The ESG conversation has now been going on for a number of years. Is this similar? You don’t care what the culture is as long as somebody can explain to you why it’s that way and why that fits the strategy? Is that really what this is about?
Taraporevala: By and large, yes. I’m not sure I’d go quite as far as saying we don’t care what the culture is. If somebody showed up and said they have a completely rotten and corrupt culture start to finish I think we may have a little angst about it. But I think you were using it in sort of broad-brush terms. So, yes, we’re not saying, “This is the right answer. This is the culture. We want to hear you say these words and not some other.” The real question is how is it aligned with the strategy? You can have a good culture that is completely not aligned with the strategy and that doesn’t work either. It really is that alignment of “what’s the strategy, where are you trying to go, and how is the culture either an enabler or an impediment to that?”
Kumar: For us, this is part of financial performance. This is not something on the side. It’s very much that the reason we’re focusing on it is because we believe in it being a value driver.
Taraporevala: So that’s a great point. Broadly, and you’ve seen the surveys and studies, over 50 percent of the company’s value—sometimes as much as 90 percent—is through intangibles. That encompasses a whole lot of different stuff. It includes ESG, and it certainly includes culture. So, you start there by saying, ‘Okay, so it’s a major driver of value, and how could we not talk about it?’
It’s like when you see the annual report there’s this line: “People are our most important asset,” and then they’re not mentioned again in the entire report.
Taraporevala: This is a distinction we would draw, which I do think, as in the debate about ESG and asset stewardship more broadly, has gotten a little lost in the rhetoric, which is: We are not having these conversations—whether it’s about culture or other parts we would be engaging in—because of values, call it political or morality views.
You’re not freaking out Milton Friedman.
Taraporevala: This is for value, not values. This is Drucker, right? Who I think Milton was pretty familiar with as a business thinker and a business guru, not a morality guru. That’s our starting point, which is: this matters, this impacts value.
Now we have two sides of our business. We have an active part of our investment management where our portfolio managers, if they don’t like what they see in a company and the way the value is or isn’t manifesting itself, it’s pretty simple. They press a button. They hit sell.
On the index side of our business, our portfolio managers don’t have that luxury. As long as the company is in the index it’s going to be in their portfolios. So in that side of our business, a large part of our business, we’re as close to permanent capital as it comes. We have to engage with the companies and with the boards to drive value. And again, it’s value, not values.
How typical is it for you to have a conversation with a company?
Kumar: So I would say we actually do about 700 a year. The shift that’s happening is that instead of being driven by the ballot or the proxy vote, the conversations are being driven by issues that we want to raise, that we think are important. So we’re not beholden. I know the company is trying to respond and react to get our view and to solicit our vote, but what we’re trying to do is understand the company on a holistic and broader level. We don’t need to engage with companies every year. Governance doesn’t change every year. We need to give companies the space and the time to take the feedback that we have provided and work it through the board discussions and come to their own conclusion as to what’s right or wrong for the board.
We think it’s important to have board conversations. I would say, close to 30 to 40 percent of our meetings are with directors. That’s a significant rise from a few years ago. Even four years ago I don’t think it was even 10, 15 percent. I think that engagement culture in the U.S. has definitely changed. Boards are more willing. They’re keen to hear because they realize that they are our elected representatives. And as part of that conversation, they get a very different perspective when they talk to us versus if they’re hearing secondhand from management the interpretation of what we’ve been saying.
How important are the proxy advisors to you versus how you do things in-house?
Taraporevala: So this is a really important difference than perhaps some other firms. We absolutely own and are completely responsible for our votes. We don’t rely on proxy advisors for the most important thing we do, which is our vote. We do rely on them to operationally make it easier to cast our votes. And there is sort of just ease of implementation and efficiencies where we do absolutely use the services of proxy advisors. I think there is a misperception that all investment managers rely on proxy advisors and their views. We don’t. We don’t believe we should.
Taraporevala: We believe this is our fiduciary responsibility. You don’t outsource your fiduciary responsibility. It’s the most important thing you do as an investment manager.
Kumar: We look at things in a very different perspective. We can’t be relying on a vote which is a one-sizefits-all vote for all strategies. We are a different investor, we need to think of issues differently. Sometimes governance matters for an M&A transaction, for example. Sometimes it’s the most important thing and sometimes actually it’s not. I think you need to have a framework for yourself to evaluate these issues, and I think what we pride ourselves on doing is raising issues that are well ahead of the proxy advisors’ radar, and we don’t blindly follow if they make a small change. It’s not like we change overnight just to comply with what they have said.