Bob McCormick: Donna, thank you for taking the time to speak with us today. Let’s start out with a foundational question: what is unique about T. Rowe’s approach to corporate governance?
Donna Anderson: I think the most distinguishing characteristic of our approach to governance issues, engagement and voting is that we all vote our own shares. That is to say while we do have firm-wide guidelines, we take a portfolio-specific approach to voting. We have a fundamental belief that the vote does not belong to the firm but to the clients of each strategy. The way we do that is to have an engaged team of portfolio managers (PMs) and analysts, and to have the governance and ESG functions embedded within investments.
Bob: Given your portfolio-specific approach, how frequently does T. Rowe split votes?
Donna: The most common subject that we split votes on is shareholder proposals for an independent chair. We don’t have a firm-wide view on this, nor have we found any evidence that one structure produces better outcomes than another. Our vote is less based on company performance than whether the portfolio manager has conviction that the roles of Board Chair and CEO are inherently separate jobs. We also have PMs who believe that the Board is best positioned to decide how it should work under each CEO. Our split votes on this issue reflect these different perspectives.
Bob: Looking back on 2018, what themes were prevalent?
Donna: This past year we had some very interesting conversations about diversity. There is still a small, but dedicated, group of companies without any outward signs of diversity on their Board, and they don’t think it’s needed. That perspective is interesting to hear and something we wanted to discuss further with those companies. Most companies have reasonably diverse boards, across multiple dimensions, or they recognize the value of it and have made it a priority to strengthen their diversity. Those are conversations where we try to be helpful, but there isn’t really a difference of opinion there.
What really spurred us on to start focusing on this a few years ago was female board members saying to us that investors were not doing their part. Female board members approached me and other investors saying it’s going to be hard to get this up the priority list without signs from investors that they care about it. They asked for help, and they were right.
Bob: The attention being paid to issues such as diversity is certainly part of the broader, market-wide shift in focus on environmental and social issues. How do you view these issues – is it part of investment decision making or part of the governance perspective in voting or engagement?
Donna: We have come to view what we call responsible investment as definitely related, but distinct from governance. We’ve structured our program to reflect this. I have a colleague, Maria Elena Drew, who heads Responsible Investment, based in London. She is our expert on E&S issues, and I cover “G.” We both have global remits.
The reasons we’ve separated these is because with governance, there’s a natural cadence to the work. Every company has to come up for a vote, and everything I need to do my analysis can be found in a required public disclosure. With E&S issues, it’s more of a risk-based assessment and a very company-specific timetable. For these topics, it’s still very much a challenge to get your hands on the right data and identify what’s meaningful.
Our solution to this problem is to apply the same deeply investment-centered, PM-involved process that we’ve developed for governance to E&S topics. We’re taking data from outside parties and companies, but we’ve developed our own scoring framework that is very much about identifying for PMs where the outliers are while leaving the final decision about investment, portfolio construction, weighting and voting to the owner of the investments.
Bob: Companies get inundated with requests for E&S information and there’s a fair amount of overlap among them. Which data source or framework do you find most valuable?
Donna: The main sources that we’re drawing from are Sustainalytics, Bloomberg direct data and internal sources like analyst insights. It is a real problem, this issue of the proliferation of scoring systems. One perverse trend that my colleague Maria has identified is that as companies try to make information more digestible and presentable to stakeholders, for instance putting data into infographics, in many cases it’s hurting them on scoring systems because it’s not a form that the web scrapers and quantitatively-driven tools can focus on. You lose points in disclosure if you make it more visually appealing. If companies are trying to limit the amount of time that they spend on these surveys they should pick one or two providers that are most relevant to their fields.
Bob: Shifting to engagement – as the prevalence and amount of engagement has grown, what aspects of it do you find most helpful or unhelpful?
Donna: I do not feel we are in a good place with engagement in the U.S. Because our investment universe is smaller than those with index strategies, this is the first year for us when requests for engagement really got out of hand. I would chalk that up to small and mid-cap companies coming on to the scene.
I’m just not convinced that an annual governance-focused engagement meeting makes sense for T. Rowe. We are increasingly seeing companies that aren’t sure why they are engaging; the more candid ones will say it’s because their Board made them do it. It’s very clear that they are not achieving any objective other than saying they talked to all of their investors. The nature of the dialogue has also changed, in part because of the increasing participation of investor relations as well as in some cases directors wanting to participate. I don’t think what we have right now is sustainable long-term.
Engagement is very positive when there’s an objective. Engaging with a newly-public company, for example, allows us to discuss what we think they should prioritize over the next ten years, the expertise they’ll need on their board – that’s a great opportunity to shape the future of that company. Similarly, if a company is thinking about changing its compensation plan, we’d love to have a voice into how they’re amending it. But those kinds of experiences are being lost to the many, many companies that think they need to have an IR person lecture me for 45 minutes in order to check a box.
Bob: Many companies believe that engaging over time helps to build a relationship and understanding of the company’s Board and management team and overall strategy. Does that resonate with you?
Donna: T. Rowe is not going to vote solely based on the relationship – we’ll always hear the case and come to our decision on the merits.
Bob: If you do have a situation where you end up having concerns with a company’s practices and consider voting against them, do you give them a call to discuss the vote or ask if they would change that practice? Do you follow up after a vote against?
Donna: On issues where our voting policies, which are on our website, are black and white, I don’t always reach out. For instance, our policies are quite clear on poison pills and classified boards. There’s not a lot of room for dialogue, I assume the company knows where we stand.
But if there is a nuanced issue – compensation, for example – when I reach out to a company to discuss it, it’s because we haven’t made up our minds on the vote. We’re seeking their perspective and more information. There’s no underlying objective to increase the amount of friction with our portfolio companies. If there is a constructive conversation to have, let’s have it.
Bob: You are active in a few different groups that engage with companies and promote good governance practices in general like the Investor Stewardship Group (ISG). How do you measure the impact of those groups?
Donna: I think it’s too early to ask what impact the ISG has had. We’ve been methodical and deliberate about this because we want it to be something that lasts and doesn’t need to be amended much over time. It has taken us a while to get our own governance in place – electing officers, getting new members. That’s all in progress and has gone very well. We recently announced that our membership now represents in excess of $31 trillion in AUM and we have quadrupled in size over the past year. But even with the success we’ve had, I don’t think about the impact we’ve had to date, but I do think about the impact we’ll have over the next several years.
Bob: Shifting gears, one area that’s come under a good deal of scrutiny recently is the proxy voting system. The recent SEC roundtable covered a broad spectrum of issues, including proxy plumbing, shareholder proposals and proxy advisors. What was your take away from that discussion?
Donna: My main takeaway from the SEC roundtable was that there was a surprising degree of consensus that the top priority should be modernizing the voting process itself and transparency around that. It is definitely our view that the voting process is the priority. We have concerns about the movement to rein in or make life more difficult for proxy advisors – that’s a service we need for a variety of reasons, and we simply do not share issuers’ concerns about them. On shareholder proposals, I can see the frustrations on both sides, but at the roundtable the case was made that this is actually not a problem for most companies most of the time. In the grand scheme of things, the SEC’s attention would be better placed elsewhere.
Bob: In the current market, a lot of companies have become very large before they go public. That’s because of a number of factors, including private equity and VC funding, but also through participation of large institutional investors. If companies are pre-IPO, does governance matter? Do you engage with pre-IPO companies on governance structures such as dual class shares and classified boards or on compensation?
Donna: As you know, I have been doing this a long time and one of the interesting artifacts about having been involved in proxy voting is that back in those days there was no off-season engagement, no ESG, and there wasn’t a whole lot of attention paid to corporate governance issues. As a result, most of us from those days developed other specialties to keep busy in other times of the year. Mine happened to be valuation. I continue to be very involved in that work here as a member of our firm’s Valuation Committee. I’ve found that there are ways that this work extends into governance.
Our approach is to be consistent: we have principles we believe in, whether companies are public or private. For example, our public voting policy is to oppose certain key board members for any company that is controlled by means of dual class stock with differentiated voting rights. We accompany these votes with an explanation to the company as to why we have concerns with that structure for the long-term. Any features we oppose on the public side, we would not tend to consent to them on the private side either.
But it’s really not about applying a rules-based framework. These private companies are looking to their early investors to be their partners, and that’s the attitude we take. It’s about helping them along the journey, helping them find a governance structure that might be appropriate for them today vs. five or ten years from now. Our role in this is not to be the cops on the beat – it’s a consultative relationship. We’re helping to prepare them, if going public is in their plans, for what that will look like in the world of public shareholders, proxy advisors, votes and shareholder rights.
Bob: I wanted to ask about the activism article you wrote this past summer. Since you published that, what has been the reaction? Has it changed your approach or modified how others approach you or was it a codification of existing policies?
Donna: We felt that we were codifying what we’ve already done. We’ve always endeavored to speak to both sides in contested situations. We’ve always been very transparent with both sides about voting intentions. We’ve always had these policies around when we will or will not speak with other investors. We didn’t think that the paper introduced any new concepts, but it was very well received by a surprising range of market participants. We got notes from CEOs, advisors, company managements, other investors and activists who seemed to think that laying out our thinking was helpful, in terms of the behaviors we expect from companies and activists in these situations, and what we commit to do ourselves.
Bob: Diversity has increasingly become a topic in activism situations as well.
Donna: I think the diversity of the slate being proposed on both sides will be a consideration going forward in contested situations.
Bob: How frequently does T. Rowe go public with its views in an activism situation? Do you find it is helpful or do you believe you can be more effective having private conversations?
Donna: We have spoken publicly on occasions where we believed sharing our perspective would be constructive. But most of the time our approach has been to tell both sides, as early as we can, how we come down on their dispute. We think that transparency accomplishes our objective of reaching the outcome most likely to result in better performance.