Good Governance. Greater Returns.
Environmental, Social and Governance (ESG) issues are taking a larger place in investor mindsets of late. As the Green Revolution takes hold, corporations’ roles in protecting our planet has driven their environmental practices to the forefront. At the same time, global companies’ treatment of workers in factories and warehouses has ignited debates about corporate social responsibility.
Environmental, Social and Governance (ESG) issues are taking a larger place in investor mindsets of late. As the Green Revolution takes hold, corporations’ roles in protecting our planet has driven their environmental practices to the forefront. At the same time, global companies’ treatment of workers in factories and warehouses has ignited debates about corporate social responsibility. Given these, one can be forgiven for believing that the third letter in the ESG framework – governance – should take a backseat to environmental and social issues.
We would fervently disagree. In our experience, corporate governance – the system of rules, practices and processes by which a corporation is controlled and operated – is the most critical and impactful of the three ESG factors, as it is arguably the only one that can influence the other two. To us, corporate governance is the soul of a corporation – starting from the top, it dictates and permeates down into the firm’s culture, and ultimately determines its integrity, ethics and fairness in all matters, including environmental and social ones. In short, success in firm governance tends to lead to successes in environmental and social issues as well.
The window to the corporate soul
If you really want to see inside a company and figure out what makes it tick, open up a proxy circular. Detailing what issues will be presented and voted on at the next shareholder meeting, it provides a treasure trove of useful insights on the company’s management team and its board of directors: What’s the average director tenure? How independent are the directors? Are managers incentivized to deliver long-term success, or is short-termism an issue? If governance is the soul of a corporation, then proxies are the window to that soul. That’s why our team reviews and votes every proxy ourselves – they provide such valuable insight into the firm’s potential to generate long-term value that neglecting to vote them would be damaging to our portfolio’s performance at best, and downright irresponsible at worst.
