Talking Governance with Donna Anderson

Michael Flaherty and Patricia Figueroa are Senior Vice Presidents at Gladstone Place Partners, LLC. This post is based on their Gladstone Place memorandum.

Donna Anderson leads the policy formation process for proxy voting at T. Rowe Price, an active mutual fund manager with more than $1 trillion of assets under management. Barely a decade ago, the proxy voting process for public company annual meetings was largely seen as a back-office, box-ticking function. Now, with investment assets growing and with investors across the globe pressing companies and boards to promote long-term strategic policies focused on benefitting the environment, society and governance, heads of governance such as Anderson are in an increasingly important and powerful position. She sat down with GPP’s Michael Flaherty and Patricia Figueroa [in December 2018].

GPP: T. Rowe has separated the ESG oversight duties, with you owning the governance part and your colleague owning the environment and social parts (Anderson previously oversaw all three). Why did you separate those out?

Anderson: My colleague you reference is Maria-Elena Drew, who joined T. Rowe Price in 2017 in the new role of director of research for Responsible Investing. She is based in our London office. We do view environmental and social factors as related but very separate disciplines from governance factors. One reason for that is that there’s a natural cadence to the corporate governance year because there’s a proxy vote. There is a certain amount of time-based screening and analysis that takes place naturally. The other major differentiator is everything that I need is a required public disclosure, and on the E and S side, the work is still very much around identifying and obtaining the data you need, then determining what’s relevant.

GPP: What are the key corporate governance issues on the horizon, call it the next 12-18 months, that companies and investors should be thinking about?

Anderson: We believe it’s our responsibility as an asset manager to safeguard our clients’ interests through active ownership, monitoring, and mutual engagement with issuers. At the same time, we think we owe it to our portfolio companies to be consistent on issues over time. We try not to be trendy in our approach. I spend all my time on a company level. In terms of what I am hearing on the trend front, it has been conversations around share buybacks and the effects of the tax law change. Some of the research that SEC Commissioner Robert Jackson has put out about the intersection of executive compensation, insider sales and buybacks is, for sure, going to keep bubbling up. (An example can be read here). That’s not necessarily our issue but it’s definitely on the minds of some investors.

GPP: What mistakes do you think companies are making when it comes to trying to win your support?

Anderson: One issue seems to be that an inordinate amount of companies fear that they’re going be the next activist target. Mathematically speaking, the probability is not likely, but many companies behave in a way that would lead you to believe that they think they’re going to be next. And we see some behavior that indicates that companies are behaving in a conservative or defensive way with regards to things like capital allocation, for instance, or deferring actions that they want to do out of fear of activism, whether that fear is realistic or not. I think that is troubling.

The buyback is a good example. There are some companies that are really good at a more tactical approach to a buyback. They really know the value of their shares and they know where they can create value by repurchasing shares opportunistically. And so, when we ask these companies—“How do you think about the timing of the buyback relative to other choices?”—they’ll say, “What we’d love to be able to do is build up a little cash, to be more tactical with the buyback, but if we build up a ‘lazy’ balance sheet, we’ll get attacked by an activist.” And then we look at the stock and see they have a very stable base of long-term, long-only shareholders, plus high inside ownership. So why are they worried about extra cash temporarily sitting on the balance sheet? It’s irrational to shut down avenues of value creation out of fear of what amounts to a low-probability event.

GPP: Other mistakes?

Anderson: The other thing on my mind from a governance-practitioner level, is this: we are over engaging. The signal-to-noise ratio is dropping fast. There are just so many companies doing maintenance engagement for objectives that they don’t seem clear about, and I am not clear about. They’ve been told to do this by their own boards or by their advisers. But why? We’ve been engaging like this for several years now. It’s only growing—it’s spreading to midcaps, it’s spreading to other markets. I am really wondering about the collective return on investment on that time.

Sometimes the invitations are so vague, it’s not clear that they want a call. They just say “Hey, we’re here if you need us.” We tend to decline those. But if a company says they wish to speak with us and if we have an investment there, we don’t triage those engagement requests. Our guidance says we do not think that a frequency-based approach to engagement is necessary (To read about T. Rowe’s engagement policy, click here). It makes more sense in our view to be more event-based. If there’s something you want to tell us or there’s something you want consultation on, let’s focus more on those kinds of conversations. Or, for instance, if we’re a new investor in the name, absolutely, let’s spend an hour together. But because we’re active managers, because we have global industry analysts all over the world talking to these companies many times a year, the need for a separate, parallel governance engagement with us is different than with other investors.

GPP: What do you think of the Calif. law mandating women on boards for certain companies headquartered in the state?

Anderson: I have mixed feelings. We have seen markets that have hard targets on gender diversity on boards that create unintended consequences, so there’s definitely some concern about that.

On the other hand, the only things that seem to work are soft or hard requirements. In the absence of requirements, the pace of change is glacial. So, I really am kind of mixed on it. But I do think the ball is rolling in terms of U.S. board diversity. Investors have finally coalesced around that issue and backed that up with their votes. And so, we’ve seen a hockey stick in that the pace of change. It was very slow for a long time and now that’s clearly changed.

GPP: What unintended consequences are you referring to in terms of more women on boards?

Anderson: For example, you’re seeing a lot of women over-boarded now in markets where quotas are mandated. All of a sudden, you saw women go from zero boards to six. And that’s not the point. That creates a negative, unintended consequence, and a lot of investors tend to vote against directors who get over committed.

GPP: Will this push for more women on boards lead to more board diversity broadly? For example, race, ethnicity?

Anderson: Board diversity is an important issue for a growing number of investors, including T. Rowe Price. In our view, when a board lacks diversity, it doesn’t reflect the diversity of its stakeholders—employees, customers, suppliers, communities, or investors. This represents a potential risk to a company’s competitiveness over time. We do use gender as an initial screen. But then, of the companies that screen out as having no diversity in that realm, we go in and look and see if there is something explaining that. Are there other forms of diversity that are quite clear? And we do mean outward signs of diversity here. Not, one went to Harvard, one went to Yale. I mean, true elements of diversity. But the business context is important. For instance, we have a company that does all of its manufacturing on one continent and all of its sales and marketing in North America. And so, the board is half and half. And they do happen to be all male but it’s clearly a diverse board and clearly reflects the needs of the business, so that’s a situation where we don’t consider it a bad structure. If there is still no evidence of diversity after those two screens, that’s when we begin engaging.

GPP: What are the most effective ways that a company can engage with you?

Anderson: We do get a lot of companies that put out their soap box, talk for 45 minutes, and then we hang up. That’s not the kind of engagement we’re looking for. An ideal engagement takes place when the company has done its preparation, I’ve done my preparation, and we can get straight to the issues that either side is worried about. And then, we have a mutual understanding of how we want to proceed. And they don’t make me flip through a deck. That’s all they need to put me in a happy place.

GPP: T. Rowe’s threshold for calling a special meeting is 25 percent of the shareholder base. How did you come up with that number? How do you justify it?

Anderson: Over the years, we have participated in attempts to call a special meeting. It should be available, but it should be hard. Most things can wait until the next AGM. And if the circumstances are such that you’re calling a special meeting, we want that to be a high hurdle. We think it’s in our interest for the hurdle to be high, but it should not be impossible. With the benefit of many years of experience, we have come to believe that 25 percent is the appropriate level. I think at 10, it would be happening too frequently.

GPP: What do you think of the trend of virtual annual meetings?

Anderson: I think it’s just way too early to be getting paranoid about virtual meetings. This may make us outliers, I don’t know, but there are great technology solutions. There’s great potential in this idea, especially for a firm like T. Rowe Price and other institutional investors. Speaking for myself, I don’t leave my desk from April until the end of June. I would love to able to participate in more meetings but I can’t travel for them, so why aren’t virtual meetings seen as an avenue to increase the overall impact and effectiveness of the proceedings and the dialogue in annual meetings? I don’t understand the notion that virtual meetings are somehow being used against shareholders. It should probably be the way moving forward for a lot of companies.

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