Transcript Super Informed Radio episode 17

Super Informed Radio episode #17: Governance is the (not so) new black

August 2018

Disclaimer: What you're about to read is of a general nature and doesn't take into account your personal financial situation, needs or objectives. We recommend you seek financial advice before making any decisions about your super and consider the relevant UniSuper product disclosure statement.

Rob: Hello and welcome back to another episode of "Super Informed Radio," the podcast where we help you wade through the complexities of super and the broader world of finance. As usual, my name is Rob.

Lyndon: I'm Lyndon.

Marta: And I'm Marta. So, a little while ago, we had a couple of special guests in the studio — Talieh Williams, who is our manager of governance and sustainable investment, and Sybil Dixon, a senior investment analyst at UniSuper — to talk to us about ESG, so, like, the environmental and sustainable side of investments here at UniSuper.

Rob: Mm-hmm. We did. And I notice you didn't mention the G there, Marta.

Marta: No. The G was a little bit silent there.

Rob: The G in ESG.

Marta: The G, which stands for the word, governance, doesn't get a lot of airtime, I think, because of the debate and prominence of climate change and those kinds of issues in the broader zeitgeist. But in many ways, governance, and especially as it relates to investments, is actually probably one of the more important aspects of it. So, I thought this month we could bring them back to help us unpack it a little bit more.

Lyndon: And that we did, Rob. 

Rob: We did. We had a chat with Talieh and Sybil. Should we have a quick listen?

Marta: Yeah. Let's do it.

Rob: Talieh and Sybil, welcome back to "Super Informed Radio."

Sybil: Thank you.

Talieh: Thank you. Good to be here.

Rob: Now, we chatted to you guys several months ago and we talked a little bit about ESG. And we're just sort of scratching the surface at that time. And we wanted to bring you back because there's just so much more that we could talk about.

Today, we're gonna focus a little bit on corporate governance. And it'd be great if you could just give us a bit of a definition as to what that means and then we'll sort of take it from there. So, I'll hand it over to you guys. What does the G mean in the ESG, the corporate governance?

Talieh: Sure. So, it's Talieh here. And UniSuper has been focused on corporate governance for an extremely long time. So, I've been with the fund for over a decade and already when I joined, there was already a strong approach to governance in place.

And when we're thinking about corporate governance, it's the system, both formal and informal, of rules, practices, processes and behaviors by which a company is governed and managed, and the way in which it's operated. And the board of the company is absolutely fundamental in terms of setting that corporate governance framework and really setting the tone for that corporate governance culture.

And we see the chairman of the board as essentially being the captain of the ship who is guiding the company and setting the tone from the top. And there's also a really strong relationship between corporate governance and in the culture of a company. And culture can be really, really difficult to define. But simply put, it's what people do when no one is looking. And those things are really important to us as a large institutional investor in Australia.

Is there anything else you would add to that, Sybil?

Sybil: I'd just add that one of the most important jobs that the chairman and the board has is choosing an appropriate CEO to execute their vision. And so, we put a lot of emphasis on how that decision is being made and sort of the other decisions around that, so, things like remuneration and incentives that are in place.

Rob: So, what actually is our approach to investment governance?

Talieh: So, it's fairly broad ranging and Sybil has already picked up on some of that. First and foremost, I think a really key point to make is that UniSuper is a large institution. It's a really significant investor both in Australia and internationally. And UniSuper has significant ownership rights and with those rights equally come responsibilities and obligations to discharge those in a prudent manner and in our members' best interest.

And so, when we're looking to invest in companies, we really focus on wanting to invest in quality companies, and very central to that is focusing on companies that have strong corporate governance practices in place that have an appropriate board of directors and appropriate chairmen, a good CEO, and ensuring that we're comfortable with the way in which the company is governed.

So, we do a lot of pre-investment due diligence on that corporate governance issue.

Sybil: One of the things that we do like to see is that a company, both listed and unlisted, is relatively aligned with the values that UniSuper deems to be important. So, we like to see not just sort of a focus on shareholder returns, which is our absolute priority, but also that people are safe at their workplace, that they're treating the environment in which they operate responsibly, that they're a good corporate citizen and that they're managing their stakeholder relationships well not just with their direct counterparties but with the wider community in which they operate.

We're quite comfortable stepping in and telling boards when we're not comfortable with how certain aspects of their business are being run. Both in the listed and unlisted space, we've had very firm and frank conversations with boards and chairmen, sort of saying, "We're not comfortable with whether or not it's an attitude to safety, whether or not it's an attitude to community relations, stakeholder management."

Rob: In terms of that due diligence, it is quite a thorough due diligence. I think you said in our last podcast that you actually go out to the workplaces sometimes and check that it is safe and they are actually practicing good governance, principles.

Talieh: And doing the site visits, that enables us to look at a whole range of ES and G factors, but it's still very difficult to gauge and measure governance just by visiting a workplace. So, it really comes down to knowing who's on the board, who the chairman is, who the CEO and executive management team are, trying to get a feel for what their relationship with each other is like.

And then also looking at other factors such as executive remuneration and how executives are being remunerated. Is the remuneration aligned with our expectations as a shareholder? And for example, we recognise that company CEOs can, in every day terms, be paid quite large sums of money. And that quantum can be one issue, but the key issue for us is making sure that executives aren't being remunerated for poor performance and that they're not being incentivised to do things that will damage the company in the long term just so that they can get their incentive payments.

And so, we spend a lot of time with our portfolio managers looking at remuneration structures to ensure that there is that alignment. And the ability to vote on remuneration reports each year then provides us with the mechanism to provide that feedback to companies as well. 

Sybil: I think it's also important to note we don't just take what the company says into account when we're considering companies. We look at a range of external sources as well as the company's own reporting. So, if they say that they've got a good, I'll use health and safety again as an example, but they've got good occupational health and safety processes in place and all of these sorts of things.

We do look at things like, you know, injury rates and fatalities and those sorts of things to just make sure that it's not just a policy that's sort of sitting up on a shelf gathering dust. We do like to see continual improvement in the way that companies are operating. And, you know, those sound processes should reflect in a decrease in injury rates, a decrease in admissions or whatever the particular policy that we're looking for.

And that's a good, sort of sometimes a better, indication of what culture is, then what the physical policies that they have in place are.

Lyndon: Something that just occurred to me is we invest in companies that are pretty large companies. You know, they might be the multinationals or have head offices in multiple states and things. When you talk about going to, you know, meet with the relevant representatives from those organisations, like, who is it or how much of a sense can you actually get of companies that are so massive? 

Talieh: It can be really challenging particularly as a global investor we're based in Australia. But because we now manage a number of international portfolios internally with our own investment team, not just through fund managers, we have increasing access to those large international companies.

But when we're talking about our active ownership approach and the engagement with company boards, a lot of that still really is in the domestic Australian market. And that also makes sense for us because that's where our most significant investment exposures are and the largest sums of money are invested. But notwithstanding, we are really focused on expanding that engagement with international companies and that is happening more and more.

Sybil: And we do use other third party both from a proxy voting perspective. We have someone who advises us for international companies that does do engagement with these companies directly. More globally, it's more removed. It's not us doing it directly, but third parties will undertake some level of engagement around corporate governance and those sorts of principles that are aligned with what we're after. So, both our proxy voting provider, also our ESG research data providers, and then again, it's sort of also using, you know, just news articles and those sorts of things to get a sense for how these things are practiced.

Talieh: We don't try to quantify it and some institutions and research houses do try to quantify it. For us, we focus on it from a qualitative perspective because intuitively, good governance makes sense. And if the company's well governed, then it means it's more likely to be doing other things well such as safety, for example, and to be able to generate sustainable returns into the long-term. And if you go down the path of trying to quantify it, it then becomes a question of whether it's causation or correlation, again, to this debate about is it really the corporate governance that's being effective or not. So, we sort of go from a qualitative perspective. And just from that intuitive approach, we believe it makes really good sense.

Sybil: But one of the factors that if you manage safety well, it's probably more likely that you're going to be managing your leverage better as well. So, you know, the financial aspects of a business are tied to how they manage other risks, financial risks. If a company is managing their ESG risks, it's highly likely that they're managing their financial risks better. So, that's why we believe quality leads to better investments.

What good corporate governance is can vary between companies. So, different companies face different risks. And what might be incredibly appropriate at one company will not be appropriate at other companies. So, it is important to sort of take the context of how a company operates the business at their end, the region that they're in. There are certain absolutes that, you know, should be held true, but what's appropriate for a retail business is not necessarily appropriate for, say, a miner.

So, we need to consider, while there's sort of high-level principles, it should remain consistent. There's not, you know, one specific indicator where you can go, "Oh, that's good corporate governance," and it will apply universally.

Rob: Are there any examples of where we have actually stepped in, you know, not naming companies or sectors or anything, but just to give a bit of a flavor for the types of things that we have sort of brought up in the past as a significant issue to get our…the company that we're invested in kind of back on the right track or something? 

Talieh: We do from time to time. And these issues can be quite sensitive and we need to make sure we maintain diplomatic and strong relationships with the companies we're invested in. So, we typically would never conduct any of these activities publicly or name names. But there certainly have been instances in which UniSuper has had a strong view on issues such as the need for board renewal and the appointment of new directors to companies.

And so, we actually do step in and say this change really does need to occur. And if it doesn't, we'll be voting against the appointment of directors at the next AGM or potentially even voting against remuneration report because one thing we should note is that in Australia, since around 2011, we've had what's called the two strikes rule. And what this law means is that where a company receives a vote against its remuneration report of greater than 25% in 2 consecutive years running, if in that second year there is an against vote of 25% or greater, shareholders then have the ability to spill the board.

And so, it's quite a strong tool that could be employed by shareholders. It's never been used. And so, some companies have received a second strike and the board hasn't been spilled, but the risk of that occurring has made directors and companies very aware of the need to engage and listen with investors because they know that if they don't, there's a risk that there is that tool that could be used as a means of last resort.

Lyndon: And UniSuper is just one investor potentially in a company. There might be a number or many other investors in the same company. Does everyone have the same approach that we do?

Talieh: Not always. And many of these corporate governance issues can be quite nuanced and involve sort gray areas. And so, we might have a strong view one way. Another investor might have a strong view another way.

But what it does do, I guess, is generate healthy dialogue and debate. And ultimately, we also try to employ a common sense approach. So, even though we might not always agree with everything a company is doing, we also wanna be practical in terms of our approach particularly to corporate governance. So, we are flexible in that regard. 

That said, we do also, from time to time, collaborate on engagement activities. So, UniSuper is a member of the Australian Council of Super Investors and that has a number of large superannuation funds that are members of it. And AXA also conducts quite a range of engagement and corporate governance related activities as well on behalf of its membership base. 

Rob: Talieh, Sybil, one final question. What we've been talking about today, this corporate governance, does that apply to just our sustainable options or is it across all of our investment options.

Talieh: Absolutely across all of our investment options. So, our approach to looking at corporate governance and being an active owner is central to all of our investment activities including our sustainable NGO options. And it's an approach that's, as mentioned previously, been in place for a very long time. Should people want more information, there's some on the website and also in our six-monthly responsible investment report. And we should also add that these are issues that we routinely hear from our members about. And so, we're always happy to answer questions and to respond to any inquiries that members might have.

Rob: Fantastic. Talieh and Sybil, thank you so much for your time. 

Sybil: Thank you very much. 

Talieh: You're welcome. Thank you.

Marta: So, that was Talieh and Sybil there for round two of grilling by you guys on the pod. Now, some pretty interesting stuff and I didn't realise that as a bit of a noob, that we place so much emphasis on that. I mean, I knew a bit, but it was really interesting to see that and especially for me, how not all companies or not all investors might have the same sort of approach to this.

Lyndon: Yeah. Again, I'm sure you're the same, Rob. I felt like we were kinda just scratching the surface there. We really could go on and on. We won't, but we could. 

Rob: We'll definitely invite them back to talk a little bit more about that. It is just so fascinating.

Lyndon: Well, that wraps up another episode of "Super Informed Radio." Thank you very much for tuning in. As always, if you would like to learn a little bit more about governance and ESG considerations here at UniSuper, you can also read an article we've got in our latest member magazine, "Super Informed," which you will be getting with your statements very soon.

Rob: As always, you can catch up on past episodes of "Super Informed Radio" at unisuper.com.au/podcasts or subscribe to us through any good podcast app. See you next time.

Marta: Bye for now.

Lyndon: See ya.