Investors are increasingly focused on environmental, social and governance (ESG) issues. Capital Group takes these concerns very seriously, whether they involve the long-term health of the environment, ethical business practices or the impact of a firm’s products and operations on society. As an investment firm, we are a steward of the savings of millions of people around the world, and thus examine these topics from that distinct position.
As fiduciaries, our focus on long-term shareholder value obliges us to look at ESG issues as part of our overall mission: improving people’s lives through successful investing. Put simply, we believe a company’s ability to align its business strategy with evolving societal expectations is essential to long-term value creation. As a result, we analyze ESG issues in an integrated way—alongside other financial and business indicators—as part of our core investment process.
Our analysts and portfolio managers make thousands of company visits each year. These regular meetings with management allow engagement and discussion on issues relevant to the long-term value of a company. ESG issues are an important and natural part of this ongoing dialogue; management’s understanding of environmental, social and governance issues is a vital aspect of our analytical process. A firm’s efforts to both minimize risks and also seize new business opportunities related to society’s changing expectations help shape our investment decisions. We believe management’s ESG policies can affect a firm’s reputation and license to operate, its ability to attract and retain talent, its prospects for working effectively with stakeholders and regulators, and its long-term growth outlook.
We also take a deliberative approach to proxy voting in this context. When evaluating proposals relating to ESG issues, we assess the specific circumstances at each firm, the company’s current policies, and the long-term impact on the company’s shareholders. We find that sound governance often serves as a wellspring for prudent practices across the full range of ESG concerns. We support greater disclosure of environmental-related information, as such information can help us better assess the long-term value of a company. We also support governance proposals that protect the shareholder rights of our clients. Capital is a member of the Sustainability Accounting Standards Board (SASB) along with many other groups focused on improving governance and reporting globally. We support efforts by many of these organizations to set standards for the reporting of ESG information.
Finally, Capital’s fundamental, “bottom-up” investment approach and long-term outlook means we think broadly about a firm’s touch points with society, and the future risks a business may face. We compensate portfolio managers largely based on five- and eight-year results, and often hold stocks for much longer periods. When one invests over longer time horizons, one looks at a firm’s behaviour in different ways; and, as a rule, the longer the time frame, the greater the weight ESG issues tend to carry. By behaving as an owner, not a trader, Capital is able to make decisions that realize both long-term shareholder value and societal value.
A belief in judgment. A commitment to long-term value.
As a steward of millions of families’ savings, Capital Group, home of American Funds, takes its contribution to the successful governance of modern business enterprises very seriously. Sound corporate governance means that the companies we invest in on behalf of our investors have the appropriate policies, checks and balances in place to ensure the entity is run in the best interest of its shareholders, employees and other relevant stakeholders.
The money that investors have entrusted with us makes Capital Group a significant shareholder in many public companies across the world. The success of these companies is critical to helping our investors send their children to college and retire securely. We use rigorous analysis, diligence and care when considering governance issues. To us, corporate governance involves more than just proxy voting; it must be an integral part of the investment process. We engage with company directors and management to encourage good governance as we have found it to be a key element in achieving investment success. This is also why we devote a significant effort to positively influencing governance standards globally.
Over eight decades, Capital Group has developed a thoughtful and robust process for managing our role in corporate governance. What makes our approach different? In an era when investment decisions, as well as markets themselves, are increasingly dictated by algorithms, formulas, split-second computerized trades and index investing (where one buys a basket of stocks without regard to the valuation of each underlying security), Capital Group takes great care and deliberation, evaluating issues on a case-by-case basis. Our analysts and portfolio managers devote significant time and energy to these matters, which differentiates us from many of our peers. We debate critical questions with our colleagues and then exercise experienced, nuanced judgment.
At Capital Group, the cornerstone of our investment process is fundamental research. Within this process, known as The Capital SystemSM, we study companies and industries intensively, interviewing managements and seeking all available, relevant information. This information forms the foundation for our investment decisions. Our process combines individual accountability with teamwork. Each fund is divided into portions that are managed independently by investment professionals with diverse backgrounds, ages and investment approaches. An extensive global research effort supports The Capital System.
Our investment process underpins our approach to corporate governance. Unlike some fund managers who hand off such matters to a separate department—or others who effectively outsource this function to advisory firms who favor “bright line” rules that can miss key details of a company’s specific situation—our analysts and portfolio managers drive our corporate governance practices directly. We believe our detailed, hands-on, case-by-case approach to governance serves an especially important role today, when a growing portion of ownership in global equity markets takes place via investment vehicles designed to take human judgment out of the equation entirely.
Our investment professionals encourage long-term thinking and value-creation for shareholders through (1) direct engagement with management and directors, (2) proxy voting and (3) participation in policy and governance organizations. We’ll consider these roles in turn.
Our portfolio managers currently average 27 years of investment experience, including 21 years at our company. Over their careers, our portfolio managers and analysts develop deep knowledge of companies and industries, including best practices that can help generate positive shareholder returns over time. In evaluating such practices, we seek to strike a balance between delivering current returns to shareholders (via dividends and share buybacks) and assuring long-term growth for the business, its employees and other stakeholders (via capital investments). We conduct thousands of in-person meetings and conversations each year with senior management and directors of portfolio companies. This allows us to assess not just the operations and strategies of the companies we follow, but also to make informed assessments of the individuals who guide and manage them. The relationships we build through this process can also result in companies seeking our input on a variety of corporate governance matters.
Proxy voting is an integral part of corporate governance. Investment analysts are responsible for developing proxy voting recommendations for each company held by one of the American Funds from Capital Group. These recommendations are reviewed by senior analysts serving as proxy coordinators. Our internal governance and proxy team coordinates and informs this process, drawing on their deep knowledge and institutional expertise. Portfolio managers on the investment committees within Capital Group debate and ultimately vote on the proposals. We also benefit from the perspective and experience of the American Funds’ independent board members, who work with us to develop and vet guidelines that shape our deliberations.
Because each proxy vote is analyzed on a case-by-case basis, and because multiple decision-makers may weigh in, certain American Funds may vote differently than others. However, all votes are informed by the same basic principles. Following are examples of those principles, applied to specific topics of interest (for complete proxy voting guidelines, please see American Funds and American Funds Insurance Series® (PDF) and American Funds Target Date Retirement Series® (PDF)):
Compensation should create incentives for superior investment returns and align management’s long-term interests with those of the shareholders. For this reason, consistent with our approach to investing, we generally prefer a significant portion of management’s compensation to come in the form of equity stakes tied to long-term value creation for all shareholders. It is important, however, that such compensation be designed not merely to reward a “rising tide” in either the market or a specific industry that cannot be fairly attributed to management skill or contribution. We look for multiyear arrangements that are appropriately tailored to both the industry and the company’s size and growth rate. We also believe that absolute levels of compensation (as well as pensions and severance, when they apply) should be monitored with an eye toward preventing excess. In addition, we are vigilant about assuring fairness for public shareholders; we frown on plans that unjustly dilute their stakes and stand ready to vote these convictions. We believe the goal should be to balance incentives for high performance with a commitment to superior shareholder returns.
Board independence is essential to good corporate governance. Typically, we find this requires that a significant majority of the board remains fully independent of management. We also generally prefer a separation of the chairperson and CEO roles, with the chair being an independent director (i.e., not a current or former executive or other affiliated director). Additionally, we recognize that, in some cases, a sufficient level of board independence and leadership can be accomplished via other means, such as through an empowered lead independent director.
Giving shareholders the ability to nominate directors is a potentially constructive tool in cases in which there are questions regarding a company’s dedication to creating shareholder value. This input, however, must be balanced against the risk of abuse by groups whose short-term agenda can distract or destabilize a company in ways that undermine long-term value creation. When assessing such proposals, we believe it’s important to consider a company’s existing governance structure and responsiveness to shareholders. In some cases, the presence of strong independent directors and a strong chair of the nominating committee may better meet our clients’ goal of long-term value creation than new forms of proxy access.
The right to act by written consent (without calling a formal meeting of
shareholders), as well as the right to call a special meeting, can be powerful tools for shareholders. As a practical matter, these tools are needed only rarely, but it’s essential that proper options be “on the shelf” should such occasions arise. We therefore typically seek to ensure appropriate access to these tools while avoiding abuses by small groups that may not be in the long-term interest of most shareholders.
An intelligent capital structure is an integral part of any business strategy. As proposals arise, we seek to balance the need for flexibility in managing the financing needs of the business with an overriding commitment to fairness for existing shareholders. In this context, we generally support reasonable increases in authorized shares when the company has articulated a need (for example, a stock split or recapitalization).
A company’s ability to align its business strategy with evolving societal expectations is essential to long-term value creation. Management’s understanding of emerging issues and their efforts to minimize risks forms an important part of our assessment of management quality, a key factor in our stock-selection decisions. ESG issues are an important and natural part of this ongoing dialogue. They can affect a firm’s reputation and license to operate, its ability to attract and retain talent, and its ability to work effectively with stakeholders and regulators.
When evaluating proxy proposals relating to ESG issues, we assess the impact to the company’s shareholders, the specific circumstances at each individual company, and the company’s current policies and practices. We support greater disclosure of environmental-related information, as such information can help us better assess the long-term value of a company.
We believe that we serve our clients’ long-term interests by helping improve governance practices globally. In addition to our direct engagement with companies, we know from experience that detailed technical matters can often play a vital role in sound stewardship. We frequently share ideas with such bodies as the Financial Accounting Standards Board and the Public Company Accounting Oversight Board, and with stock exchanges and their regulators around the world, from Hong Kong to London to New York. We work to improve standards around the globe including the Sustainability Accounting Standards Board (SASB) in the United States ,the Japan Stewardship Code (on which we were a charter signatory), or by participating in such venues as the Asian Corporate Governance Association.
The direct involvement of analysts and portfolio managers in governance issues, together with our case-by-case analysis of critical proxy issues, is an important part of our investment process.
By helping assure that investment capital flows to ideas that often become products and services that improve people’s lives (and thus create long-term value), effective corporate governance contributes to shared prosperity. The stakes are high; after all, when taking the long view, the extraordinary rise in human well-being in the last 200 years is due in significant measure to the investment, innovation and talent mobilized within publicly owned corporations.
We take pride in helping many of the world’s leading firms work for the benefit of the millions of investors we serve, and look forward to continuing this tradition of diligence and stewardship on their behalf.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
Content contained herein is not intended to serve as impartial investment or fiduciary advice. The content has been developed by Capital Group, which receives fees for managing, distributing and/or servicing its investments.