When we interact directly with a company’s management, we raise issues we consider material. In doing so, this helps us assess management quality and their short- and long-term priorities.
For over 20 years, we have emphasized the importance of understanding management priorities and corporate governance in our investment process. It is not enough to have a profitable company with phenomenal returns if those returns are not sustainable. For this reason, after identifying high-return companies, we ask: “Is management focused on maintaining a company’s returns by allocating capital wisely? Is it incentivized to strive for long-term returns over short-term earnings?”
High-quality companies require extra scrutiny
For the types of high-quality companies held in our portfolios – including Global Sustain, the latest addition to our global equity strategies – these questions matter even more because management has discretion over how to deploy large amounts of cash flow. The decisions they make can influence returns over years to come.
That’s why we believe governance is central to sustainable long-term performance. Also, if a company does not get the governance factor right, it is unlikely that it will be on the right side of the two other ESG pillars: environmental and social factors. And that’s why direct engagement is so valuable.
Much of the ‘governance industry’ concentrates on scoring what is easily measured and ends up ticking boxes, neglecting the human element. As such, we see governance scores from the likes of MSCI and Sustainalytics as having limited value beyond raising potential flags. We support corporates having a separate Chair and CEO, but this is of limited use if the Chair is somehow in the CEO’s pocket! From an opportunity perspective, new management or changes in management often present the most interesting investment opportunities.
We engage directly – and often
We held 466 management meetings last year, 215 of which included ESG engagements. We also liaise with the firm’s corporate governance team on proxy voting and specific engagements with companies.
The assets we manage and the concentrated nature of the portfolios give us significant influence in our engagement program: We control over 1% of the free float in more than half the companies in the Global Sustain portfolio, our newest strategy. As long-term shareholders, our portfolio turnover is low, allowing us to build long-term influential relationships with management teams.