Revised Shareholder Rights Directive II
Shareholder Engagement Policy
Our guiding principle in all our activities related to the funds we manage is to act in the best interests of our investors, aiming to achieve the funds’ stated objectives to our investors’ benefit.
Our detailed policy is as follows:-
Monitoring investee companies on
Before investing in any company we conduct due diligence, which will include reading the strategy statements from the past few years’ Report & Accounts. We are looking for a consistent message, with realistic targets set, adhered to and achieved, and a thorough and credible narrative explaining how certain targets have been achieved, how these achievements will be built on, the reasons why targets have not been met, and what remedial action is being taken. We look for managements who are able to devise and pursue realistic and deliverable strategies and are able to report honestly and in adequate detail on their progress. Our due diligence process also includes meetings with management, or with senior members of their IR teams in the case of very large companies, in order to test the investment case that we are developing.
Once we have satisfied ourselves regarding the strategy, and have taken a position in the company, we continue to monitor the strategy as reported in the Interim and Final reports, as well as in other announcements as they are made. We engage continually with companies through face-to-face meetings and ‘phone calls, as well as by email from time to time.
If our research uncovers evidence that a company’s stated strategy has been amended or departed from without adequate explanation, or that a strategy has been abandoned in favour of an inferior one, this would be sufficient reason to sell our holding in the company.
Financial and non-financial performance
Measures of financial progress are to be found in each company’s Report and Accounts, which we analyse in detail, and put through our proprietary models. Our conclusions on each set of accounts are noted in detail and discussed between the fund managers. Any points of doubt or concern are raised with the company management. Any significant deterioration in a company’s financial position, especially where peers in the sector are not experiencing similar pressures, would be sufficient reason to sell the holding, as would a failure adequately to explain and justify the financial position.
Non-financial performance is normally covered in a set of Key Performance Indicators (KPIs), which companies set and report on at least annually. We look at the KPIs themselves, asking whether they are appropriate for this company, and whether they cover all the areas they should. We especially like to see companies which have set themselves demanding KPIs in relation to such important matters as employee retention and engagement, as well as emissions targets. This is because we are keenly aware that it is impossible for a company to be successful in the long term without a supportive management creating a good culture and a high level of staff morale. We also monitor how KPIs are changed over time and are wary of companies which appear to be dropping KPIs merely because they have found them hard to achieve. Any concerns arising from our study of the company’s reporting of its performance in relation to its KPIs will be raised with the management, normally at the post-results meeting.
Companies list the main risks they face in their annual Reports, with a commentary explaining why they believe risks have increased, reduced or stayed the same in each different category. We monitor these reports carefully, and we also look at the list itself, to check that the company’s evaluation of the risks it faces matches our own. Any anomalies will be picked up in the course of our research and raised with management in the course of our conversations with them.
We have a set of criteria which a company must meet before being investable. These include ratios such as net asset value to market capitalisation, net current liabilities to net current assets, net debt to net assets, cash to net assets, intangibles to net assets, pension deficit to net assets and so on. To be investable, companies must be sufficiently well-capitalised to withstand several years of difficult trading conditions. We also monitor the direction of the capital structure, in certain cases preferring a somewhat weaker capital structure which is improving to a stronger one that is deteriorating. We also compare each company’s capital structure to those of its sector peers.
We believe that a weak capital structure reflects a weak management and would not invest in a company where we do not have a good level of conviction in the quality of both.
We regularly ask company managements hard questions about their capital structures and would be unlikely to invest in a company whose management have a looser definition of the adequate margin of safety than our own.
There are two main aspects in our view. One is the way in which companies treat their employees, the other is the way in which they interact with the communities in which they are based. Clearly a company needs happy, healthy and engaged staff in order to perform to its potential. Staff are members of the local community, and the local community will be richer by virtue of the fact that the employees of its largest local employers are engaged and believe in what they spend their days doing.
Employee satisfaction has become a more prominent issue in the last decade, so more companies cover it in their annual Report and Accounts and will tend to list their achievements in this area. We aim to look behind these statements at what is really going on. We have for many years studied levels of staff sickness and turnover and ask to see these figures when they are not made available. It is also possible to tell much by visiting a company’s place of work and seeing where and how people work. It is normal for investors to meet the CEO and CFO of investee companies. We like where possible to see other senior managers. We enquire about management structures, aiming to gauge how flat or hierarchical they are, and to what extent employees’ ideas are really listened to. Many companies are unwilling to share this information, which is in itself revealing.
On the wider social responsibility aspect, we look for evidence that the companies we consider investing in are engaged with the communities in which they reside and are aware and sensitive to the impacts they have, and any issues that arise.
Companies’ environmental impacts vary greatly between sectors. At one end of the environmental impact spectrum are large mining corporations, while at the other might be a firm of environmental consultants based in a low-carbon office. Each company needs to be looked at on its merits. We look for companies which monitor their environmental impacts in relevant ways, and have set themselves realistic reduction targets, as an increasing number do. We monitor progress both through statements on the subject made in the annual Report and Accounts, and through conversations with management. It becomes clear from this research who is dedicated to reducing their environmental impact, and who is merely going through the motions.
We look for a settled board structure, where ideally the senior executives, CEO, CFO & COO, have been in post for at least several years. We look for a strong non-executive Chair, and a group of non-executives which is numerically roughly the same as the number of executives on the board. We look carefully at the non-executives’ relevant experience. We are wary of ‘serial non-execs’ who have so many roles that they are unlikely to have much idea what’s going on in any one of their companies. At least two of the non-executives should have been in post for over five years, to maintain continuity.
We scrutinise board meeting attendance figures. We expect the meeting attendance figures to be at or very close to 100%.
We look for a proper level of diversity on the boards of our investee companies. This is more difficult to achieve in certain male-dominated sectors, and we make allowance for that. Today, we would be comfortable with a third of an investee company’s board members being women, and we look for that proportion to rise slowly over time.
It is not necessary for all these criteria to be met in full in order for us to invest in a company, though it is a positive sign if they are. Where one or two of our criteria have not been met, we would still be happy to invest, so long as there is a satisfactory explanation. A company with a hastily-assembled board, with an inadequate number of inexperienced non-executives, and no female representation, is not one we would be likely to invest in.
On executive pay, we are not averse to talented executives of large companies earning what most people would consider to be a lot of money. We focus on the way the remuneration structure has been put together. There needs to be an adequate base salary. Incentives need to be targeted at the critical KPIs of the company, with targets set at a suitably challenging level, so they will not automatically be achieved every year. No two companies are the same, and each needs to be taken on its merits. We are unlikely to invest in companies where we believe the executives to be overpaid, or where we consider the LTIPs to dilute shareholders excessively.
How we engage with investee companies
As already mentioned, we engage in ongoing dialogue with all the companies in which we invest. As managers of a relatively small fund, we have to be realistic enough not to expect access to the top executives in the largest companies in which we invest. We are happy so long as there is a good IR team who understand and can explain the company’s strategy and answer detailed questions on all aspects. Our relationship is different where we invest in smaller companies in which we are often significant shareholders. In these instances, we have found that management will regularly ask our opinion on different areas of policy. Here it is easier to engage meaningfully with the companies in which we invest.
How we exercise voting rights
Our policy is twofold – we always vote on resolutions, and as a default, we always vote with the management. This is because we would not invest in a company which we didn’t believe to be well-managed, and therefore we are naturally supportive of what management is trying to achieve. However, we monitor all the issues on which we are invited to vote and will vote against a motion on the rare occasions where we feel a proposal is not in the company’s, and by extension our shareholders’ best interests.
How we co-operate with other shareholders
A situation in which we have needed to co-operate with other shareholders, for example in opposing a proposal by a company which was felt not to be in the shareholders’ best interests, has not arisen.
However, should such a situation arise, we would always act in what we believed to be the best interests of the investors in our funds.
How we communicate with the relevant stakeholders of the companies we invest in
It is possible that at some future time, we might approach large suppliers or customers of investee companies, in order to broaden our understanding of what a company is like to deal with. However, up to the present time, we have not conducted this type of research.
In all our activities, we will abide by the principle that we are acting for our investors, and in their best interests.
How we monitor actual and potential conflicts of interest arising from our engagement with companies
Wise Funds is an independent, privately-owned company, a situation which removes potential conflicts of interest arising from investment in parent companies.
We take all reasonable steps to identify and prevent conflicts of interest that might arise from Wise Funds staff owning shares in or being directors of investee companies.
We are aware that conflicts of interest could arise in the following areas –
- Where a member of Wise Funds staff voted against a company’s management on their own personally-held shares
- Where members of staff might receive unsolicited inducements
- Where members of staff deal on their own account
- Where one of us receives non-public information
In cases where we are given non-public information, the company concerned will normally ask whether we are happy to be ‘taken inside’ in which case we are debarred from disclosing the information to anyone, and from dealing in the company’s shares. However, on occasion, we may decide that information a company has disclosed in the normal course of a discussion is non-public and will treat it as such from a compliance point of view.
Where a potential conflict of interest arises, it will be referred to our Compliance Officer for a decision. Soon after an incident is reported, it is entered in a log which records the date, client or company, description and the outcome. We also have an internal logging system for each engagement, where we record if we have, or have not received material non-public information.
We will act in our investors’ best interests at all times.
How we have voted
On the documents below, you will find information on how we have voted