate engagement on strengthening corporate disclosure related to climate change. Sample engagement questions are provided below.
Current theme: Climate disclosure
- What is the company’s climate change strategy and governance approach?
- Does the company have a science-based target in place?
- Is the reporting on climate risk TCFD-aligned?*
The issue: A major steel manufacturer in Japan has been reluctant to commit to company-level environmental targets such as carbon footprint reduction and energy efficiency.
The engagement: We engaged with the senior officers in charge of corporate strategy and with investor relations specifically on climate risk. Since then, we have regularly raised concerns about the company’s lack of environmental disclosures.
The result: In 2019, the company issued its first climate-related scenario analysis in accordance with the TCFD. Although this is only a starting point, we have observed a significant improvement in management commitment on climate change.
Our policies and commitments
Investing on the basis of sustainability/ESG criteria involves qualitative and subjective analysis. There is no guarantee that the determinations made by the adviser will align with the beliefs or values of a particular investor. Companies identified by an ESG policy may not operate as expected, and adhering to an ESG policy may result in missed opportunities.