Good stewardship is key to maximising long-term shareholder value, as Dan Brocklebank explains
As investment managers, how effective we are as stewards of our clients' capital depends not only on the caliber of the decisions we make to buy and sell shares, but also on how we act as owners when investing in companies on our clients' behalf.
A competent businessperson would never stick their head in the sand after buying a business; they would take a keen interest in the company's affairs, engage regularly with its managers, and, if necessary, intervene to help guide the company toward better decisions. We aim to do much the same with the companies held in our funds.
Meet the brass
In fulfilling our responsibilities as owners, we meet regularly with company management. Most of the time we are in listening mode, focussed on improving our understanding of the business. We believe that responsibility for a company's day-to-day operations rests with its executives and that we probably have very limited value to add here. Still, there are times when we may be able to contribute to a company's deliberations over its broader strategy, and particularly deliberations about how cash flows generated by the business are to be re-deployed. When offered these opportunities, we are always happy to share our perspective.
Sometimes our views differ materially from those of the company's management. In such cases, we will always raise these concerns with management first, but if our concerns are significant enough, we may then ask to meet with an independent director or write to the company's board directly.
Meetings with management are typically a constructive but relatively informal form of communication. Shareholders are also asked, at least annually, to express their preferences on a range of issues in a more formal way, i.e. by voting.
We believe it is in clients' best interests if we approach shareholder votes without prescriptive rules, assessing each resolution put to us on its individual merits. Without prescriptive rules on how to vote, our investment analysts have to do their homework before voting. They may supplement their own research with external research from independent governance analysis firms, such as Glass Lewis, and the expertise of in-house legal counsel. Ultimately, however, they will take an all-inclusive view of what is in the best interests of shareholders, including assessing the impact of their actions on their ability to communicate effectively with company management going forward.
A large portion of votes put to shareholders cover routine matters which are rarely controversial, such as approving financial statements and the reappointment of auditors. Our preference is to invest in quality businesses with management teams we admire, so we would expect mostly to be supportive of management's recommendations. But, as with any long-term relationship, there will be some disagreement.
Shares represent ownership of a fraction of a company. That fraction shrinks when companies create more shares. This can make existing shares less valuable, so our analysts scrutinise any resolutions that grant a company general authority to issue new shares particularly closely. Such proposals are common in certain countries in the Asia ex-Japan region. In 2016, we voted against ten such proposals by companies in the region.
In many countries, shareholders also vote on executive pay arrangements. A vote against a company's executive remuneration policy doesn't necessarily imply a dim view of the company's executives. It could also signal a belief that the compensation scheme, when taken as a whole, should be better designed. These schemes are complicated and we recognise that no perfect policy exists. However, we believe an effective scheme should attract and retain good managers, compensate them fairly based on their performance, incentivise behaviour that maximises long-term shareholder value, and discourage behaviour that destroys value or encourages undue risk taking.
We believe that time spent on our stewardship role is an essential part of our job as managers and entirely consistent with our long-term investment philosophy. Recognising the importance of shareholder responsibilities, several bodies worldwide promote good practice and encourage investors to disclose their approach to stewardship. We are signatories to the United Nations-supported Principles for Responsible Investment, perhaps the most prominent such initiative with over 1,500 signatories globally, representing more than US$60trn (£47bn) in assets under management.
Increased awareness of the importance of stewardship is positive for asset owners and managers alike; as providers of capital, investors are well-positioned to encourage companies to enhance shareholder value as well as long-term operational performance.
Dan Brocklebank is head of Orbis Investments UK
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