Enlightened engagement

Active management isn’t just about picking stocks. Investors can also leverage their interactions with management teams and boards to get a fuller picture of a company and, where necessary, advocate for change.

For Harris Oakmark, a Chicago-based affiliate of Natixis Investment Managers specialising in investing in value equities, successful engagement requires complete transparency. The firm discusses all types of issues with the company's management: the challenges facing the company, strategy, business model, executive compensation, environmental and social aspects, when necessary, and so on.

In this Q&A, Chris Knowland, Harris Oakmark’s director of responsible investing, illustrates how the firm’s approach to engagement has evolved and explains how, when carried out thoughtfully, its engagements can be a valuable tool that ultimately supports the creation of shareholder value.

How would you describe your approach to engagement?

At Harris Oakmark, we are active investors. As well as carefully scrutinizing potential opportunities before investing, and actively weighting our portfolios according to a range of criteria, we apply this principle to our engagements with portfolio companies. These engagements, which we define as substantive, meaningful conversations with management teams and company directors, are a key part of our investment process for two reasons.

First, they provide us with insight into how management teams and boards think, how they perceive the strategic challenges their companies face, and whether they are focused on creating value for their shareholders. Second, they give us the opportunity to advocate for specific courses of action that we would like to see them take. These could be related to corporate strategy, capital allocation, executive pay or a range of other issues.

What typically makes you successful in your approach?

Since we are often significant shareholders of the companies in which we invest, in many cases we have excellent access to senior executives and board members. We make use of this access for both the ‘informational’ and ‘outcome-focused’ types of engagement – leveraging our position as shareholders to learn more about how companies are managed and, where needed, to encourage specific courses of action.

Engagement meetings are often with CEOs, CFOs, and other senior executives, as well as directors and board chairs, enabling impactful conversations with our analysts and portfolio managers. We supplement these senior-level meetings with additional engagements on specific topics where more specialized company personnel may be prepared to go into greater details on certain matters.

For example, when addressing a company’s climate strategy, we may hold a conversation with its head of energy or sustainability, enabling us to break down net-zero commitments and other goals in more detail.

How do conversations with senior-level company management evolve?

When we decide to invest in a company, we are entrusting our clients’ assets to that company’s management team with the conviction that they will be able to create shareholder value over our investment horizon. This means that getting to know how a management team thinks and acts are important parts not only of pre-investment due diligence, but also of our approach to active ownership.

Wherever possible, we hold meetings with senior executives, such as CEOs and CFOs, as well as board members at multiple times throughout the year. Our preference is to hold these meetings in person. Our investment team finds that by travelling to company offices, they are able to gain additional insight into a firm’s culture.

We also host meetings at our offices and hold virtual meetings and phone calls, when needed. Each meeting focuses on topics our team considers to be the most material issues facing the company at that time. These matters range from corporate strategy and asset allocation to executive compensation, human capital, and many others.

Understanding a management team’s views on recent developments, such as earnings reports or announcements on corporate strategy, is a common objective for us. But as well as listening, we are able to use these meetings to challenge management teams and boards. Why was a certain decision made, or a particular individual promoted to a senior role? And if we disagree with something a company is doing or plans to do, these direct interactions are a valuable tool for making our views known.

When advocating for a company to take specific actions as part of an outcome-focused engagement, we recognise that our efforts may not always be successful. In this case, we may choose to escalate an engagement through means such as a formal letter to company management or a vote against the re-election of specific directors at the company’s annual meeting.

In the most extreme case, lack of progress on a certain issue may mean that we decide to divest This process would typically start with a series of bilateral engagements regarding the issue in question, which are then escalated by means such as formal letters to the company and votes against individual directors, which could include the board chair. In the absence of progress at this stage, we may decide to exit our position in the company.

Being aligned with a company’s management team is a prerequisite for investment, so we never become a shareholder in a company with the intention of trying to ‘fix’ it. And while we will not hesitate to escalate engagements where needed, this is not something that we seek.

Indeed, the natural outcome of our high-conviction investment philosophy is that such outcomes are rare: we aim to invest in great companies with great management teams, which we also consider to be undervalued by the market. Following investment, we monitor each company closely and are ready to engage as and when needed.

In recent years, we have seen an increased focus on stewardship from across the investment ecosystem. Institutional investors, such as pension funds, have raised their expectations of external asset managers.  These managers have responded by increasing the size of stewardship teams and disclosing more information about their engagement activity.

The resulting ‘stewardship stampede’ can sometimes make it seem like asset managers’ primary objective is to be agents of change acting on behalf of clients and their underlying beneficiaries, such as pension holders. We believe that asset managers do have an important role to play in acting this way and support the idea of providing transparency to clients, but we are very clear about our own approach to engagement and how it supports client outcomes.

For us, engagement is a tool that enables us to make better investment decisions and advocate for specific actions from portfolio companies. We do not invest in a company with the intention of trying to change it, and although we track engagement activity, we do not believe that more outcome-focused engagement is always better.

Can you provide other examples of successful engagement outcomes?

One example of a successful engagement outcome comes from our investment in Fresenius Medical Care, a medical services company headquartered in Germany, where we engaged with the company’s supervisory board and management team to provide our recommendations on its supervisory structure and board composition. A change in structure and legal form after this engagement resulted in what we considered to be a simpler governance structure with greater accountability and meaningful voting power for free float shareholders.

There are many cases where we hold ongoing, informational engagements with portfolio companies. A good illustration of our approach is Holcim, a cement and building materials company headquartered in Switzerland but with global operations. Corporate strategy, expansion and asset sales have been important parts of our engagement conversations with the company. Since Holcim is one of our most carbon-intensive portfolio companies, we have also held additional engagement meetings with the firm’s head of energy and sustainability focusing on climate risk. This has enabled us to go into detail on topics, such as net zero goals and low carbon product strategy.

And how would you describe the relative success of some of the higher-profile engagements with companies like Glencore, Credit Suisse, and Daimler, for instance?

In the past, Harris Oakmark has engaged in dialogue with the Swiss mining group Glencore following accusations of bribery, speaking directly with its CEO and chairman to address the company’s management of this risk factor. Our position as a major shareholder meant that as soon as the allegations became public, we were talking to the company’s management and board to understand how they planned to address the immediate legal issues and ensure that adequate controls were in place to prevent similar events occurring in future. We followed up with additional engagements as the legal issues were resolved and additional anti-bribery measures were put in place.

One of our most high-profile engagements was with Credit Suisse, a major financial services group based in Switzerland that was subsequently acquired by UBS. Over many years as a major Credit Suisse shareholder, we engaged with the company on a number of topics. These included our support for Tidjane Thiam, a former CEO of the firm who resigned in 2020, and the board’s reaction to risk management failures in 2021. Since we did not see adequate progress on the issues in question, we escalated our engagement by communicating formally with the company, issuing a public statement, and voting against board members, including the chairman. In late 2022, we concluded that the company was no longer an attractive investment and made the decision to sell our stake. Following this, Credit Suisse’s share price collapsed and it was acquired by UBS.

In 2019, Harris Oakmark began a dialogue with Daimler (now Mercedes-Benz Group) regarding the shift to electrification of vehicles and the company's strategy to position itself as a luxury brand and divest its truck business. The management team launched a six-pillar strategy focused on financial performance and cash flow generation, while also establishing a close relationship with its customers to generate recurring revenues. To this end, the company upgraded the technologies used in its vehicles to provide real-time updates.

Mercedes-Benz Group has also worked on its social practices — the S in ESG — by improving relations with its own workforce and offering more targeted bonus systems. As a result, we find its business model is more sustainable and based on better ESG practices. Governance issues, including the performance of the firm’s management team, have also been a constant throughout this engagement. As it continues to focus on material E, S and G issues, the impact on Mercedes-Benz Group’s return on capital has been clear.

Written in September 2024

Harris Oakmark is an affiliate of Natixis Investment Managers and forms part of our Expert Collective