The quality of the people in the boardroom, and the resulting corporate culture, is a major factor that determines whether a company creates value for its shareholders over time. Beyond strategic and financial analysis, one of the ways we succeed as investors is by spending time understanding these cultures and assessing the governance framework within which each board operates.

Here we share some of the factors we use to assess boards and highlight trends we currently see in European boardrooms.

People matter

It is the quality aspects of the company’s leadership that allows for outperformance versus the expectations that are embedded in the share price, hence allowing for outperformance of the company’s shares over time. 

Governance is one of the key factors determining the overall quality score that we apply to each company. This subsequently determines the required return that we use in our valuation model for the company. Assessment of the quality of governance is, therefore, central in our investment process when making investment decisions.
Boards should have leaders with the right skillset - based on their professional roles and accomplishments – as well as the right mindset. The latter includes qualities such as being balanced, skeptical, collaborative and socially adept, among others. Board membership is a demanding job, requiring significant time commitment. We believe it is difficult for executives to do it on the side and we, therefore, advocate for a fully professional board.

Raising the bar 

During the last 10 years, we have seen a marked increase in levels of professionalisation within European company boards, with small cap companies catching up on large caps. Firstly, the push for diversity and better oversight has led to an increase in women on boards, also aided by EU and national legislation. 

Secondly, we see a change in the broader profile of board members as well. In the past, boards consisted of a few specialists (typically financial and legal) alongside generalists with corporate governance or executive experience. With mounting governance requirements and investors seeking dialogue on topics like remuneration, sustainability and capital allocation, boards are becoming populated with specialists, including HR, legal and financial experts. Today’s modern boardroom is thus more of a medley of industry-relevant specialists, each contributing from a specific strategic perspective.

Since directors are also expected to see the bigger strategic picture and consider the company’s trajectory, some companies are establishing advisory boards alongside supervisory boards. This way, both realms get their due attention, with supervisory boards focusing on governance issues and advisory boards consisting of industry experts who provide insights on innovation, competitive positioning and strategy.

A collaborative approach

Active shareholders play a crucial role in raising standards within boards – especially with small cap companies, where the relationship between shareholders and the executives is usually quite close. 

We take pride in being a strongly engaged, long-term shareholder that seeks to invest in quality companies with a strong sustainability profile and an attractive valuation. For this reason we closely engage with the boards of our holding companies on issues like strategy, remuneration, capital allocation, leadership succession etc. We always actively vote at AGMs and have conviction to vote against proposals if our recommendations are ignored and we disagree with a proposal. If appropriate, we sometimes help to shape boards by suggesting suitable candidates for their consideration.

On the whole, we see it as our duty to ensure that leadership is in the hands of the most qualified  individuals who work effectively within a robust governance framework that aligns the company’s interests with ours, as long-term shareholders.

Influencing across the board 

Our close relationship with small cap companies involves extensive engagement, both with executive board members and non-executives alike. The latter sets us apart from many other investors, since most direct their attention on the CEO and CFO.

We see that in the UK governance model, which typically follows a one-tier board structure, non-executive board members show a high level of involvement and responsibility for the company’s success and share price. In Continental Europe a two-tier board typically forms the basis of corporate governance and in this structure non-exec directors typically view their role as advisory, less directly responsible for shareholder value. However, more recently we see supervisory boards getting more involved, due to active stakeholders engagement from investors, regulators and NGOs who increasingly expect supervisory board members to take more responsibility and action.

In summary

The quality of a company’s leadership and its governance structure is critical to shareholder value and potential outperformance over time. As engaged shareholders, we therefore devote a significant amount of time and attention to this subject, making time to actively engage with both executive and non-executive board members. 

Companies generally appreciate our involvement and constructive feedback as well as our insights on governance issues. This can help them to align the company with shareholder interests, resulting in  value creation and an attractive share price development in the long term. Ultimately, this is what we work towards and what matters most in our world of listed small caps.