Welcome to the second episode of the GSI Podcast, from Global Systematic Investors, presented by financial journalist and author Robin Powell. In this episode we’re going to look at Active Ownership.
Joining Robin is Paul Hewitt from Minerva Analytics. Minerva is a Solactive company and is a financial technology firm specialising in proxy voting, and Paul has some very interesting things to say.
Some themes Paul addresses include: Why small asset managers should care about proxy voting? How proxy voting companies like Minerva come up with proxy voting recommendations? How to tell if the data supplied by companies is of good enough quality? How voting transparency and reporting is tracked?
Robin Powell interviews Paul Hewitt, Stewardship Director at Minerva Analytics, looking into the importance of Active Ownership.
Robin Powell | Host: Hello and welcome to the GSI podcast. I’m Robin Powell. GSI stands for Global Systematic Investors. The company’s mission is to provide a successful long-term investment experience whilst allocating more to companies with a sustainable vision. To find out more, just visit the website, GSIllp.com. That’s GSIllp.com.
Over the next 30 minutes, we’re going to be looking at active ownership.
1.23 Robin Powell | Host: Why is this issue so important to you? And how did you get involved in this work?
Paul Hewitt | Minerva Analytics: I suppose I’ve always had a thing for the interplay between social issues and economics, back from when I was a student. When the opportunity to join Minerva came up it really caught my attention and my imagination. I have to confess, institutional investment was a new area for me when I joined 18 years ago, but it really made sense because my studies in democracy and voting really chimed with the idea of shareholder democracy.
1.59 Robin Powell | Host: When did you first realise that ordinary investors can actually make a positive difference in the way that companies conduct themselves?
Paul Hewitt | Minerva Analytics: That’s a really interesting question because with my privileged access to Minerva research at a relatively early stage, I had a little shareholding in a life insurance company called Chesnara, and I spotted in the research that I read on that company that the chief executive and his executive colleagues didn’t have any requirements in place to hold shares in the company that they ran. I looked at the number of shares the chief executive held in the company and worked that out as a percentage of what his salary was. Then I did the same calculation with regard to my holding the company and my salary, and I realised I had more skin in his game than he did. So, I wrote to the company to say I was going to vote against the remuneration report that year because you don’t have these provisions in place, and I think it would be a good idea for you to do so.
I got an acknowledgement back, and to be honest I didn’t take it very seriously. But within two years they had actually put that policy into place at the company, and I found that really encouraging because it showed the power of not just voting but communicating alongside it.
3.14 Robin Powell | Host: It’s hard to say whether your personal intervention had any impact, but how did it make you feel to learn that Chesnara’s board had made that change?
Paul Hewitt | Minerva Analytics: You’re absolutely right: I’m sure my holding the company didn’t make a tremendous amount of difference on its own. But I think the important thing is really making a good point from an informed perspective that chimes with good sense. For me, it was very encouraging to know that when an investor makes a good, relevant, well-argued point toward a company that is in the interests of the company and its shareholders that they do make a difference in terms of being heard. And I would be very surprised if there weren’t other investors making similar points around that time as well. You’ve got to take into account the fact that critical mass is the thing that ultimately makes that difference. If they’re getting the same message consistently from a good number of shareholders, then they know that that’s something that they ought to consider doing.
4.17 Robin Powell | Host: It’s an important principle for Minerva, isn’t it, that every vote counts. Tell us about the company and the services you provide.
Paul Hewitt | Minerva Analytics: You’re absolutely right about this idea that every vote counts, and one of the really important principles for us, is that we’re here to help investors take ownership of their own decision-making processes. We’re about providing good quality information, which is a slight differentiator for us compared to some of our competitors. So, you won’t see headlines about Minerva making recommendations about a particular company meeting because all of our customers receive custom, bespoke voting guidance which is derived from a policy that’s proprietary to each customer on their own.
What we’re looking to do there is, in addition to helping each client underpin their own perspective in the voting guidance they get from us, is to enable them to ensure and demonstrate with transparency that they’re aligning the interest of management and their own ownership of the company. So that’s really at the heart of what we do, and whilst today’s conversation is largely about voting, we see voting as an integral part of that wider ownership or good stewardship process. For us, transparency, objectivity, and an evidence driven approach are really important in demonstrating good practice.
6.11 Robin Powell | Host: The whole ESG issue is very subjective. We all have our own priorities, whether it’s climate change, social issues, or whatever. How does Minerva allow for these differences?
Paul Hewitt | Minerva Analytics: We see our role as providers of quality information in order to be able to help investors arrive at their own conclusions and to accommodate all of those different perspectives. The one thing we need to make sure we do is to provide a really comprehensive range of information data points that feeds into the research systems that our clients make use of. Then, once we’ve got that sufficient range of inputs, the second piece is to deploy smart technology to enable clients to make use of those pieces of information in the way that they choose to make use of them.
So, for example, on the question of dividends, when there’s a resolution about approving the dividend at a company, different investors may take different perspectives on the point at which they might choose to oppose a dividend resolution. Our job is to say, let’s have questions about dividends. Let’s have a choice of outputs about what the voting guidance from our system will be. If the investor chooses to say, let’s make sure the dividend doesn’t exceed returns, or let’s not be too worried if the dividends exceeded returns this year but was fine the last year or two. In that way, we provide the variety of not just the substance of the considerations but actually what the investors choose to do with them.
8.08 Robin Powell | Host: How comprehensive is the scope of what you cover? Do you focus mainly on environmental sustainability? Or are the S and G in ESG just as important?
Paul Hewitt | Minerva Analytics: We focus principally on governance. But governance is, if you like, an umbrella discipline through which we then understand how the company is addressing all of its various different responsibilities, of which sustainability is becoming the most important.
The scope of the research that we do covers the way that the company is run, the way the board is organised, how the directors are remunerated and incentivised, how the company is audited, and the audit and internal control mechanisms they have in place.
Then we also look at what kind of policies the company has in place with regard to its external responsibilities, and that’s where you start to find the interaction with what we would commonly term ES, or the E and S issues — the environmental and social issues. We’re looking at how well the company is managing, making its responsibilities known, managing those responsibilities, and reporting them, and the ability to hold it to account for those commitments.
9.29 Robin Powell | Host: Executive remuneration is a key ESG issue at the moment. I understand that part of Minerva’s philosophy is that you actually don’t mind approving higher remuneration for company executives who are “doing the right thing”. Is that correct?
Paul Hewitt | Minerva Analytics: It’s not uncommon for our clients to take that kind of approach. But I want to bring it back to our role in this piece. What we’re here to do is to enable our clients to make the links between what they want to see happen at companies and what’s being reported and how it’s happening at the moment. So, let’s take sustainability and the improvement of sustainability performance as an example when we’re looking at executive remuneration. One of the things that we’re looking for is the nature of the linkage between the way that directors are incentivised to perform through long-term and short-term bonus pay and the sustainability commitments of the company. At a very basic level, are the key performance indicators according to which the chief executive’s bonuses are paid out, in alignment with the company’s sustainability commitments that it makes to the market and to its other stakeholders?
11.26 Robin Powell | Host: The proxy voting sector is growing quite fast in response to the current popularity of sustainable investing. Who are your main competitors? And how do the services you offer at Minerva differ from those of your competitors?
Paul Hewitt | Minerva Analytics: I think there are two broad areas where we would say we have competitors. One is those companies who provide voting and voting-related research services for their clients to make use of. In that bracket, our key competitors would be people like ISS and Glass Lewis. There’s also another UK-based competitor called PIRC, and there are a number of other often market-specific competitors that are operating around the world as well. But in terms of those companies that offer global coverage — i.e., coverage of meetings around the world — I think that probably covers the main group.
Then, slightly further afield, there are other service providers who provide engagement services, within which voting might feature. They may also be clients of ours or of our direct proxy voting competitors. But then you’re talking about competitors’ people like Hermes, EOS, Robeco, and the like.
That’s basically the landscape within which we compete, and within that landscape, I think the thing that most obviously singles us out is what I referred to earlier, which is that all of our clients receive custom, bespoke voting guidance from us. Pretty much everybody else produces their own in-house voting recommendations. So effectively, they’re saying, we as an entity have a corporate view on how we think the world should vote at this meeting. Fundamentally, because we see our role as supporting investors in making those decisions, frankly we don’t think it’s our business to make pronouncements about how we think other people should vote at a given corporate meeting. And because we’re not the investors, we don’t bear the economic consequences of the choices that we’re facilitating. Our job really is to provide information to enable those that do bear those consequences to make informed decisions transparently and report on them.
14.15 Robin Powell | Host: This is a relatively new sector, but you as a company have been around for quite a long time. Tell me about that and how the landscape has changed since you first came on the scene.
Paul Hewitt | Minerva Analytics: It depends on what you call new. But Minerva’s been going for nearly 30 years now, and I think the role of sustainability considerations in institutional investing has been taking off to a greater and greater degree over the last 15 years or so.
I would say you could pretty much use any point in time and see there’s been an upwards “hockey stick” curve from that point. But I think if you look at the last ten or 15 years, one of the things that has changed most noticeably is that it’s become more and more important for institutional investors to prioritise their own ownership of their voting decisions. So, we’ve seen a lot of them moving away from just relying on third-party voting recommendations to really digging under the surface to make sure that they understand, and can demonstrate, how they’re arriving at voting decisions.
I think voting ten or 15 years ago was sort of a nice-to-have, perhaps acknowledged as possibly important, whereas now, today, you really can’t compete if voting is not an integral part of your investment proposition, because it’s recognised as being an utterly relevant part of the investment process.
The other thing I was going to mention was — particularly from the UK, but it’s now a global phenomenon — the rise of stewardship codes and a codified approach to how stewardship should be conducted. I think that’s really had a tremendous impact on the number of investors who now realise that voting is and should be a relevant part of what they do.
16.34 Robin Powell | Host: There’s been much discussion about the really big asset managers, like Vanguard and BlackRock, which own massive chunks of publicly listed companies. Why should small asset managers care about proxy voting given that they’re likely to be too small to have a huge impact?
Paul Hewitt | Minerva Analytics: Going back to the anecdote that I related earlier about my own personal experience, and I would be very surprised if there was an asset manager on the planet that was managing assets as small as my own personal pension pot. But aside from that, I think, more importantly, is the point I made about the critical mass of multiple investors having a say. Even the largest index-based investment houses in the world are very rarely majority shareholders. They’re frequently major shareholders but a major shareholder need only be 3 or 5% of the share register, so you still got 95% of everybody else who also have a say and so, companies, in particular, do listen to their institutional shareholders and the fact that those institutional shareholders make their voices heard towards the company is what grabs their attention, irrespective really of how large that investor’s holding might be in the company.
17.00 Robin Powell | Host: How compatible is active ownership with the systematic investment approach favoured by firms like GSI?
Paul Hewitt | Minerva Analytics: That’s a really good question, and I think that one of the reasons why I’m delighted that we’re working with GSI is actually this term systematic because we’ve always proposed a systematic approach to making voting decisions. Irrespective of how an investor acquires an asset, once they acquire it, they are owners and they have ownership responsibilities, and whether you call the way they acquire those assets passive or active or whatever vocabulary you use, that is still different from the way that they approach ownership. You can still approach ownership in an active way, even if you might describe the way they acquired the asset as passive.
20.00 Robin Powell | Host: As a firm, you focus on 200 names, or holdings, for each client, rather than try to look at all of them. Why that number?
Paul Hewitt | Minerva Analytics: I think I would always underline quality over quantity when it comes to implementing an active ownership approach. Every investor is different, and I think what’s important really is to dedicate the appropriate resources to those companies and those issues which are most important to you for whatever reason. So that reason might simply be your exposure to the company in terms of it being one of the largest positions in your portfolio. Or it might be that there’s a group of companies in your portfolio who are particularly at risk in terms of an investment focus of yours. For example, climate risk might be a very good example of that, where investors might focus more attention on those companies where the climate risk is greatest. So, it’s entirely appropriate, really, to focus resources on a smaller number of companies in your portfolio, and indeed I’d argue it’s inevitable that some companies will attract, and perhaps deserve, more focus from you, and time, than some others. So, it’s entirely appropriate.
21.30 Robin Powell | Host: How does Minerva come up with proxy voting recommendations? And give an example of a recent recommendation you’ve made.
Paul Hewitt | Minerva Analytics: Sure. As I mentioned earlier on, we’re collecting lots of data points about a company ahead of an AGM that we assess for — there’s over 2000 of them in actual fact. Our job really is about making sure that we associate those data points which are relevant to each resolution on the voteable agenda. And then the next piece that we do is to test the company performance on each of those data points against each of our client policy template settings. Once we’ve done that, for each client then we’re able to produce a proposed voting orientation for that resolution.
So, to give you an example, when we’re looking at a non-executive director election resolution, there will be a number of independent criteria that we’re looking to examine. And I use the word examine very carefully because, as I said earlier on, we’re not making house recommendations ourselves. So, we’ll have some clients for whom the length of tenure that director has served will be a relevant consideration. Some clients might say we want to vote against directors who’ve been around for 12 years, others might say nine, others might say 15. Our job is to say how many years that individual has been in place. We record that data point on our data set and then it’s the database that then says, OK, Client A will want to vote against because this person’s been in for ten years, and Clients B and C will be fine to support the re-election of this director at this time. Every single one of those 2000 questions or so operates in exactly the same way and that’s how we produce the voting guidance our clients receive.
23.38 Robin Powell | Host: The work that you at Minerva do is obviously very data-driven. How can you tell if the data supplied by companies is of good enough quality?
Paul Hewitt | Minerva Analytics: In the context of voting, most of the disclosures which companies are required to make are regulatory disclosures, so they will have been subject to some form of robust quality control and audit before they go out. But you’re absolutely right: the quality of data can’t always be guaranteed, and the availability of data isn’t always guaranteed either.
We always say from our own data geek perspective, if you like, that a lack of data is data itself because it’s telling you something about what the company has perhaps chosen to be unwilling to disclose. But fundamentally, because we’re using public disclosures, we’re no more exposed to bad data than the rest of the market is. We’re also able to apply our expertise and experience in gathering and interpreting this data to perhaps make something more meaningful out of that potentially lacking data than somebody who is only doing this for part of their job might be able to arrive at. Also, it’s fair to say that sometimes we do unearth genuine mistakes in company disclosures because we have built into our own quality control procedures a number of checks that we put into place. Very occasionally that throws up some anomalies. So, it’s a combination of accepting that companies need to bear responsibility for the accuracy and probity of the information they give to the market — and that’s a very important dynamic for supporting well-functioning markets — but also combining that perspective with our own expertise in dealing with this kind of data day in day out. It means that our clients are as well positioned as anyone can be to make the best of the data that’s available.
26.15 Robin Powell | Host: Thankfully, there’s more and more emphasis now on transparency in the asset management industry, and it’s something that end investors are increasingly demanding. How do you keep track of voting transparency and reporting?
Paul Hewitt | Minerva Analytics: Well, as I mentioned earlier on, one of the facets of the increase in the demand for the stewardship code is for investors to be able to be held to account for the decisions they’re making on behalf of all of us. After all, it’s our money that they’re managing. Minerva clients get comprehensive, evidence-driven reporting from those voting database systems. Very simply, each of those 2000-odd research questions, upon which the voting template system is based, has its own reference number. Every time we produce a piece of voting guidance for a customer, it’s because we have flagged one or more of those questions in respect of which the company has failed to reach the expectations of the client’s voting policy, and therefore it is included as a part of the rationale for that voting guidance. So GSI and our other clients, when they get a piece of voting guidance on our system, don’t just get the For, Against, or Abstain for the resolution. It also tells them which lines of their voting policy have triggered that piece of voting guidance. So, they can use that same evidence trail when it comes to reporting the decisions they’ve made at the end of the season.
27.55 Robin Powell | Host: How do you see the proxy voting sector developing over the next 30 years, because it is a very fast-changing area, isn’t it?
Paul Hewitt | Minerva Analytics: Yes, it is. Clearly, the rise and the rise of sustainability as an investment consideration is only going in one direction — and not just because of the urgency and the rightful importance attached to the whole climate change issue. There are more and more ways in which sustainability is coming to the fore. I referenced the Task Force on Climate-Related Financial Disclosures early on, and that is now very much hardwired into the way a lot of our clients are thinking and approaching their voting. There is also in the pipeline a Taskforce on Nature-related Financial Disclosures, which is also going to bring in a lot of considerations, particularly around biodiversity. So those two considerations are clearly going to be key in voting in the future. I think we’ll also see the growth of instances of shareholder proposals at AGMs — shareholders putting questions on the agenda of a corporate meeting. I think we’re likely to see that growth continue as well. Also, as the importance of institutional investor voting becomes more and more appreciated and comes more and more under scrutiny, the regulation in that field is going to become more prevalent too, and I think that’s as likely to apply to us as a service provider in this space as it is to investors. That’s a trend that we’ve already been seeing and, again, I don’t think that’s going to be going away anytime soon.
29.55 Robin Powell | Host: What would you say to an institutional investor or a trustee, or the owner of a financial advice business, who is trying to choose a suitable ESG asset manager? Why is it important to choose one that has a proxy voting solution like Minerva?
Paul Hewitt | Minerva Analytics: It’s because stewardship is something that requires a good deal of transparency and accountability if it’s to work properly. Therefore, when you’re selecting an asset manager to work for your clients, I think their ability to be able to be accountable to you for the way in which they’re making use of all of the ownership rights on behalf of you and your clients really is key. If they’re unable to do that, then there’s a lack of transparency there that’s unhelpful to be able to demonstrate whether your clients’ assets are being managed suitably responsibly.
Robin Powell | Host: Paul Hewitt, thank you very much indeed.
Paul Hewitt | Minerva Analytics: Thank you very much.
You’ve been listening to the GSI podcast from Global Systematic Investors.
I’m Robin Powell, and you heard me interviewing Paul Hewitt from Minerva Analytics. Thank you to Paul and thanks to you for listening. If you’ve enjoyed this episode, please do review it. We’d love to hear your views. And of course, remember to subscribe to it, so you don’t miss the next one. Until then, goodbye.
PLEASE NOTE: The original interview has been slightly edited for brevity and clarity
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