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The Value of Engagement: Understanding Management Quality

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?” 

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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 

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.

Author:

William Lock , Head of International Equity Team

RISK CONSIDERATIONS

There is no assurance that a Portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the Portfolio will decline and that the value of Portfolio shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in this Portfolio. Please be aware that this Portfolio may be subject to certain additional risks. In general,  equities securities’  values also fluctuate in response to activities specific to a company. Investments in  foreign markets  entail special risks such as currency, political, economic, market and liquidity risks. The risks of investing in  emerging market  countries are greater than risks associated with investments in foreign developed countries. Stocks of  small- and medium- capitalization companies  entail special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies.  Non-diversified portfolios  often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility.  Derivative instruments  may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks.  Illiquid securities  may be more difficult to sell and value than public traded securities (liquidity risk).

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