Active investment commentary & analysis


Governance and managerial oversight that falls short of recognised standards has the potential to seriously hamper overall shareholder returns. The impact of any lapses in policy or procedure in these areas can result in meaningful reputational and economic damage, hitting not only profits, but also the valuation multiple the investment community is willing to apply to those profits. The ability to identify these shortfalls before they translate into collateral damage is therefore critical, but, unlike more standard metrics garnered from the profit and loss account, cashflow statement and balance sheet there is a paucity of information available to investors and that which does exist is far from standardised.

Consequently, we are constantly pushing company management for more disclosure on both governance and societal matters. This not only aids our future analysis by providing the disclosure we seek, but, is also likely to focus management and board attention on matters where previously they may have paid scant attention. A recent meeting with a large UK bank highlighted this approach. The institution concerned had experienced issues in the past with their controls and procedures regarding the reporting of concerns within the organization, otherwise known as whistleblowing.

Scrutiny of the company’s Annual Report and Corporate Responsibility documentation surprisingly revealed little information on this topic despite the chequered history. Whistleblowing cases were reported by type of event and the percentage weighting of each but no absolute numbers were given making both comparison with peers and analysis of trends impossible. This lack of disclosure gives no confidence in the bank’s statements that the issue has been resolved as, despite the warm words, we have no statistical back-up for the claims being made.

The FCA has recently conducted a review of whistleblowing among UK banks where they note evidence of annual whistleblowing reports for the governing bodies of these financial institutions. With this in mind, we have written to the Chair of the Audit Committee of the bank concerned requesting similar disclosure to shareholders, which, although not mandated by the FCA’s recommendations, would appear to be in the spirit of what they are trying to achieve.

Analysis of non-financial metrics is an essential tool enabling an all-encompassing understanding of a company’s operations, culture and strategy and can play an important role alongside more traditional financial analysis, but, as this case demonstrates, it is equally important to ensure that the companies in which we invest report in a manner that allows such analysis to take place. As a result, SVM’s engagement process devotes considerable time to engaging with our investee companies to ensure we are presented with the most appropriate data available which, in itself, is a useful barometer of company culture and governance standards and leads us to a more thorough understanding and enhanced analysis over time.