As stewards of our clients’ capital, it is our responsibility to fully evaluate the material factors that affect risk and performance for all of the companies in which we invest – and to engage when we believe change is needed. While our active ownership and shareholder engagement activities are year-long endeavors, proxy season is when much of this work can come to fruition.
We encourage each company we invest in to demonstrate exemplary corporate behavior. We closely evaluate how a company treats all of its stakeholders: its employees, its customers, the communities in which it operates, and its exposure to material environmental and social risks. All of these factors affect the top and bottom lines.
We are not alone in our convictions. According to both As You Sow’s 2019 Proxy Preview and Ernst & Young’s 2019 Proxy Preview, the key areas investors want boards to focus attention on are board diversity, human capital management, and company-relevant environmental and social issues, particularly climate risk.
Board diversity has increasingly become an important issue in the U.S., highlighted by the recent legislation in California requiring that locally headquartered, publicly traded companies have at least one female director by 2020. And while the law is new to the U.S., countries such as Norway, Spain, France, and Iceland all require at least 40 percent women representation on boards of publicly listed companies.
It is important to note that at Reynders, McVeigh, we believe in the financial case for diversity of race, ethnicity, age, and even professional backgrounds. For example, a 2018 McKinsey & Company study found that “companies in the top quartile for gender diversity on their executive teams were 15 percent more likely to experience above-average profitability than companies in the fourth quartile. In our expanded 2017 data set this number rose to 21 percent and continued to be statistically significant. For ethnic and cultural diversity, the 2014 finding was a 35 percent likelihood of outperformance, comparable to the 2017 finding of a 33 percent likelihood of outperformance on EBIT[1] margin; both were also statistically significant.”
Human capital management[2] provides a clear example of how non-financial issues impact the bottom line. Consider the effects of retention and turnover. If a company is constantly losing employees, it must deploy more resources to replacing that talent – from the search process to training and onboarding. A report on employee engagement from Deloitte also showed that “American businesses lose productivity worth $300 billion annually due to disengaged workers.” The same report also claimed that businesses with a highly engaged workforce saw “a three-year revenue growth rate 2.3 times greater than average.”
Consideration of environmental risks and opportunities has always been a cornerstone of our investment philosophy. Climate change is very real, as are constraints on natural resources. The companies that will benefit the most in the future are those prepared to operate in this rapidly changing global environment, as well as those working to limit emissions, water use, and improve the state of our natural environment, whether in their own operations or through the products and services they provide.
Engagement on these factors and other issues can uncover opportunities. Perhaps more importantly, as we are charged with preserving our clients’ capital, we believe that working with companies on these issues protects our investors from downside risk. All one has to do is look back on the Cambridge Analytica data breach that led to Facebook losing close to $120 billion in market capitalization in one day, or consider the $1.4 billion in costs and more than $14 billion in expected liabilities PG&E could face in 2019 as a result of the California wildfires.
We engage to advance the factors we believe are directly correlated to long-term value. We continue to work with the companies we invest in to ensure that they are considering all financial and material non-financial factors that may lead to outperformance and mitigate the risks and volatility inherent in financial markets.
DISCLOSURE: This material is proprietary and is produced by Reynders, McVeigh Capital Management, LLC, including its division Fresh Pond Capital (collectively, “RMCM”) for educational and informational purposes only. This should not be construed as a research report, a recommendation, or investment advice, and should not be relied on as such. The opinions expressed in this material are subject to change and represent the current, good-faith views of RMCM at the time of publication (May 2019). All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed, and RMCM disclaims any duty to update any of the information and data contained herein. Certain statements may be deemed forward-looking, but any such statements are not guarantees of any future performance and actual results or developments may differ materially from those discussed. There is no guarantee that investment objectives will be achieved or that any particular investment will be profitable. Past performance does not guarantee future results.
[1] EBIT: Earnings Before Interest and Taxes
[2] Human capital management (HCM): A set of practices related to people resource management, such as the skills, knowledge and experience possessed by an individual or population, viewed in terms of their value or cost to an organization.