Governance and why it's critical to how we invest
When investing your money in a public company, you are trusting company management to do the right thing by you. So, assessing a company’s governance should be and is a critical component of our investment decision process.
What do we mean by governance? Governance is an evolving concept, but today it would include:
- the prudence exercised around executive remuneration, including share option issues
- the recognition of the legitimate interests of minority/external shareholders
- sound systems of internal controls for risk oversight and the timely disclosure of matters to the market, and
- systems to identify conflicts of interest and to safeguard against bribery and gratuitous payments.
- Governance is an evolving state, so we work to keep abreast of what is viewed as best practice. If we went back to the 1980s, there were many related-party transactions between companies and their directors and management. As a first step, a requirement to disclose these transactions was introduced and then investors agitated to see their elimination. Now, we are considering whether the appropriate systems are in place to detect and ensure such transactions are appropriately reported.
However, rules will not stop poor behaviour: people will find a way around them if they want to. Therefore, we consider the ‘spirit’ of the way management and boards comply with the requirements and not just the letter of the law, often judging their actions when events go awry. At a level, this involves having a view on members of the board, and particularly the chairperson, to drive a culture of responsible and ethical decision-making.
There are several companies we choose not to invest in given the disregard a major shareholder, management or board has shown to external investors in the past. You build a knowledge about individuals in the market over time and can avoid those who have not stuck with the spirit of the rules.
As featured in Alan Kohler's The Constant Investor