During the earlier parts of his career, Sinatra had always strived for more creative control of his music and, in an effort to assert a new direction, he formed Reprise Records in 1960. Sinatra enjoyed many early successes running the label, building its appeal as one in which artists were promised minimal interference when creating music, as well as a guarantee that they would eventually gain complete ownership of their work, including publishing rights. His hands-on approach to running his company soon earnt him the famed nickname “the chairman of the board”, a moniker he apparently despised.
From being on a great record company’s board of directors, to having a great record as a company’s board of directors, achieving the right balance at executive level is crucial to a corporation’s future. The board of any company’s key purpose can be seen as the balancing act of ensuring corporate prosperity, whilst simultaneously meeting the appropriate interests of its shareholders and relevant stakeholders. Being entrepreneurial enough to take a company forward and yet keep a firm control over day to day workings will have many directors Learnin’ the Blues, wrestling with the commercial interests of the business as well as the needs of society as a whole.
Interestingly, research shows that Environmental, Social and Governance (ESG) factors, although a fairly recent investment concept, are becoming increasingly important when investors choose the composition of their portfolio. According to the Royal Bank of Canada (RBC)1, and primarily manifesting as a growing trend amongst younger generations, 76% of Millennials, those born between 1985 and 2000, believe it’s essential to have ESG factors integrated when investing. For Baby Boomers, those born before 1964, 37% see it as a consideration.
I’d suggest that whilst the E and S parts (of ESG) are well understood by investors, it is the G, focusing on the boardroom dynamics, that are the strangers in the night.
That is to say, it’s a relatively easy concept to understand that you can simply boycott or exclude from your portfolio, for example, companies that could do harm to the environment such as those involved in extracting natural resources, or those that are fundamentally involved in selling products that are addictive, like alcohol and cigarette companies. Far less of an issue seems to be placed on board diversity, corporate structure, bad behaviours and doing something about it. By simply taking a default position of exclusion, based on E and S principles alone, forfeits the chance to change a company’s practices by gaining a seat at the table and holding them accountable for their actions and behaviours, and influencing positive change from within.
Within a company, the board of directors is the principal agent of governance and enterprise, and the principal maker of commercial decisions. This makes it the prime target of shareholders, who can apply pressure if they see a need for change in direction or corporate culture.
An integral part of the ESG mandate is for institutional investors, such as fund managers, to try and change a company’s corporate culture from the inside out by vetoing such actions as large unjustified boardroom pay rises as well as corporate vanity projects and baseless M&A activity.The rise of such a dynamic approach also pushes the case for employing an active investment strategy. Firstly, it is really only active managers who can directly engage on the issues that are important for their clients and secondly, such managers play a key role in exercising proxy voting, ensuring that the interests of shareholders are represented. Although passive instruments can offer exposure to themes broadly in line with a client’s beliefs, they cannot regularly participate in enforcing them.
It’s important to recognise that ESG investing is not necessarily about screening out companies which work in industries that go against a client’s principles; it can provide the investor with the ability to influence and help enlighten companies, rather than to just not engage with them at all. What is more important, however, is offering flexibility for clients who wish to invest in multi asset portfolios that are aligned to their principles and tailored to their own specific needs. Perhaps Frank Sinatra can provide enlightenment at this juncture once again, as the great crooner once sang I did it my way, a sentiment we can all appreciate when investing.
Please remember, the value of investments can fall as well as rise and you could get back less than was originally invested.
To find out more about how 1825 provides for ESG investing , please contact your 1825 Financial Planner or, if you’re new to 1825 and would like to find out more about how we can help, please Contact Us.
The information in this blog should not be regarded as financial advice.