Collective work is an extremely effective method of engagement, but one that requires enormous amounts of resources and organisation. In order to facilitate this process, we are members of industry-wide associations and networks.
As noted in 02.2, the 'Service Provider engagements' are not commercial relationships where they are mandated to engage with companies on our behalf (ESG overlay or consultancy type of arrangements). Instead, they refer specifically to cases where we use associations to develop standards and push for regulatory and market reforms.
Our membership to various investor associations, including Board positions, working groups and committees enable us to influence the strategic direction of collaborative engagements and inputting our views on strategy and content of the engagements.
Our participation at board level or committee level allows us to monitor and oversee the activity of service providers. For service providers where we do not hold a board or committee level position, we monitor and oversee their activities through direct communications from them, regular and active participation to conferences, and regular contact with their representatives.
Example of joint engagement with a service provider: Cobham plc
In April 2016, the company sought a £500m rights issue to reduce debt otherwise risked breaching its banking covenants. In addition, the company decided to still preserve its dividend payment even though it was raising capital to address financial stress.
This surprised the market (demonstrated by a 19% fall in the share price) and was widely criticised by investors. Trust and confidence in the board to manage financial risk was also severely damaged. We raised our concerns with regards to the company’s history of capital allocation, the deterioration in working capital management and free cash flow generation and the size of issuance including fees payable.
LGIM held a meeting directly with the company following the announcement. We had material concerns with the decision-making of the board and escalated our concerns to the UK Investor Forum. The Forum conducted in-depth discussions with several key shareholders in Cobham and agreed a collective engagement strategy that was communicated to the board in June 2016.
Investors involved in the engagement believed that in addition to the rights issue that was required to repair the company’s balance sheet, a succession plan was needed to hold the board accountable for past failures. Furthermore, the company needed to strengthen and refresh the skills and knowledge of the board in order to better prepare the business for future challenges.
The Forum was able to strengthen the voice of leading shareholders, and engaged with the board through the year. They reported to LGIM regularly throughout the process.
Many of the issues identified in the engagement strategy and shared with the Chairman in June came into sharp focus and were addressed with the profit warning that accompanied the trading statement in November.
By the end of 2016, the company had replaced its Chairman, CEO and CFO and the collective engagement was closed as investors await a new strategy and approach from the new team. LGIM felt this was a positive outcome and as a long term investor we continue to actively monitor the company.