The missing piece this AGM season

As the season of corporate annual general meetings draws to a close, ACT Insights explores the missing financial material risk overlooked in shareholder resolutions

Corporate culture has become one of the most frequently discussed topics in investment management. Asset managers increasingly recognise that culture influences everything from risk management and employee retention to innovation, long-term performance and corporate resilience.

Yet there is a curious disconnect taking place. While many investment managers have developed sophisticated ways of assessing culture within their own organisations, and among the companies they invest in, including the ACT Framework, there is remarkably little evidence that culture is receiving the same level of attention in the corporate world itself - particularly during AGM season, where shareholders are supposed to hold companies to account.

The result is that one of the most important drivers of long-term value creation remains one of the least visible aspects of shareholder oversight.

For sustainable investment specialist EdenTree Investment Management, culture is not a peripheral issue, which sits at the heart of investment analysis, according to Carlota Esguevillas, head of sustainable investment at the firm. 

"Culturе is for us one of the most important indicators of long-term value," she says.

"We absolutely think about sustainable investment as identifying risks which don't necessarily show up in financial statements. Things like human rights, things like culture, right through to climate risk."

Risk and performance 

Esguevillas prefers the term "extra-financial risks" rather than "non-financial risks", arguing that these issues ultimately affect company value and investment outcomes.

Importantly, she sees culture through two lenses. The first is risk management. Poor cultures can create misconduct, governance failures and reputational damage. The second is performance.

"When we look at teams and businesses that perform really well, it is down to the culture, the alignment and having the right people and the right strategy to deliver against objectives."

This perspective is becoming increasingly common among investors. Culture is no longer viewed as a soft issue or a human resources concern. It is increasingly regarded as a material factor that can influence returns.

Yet despite this growing recognition, culture remains difficult to identify during AGM season.

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Lindsey Stewart,  director of institutional insights at Morningstar, explains shareholders looking for clear signals on culture may struggle to find them.

"Culture is always very, very difficult to get clear signals on," he says.

While shareholder resolutions in the US can occasionally provide clues about investor concerns and corporate priorities, opportunities elsewhere are limited.

"In jurisdictions that have much fewer shareholder resolutions, like the UK and frankly most other capital markets, there are fewer signals on those kinds of non-quantitative issues."

Instead, investors are often left searching for indirect indicators.

Votes on director elections, remuneration policies and board tenure can offer hints about the values and priorities of a business. Long-serving directors, for example, may indicate whether influence is concentrated among a small group of individuals. However, he notes these are proxies rather than direct measures of culture.

While votes and resolutions may not be clear, some fund managers have found their own ways and spend considerable time trying to understand culture through engagement.

Esguevillas explains that at EdenTree culture is assessed in almost every meeting her team has with company management.

"When we meet a management team, part of the purpose of that conversation is to determine the sort of culture that business has."

The assessment goes beyond formal answers.

"We learn as much from their responses to our specific questions as how they operate as a team, how they interact with each other, how they interact with our questions and how they speak about their workforce."

Stewart agrees that observation often tells investors more than formal disclosures.

"Perhaps a key way is just to turn up to the AGM and observe what's going on - who talks to who, and how are they interacting with each other?"

The challenge, however, is that these observations rarely make their way into formal shareholder discussions with questions around culture seldom arising at AGMs unless a company has experienced a major controversy or governance failure - when the damage has already been done.

"In the aftermath of something going seriously wrong that requires board-level attention,” says Stewart, “you may get more questions around it, but it is not something that comes up routinely."

If culture is genuinely one of the strongest indicators of future performance, then waiting until something has gone wrong is too late - therefore fund managers that are considering culture in their investment processes and engagement are a step ahead. 

The conversations taking place across the investment industry suggest there is broad agreement that culture matters, even though that is not currently being translated into meaningful shareholder scrutiny.

For now, AGM season risks continuing to focus on what is easiest to measure rather than what may matter most.