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“Early engagement and focusing on a key list of issues rather than a generic list of asks, will help ensure engagement is effective,” said Mark Rigotti, CEO of the Australian Institute of Company Directors (AICD).

 

On the heels of RIAA’s Australian conference, at which he participated in an informative panel discussion along with top Australian Board Directors Patricia Cross and Guy Debelle, Mark Rigotti provides advice to RIAA members on what makes for successful stewardship and what company directors would like investors to consider in planning their engagement activities. 

 

“Boards and investors have shared interests… both would like to see sustainable value creation over time.” 

 

No surprises: AICD’s Mark Rigotti suggests investors do a regular stock take 

 

Investors are among the primary stakeholder groups within corporate Australia. And there’s no doubt that corporate boards are being tested when it comes to considering the needs of investors and making decisions that are in the best interest of their businesses. 

 

At the same time, the regulatory environment has never been more complex or demanding, with an increasing array of stakeholder interests and expanded non-financial as well as financial risks for directors and senior executives to manage.

 

Directors need to be extremely well-informed while also taking an open-minded approach to dealing with these issues. This is where investors can work to ensure that their interests, issues, and concerns are adequately heard and dealt with by boards and management.

 

My number one piece of advice to investors and other stakeholder groups is: no surprises.

 

“Gotcha” moments are unhelpful and antagonise all involved.

 

Investors should be taking a proactive stewardship approach, which means building relationships with executives and boards. Investor engagement with corporates must be clear and direct and the ‘no surprises’ approach will help promote trusted, constructive relationships.

 

Given the increasingly complex regulatory environment that corporates are operating in, I would advise investors to be mindful of the multitude of compliance, commercial, and ‘environmental, social and governance’ (ESG) issues on board agendas. They should consider their engagement approach – giving thought to how best to prioritise the complex issues they want to prosecute, so as to minimise the risk of the board becoming overwhelmed.

 

Early engagement and focusing on a key list of issues rather than a generic list of asks, will help ensure engagement is effective.

 

Early and consistent engagement between investors and boards is critical in advance of the AGM season to ensure issues are clearly telegraphed and positions can be anticipated and given due attention.

 

Of course, this does not mean there will always be agreement or no divergence of opinion or position. But the best chance of influencing companies is for investors to appropriately, and having regard to the context, make their expectations clear, and to be realistic about the achievable options available. A good example of how this can work is with non-financial metrics.

 

In this age of ESG, non-financial considerations are increasingly in the frame – issues such as climate emissions reductions, cyber security, modern slavery reporting, workplace health and safety, culture, diversity, and inclusion. 

 

It would be helpful for investors to define and or quantify those ESG risks they want to prioritise and to create metrics by which progress can be tracked and measured. This should serve to clarify priorities for medium to long-term planning while weighing these against the short and longer-term financial implications. 

 

No one wants to be ambushed.  

 

Companies and boards want to hear directly from investors as to their expectations and have these openly discussed to drive alignment, rather than indirectly through the media.

 

This goes to the importance of the fundamental relationship between boards and long-term investors, recognising that boards and investors have shared interests and that both would like to see sustainable value creation over time.
 

While engagement with investors is a critical component of good corporate governance, it’s important to recognise that it is only one of many things on directors’ minds.
 

Boards are struggling to carve out time for strategic discussions, which are crucial to the creation of long-term value for shareholders and stakeholders. So it is worth reminding investors and investor groups to regularly take stock and remember that their requests and demands of corporates are just one of the many issues that boards have to grapple with.

 

Companies play a critical role in society, and their impacts go well beyond shareholder interests.

 

The AICD has released clear guidance to boards, backed up by legal opinion from Bret Walker SC that the ‘best interests’ duty of directors does not require a narrow focus on short-term returns. The Walker opinion examined the duty’s current interpretation by Australian courts and informed the AICD’s guidance, confirming that directors:
 

• have considerable discretion to identify the best interests of the company,
• are under no obligation to focus on short-term profit maximisation, and
• can and should take into account stakeholder interests, provided there is a rational
  justification for doing so – for example, protecting the organisation’s reputation or the sustainability of its business over the longer term.

 

While this work might not sound ground-breaking, it has addressed some of the ambiguity surrounding the degree to which stakeholder interests should inform directors’ decision-making and provided assurance that taking a narrow, short-term profit-focused approach is unnecessary and indeed unwise.  

 

As a guiding principle, directors and investors should seek to coalesce around a long-term view of what sustainable value creation looks like for companies and how it can be achieved.  

 

That will ultimately benefit investors, boards, the companies involved, our nation, and the planet – rather than short-term, pyrrhic victories based on winning a war of words.

 

 

 

 

 

 

 

By Mark Rigotti, CEO of the Australian Institute of Company Directors (AICD).

 

 

The views and opinions expressed in this article are solely those of the author(s) and do not necessarily reflect the view or position of the Responsible Investment Association Australasia (RIAA). This article is intended as general information and should not be considered investment advice. It is recommended to seek appropriate professional advice before making any investment decisions. RIAA does not hold an Australian Financial Services Licence.