Sustainability Inspires: How we use voting to make business better

At abrdn, engaging with the companies in which we invest – especially by exercising our right to vote at annual shareholder meetings – is a key way we look to drive positive change and improve performance of our clients’ investments.

But what does voting involve? How do we decide how to vote? And on what issues has abrdn been voting in 2024? 

In our latest Sustainability Inspires podcast, Andy Mason and Joanna Sulc of the abrdn Investments Active Ownership team explain all.

Transcript

Fionna Ross

Hello, I'm Fionna Ross. You're listening to the abrdn podcast Sustainability Inspires discussing all things relating to sustainability and responsible investing. My guests today are Andy Mason and Joanna Sulc from the abrdn Investments Active Ownership team. Welcome to the podcast, Andy. 

Andy Mason 

Hey, Fiona, thanks for inviting me along. 

Fionna Ross

And also, hello, Joanna. 

Joanna Sulc

Hi, Fionna.

Fionna Ross

So today we'll be discussing abrdn Investments active ownership approach in relation to voting, beginning with an overview of our process. Building on this we’ll then take a look over the past year, touching on our activity in the voting space and discussing the trends we've seen emerge. So, Joanna, could you maybe kick us off by giving the listeners an overview of our approach to voting? Can you talk through the process and also, have there been any notable updates this year that you could share?

Joanna Sulc

Thanks, Fionna. Of course, I'd say our voting approach has been consistent over many years. Overall, here at abrdn, we take our stewardship responsibilities very seriously. And voting is a key aspect of our active ownership approach. It supports the significant work we do as a company around company analysis and engagement.

Voting is such an incredibly valuable tool for investors that allows us the opportunity to emphasize or refuse companies, allows us to hold boards and account, and enables us to escalate concerns which may not have been addressed even despite of early engagement efforts. So here at abrdn, we really look to instruct decisions across our actively held equity portfolios, following a review by a member of one of our regional teams or our active ownership team.

Fionna Ross

And you mentioned involvement of the regional investment teams and also the active ownership team. Why involve both teams? 

Joanna Sulc

Yeah, absolutely. There are dozens of equity stock analysts involved in the process of reviewing and instructing votes at the company's, which they cover. This integration into an investment process is really important, because it means that decisions are being taken by the individuals who know the company, who know what circumstances, and who have been involved in engaging with that company over time. We do have a very significant quant portfolio, and where we may hold a company in quant only funds, we still review many general meeting agendas. For example, we have taken the decision to review all proposals which relate to environmental and social topics. This is as a result of these being particularly high profile or nuanced proposals.

We also actively work to identify resolutions which are controversial or high profile, or where we view them, to be a specific laggard around a thematic piece. 

Fionna Ross

Could I just jump in? Could you give an example of what you mean here? 

Joanna Sulc

Yeah, absolutely. So, for example, a company that we would consider to be a laggard in terms of board oversight of climate.

Over the years, to support our voting, we've worked hard to set voting policies which reflect our views and we believe, reflect our client's best interests. So we have policies in place for numerous governance topics, which are the most common element of agendas. We also provide guidance across environmental and social topics. And we, with an active ownership team, lead the process of developing, our voting policies.

What we do is look at things like regulatory developments, changes to expectation of best practice, our own evolving views, as well as considering our clients views and their positions such as the Investment Association. Once these policies have been agreed internally, we publish annually revisions to our ESG Principles and Voting Policies document that's out on our website and is very transparent and provides visibility for clients, for companies and for the public. So do check that out. 

And those policies really provide the basis for decision making, helps us identify where there are deviations from our expectations of best practice. But as I described before, in line with our active ownership approach, we will additionally review company’s disclosures. Will assess company specific circumstances and consider any other explanations or commitments that we've gained through discussion with the company before instructing our final votes.

Fionna Ross

So, it sounds like you're really trying to make quite considered decisions based on the policies that you've just mentioned. What about any insights that you get during engagements? 

Joanna Sulc

We really value the exchange that we have with companies ahead of the general meetings. I found that even if we landed a position of being unsupportive of a proposal, companies generally appreciate, and are receptive of constructive feedback. So I describe our approach as considered, robust and a really core element of responsible stewardship on behalf of our clients. We’re really passionate about voting and the tool it is for investors. 

Fionna Ross

Great. Thanks for all that insight. So I know it's been another very busy year across the voting landscape for abrdn. Can you talk about some of the activity that you've seen. 

Joanna Sulc

Yeah absolutely. I mean firstly in terms of the busyness; it is true that the process of analyzing and instructing votes does take up a lot of resource. We, like a lot of investors, are particularly busy in the second quarter of the year, known as the peak season. That's probably the only issue with being involved in voting: that I just miss out on a lot of spring! But so far, in 2024 here at abrdn, there have been over 5,500 general meetings of our investee companies, with 70% of those falling in the April to June period. Of those meetings around one third have been fully reviewed and instructed by an analyst.

Fionna Ross

Well, it certainly sounds that you and the team are kept very busy over the year, probably an understatement. Can you talk about any notable changes or additions that you have made to voting policies over the past year? 

Joanna Sulc

We publish revisions to our voting policies ahead of the peak season, so we did that in Q1. This year, we announced several changes to our public policies.

The first change was around the composition of audit committees, particularly the independence of those committees. We announced the intention to take voting action in developed markets where composition wasn't in line with expectations. This was driven, not just by client feedback, but also having reviewed external research, particularly a paper by Stanford University, which linked audit committee independence to reduce misconduct and a positive impact on earnings quality, mindful of the significant oversight responsibilities borne by audit committees. We therefore decided to update our voting policies to take action against non-independent members of an audit committee that wasn't wholly independent. That was in the case of the US, in the UK and non-independent members in continental Europe, if the committee was not majority independent. Now that's just an example where there might be a slight difference of approach regionally, because we do have to take account of market practice.

Fionna Ross

That's interesting. And are there any examples that you could share on these regional nuances?

Joanna Sulc

So in continental Europe there's much more prevalence of having employees on the board or shareholder representatives for example. So that means there's a slight difference to date. This year we voted against the reelection of 88 non-independent directors across 54 companies due to insufficient, insufficient independent audit committees on diversity.

We’ve over several years implemented policies around these topics, at board level, both in terms of board level, gender and ethnic or racial diversity. But following the introduction of targets related to board level diversity introduced by the FCA. We wanted to introduce a provision that we may vote against nomination committee chairs if we have concerns regarding their efforts in succession planning to meet the diversity target of 40% female directors today.

We've only taken voting action at nine UK companies based on concerns regarding gender diversity. Overall, we welcome the improvement to diversity seen at several companies and also the commitment of others to meet the FCA's diversity targets in the near term. We will continue to monitor progress, and we will consider how we will update our policies further in relation to diversity this year and in the coming years.

A final change was around the format of general meetings, so there's been quite a bit of debate from investors and companies around the format of general meetings. 

Fionna Ross

Just to stop you there, what do you mean by that? The format of meetings. 

Joanna Sulc

So the Covid pandemic ushered in the need for virtual general meetings. And while such a format can increase participation of investors by removing the challenges presented by location or meeting concentration, we are still of the view that in-person meetings provide an important point of contact for investors and are a valuable tool for accountability.

Therefore, our preference is for companies to have a hybrid approach to balance accessibility with in-person accountability. As temporary pandemic regulation has come to an end, there were certain European markets introducing legislation around the format of general meetings. We therefore decided to strengthen our voting policy, to clarify that we would generally vote against proposals that would permit entirely virtual meetings, but we would consider whether that provision was only for exceptional circumstances.

There were fewer proposals that came up on agendas, as perhaps anticipated, but we did vote against 23 resolutions where companies sought to amend their articles of association or otherwise. 

Fionna Ross

Fantastic. Thanks, Joanna. It's so useful to understand more about the work that you and the rest of the active ownership team does. So, Andy, let's not forget about you. I suppose to build on the topic of the past year it would be interesting to hear what key trends have you seen emerge in the market over the year? 

Andy Mason

Yeah, that's that's a good question. So firstly, we continue to build on the work that we're already doing and different trends emerge within different areas. That's things like diversity, labor practices, climate board structure, etc. The new one we're really seeing this year is around artificial intelligence, and it's a bit of a head scratcher.

What we have is quite a dispersion of views out in the market. So I'm seeing lots of different messages coming from different actors, different brokers, etc, about, you know, what the impacts are, what the opportunities are, where's the risk? Where's the reward? I am seeing some regulation emerging in the US and the EU, but the regulation is behind the technology. That doesn't mean the regulation is bad, it just means technology moves faster than regulation. 

And also what we're seeing is more votes been tabled at companies in relation to artificial intelligence and that's kind of where the rubber hits the road for us as well, because we need to think about what are we going to do with this and how do we deal with our investee companies.

And so our starting position is to work with companies. I just want to make that very, very clear. This is an evolving area. So what we want to do is understand what companies are doing and work with them. And for us, how do we deal with this? The position we take is, is, is to work with companies. It's an evolving area and we want to understand, you know, what companies are doing.

And when we put an ask to company or request to company, we need to make sure that it's appropriate. So it's appropriate for the sector. It's appropriate for that company. And they'll get the best outputs. And we also need to make sure that that is a measurable ask. 

Fionna Ross

So what are the type of questions that you're asking companies on AI?

Andy Mason

The areas that we're looking at in relation to AI, what what we're asking companies for is that they have the correct governance and oversight in place, that they have ethical guidelines in place, that they have the appropriate due diligence to have transparency around those areas, which they share with investors. And one area that we're focusing in on quite a bit as well, is how closely they engage with their workforce on this, because we don't know, but there is potential for impacts on the workforce, off the back of how AI develops.

The outputs of this has been we've voted at a number of different companies AGM and that's been across a range of topics, a greater focus on misinformation that could be produced as a result of artificial intelligence, better compliance procedures and stronger board oversight around artificial intelligence. As we go into the next voting cycle, will develop and what we've done in this area and start to get more focused as well.

But back to my initial point. The key to this is how we work with companies on this and understanding what challenges and opportunities they have, and making sure that our work is in partnership, not just taking a position where I would understand in what companies are doing. And since we're talking about the future, I'm just going to caveat all that with that could be something completely different that lands on my desk in Q1 of next year.

And, people may hold me up on this record and say that I was completely wrong. So we voted on a variety of topics at different tech companies, and that included greater focus on misinformation as a result of artificial intelligence. Better compliance procedures, and also stronger board oversight and responsibility of how artificial intelligence was applied. 

Fionna Ross

Well, we've covered a lot of ground today, and I have so many more questions, but I think that's all we do have time for today.

Thanks to Andy and Joanna for joining us. If you like this episode, hit the like and subscribe buttons. You can find us on Spotify, Apple and the Aberdeen website. Goodbye for now.

Disclaimer

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for informational purposes only and should not be considered as an offer, investment, recommendation or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication, and do not necessarily reflect those of Aberdeen.

The companies discussed in this podcast have been selected for illustrative purposes only, or to demonstrate our investment management style, and not as an investment, recommendation or indication of their future performance. The value of investments and the income from them can go down as well as up, and investors may get back less than the amount invested. Past performance is not a guide to future returns, but projections or estimates, and provide no guarantee of future results.