Q3 2015 Stewardship Report

Stewardship and Managing Equity Interests for Our Clients

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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 UK 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.  This 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 entrench 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 (http://www.omglobalinvestors.com/corporate/about-omgi/governance/) 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 July-September period of 2015 is set out below:

Leadership

Discussions continued with a company regarding succession planning for the leadership.  The company has continued a plan regarding the timing of a change but since their plan is close to completion, the question of leadership has become more pressing.  The company has begun the search for new appointees. 

Cash Distribution?

We continued discussions with a company regarding the timing of cash returns to shareholders.  The company generates significant levels of cash.  It invests in new operations – something with which we agree – but the remainder of the cash is retained.  We see there is a case for the company to consider special dividends or buybacks.  The company continues to be reluctant to accelerate the pace of returns but is recognising the case to do so.

Power: Drax

On 8 July, the UK Government announced it would remove an exemption from the Climate Change Levy earlier than the company and investors had been led to believe.  The exemption had been in place since 2001 to encourage moves towards green energy supply in the UK.  The exemption partly underpinned Drax’s conversion of boilers from coal to biomass.  The latter, although not zero-carbon, represented a significant reduction in net carbon dioxide emissions by reason of new growth replacing the biomass used in the boilers to generate electricity.

The Government’s retrospective change on the exemption from the Climate Change Levy (a tax) caused the share price of Drax to fall by 30%.  It damaged the investment case and in response, we had to ask the company to stop further investment in carbon-reduction processes and to run the company to generate cash rather than over the longer-term.  This included stopping work on a joint project to capture and store carbon (CCS) released by the generation of electricity at Drax. 

This was a difficult and deeply disappointing request to make: for material financial reasons, we were obliged to ask the company to stop further work on developments that would assist the UK reduce net carbon dioxide emissions.  We and the company were left with little choice but to take action which increases carbon emissions and therefore contributes to global warming.

The company was already considering these issues.  It announced, in September, it would withdraw from the CCS project.

We also met representatives from the UK’s Department of Energy and Climate Change.  It appears they were not part of the Government’s decision making process on the tax exemption changes.

Industry Change: Ladbrokes

Ladbrokes announced a proposed merger with Corals.  We had been engaging with the company for some time on the combination – and the business generally – and view it as a positive step in the company’s adaptation to a changing market. 

The merger remains subject to regulatory and competition scrutiny. 

The chair of the combined entity is proposed to be an individual who is currently the Senior Independent Director of the Ladbrokes board but was formerly an executive at Corals.  We are aware of claims that the new chair would not, through involvement with Ladbrokes and Corals, be sufficiently independent.  We take the view, however, that this Chair is an appropriate appointment given knowledge of the industry, the work involved in integrating the new business and to support the Ladbrokes CEO, who will be CEO of the combined entity. 

National Living Wage

We met the chair of a retail company.

In addition to discussions regarding strategy, leadership and performance, we also discussed increases in the minimum wage.  This was some days ahead of the announcement by the Chancellor of the Exchequer of a move towards a National Living Wage in the UK.

The chair observed that the likely outcome of an increase in wages would be seeking improvements in productivity and, he considered almost inevitably, a loss of jobs. 

We welcome improvements in payments to lowly-paid staff but as noted in news commentary at the time the Chancellor announced the National Living Wage, there may be an impact on employment.  Thankfully, this does not appear to have occurred since the minimum wage was introduced. 

Climate Change: the Governor of the Bank of England’s speech

On 29 September, Mark Carney gave a speech to Lloyds of London on the subject of climate change.  Amongst other things, he noted that there are implications for insurers, financial stability and the economy from a warming climate.  He noted that the insurance industry has been addressing climate risks for years but that there may be underestimation of the potential losses from climate changes, that once climate change becomes a defining issue for financial stability, it may be too late and that there is a case for greater disclosure of greenhouse gas emissions by companies. 

The speech also included a phrase which is likely to be repeated widely in future: “tragedy of the horizon”, whereby the damaging impacts of greenhouse gas emissions will be felt by future generations.

Voting

Old Mutual Global Investors  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/).  

 

Paul Emerton

Head of UK Stewardship and Governance

Old Mutual Global Investors