Q1 2015 Stewardship Report
Stewardship and managing equity interests for our clients
Old Mutual Global Investors manages money on behalf of its clients with the aim of generating returns to meet their financial aspirations. As part of that process, we regard using our powers as shareholders, particularly the ability to engage with companies on a range of issues, as a key tool for relevant equity funds. We are stewards of our clients’ interests and it is appropriate we report on that role. Our report is also consistent with fulfilling our obligations under the UK Stewardship Code 2012.
In these reports, it is generally our practice to remove identification of the companies with which we are engaging. Experience has taught us that undertaking discussions which may be sensitive, or delicate, in the glare of publicity is damaging. Publicity can cause a defensive reaction and entrenches views. We prefer to conduct a sensible dialogue with companies where, in the event of a change of policy, this can be adopted and not seen as a management climb down. It is part of the need to build an element of trust, permitting clear and occasionally frank communication and challenge.
Our voting policy document states that we control a wide range of equity interests. These range from short-term holdings, in which case it is not appropriate to vote, to derivatives (which cannot be voted on) to funds where the focus is on trading. Where our stewardship can be most effective, and where the bulk of our stewardship work will occur, is in long-only funds where the emphasis is on understanding and building a long-term investment and relationship with the company.
A sample of our activity for the January-March period of 2015 is set out below:
We continued discussions with a company’s board regarding continuing, albeit drawn-out, implementation of a turnaround. We have also continued to discuss strategy and raised potential changes to strategy.
Performance and leadership
Discussions have continued with a company regarding succession planning. Whilst there were question marks regarding performance of the business, it is the board’s view that the current strategy is being implemented successfully. Accordingly, the board will continue to follow its current succession planning process, notwithstanding that alternative leadership options or are available.
The leadership of the board has maintained a constructive relationship with shareholders. Although we have argued there is a case for the board to accelerate the succession process for the CEO, we are content to leave the timing of that process with the board.
We requested a meeting with the chair of a company which announced a profit warning. Discussions covered opportunities for the company, its strategy and the development of governance at the company, particularly in light of the fact that it might transition from a small start-up to a more mature, larger company.
We met an individual who is chair of more than one company, in addition to being a non-executive director at other companies. The meeting was helpful in understanding the governance of the companies concerned as well as the strategy being followed. Iit provided a confirmation of our impressions regarding each company. It also allowed us the chance to confirm to the chair that we supported the management at each company.
Regarding the multiple roles of the individual, it has been the subject of discussion in the past. We are content that there is capacity to fulfil all roles.
We met the newly appointed chair of a company. The individual is someone with whom we are familiar and know he has a great deal of relevant experience in the industry. We were able to discuss the strategy of the company in uncertain markets, risk and governance.
The chief executive officer and the chief financial officer of a company appeared to be providing different messages regarding expectations for the company. Accordingly, we asked to meet the chair.
The chair acknowledged there was an issue regarding consistency of communication and is working to resolve the issue. The chair also accepted feedback that the company might provide further detail in announcements regarding business performance, in order that shareholders could properly evaluate the position of the company.
The company’s subsequent year end results provided a consistent – and satisfactory level of detail.
Performance and strategy
We requested a meeting with the chair of a company regarding performance and strategy.
Discussions covered our perception that the company was becoming more acquisitive than had been anticipated, together with a material increase in debt. The business was also missing operating targets.
It was not a reassuring meeting. On the grounds that there was a shortage of quality managers in the sector, the company had taken the decision to slow down organic growth. They also believed that difficulties in operating businesses in the sector were making assets available at low prices.
The chair explained that the company had brought together two businesses shortly before its IPO and will take time to settle.
The chair remains optimistic. The company will be making efforts to improve communications – and therefore expectations – with the market and shareholders.
We met the chair of the company regarding recent activities, including profit warnings. Discussions covered a wide range of issues including management change, innovation, cost structures, pricing, industry capacity and the product pipeline. Despite a number of challenges, the chair has not lost faith in the strategy. It also left a question mark as to whether the CEO or the chair is better placed regarding oversight of general management.
We met the chair of a bank. Discussions covered capital requirements, ring-fencing in the UK (and the risk that investment in the UK business may fall as a result), the potential for cost reductions, risk, funding, the relationship with regulators and potential returns across various businesses. The discussion also included succession planning for members of the board, including the chair.
Improving governance prior to listing
We noticed an article in a national newspaper regarding board membership of a company which was expecting to list in the UK. The article noted the business history of the chair and senior independent director (SID), both of whom had played significant roles at companies which had failed. We drew the attention of other institutional investors to the article.
By chance, we were also meeting an adviser to the company that day. In that meeting we made clear that both individuals would be regarded as unacceptable as directors. However, as a compromise in order to ensure that both would leave, we agreed that the SID would not proceed to the IPO and that the chair might remain after the IPO provided it was made clear that he would step down shortly thereafter. We also made concerns known, along with other potential investors, to other advisers and the company directly.
The company subsequently confirmed an intention to float. It was also confirmed that the arrangements we discussed with the advisers were taking effect, namely the senior independent director stepped down prior to the IPO and the chair will leave once a successor is found.
Following a meeting in 2014 with the chair of a manufacturing company regarding the accelerated pace of funding for the company’s pension scheme – and in particular, that a deficit on the pension scheme was being reduced at a pace which did not reflect the strength of the company - we continued correspondence regarding the timing of distributing funds to shareholders. The company is generating significant amounts of cash. After contributions to the pension scheme and allowing for a significant level of reinvestment into the business, the company has now announced that it will begin purchasing its own shares as a means of returning surplus cash to shareholders.
We see a case for the buyback of shares to be increased and/or for the company to pay special dividends. The company, however, remains cautious. We will continue to engage with the company.
We were consulted by a number of companies seeking approval, ahead of their annual general meetings, for changes to pay policies. Discussions included the level of rewards, service contracts and the linkage of rewards to the performance of the companies.
In one case, the company proposed a number of changes to performance targets. We objected. The company was potentially going to review strategy and until that was completed, it was inappropriate to impose new objectives. The company postponed the changes.
A company also gently enquired whether there was scope to amend performance conditions for outstanding share awards – in essence, that performance conditions had been missed and that therefore the targets should be amended or waived. Not unexpectedly, we and other shareholders objected. The company withdrew the proposals.
Contract notice periods
On 17 February 2015, Old Mutual Global Investors announced that it expected UK companies to reduce the service contracts of directors to a notice period substantially below 12 months.
The announcement received press coverage in the UK.
Our new policy was defined following Tesco PLC announcing, in early February, that it had agreed to make contractual payments to its former Chief Executive Officer and Chief Financial Officer of £1.2m and £0.97m, respectively. We believe this highlighted a structural flaw namely that Tesco was obliged to make payments, in this case broadly equivalent to 12 months of salary (although Tesco may attempt to reclaim the payments depending on the findings of the Serious Fraud Office which is investigating Tesco’s supplier payments).
We were not directly criticising Tesco because the company faced a contractual obligation. The level of the payments, however, provides a case for examining whether it is in the interests of our clients – or anyone – to have 12-month service contracts. We therefore concluded that we will oppose such contracts, effective from March 2016.
We have published a further commentary on our new policy at http://www.omglobalinvestors.com/corporate/media/reduction-in-notice-periods-pe/
Old Mutual Global Investors is has implemented voting across its in-house equity funds consistent with our policy guidelines as set out at (http://www.omglobalinvestors.com/corporate/about-omgi/governance/).
Head of UK Stewardship and Governance
Old Mutual Global Investors