Assessing the quality of a company’s Board and senior executives, including having regular communication with them, is an important component of the process in selecting the companies that AFIC invests in. AFIC Managing Director Mark Freeman explains why and how we engage with the Boards of companies within the portfolio.
How we determine the quality of a Board and how we interact with Directors is an important part of what we do at AFIC. Assessing the leadership of a company and building trust in their people can be just as important as financial analysis.
Building strong relationships with the Boards of the companies we invest in helps us to build trust in their future performance and allows us to engage and influence positive change if we need to.
What we look for
For us, a desirable Board demonstrates integrity, honesty, experience, qualification, diversity, a track record of achievement, and community/shareholder engagement.
To understand if a Board has these characteristics, we ask a range of questions: Does the Board have the sense of responsibility to run the business in the best interests of shareholders? Will the Board have shareholder interests front of mind, whether those shareholders are investing individually or through an institution? Having that sense of responsibility and obligation that you’re looking after people’s wealth—as we do here at AFIC—is critical.
Of course, good business management is essential in any Board. We consider if a Board is allocating capital in an appropriate way to produce expected returns and if they are ensuring the business always operates from a position of strength. We can see that by the way they run their balance sheet. Also, is the company investing in the right way? We can see that in the return on capital.
We also look at business experience and the overall skill set of a Board. What skills does each Director bring to the company and how do they add value? We like to see some industry experience on the Board and a track record of achievement.
We also seek feedback on the general culture of a company. We want a company that’s focused on looking after their customers, suppliers, and their staff.
Proper corporate oversight is important. We consider how the Board is dealing with ESG (environmental, social and governance) matters and the effort and sense of responsibility that they commit there. This is becoming an increasingly important topic and, with various standards coming out to guide how companies report on ESG, such as the new International Sustainability Standards Board, we’re continually assessing our investments with these factors in mind.
Ultimately as a long-term investor, we seek to invest in companies that have a Board focused on strong governance and risk management processes.
How we engage
We seek as much information as possible from many sources. For many of the larger companies that we invest in—and we’re a large shareholder in quite a number of them—we typically meet with the Chair once a year and communicate with the company on a regular basis.
Because we are a long-term investor and businesses appreciate it is a long-term game, we find that companies are interested in what we have to say, particularly on issues such as remuneration reports with a Chair sometimes seeking our view prior to an annual general meeting.
Voting on resolutions is one of the key functions that a shareholder has in ensuring better long term returns and management of investment risk. We take input from proxy advisers but conduct our own evaluation of the merits of any resolution. We vote on all company resolutions as part of our regular engagement with the companies in the portfolio.
We actively engage with companies when we have concerns those resolutions are not aligned with shareholders’ interests. We seek to stay engaged with the companies and satisfy ourselves that the issues are taken seriously and worked through constructively. Ideally, in this instance, we seek to remain invested to influence a satisfactory outcome for stakeholders.
What happens if there are concerns?
You can learn a lot about a Board from their response when something in their business goes wrong. Are they proactive in recognising a problem and fixing it?
An example of that was Rio Tinto’s destruction of rock shelters of exceptional significance at Juukan Gorge in Western Australia’s Pilbara region in May 2020. We were very concerned about this situation. We chose to continue to hold Rio as an investment and be part of influencing some positive change. Along with other investors, we expressed directly to the company our concerns and, as a result, we saw some positive changes in management and in the Board.
If we have a major concern with a company in our portfolio, we will express our view to that company’s Board. We don’t normally get involved with a company’s operational matters, but we will if we believe it’s prudent to do so, such as a very large acquisition that in our view could potentially negatively change the nature of the company.
We regularly review companies to ensure ongoing alignment with our investment framework and interact with those companies. We actively engage with companies when we have concerns and aim to satisfy ourselves that issues are taken seriously and worked through constructively. We seek to remain invested so that all stakeholders obtain a satisfactory outcome.