Staying engaged

October 2021

Key points

When LTGG decides to invest in a company, it’s just the start of what’s intended to be a long-term relationship.

We have always been adamant that stewardship is part of our ethos. However, we have never taken a holding with the intent of advancing a corporate agenda. In Long Term Global Growth, we buy because we believe that the companies that we invest in are already concerned with being long-term in approach and will flourish by having a purpose beyond shareholder value.

In 2020, UK regulators defined stewardship as “the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries”, adding that this should lead to “sustainable benefits for the economy, the environment and society”. 

This mirrors LTGG’s own ambitions. Our 10 Question Stock Research Framework requires us to: 

– ask what might happen over the next decade and beyond 

– seek insight into corporate culture 

– explore a company’s relationships with its stakeholders 

– assess a firm’s contribution to society 

– scrutinise how an enterprise’s investment strategy supports long-term growth 

One advantage to LTGG having only a handful of stocks in its portfolio is that we can build meaningful long-term relationships with management teams and boards over time. In doing so, we continuously refine and develop our answers to our 10 questions. This is what underpins our engagement. 

Talk of ‘engagement’ – as with ‘ESG’, ‘responsible investing’ and ‘stewardship’ – is ubiquitous in the finance industry, but often poorly defined. So it’s important to be clear what we mean by the term. 

Firstly, we don’t believe there’s a single formula for it. Just as we analyse companies in their own context and on their own merits, so our engagement with their leaders should be specific to each situation. And we are wary of prescriptive policies and rules. By their nature these are reductive and blind to nuance. 

Instead, we shape our interactions by drawing on a small number of principles we expect our holdings to respect: prioritisation of long-term value creation; a constructive and purposeful board; long-term-focused remuneration with stretching targets; fair treatment of stakeholders; and sustainable business practices. 

With these ambitions in mind, our goals for engagement fall into four categories: 

These are each of equal importance. We acknowledge that our clients’ and other observers’ focus is often on the ‘influencing’ part, given the desire for there to be measurable consequences. But it takes time for influence to make a difference, and it nearly always builds on fact finding, monitoring and support.

LTGG follows this approach across its portfolio. Amazon is one of our longest-standing and largest holdings, and we have engaged with it over a wide range of topics over the years since our first meeting in 1999 – five years before our first investment. We’ve spoken with the company about disclosure and reporting, remuneration, board makeup, management succession, tax, data privacy, sustainability, environmental efforts, supply chain management, and of course management of employees from head office to the fulfilment centre floor.

These stewardship activities have evolved over the years from being more transactional in nature – fact finding and focused on AGM agenda items – to interactions that challenge and influence.

That’s not only because our relationship matured, but also because Amazon itself matured.

Founders and management learn over time what is best practice and most appropriate for their business. Baillie Gifford can draw on its experiences as a long-term investor to help younger businesses in this regard. This is especially true for newly public companies, which, almost overnight, are held to new sets of standards.

Yet ESG scores and ratings are often based on how much companies disclose rather than their fundamental business practices. This inherently disadvantages innovative but less mature firms. It’s one reason we are wary of such metrics. Another is the wild inconsistency between different data providers. So rather than rely on such ratings, we engage directly with founders and other leaders to support and influence them as they develop their own practices and disclosures, especially those relating to stewardship and sustainability.

Our engagements with two recent portfolio additions – Beyond Meat and Peloton – demonstrate this.

"Cows are a particularly inefficient way to create protein, requiring about 15,000 litres of water to produce each kilogram of beef..."

Beyond Meat’s founder Ethan Brown is tackling climate change by addressing one of its biggest contributors: livestock. Farmed animals account for about 15 to 20 per cent of global greenhouse gas emissions. Cows are a particularly inefficient way to create protein, requiring about 15,000 litres of water to produce each kilogram of beef, according to the Water Footprint Network. 

Yet an ESG rating agency recently scored the company poorly on water risk management, essentially because Beyond Meat hadn’t disclosed enough detail about its operations. As a result, it ranked in the bottom quartile of surveyed packaged food producers, while Nestlé – which sold nearly $7bn worth of bottled water last year – made the top quartile. This was despite the agency’s own report acknowledging that plant-based burgers used about 99 per cent less water to produce than beef burgers. 

So what’s the best way forward? We agree that water usage is an important consideration and that companies should disclose relevant details. But a low ESG rating shouldn’t prompt a sale. Instead it’s further cause to provide support and influence. 

Before the report’s publication, we had already talked to Beyond Meat about its need for policies and infrastructure to make better environmental disclosures possible. The company has created an ESG steering committee and shortly plans to publish a sustainability report based on industry standards. We intend to stay engaged. 

LTGG also has a nascent relationship with the home fitness firm Peloton. In early 2021 it stumbled over its initial response to a safety issue with its treadmills. It resisted a recall and clashed with the US Consumer Product Safety Commission, which had highlighted a risk to children. Peloton subsequently acknowledged that a recall was indeed required and that its initial response had been “a mistake”. Chief executive John Foley and other management have been transparent and responsive, and admit the experience was a wake-up call. 

We are encouraged that the company is willing to learn. And from a shareholder perspective we are pleased that Peloton’s management contacted us at the time to suggest a call to discuss the issue. Though still a relatively new holding, our relationship with Peloton bodes well for the long term, and shows the benefits of us having known and invested in the company in private markets ahead of its 2019 flotation. 

There have, however, been instances when companies haven’t been receptive to engagement, leading us to sell our entire stakes. This happened two years ago with US sportswear firm Under Armour and the Chinese search conglomerate Baidu. In the former case, senior management were overly focused on short-term market reaction. In the latter, the CEO’s micromanagement was stifling talent. In both situations we had tried to communicate our concerns and reiterate support for the companies’ long-term growth, but to no avail.

More recently we have exited a 13-year investment in Google’s parent company, Alphabet. The main reason was that having reached a market cap of $1.8tn, we believed it was unlikely to grow a further five times in size. But we might have had more confidence if we’d had a closer relationship with senior management. As early as 2011, we described the company as being “frustratingly opaque”. Its leadership’s aloofness and the firm’s increasingly evident cultural blind spots, such as its standoffishness with regulators, led us to suggest in 2018 that “the biggest threat to Alphabet is Alphabet”. These issues now threaten its expansion into new growth categories. Alphabet’s employees thrive on solving the world’s hardest problems. But commercial success in the cloud, hardware and autonomous driving requires more than just intellectual prowess. It requires collaboration with suppliers, distributors and other stakeholders.

A Google store in the Chelsea neighbourhood of New York. © TIMOTHY A. CLARY/AFP/Getty Images

Of course, in a long-term portfolio with relatively low turnover, most engagements don’t lead to such decisions. 

Many centre on fact finding – not just getting to know new holdings better, but also understanding how the ones we have owned for longer change over time and handle fresh challenges. 

This can be company-specific: for instance, hearing how Moderna thinks about remuneration, how Alibaba interacts with China’s regulators, and how Tesla’s bolstered board affects its ambitions. There are also issues that impact all holdings, such as modern slavery and climate change. Here engagement starts with fact-finding questions about exposures, policies and ambitions. The replies then underpin how we monitor and influence the companies’ behaviour over the following years. 

When it comes to monitoring, we’re conscious that ambitions are rarely achieved overnight or challenges solved that quickly. But regular engagement and follow-up conversations help us to recognise change. This is evident with some of our high-profile holdings. Tesla’s corporate governance is more robust and its health and safety record has improved. Amazon has raised wages for its workers and advocated for a higher minimum wage. Facebook has implemented numerous measures to moderate problematic content. 

This is good to see but none of these companies has ‘finished’ improving. Tesla’s CEO remains idiosyncratic and the firm could better manage its public communications. We have spoken to Amazon about its behaviour during the unionisation vote in Bessemer, Alabama and repeated our wish for it to improve its disclosure of social practices. Facebook continues to grapple with misinformation and abuse on its platforms. Likewise, for large and long-term endeavours such as supply chain transparency and decarbonisation, we will continue to engage with our holdings for years, if not decades, to come. 

"The strength of our relationships also provides us with a sure footing when we do feel strongly about an issue."

We are frequently asked for evidence that our engagements have prompted change. We hesitate to make such a claim. We don’t consider ourselves activist investors and we believe that the few companies we pick are extremely well run from the outset. It’s not for us to dictate microscopic details of strategy or culture. However, we can offer decades of experience gained across a range of businesses and geographies. We can also bring our long-term view, which is often received as refreshing. And we can ensure companies have our support when appropriate. This has led several of our holdings to collaborate with us over new policies and disclosures. Examples include Alibaba’s first sustainability report, Beyond Meat’s planned ESG reporting, and our current portfolio-wide conversations about climate change. 

The strength of our relationships also provides us with a sure footing when we do feel strongly about an issue. One example is luxury goods maker Kering agreeing to incorporate ESG targets into its leadership’s financial incentive plan. Another is us supporting shareholder resolutions for Facebook to enhance its reporting on child exploitation and platform misuse. 

Underpinning fact finding, monitoring and influencing is the fourth category of engagement: support. This can be provided in different ways. 

One clear-cut example was LTGG telling all its holdings in March 2020 that in the face of the pandemic we were comfortable with management putting the long-term interests of all stakeholders ahead of meeting their quarterly targets. 

Support can also be implicit. It’s what we don’t do, such as not bombarding companies with short-term questions. Support can also be offered in reaction to external events, such as LTGG opposing Roche’s bid for Illumina nearly a decade ago, or more recently retaining our stake in Meituan and Pinduoduo at a time others were selling out because of regulatory intervention. Equally we accept that bad things can happen internally that require us to offer our support. Examples include Tesla’s Model 3 ‘production hell’ in 2018, and public concerns about Zoom’s data security in the early days of the pandemic. 

We strive to get to know our investments well enough that problems are neither a surprise nor so destructive of former hypotheses that exit is the only response. 

Finally, we can offer support when nothing fundamental about the company has changed, but for no good reason other investors have got nervous and sold. Under such circumstances LTGG might let management know it is holding firm, and even take advantage of the share price dip to increase our stake. 

This last point brings us full circle with a reminder that engagement and patient long-term investing go hand in hand. Our holdings benefit, and so do our own investing skills – both of which serve the interests of our clients. These flywheels mesh unusually well. If we treat companies more thoughtfully then they will treat us more seriously and thus we become better investors. 

Risk factors

The views expressed in this article are those of the LTGG Team and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in October 2021 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

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