Governance & Smørrebrød – Best Practice Discussions in Copenhagen

    by Richard Tyszkiewicz & Aline Reichenberg Gustafsson, CFA

    As the world of investing grapples with a deluge of environmental and social considerations that necessitate tracking, managing, and disclosure, is governance at risk of being overshadowed? The venerable ‘G’ in ESG has, after all, been part of good investment practice long before its ‘E’ and ‘S’ companions. Fundamental stock pickers have always sought out companies with not just quality management but also the reassuring presence of sound governance structures, practices, and incentives.


    In a quest to navigate the ever-evolving landscape of governance within this intricate ESG framework, NordSIP brought together an exclusive gathering of Danish institutional investors in Copenhagen. They convened to exchange insights and perspectives with two seasoned industry experts from both the United States and the United Kingdom. Ashley Hamilton Claxton, Head of Responsible Investment at Royal London Asset Management, and Rob Hardy, Corporate Governance Director at Capital Group illustrated some of the challenges they have faced with the help of recent case studies. The closed session was held under the Chatham House Rule, allowing for a full and free exchange of views. This article aims to provide an overview of the key points discussed during the workshop.

    A fine balance

    Effective stewardship is an intricate and resource-intensive practice that requires a delicate touch. Engaging with companies serves as a valuable complement to existing research, offering an opportunity to gain deeper insights into a company’s activities. It can also serve as a conduit for attempting to influence a company’s behaviour, policies, and practices. To achieve this objective, it is crucial to strike the right balance between engagement, escalation, and activism, all while maintaining transparent communication with company management.

    In the first case study discussed during the session, a long-standing equity holding prompted a series of engagements when the energy sector company rolled back on its emissions targets. These engagements were supported by letters addressed to the CEO, containing thorough explanations of the shareholder’s stance and explicit voting intentions. The voting strategy employed included a “warning shot across the bows” in the form of abstentions on select critical points. Abstention, in this context, is regarded as a means of sending a powerful message to the company’s leadership while affording them an opportunity to rectify the situation.

    Feedback essential to progress

    An essential element of engagement involves the process of providing feedback to investee companies concerning negative voting outcomes or abstentions, which can often demand substantial time and effort. In certain cases, it may prove beneficial to enlist the services of third-party proxy advisers to send letters to company management on behalf of the shareholder, rather than committing internal resources to this task. The managers participating in the discussion emphasized the effectiveness and cost-efficiency of this approach.

    The workshop also delved into the strategic course of action to adopt when escalation efforts fail to trigger positive change. This entails a comprehensive examination of the transition plans and activities of all key players within a sector. Notably, it was mentioned that few US-based energy firms possess credible transition plans, and there is little to distinguish their European counterparts, many of which are on watchlists due to perceived weaknesses in their climate strategies. The consensus that emerged underscored the superiority of engagement over divestment in the medium term, particularly for funds with a focus on transition. Maintaining open channels of communication with investee company management and delivering detailed feedback on specific votes remains the cornerstone of effective engagement.

    Why ‘G’ Should Precede ‘E’ and ‘S’

    A second case study explored investor concerns surrounding the composition and structure of an investee company’s board. Environmental and social issues can often serve as symptoms of underlying governance problems. Therefore, a myopic focus on eradicating the ‘E’ and ‘S’ red flags might miss the fundamental issue, which is whether these problems stem from board-level weaknesses.

    For shareholders, the initial step should involve a thorough examination of the overall quality of the board members. Are they equipped with the requisite experience and expertise relevant to the company’s specific industry or sector? A subpar board composition might be connected to the company’s historical ownership, perhaps due to prior state ownership or affiliations with a founding family. In some instances, inexperienced or unsuitable board members may have been appointed due to the undue influence of minority shareholders. Consequently, it is imperative to assess board members based on stringent independence criteria and work towards amending the firm’s bylaws to ensure that future board elections are conducted in a fair and transparent manner.

    In the case being discussed, it became evident that these efforts could take several years to yield results and necessitate a combination of patience and tenacity to seize opportunities for change as they arise.

    Beware the Trojan horse resolution

    Life is not getting any easier for shareholders keen to get to grips with governance and stewardship issues. ESG requirements are becoming increasingly complex and prescriptive, making them harder to pass through the approval process compared with earlier simpler efforts towards greater disclosure. The trend towards polarisation around ESG issues and the involvement of politics has also led to the need for much greater alertness on the part of shareholders.

    One case under discussion revolved around what was referred to as a “Trojan horse” shareholder proposal. This proposal advocated for the appointment of an independent board chair in a major financial institution where the CEO also held the position of board chair. On the surface, the proposal seemed entirely reasonable and in alignment with governance recommendations put forth by influential proxy voting advisory firms like Glass Lewis and ISS. However, further investigation by the asset manager revealed that the proposer had ties to a controversial think tank in the United States. The supporting documentation indicated that the proposal was driven by political motivations, aimed at personally attacking the company’s CEO. This incident highlights the importance of not merely accepting the broad principles of a proposal at face value, but instead taking the time to delve deeper and assess its alignment with the proposer’s intentions. Many shareholders might have supported this proposal without being aware of these underlying motives. Another instance of such deceptive shareholder proposals involved ostensibly raising concerns about child labour in the battery supply chain, concealing a hidden anti-Electric Vehicle (EV)/pro fossil fuel agenda. Conducting a comprehensive analysis of the identity and motivations of those behind each shareholder proposal is imperative before lending support to it.

    Global investors should also be aware of the distinct governance-related guidelines and cultural nuances prevalent in the markets where they have investments. For instance, engagement and stewardship practices can vary significantly between Japan and the UK, necessitating an adjustment in the expectations regarding the timing of behavioural changes within companies. The workshop participants also concurred on the inadequacy of a simplistic approach to governance. Asset owners and managers are often asked about their voting percentages (for or against) on climate-related shareholder proposals, ostensibly to gauge their commitment to environmental issues. However, the workshop discussions underscored the intricate decision-making process that underpins these votes. Each proposal and its proponents require a thorough, case-specific evaluation to determine their suitability.


    The participants of the Governance Best Practice workshop held in Copenhagen concluded that many environmental and social issues stemming from investee companies can often be traced back to weaknesses at the board level. Addressing these weaknesses demands a considerable investment of time, patience, and unwavering commitment, which may necessitate outsourcing certain tasks to maintain effectiveness. Nevertheless, asset owners should remain vigilant, especially given the increasing proliferation of intricate and occasionally politically motivated shareholder proposals. While the proposal’s headline may appear reasonable, shareholders must exercise caution and conduct thorough due diligence before casting their votes.

    In illustrating how governance can sometimes be overlooked in the realm of ESG, one workshop participant drew a parallel to insurance coverage. Governance, much like insurance, is an indispensable investment requiring meticulous attention to detail, with its benefits often only apparent during times of crisis. This insightful closed-session discussion served as a potent reminder not to underestimate the significance of the “G”, as many sustainability issues within portfolio companies often originate from the highest echelons of leadership.

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