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IMPORTANT INFORMATION
All data as at 31 December 2024, unless specified otherwise. This document is issued for information purposes only. It does not constitute the provision of financial, investment or other professional advice. We strongly recommend you seek independent professional advice prior to investing. The value of investments and the income derived from them may fall as well as rise. Investors may not get back the amount originally invested and may lose money. Any forward-looking statements are based on CCLA’s current opinions, expectations and projections. CCLA undertakes no obligations to update or revise these. Actual results could differ materially from those anticipated. All names, logos and brands shown in this document are the property of their respective owners and do not imply endorsement. These have been used for the purposes of this document only. CCLA Investment Management Limited (a company registered in England and Wales with company number 2183088), whose registered address is One Angel Lane, London EC4R 3AB, is authorised and regulated by the Financial Conduct Authority.
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Corporate governance and our portfolios
Corporate governance and our portfolios
Corporate governance is the system by which companies are directed and controlled. A board of directors is responsible for the governance of a company. The role of shareholders is to appoint the directors and auditors to satisfy themselves that an appropriate governance structure is in place.
“Do you solemnly swear to never question my authority?”
www.CartoonStock.com
Good corporate governance generally requires the following:
- a well-functioning board, which can both lead and control the business in nurturing its long-term success
- effective sub‑committees (reporting to the board): nomination, remuneration and audit (and risk)
- executive remuneration that aligns the interests of the directors with the long‑term interests of the company and its shareholders.
Governance evaluation process
Governance evaluation process
We use a bespoke quantitative corporate governance rating tool, designed to assess companies’ board structure, ownership, accounting practices and management capabilities.
The panel below details what each theme assesses and how these themes are weighted. A secondary, qualitative overlay allows us to identify strengths and weaknesses in a company’s governance structure and how these adapt over the life of the holding.
OUR Governance evaluation process
We score and weight companies on the following themes:
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capital stewardship
Assesses the quality of management and its ability to generate cash and manage growth
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accounting
Assesses the quality of the company’s financial statements AND ITS accounting
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board composition
assesses the quality of the individuals, their independence and their track record
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shareholder rights
Assesses the ownership structure of the company
Corporate governance and the investment process
Corporate governance and the investment process
At CCLA, our governance evaluation process is an integral part of our investment process and operates as follows:
- Corporate governance analysis is conducted on all prospective investments prior to purchase.
- Companies with a high governance risk will only be eligible for investment with the approval of CCLA’s Investment Committee.
- For a high-risk company to be approved for investment, the relevant investment analyst must demonstrate why the risk rating is incorrect or not of concern. This can require detailed qualitative analysis, fact-finding discussions with the company, and ongoing, target-based engagement.
- Should an existing holding’s rating decline to ‘high risk’, a full governance review is required and approval from CCLA’s Investment Committee must be secured for our continued investment.
- Review of high-governance-risk companies and portfolio structure by governance rating are standing agenda items at CCLA’s Investment Committee meetings.
Governance and our portfolios
Governance and our portfolios
Using our proprietary quantitative corporate governance rating tool, we award all companies that we assess a governance rating from A (best) to F (worst). Shown in percentage terms, the chart below compares the governance ratings of companies in our funds with those in the MSCI World Index.
A secondary, qualitative analysis is undertaken on every company prior to investment. High-risk companies (those rated E and F) are not permissible investments without approval of CCLA’s Investment Committee.
At the end of 2024, we held 11 companies deemed high risk according to our governance analysis. Investment in these companies was approved by CCLA’s Investment Committee, for the reasons outlined below:
- AIA Group. The main governance concern is the length of tenure of certain board members. While the average length of board tenure is 7 years, and there have been three new appointments during the past 12 months, half of the audit committee members’ tenures exceed 10 years. This is a concern as the committee is responsible for the oversight of the financial reporting process, including risk. Longstanding tenure may result in a lack of challenge to historic decisions in which a committee member may have been involved. We will monitor board and committee changes over the following year. Should the situation not improve, we will engage with the aim of increasing audit committee independence.
- Alexandria Real Estate Equities. The founding director remains on the board as combined chair and CEO. However, balance is achieved through the presence of several independent directors and a wide shareholder base.
- Schneider Electric. Jean-Pascal Tricoire served as CEO of the company until 4 May 2023, after which he was appointed chair of the Supervisory Board. While common practice in the local market, such an appointment is contrary to best practice and Tricoire’s re-election attracted a 20% dissent vote at the 2023 annual general meeting. This concern is balanced by the existence of an independent lead director and a large proportion of independent directors on the board and its committees. We will continue to monitor the situation.
- DiaSorin, EssilorLuxottica, LVMH Moet Hennessy Louis Vuitton, Nike*, Novo Nordisk and Pernod Ricard. Each of these companies has a degree of ownership concentration, which can be unfavourable for minority shareholder rights. While this was flagged in our quantitative governance analysis, our qualitative review showed that the companies had high-quality management teams, a strong track record of delivering value for minority shareholders and a long-term perspective. We will continue to monitor their governance arrangements.
Engaging with the board of PRS REIT
CCLA is a major shareholder in PRS REIT and we have had concerns for some time about the low valuation of the company’s shares and lack of action taken by the board to address the problem.
In the summer of 2024, we requested a meeting with the board, which took place in June. Unknown to us until the day before the meeting, the board had agreed changes to its investment advisory and development management agreements that extended the term of the contract with the underlying investment manager. This change was scheduled to take effect just one day after our planned meeting.
The news raised serious concerns for us. Not only had the board failed to undergo a meaningful consultation process with shareholders on its proposed plans, but it had also awarded an overly generous five‑year contract to the incumbent manager, despite its mediocre performance record.
Accordingly, we gathered a group of major shareholders and filed a requisition to convene an extraordinary general meeting. We called on all shareholders to vote on ordinary resolutions to remove two of the five existing independent non-executive directors: the chair, Stephen Paul Smith, and David Steffan Francis.
In response, the company offered to remove the chair and to add two directors (nominated by the investor group) if we would withdraw the requisition notice. This was agreed and the company has since undergone a strategic review and put itself up for sale. This is good news because the board is now able to return value to shareholders that is closer to the net asset value.
Two of the eleven companies are family founded and controlled. Engagement is underway to push for a more equitable balance of controlling and minority shareholders:
- Alphabet. The company has developed an unconventional governance structure to protect itself from the short-term nature of Wall Street trading. We are pushing for the appointment of a senior independent director.
- CME Group. Under the company’s articles, the individual share classes have the right to appoint directors. The board has made several attempts to unify the structure but has been unable to obtain the level of support required from each individual class of shareholder.
*Not held in CCLA portfolio(s) as at 31 December 2024.
Our proprietary governance rating
Using a proprietary quantitative corporate governance rating tool, we award all companies a governance rating from A (best) to F (worst). High‑risk companies (i.e. those rated E and F) are not permissible investments without the approval of CCLA’s Investment Committee.
The comparison against the MSCI World Index is for information purposes only. The governance ratings only apply to listed equities held in each fund (listed equities excludes investment trusts and other collective investment schemes). Not all listed equity holdings in the funds are included in the MSCI World Index. The funds’ data is reweighted to 100% for comparison purposes.
Source: Sustainalytics, UBS HOLT and CCLA, as at 31 December 2024.