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Feature | ESG


Corporate governance is not sexy. It does not make mainstream headlines in the way that climate change has in recent years. Sir David Attenborough did not interrupt this year’s Glastonbury Festival to talk about how companies should improve the way they engage with their shareholders. Children did not leave classrooms sitting empty to march against the government’s failure to promote greater corporate trans- parency and protestors did not block roads in London to demand that there are more independent voices in company boardrooms.


Unlike climate change, governance is not fashionable. Yet how executives make deci- sions and execute a company’s strategic objectives are crucial to protecting inves- tors. Governance has always been high up the agenda for institutional investors, it just doesn’t have hour-long television specials dedicated to it. This, Daniel Peters, an investment partner at Aon, puts down to it being almost uni- versally expected that governance will be assessed and reviewed by fund managers. “There is less focus on it because it is less debateable,” he adds. Corporate governance is more of a main- stream discussion than the environmental and social pillars of ESG. It is also the only one of the three that is applicable to all companies and typically is the only one that companies can provide data on. But asset owners need to remain vigilant. Just because governance has been part of furniture in investment analysis for dec- ades does not mean it is always thoroughly carried out. The mishandling of personal data by tech giant Facebook and the emis- sions scandal at German car maker Volk- swagen in recent years are examples of poor governance.


“It is important that it does not get missed in the ESG piece, because it is almost taken for granted that it has to happen,” Peters says. “If a fund manager is not exercising their voting rights it would generally be seen as unacceptable.” If there is one word that Michael Hersko- vich, BNP Paribas Asset Management’s head of corporate governance, would use to


summarise corporate governance it is “trust”. “If we do not trust the corporate governance it means that we do not trust management, so you shouldn’t invest in the company,” he says. Indeed, risk management incidents related to accounting fraud or environmental catastrophes have frequented the news in recent years. Often those fail- ures were due to inadequate corporate


governance struc-


tures, says Carola van Lamoen, who leads asset manager Robe- co’s engagement and voting activities. Strong governance structures are crucial. Peters emphasises this point by referencing the growing body of research showing that high ESG standards could have a positive impact on a company’s financial performance.


David Czupryna, head of ESG client portfo- lio management at asset manager Candriam, uses two of the world’s largest companies as an example of why investors need


to consider the structure of a


company. Mark Zuckerberg controls 51% of the voting shares in Facebook. It is a similar problem with Google. “At Google it is two people, at Facebook it is one person who controls the fate of the company and beyond that every- thing that the company does with our data,” he adds.


Czupryna likens these structures to new forms of “extractive monopiles akin to the oil barons of the early 20th century”.


THE BALANCE OF POWER When Newton Investment Management assesses a company’s governance stand- ards, it is looking to get a “flavour of the corporate culture”. “We want to understand what we are getting into as an investor,” says Ian Burger, the firm’s head of corpo- rate and stewardship. To achieve this, questions that need to be answered include where does the responsi- bility in a company sit? Who are the main influencers? What are the motivations and incentives for the board and senior man-


26 | portfolio institutional | June–July 2019 | issue 85


agement? Do those incentives fit with the company’s strategic objectives? Do they sit well with your investment objectives and expectations? Is there a good level of inde- pendence on the board? “It is about build- ing a big picture, so that we are able to invest with our eyes wide open,” Burger says. For BNP Paribas’ Herskovich there is


It is about building a


big picture to invest with our eyes wide open. Ian Burger, Newton Investment Management


one core issue he must get to the bottom of when assessing a company. “The balance of power is something that we look at carefully between the three main bodies of corporate governance: shareholders, directors and management,” he explains.


Understanding where the power lies is cru- cial as many people reading this will be tak- ing minority stakes in companies and need to know how the little guys on the share register will be treated. “Going in as a minority investor carries risk and it is about understanding that risk,” Burger says. Part of understanding governance risk is also to identify any biases that might creep into the decision-making by executives or how


an organisation, whether it’s a


company, trustee board or football club, is structured and managed. For Susan Hoare, a partner at Aon, poor execution of strategic objectives, trustees not considering all factors when making important decisions or exposing a company to lots of risks are symptoms of poor governance. To avoid such problems, Hoare calls for more people from different backgrounds to be sitting around boardroom tables to avoid the “group think” that has been all too evi- dent in recent years. “If you put people on the board who do not think the same way you have a better chance of highlighting things that could go wrong,” she adds. Czupryna points to academic research that


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