ESG | Feature


shows companies with diverse boards are better at resisting the temptation to embark on value destructive M&A. “Having a more diverse board, for us, guarantees a cooler- headed attitude at board level,” he adds.


DIFFERENT STROKES Additional expertise might be needed when investing in companies outside of the UK as governance standards vary throughout the world. Indeed, those targeting tech giants in the US or the growth protections and double-digit returns offered in emerg- ing markets need to look at companies in the context of their market to understand the regulatory structure. “You have to take this on a company-by-company basis, because their approaches will often be dif- ferent,” Burger says.


“It is unfair to look at a US company through a UK governance lens. It is com- paring apples with oranges,” he adds. Czupryna says that the merits of factoring governance into your research should not be underestimated. “The further we go


ards. “Several emerging market countries are trying to lift their corporate governance standards as they understand that having a good track record on this front is in their own interest to attract foreign capital,” Lamoen says.


Brazil has set stringent rules around board composition and executive pay transparency, while India is considering making potential independent directors sit an exam before joining a board. South Korea, meanwhile, has improved the rights of minority shareholders and wants greater representation in boardrooms.


ALL TOGETHER NOW


These improvements have been driven not only by shareholders, but also by the intro- duction of corporate governance and stew- ardship codes. “Governance codes have been effective,” Burger says. “It is part of a toolkit from a regulatory


or best practice setting


perspective. “We have a long-term view on investments


It is unfair to look at a US company


through a UK governance lens. It is comparing apples with oranges. Ian Burger, Newton Investment Management


away from the traditional asset classes and developed


markets where towards governance high becomes yield,


unquoted companies in emerging markets is


more


critical.” Herskovich points out that emerging mar- ket companies are often family-controlled or majority state-owned. “You should not look at them in the same way as you would a company that has no controlling shareholder.” But he adds that emerging market compa- nies are moving in the right direction when it comes to governance. “There have been a lot of improvements.” Brazil and Korea are two countries using regulation to lift their governance stand-


and long-term interest in the companies in which we are investing,” he adds. “Ulti- mately, the stewardship codes that we see are fostering that investment thesis, as it were, for long termism.” Stewardship


codes not only promote


enhanced transparency and dialogue between directors and investors but also defines a board’s responsibilities. “[Governance codes] are a necessary first step to promote higher levels of investor engagement, which initially is translated in more comprehensive disclosures on how investor stewardship responsibilities are discharged by the signatories,” Lamoen says.


They have also been useful in making local


investors more active


as


shareholders,


especially in parts of Asia. Japan is one country that has seen improve- ments in its corporate culture in recent years. “We are seeing significant improve- ments in Japan, but there is still a way to go, which creates


great opportunities,”


Burger says. “We can identify quite readily whether a company is merely ticking the box or if it understands the value of the sub- stance behind that reform.” Japan has evolved because the main driver was the government, it wanted to revive the economy from a decades-long depression, it wanted a more shareholder-friendly cul- ture and to start handing their hordes of cash back to investors as dividends. In many cases it is just investors who are pushing for reform, but Japan is an exam- ple of success being driven by various stakeholders.


Boardroom expertise and how it fits in with the corporate’s strategy and long-term risk management will be one of the biggest issues in the governance arena over the coming years, Herskovich believes. “10 years ago the market was focused on boardroom independence,” he adds. “Five years ago it was executive pay, but not enough on having the right skills on the board. This is key. The board sets the strat- egy to challenge management to think about the long-term vision.” Herskovich calls for investors to continue pressuring


boards into identifying the


skills needed to set and execute the right strategy, which is a key element of corpo- rate governance. “There is still a lot of work that needs to be done on that.” Hoare says that if there is one habit that executives and managers need to adopt in the coming years it is to look beyond the governance code. “The governance require- ment from the regulator is low, so we look beyond that. If you are not reviewing your governance, are not taking it seriously,” she adds. “There is enough material, in my view, that sets out that great looks like.” Czupryna concludes by saying that there is still a huge amount to do when it comes to corporate governance that the size of the workload “cannot be underestimated”.


Issue 85 | June–July 2019 | portfolio institutional | 27


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