Time and time again we have seen evidence that the companies most likely to fail are those riddled with conflicts of interest, incompetent or disengaged directors, poor culture or poor risk oversight.
AMP Capital’s interest in good governance started early. As one of Australia’s largest fund managers, we naturally held a broad range of companies across our equity portfolios. Inevitably, not all those companies were well-governed.
As we couldn’t just sell every company that lacked an effective board or a reasonable pay or risk-management structure, we instead embarked upon a programme of constructive engagement.
It was many decades ago that we first committed to deeply understanding the governance structures of the companies we held and to engaging with those companies when questions or concerns arose.
As the issues are not always resolved in the first instance, we then choose whether to continue the dialogue, use our voting power to further influence change, or, as a last resort, divest from the company. Ultimately, the course of action we take will always depend on our clients’ mandate and what we consider to be in their best interests.
The governance mosaic
While financial losses can often flow from problems associated with poor accountability, fraud or misconduct, determining the quality of a company’s governance from the outside is not easy. It takes work.
When you are dealing with intangible factors – such as integrity, cognitive diversity, accountability and trust – governance, or broader ESG research, becomes much like constructing a mosaic. Individually, the pieces may contain little value but the more of the right pieces you have, the more likely you are to be able to construct a true and clear picture.
Traditional governance data points include: a separate CEO and chairman; the percentage of female directors; director attendance records; the ratio of non-audit/audit fees; the level of voter support for pay; and a whistleblower policy. These data points are easy to collect. While they may be interesting, they only show part of the picture though. Only with further information and insights can investors truly understand the level of independence and alignment with shareholder interests, the cognitive diversity and inclusion, director diligence, integrity of financial reporting, fair and effective pay structures, and employee protections.
The picture becomes even clearer when each company’s response to their environmental and social risks and opportunities is also taken into consideration.
AMP Capital found that by virtue of our large shareholdings, combined with our constructive and investment-focussed approach to company engagement, we were given unrivalled access to company boards.
Through meeting with board members, investors learn what drives a company. The insights gained by engaging with companies on the material ESG risks and opportunities they face enable us to better assess the company’s potential for generating sustainable returns over the long term.
A lot can be learned about a company’s governance and priorities by also looking at their actions around pollution, safety, and responsible sourcing. At the end of the day, for a company’s economic growth to be sustainable, its actions cannot have a negative impact on the social, environmental and community relationships in the areas in which it operates.
While some argue that it’s easier to analyse G than it is E or S, I haven’t found that to be the case. Not only is it difficult to judge a company’s governance from the outside, but governance also impacts everything a company does.
Well-governed companies get everything right – strategy, culture, management, succession planning, innovation, risk management and so on. Ultimately, those companies understand how to leverage and protect not only their financial capital, but also their environmental and social capital.
CV: Karin Halliday
Karin Halliday was appointed to the newly-created role of Senior Manager, Corporate Governance at AMP Capital in 2000, when investment careers in governance were unheard of. Prior to that, she had spent ten years in portfolio management. Since then, the Australia-headquartered global investment manager has appointed ESG specialists throughout the organisation. Even after 20 years, Halliday says she has not tired of governance and ESG – if anything, she’s more passionate about it than ever.