We believe that companies with poor management or weak corporate governance are likely to underperform over the long term. We integrate corporate governance analysis into all our equity investment decisions and promote the adoption of best practice standards through engagement and voting at company AGMs.
To better understand corporate governance, we have a bespoke quantitative corporate governance rating tool which assesses board structure, ownership, accounting practices and management capabilities.
Supported by a qualitative review process, this allows us to identify strengths and weaknesses in governance structures and how these develop over the life of the holding.
Corporate governance and our portfolios
We adopt a rigorous process to identify and remove companies with high governance risk from our investment universe, so our portfolios are biased against companies with low corporate governance ratings.
Poor corporate governance poses a substantial risk to the long-term performance of companies. For this reason, we have developed a process that includes bespoke quantitative and qualitative analysis to identify and remove companies with weak governance from our portfolio.
This operates as follows:
- Corporate governance analysis must be conducted on all prospective equity investments and fixed interest counterparties prior to purchase. This means we review ratings with CCLA’s bespoke governance rating tool and complete rigorous qualitative analysis.
- Companies rated with a high governance risk, or who do not have appropriate independent auditors or who have received a qualified audit report, do not qualify for any CCLA portfolio. To meet our requirements these would need permission from the CCLA Investment Committee.
- To be approved, the relevant investment analyst must demonstrate why a ‘high risk’ rating – or the auditors’ qualification – is incorrect or not of concern. This normally requires detailed qualitative analysis, fact-finding discussions with the company and ongoing, target-based engagement.
- Should an existing holding’s rating decline to a ‘high risk’, a full governance review is required and a decision on continued investment is required within one week.
A review of high governance risk companies and the portfolio structure by governance rating are standing agenda items at the CCLA Investment Committee meetings.