Good corporate governance should be attractive to all organisations and their leadership teams. It can improve the performance of businesses, helping them become more stable and productive and unlock new opportunities. In this article, Roger Lewis, Downing’s Head of ESG, explores the growing significance of governance and provides real-life examples of best practices.

What is corporate governance?

The environment and society are impacted by externalities that can have a positive or negative impact, and so companies and their investors are starting to place greater emphasis on understanding, internalising and being responsible stewards of capital. For example, pricing carbon is an externality that is beginning to be internalised as companies pay for their emissions.  

On the other hand, governance represents the interests of shareholders, which can be destroyed by poor boards or management. There have been several governance scandals throughout history, and one of the earliest examples was the South Sea Bubble in 1720 - perhaps the world’s first Ponzi scheme.  

From the South Sea Bubble to the Global Financial Crisis, market implosions have led to many countries establishing corporate governance laws and codes and refining them as the years go by. The UK led the way by establishing its own in 1992 with the Corporate Governance Code.  

Current governance trends

Common disciplines for governance include board independence and effectiveness, remuneration and auditing. Governance also encompasses strategy, finance, laws, ethics, psychology and sociology.

ESG is evolving and presents different challenges depending on region, sector and asset. Recent governance trends include outlining the optimum make-up of boards (including the size and whether they should have “green” directors or climate change specialists) and remuneration based on shares with restrictions on holding periods rather than just cash to discourage short-term corporate growth tactics.  

Ensuring robust governance and assessing board performance are two important ways investors meet their fiduciary duties of loyalty and care to clients. This involves carefully analysing governance policies and practices as part of wider ESG integration to investment decisions, being active owners and having conversations about current, expected and emerging governance trends; and then ensuring transparency on the real outcomes achieved.  

Governance is a core ESG theme for Downing Fund Managers with clear house views including  effective and independent boards. Below, we highlight three real-world examples of good governance among our investments. The governance scores are based on our proprietary ESG scorecard, which includes questions on boards, pay, audit and committee structures. The results have formed a foundation for engagement, monitoring and reporting.  

Governance in action:

Profile: Technology company, 25 years old, 350+ employees

‍Downing Sustainable Investment Score: 79%

Governance score: 90%

Governance initiatives:

1. Has appointed three non-executive directors ‘NEDs’ (including chairman) and three executive directors (including CEO and CFO)

2. Produced a corporate governance report which specifies clear evidence of the application of the Quoted Companies Alliance Corporate Governance Code

3. Has an independent board observer who  provides independent feedback to the board members  

4. Introduced a remuneration package which consists of shares/share options

5. Pay for performance is aligned with peers based on three-year profit and the group’s executives have ESG-related targets built-in to their bonus arrangements for 2022/23

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Profile: Industrial/agricultural company, 25 years old, 125+ employees

Downing Sustainable Investment Score: 74%

Governance score: 91%

Governance initiatives:

1. Remuneration policy has been amended to incorporate medium and long-term incentives to retain talent and align with shareholder and ESG goals (e.g. 25% is aligned)

2. The executive directors are expected to build and maintain a holding of shares to the value of 100% of salary

3. Has appointed two NEDs and three executive directors. The executive directors hold shares and participate in incentive plans in the company. This ensures that their interests are fully aligned with those of other shareholders

4. All directors are subject to reappointment by shareholders at the first Annual General Meeting (AGM) following their appointment and thereafter by rotation

5. Proportionate gender diversity – executive management (1/3 female) and board (2/5 female including chair)

6. Engagement discussion was held to review and validate Downing’s ESG scoring, in particular, the governance structures

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Profile: Services company, 35 years old, 2,000+ employees

Downing Sustainable Investment Score: 81%

Downing Governance score: 95%

Governance initiatives:

1. The board comprises of five non-executive directors, including the chair, and two executive directors

2. There is a clear policy for formats and items that are reserved for board decisions, such as approval of policies, overall management of the group and approval of long-term objectives and strategy  

3. Detailed results shared by the remuneration committee, including time spent on different aspects of remuneration  

Find out more about Downing’s commitment to robust corporate governance