MONKS STEWARDSHIP REPORT 2018 - Baillie Gifford
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MONKS STEWARDSHIP REPORT 2018
– Monks Stewardship Report 2018 Baillie Gifford
IMPORTANT INFORMATION AND RISK FACTORS
The views expressed in this article are those of The Monks This document contains information on investments which
Investment Trust PLC and should not be considered as does not constitute independent research. Accordingly, it
advice or a recommendation to buy, sell or hold a particular is not subject to the protections afforded to independent
investment. They reflect personal opinion and should not research and Baillie Gifford and its staff may have dealt
be taken as statements of fact nor should any reliance be in the investments concerned.
placed on them when making investment decisions.
All information is sourced from Baillie Gifford & Co
Baillie Gifford & Co and Baillie Gifford & Co Limited and is current unless otherwise stated.
are authorised and regulated by the Financial Conduct
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Baillie Gifford & Co Limited are listed UK companies. purposes only.
Baillie Gifford & Co Limited is the authorised Alternative For a Key Information Document, please visit our website
Investment Fund Manager and Company Secretary of the at www.bailliegifford.com
Trust. The Monks Investment Trust PLC (Monks) is listed
on the London Stock Exchange and is not authorised or The Monks Investment Trust PLC Annual Past Performance
regulated by the FCA. The value of its shares, and any To 30 June each year
income from them, can fall as well as rise and investors
may not get back the amount invested. 2014 2015 2016 2017 2018
Please remember that changing stock market conditions 11.8% 10.4% 3.2% 59.9% 22.1%
and currency exchange rates will affect the value of your
Source: Morningstar, share price, total return in sterling.
investment in the fund and any income from it. You may
not get back the amount invested. Past performance is not a guide to future returns.
Monks invests in overseas securities. Changes in the rates
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05
INTRODUCTION
06
OUR APPROACH
TO STEWARDSHIP
08
STEWARDSHIP AND
GROWTH INVESTMENTS
10
ENGAGEMENT
HIGHLIGHTS
CASE STUDY – NASPERS
15
MONKS’
CARBON FOOTPRINT
CASE STUDY – CRH
20
PROXY VOTING ACTIVITY
CASE STUDY – ELON MUSK’S
LONG-TERM INCENTIVE PLAN
24
APPENDIX 3
MONKS PORTFOLIO
PROXY VOTING DATA
– Monks Stewardship Report 2018 4
Introduction
INTRODUCTION
Our investment process at Baillie Gifford is founded on the long-term
ownership of growing businesses. We want to help these companies fulfil their
potential by encouraging them to invest in growth opportunities and to ignore
the short-term pressures of the stock market. We take the responsibilities of
ownership seriously, and we are active stewards of our clients’ capital.
We are acutely aware of the This report focuses on how Monks
responsibilities and opportunities that Investment Trust fulfils these
our ownership of companies affords. stewardship responsibilities. This is
This is an integral part of active a nuanced and complex area which
management; the careful selection requires thoughtful company-by-
of investments chosen for their company analysis rather than a
long-term potential. We see our role ‘one-size-fits-all’ approach. Our
in supporting growth and promoting efforts are supported by our specialist
good decision making as vital. We run Governance and Sustainability team.
relatively concentrated portfolios and Our regular interactions with company
commonly own substantial stakes in management enable us to understand
companies for several years. This gives the sustainability of long-term strategy.
us a position of significant influence To us, this is what actual investing has
which we aim to use for the broader always been about.
good of our clients and society.
In the pages that follow, we set out
We believe that our long-term our approach to stewardship and
perspective and growth focus how it fits with our growth style. You
are increasingly unusual among will also find engagement highlights,
institutional investors and make us an analysis of the strategy’s carbon
attractive and helpful shareholders for footprint, and information detailing
many companies, particularly when our proxy voting activity.
investors with shorter-term priorities
are applying pressure. We see our role We hope that you find this document
as helping companies to realise their of use. We have had many interesting
full potential, often through supporting interactions with clients on the subject
high levels of investment for the future of stewardship and we look forward to
and by encouraging them to avoid continuing these conversations.
short-term targets and distractions
(such as detailed quarterly guidance
and reporting).
5
– Monks Stewardship Report 2018
OUR APPROACH
TO STEWARDSHIP
Stewardship, responsibility and long-termism are A. INVESTING FOR FUTURE GROWTH
synonymous concepts. This is the philosophy which
underpins the process behind our company engagement We think it is telling that the aggregate level of capital
and stock selection. deployed for future growth versus that returned to
shareholders (the growth capital investment ratio) is
As patient, active growth investors, our challenge is significantly higher for companies in the Monks portfolio
to identify exceptional businesses with the potential to compared to the FTSE World Index. Equally, we find
deliver outsized, long-term returns for our clients. Such it disturbing that for the index this ratio has fallen
businesses and the talents which build them are rare. dramatically over recent years. It appears to us that
Engagement with company management is central to many companies have fallen foul of pressures to return
our endeavour. We aim to support and encourage their capital, boosting short-term earnings, at the expense of
ambitions while also taking the opportunity to learn from valuable investments for the future. Indeed, we believe
our conversations. Objectivity is vital, and where our that high ownership turnover, the never ending obsession
views do not align with those of management we will with quarterly income targets, and the pressure to return
provide challenge. cash, all risk stifling future growth. There will be times
when we will urge restraint, particularly within industries
As long-term owners of companies, it is also essential for sensitive to economic cycles, but we view it as our
us to consider the broad stakeholder economics of each duty to support and embolden business leaders when
of our investments. We believe that environmental, social considering their strategic investment ambitions.
and governance factors must be considered carefully
given their potential impact on the future health of a
Investing for Future Growth
business as measured through growth and returns.
(Growth Capital Investment Ratio)
2.5
HOW WE DIFFER FROM THE MARKET 2.0 c.2.5x 1.9
Three important and interrelated factors help demonstrate 1.5
how our approach is differentiated: a focus on investment
for future growth, strategic alignment, and length of 1.0
0.7
ownership.
0.5
0.0
FTSE World Monks
6 Note: Portfolio and benchmark constituents taken at end March 2018.
The analysis is conducted ex Financials, using last-reported annual
accounting data for each of the constituents. All data is gathered in USD.
Source: Baillie Gifford & Co, Factset, Worldscope and relevant underlying
index provider.
Our Approach to Stewardship
B. STRATEGIC ALIGNMENT
We typically choose to align ourselves with strategic
business owners such as controlling shareholders,
Our average period of
founders and family holding companies. These ownership is seven years.
stakeholders are typically looking to maximise the value
of the company for generations to come. They share
our belief in the benefits of long-termism and have the
passion and willingness to embrace risk and invest for
future growth.
C. LENGTH OF OWNERSHIP HOW IT ALL FITS TOGETHER
As shown by the following chart, our period of Baillie Gifford is a private partnership, which means
ownership is typically far in excess of the industry we are in the fortunate position to be able to take a
average. This gives us the opportunity to engage and long-term approach to everything we do – this sets us
build deeper relationships with company management. apart from much of the fund management industry. We
Our long-term ownership also demonstrates to companies believe this is important because we are aligned with
that our interests are aligned with theirs. We share a your interests, and able to act as long-term stewards of
common goal. businesses on your behalf.
Stewardship is not a separate part of our process. It is
Length of Ownership (Years)
Years
intrinsically linked to how we think about investing.
8 c.4.5x Stewardship, responsibility and long-termism are
7.1
synonymous concepts.
6
4
2 1.5
0
Global peers’* Monks
7
Source: Baillie Gifford & Co as at 31 March 2018.
*Time horizons based on Baillie Gifford estimates using World Bank data
of stocks traded as a per cent of GDP 1993-2014.
– Monks Stewardship Report 2018
STEWARDSHIP GROWTH STALWART
How can we best encourage continued
AND GROWTH innovation and product support?
INVESTMENTS Growth Expectations Earnings
As growth investors we split the Monks portfolio Time
into four different growth categories: Stalwart,
c.10% p.a. earnings growth
Rapid, Cyclical and Latent. This split is useful in
helping us think about the individual holdings and Our Growth Stalwart holdings are
the portfolio as a whole. It also allows us to typically well-established companies
with deep competitive moats and long
consider how best to engage with company runways for growth. But for such
management, and which questions are most companies, the temptation to deploy
capital in an undisciplined manner can
important for us to explore. Here, we examine one
be strong. We view our role as
of the pivotal aspects of long-term stewardship – ensuring that investments are targeted
how capital is invested to sustain future growth. and sufficient to support future
growth. For example, these
investments may fund product
innovation and brand marketing.
Stalwart growth companies are
commonly highly cash generative and
we look to align ourselves with
disciplined capital allocators. We have
a strong preference for those
prioritising organic growth and only
acquiring assets where there is a clear
benefit to the long-term return
structure of the business.
8
Stewardship and Growth Investments
RAPID GROWTH CYCLICAL GROWTH LATENT GROWTH
How can we support and encourage How can we best encourage How can we help exceptional
bold long-term investment plans? Does counter-cyclical capital allocation? management teams capitalise on
the company have the correct structures change?
and resources to scale rapidly?
Growth Expectations Earnings Growth Expectations Earnings Growth Expectations Earnings
Time Time Time
c.15% to 25% p.a. earnings growth c.10% to 15% p.a. earnings growth through Earnings growth to accelerate over time
a cycle
The Rapid Growth category includes Capital allocation is of pivotal In trying to identify potential holdings
our youngest and most disruptive importance for Cyclical Growth for the next five years and beyond, we
companies. These are often led by companies. Our engagement here also examine companies where there
visionary management, trying to focuses on encouraging and is the prospect of a dramatic change
create radical change. This takes supporting counter-cyclical for the better. For example, this may
courage and we believe that the investment. This will require strong be through industry consolidation, a
ultimate rewards, in terms of future management with a comprehensive change of management, or a
growth and profitability, will understanding of the supply/demand structural shift in demand. For Latent
disproportionately accrue to those dynamics of their industries and a Growth stocks having exceptional
who invest early and wisely. Our disciplined approach to investment. management is essential. Often we
primary role as stewards is to support We encourage management to scale first engage with these companies
and empower these leaders, back investments during times of following a sustained period of poor
encouraging them to continue to exuberance, and to preserve capital operational performance. Here we
invest in research, development and for deployment near the bottom of view our stewardship role as offering
future growth opportunities. But, as cycles when assets can be bought support to management and backing
long-term stewards, we are also aware inexpensively. their plans to deliver improved
that as these companies grow their performance, often as they face
dynamics will change. We therefore significant criticism from the broader
encourage these visionaries to invest investment community.
in the correct governance structures
and people to provide the skills,
challenge and experience needed to
drive continued growth as their
companies scale.
9
– Monks Stewardship Report 2018
RYANAIR
Ryanair is the largest European low
ENGAGEMENT cost airline and currently has the
youngest, most efficient fleet in the
industry. Whilst we admire the social
HIGHLIGHTS
and economic benefits Ryanair has
brought to European countries
through lower cost air travel, we had
for some time been disappointed by
its attitudes toward other important
stakeholders, particularly employees
and trade unions. Our recent
A selection of the conversations that we have engagements have therefore mostly
been having with companies that are held revolved around the outcomes of the
ongoing negotiations with pilot and
across the Monks portfolio. crew unions. We welcome the efforts
to improve relations with employees
and will continue to monitor the
evolution of these issues.
TESLA Ireland
Tesla is changing the way we think
about transport, energy supply and
distribution. Its contribution to a lower
carbon economy in our view far
outweighs the governance issues that USA Spain
have appeared in the media. Our
conversations with the company in
2017 revolved around human capital
management, board make-up, M&A
activity and the controversial topic of
Elon Musk’s remuneration. Our
engagement meetings have one goal
– to ensure the company is positioned
to continue with its positive
contribution to the environment and
society, as well as shareholders.
STERICYCLE
Stericycle is one of the world’s largest
medical waste management ROYAL CARIBBEAN CRUISES
companies. We believe that its core As an operator of large cruise ships it may
assets are extremely valuable. However, seem surprising that Royal Caribbean
the company has encountered some Cruises was recently ranked number 27 on
problems that have temporarily an index of the most sustainable
hindered its reputation, growth and companies. We are very pleased to
profitability. Notably, we have been observe its increasingly rigorous approach
alarmed by the board’s inability to to managing carbon emissions and waste.
oversee internal controls and mitigate However, in relation to its remuneration
compliance risks, resulting in a billing policy, we have been concerned about the
10 scandal costing the company millions of repeated use of discretionary equity
dollars. Having engaged with the board awards, made in addition to normal long-
and opposed the re-election of multiple term incentives. We have discussed this
directors over the past two years, we with management and have opposed a
are seeing early signs of improvement number of resolutions on executive pay, as
and are hopeful that the management well as recently opposing the re-election of
team will return to a path of growth. the chair of the remuneration committee.Engagement Highlights
SCHIBSTED ATLAS COPCO
In 2015, Spencer Adair, one of the portfolio managers, One of Atlas’s key competitive advantages is
was appointed to the Nominations Committee of this the energy efficiency of its industrial
online classifieds business. The nominations committee machines, whose lower energy consumption
has responsibility for assessing the structure, gives substantial cost savings for its
composition and strategic skills required at the board customers. The topic of the long-run impact
level. Spencer’s involvement has been beneficial for our of free, or nearly free, energy on its business,
understanding of the company but has further has been discussed with the management
developed our thoughts on board composition and how team. It is encouraging to see that their
to ensure that there is constructive ambitious debate, thinking in this area continues to evolve.
more generally. His formal and informal discussions
with the board and management help us to think
differently, and we feel it is one of the richest ways to
gain a real world business education.
Sweden
Norway
CYBERAGENT
CyberAgent benefits from the
omnipresent shift to internet
advertising, online gaming
and social media. We like the
Japan company’s dynamic,
China
entrepreneurial culture and
believe that it has the
potential to emerge as a
major force in the Japanese
internet landscape. However,
CyberAgent does not have an
independent board of
directors. We have had
numerous conversations with
the company encouraging
inclusion of independent
representation to bring
outside perspective to this
interesting business.
DIA
CHINA BIOLOGIC
Dia, the Spanish supermarket chain
operates a franchisee store model. We have China Biologic manufactures products from
discussed with the management team the blood plasma for use in vaccines, autoimmune
appropriate share of rewards that should be diseases, haemophilia, and in emergency
given to the franchisees. As critical suppliers situations. We have engaged with the company
11
of labour they ought to receive an equitable on a range of ESG issues. We recently opposed a
share to ensure long-term business proposal to reincorporate the company, which is
success. Our Governance and Sustainability listed on NASDAQ, from Delaware to the Cayman
team is encouraging the company to Islands as we were unconvinced that the benefits
introduce franchisee satisfaction as a formal of moving domicile were great enough to give up
measure in management incentive plans. the associated investor protections.– Monks Stewardship Report 2018
ENGAGEMENT CASE STUDY – NASPERS
S U P P O RT, C H A L L E N G E , C H A N G E
Over the past 20 years Naspers has become a king of re-invention. From pay TV to online, we have witnessed
the transition of Naspers into one of the world’s most successful internet investors. We learned from a number
of chairmen, CEOs, board members and senior executives. In many ways, Naspers fuelled our interest in
Chinese internet companies at a time of broad market scepticism, helped us understand the value of classified
advertising businesses, and piqued our interest in the nascent world of online food delivery. This case study
illustrates how thoughtful engagement with management teams can result not only in exceptional investment
returns for our clients, but also insight for us as investors.
We have supported Naspers through a radical early and radical shifts away from declining
business model transition. For the first 70 years businesses.
of the company’s existence, Naspers (previously
Nasionale Pers, The National Press) was an African Naspers is now recognised for being one of the
newspaper business. In the 1980s and 1990s the most successful internet investors in the world. Its
group redeployed its cash flows into the new early investment in the Chinese tech giant Tencent,
media of satellite TV. This initial radical business of around $30 million in 2001, has grown into a
model transition occurred when the group was still holding worth $136 billion in 2017. Similarly, its
privately held. More recently it undertook a second, early investments in classified advertising platforms,
even bolder re-invention away from TV towards e-commerce and food delivery businesses have
internet assets, this time in the spotlight as a listed helped innovative companies in emerging markets
company. We have owned the shares during this grow immensely over the past decade.
second transformation. Whilst management has undoubtedly been
It is important to acknowledge that these changes successful and we have supported their long-
to Naspers’ business model have not always met term vision, we have also found areas to provide
with a positive response from the stock market. It is challenge. For example, we have urged the company
difficult to reinvent oneself while listed. Investors to be more open about its ownership structure and
and market commentators prefer companies to stick the operational metrics surrounding management
to the status quo, particularly if it is very profitable, incentive schemes. In 2013 we were also involved
rather than depress profits in order to invest in in discussions about the quality and content of the
an uncertain future. Stock markets encourage integrated report. Disclosure and transparency are
conservatism rather than adventure. After studying important aspects of engagement.
the company’s arguments and understanding its We believe that our decision to abstain from
motivation, we took a long-term view. Instead of important shareholder proposals and to explain our
worrying about the short-term financial impact of rationale to management has resulted in positive
disruptive investment, we have encouraged risk- outcomes. We are pleased to see improvements but
taking behaviour. Thanks to Naspers’ bravery, opportunities remain for additional disclosures.
shareholders have benefited from the company’s
12Engagement Case Study – Naspers
Its early investment in the Chinese tech giant, Tencent
of around $30 million in 2001 has grown remarkably
into a holding worth $136 billion in 2017.
Mobile Internet Conference, Beijing, China.
© AP/REX/Shutterstock
13– Monks Stewardship Report 2018
The intention behind our engagement with management about the opportunities, challenges and scalability of new
at Naspers has always been to encourage them to increase business models. This has helped us put into context the
trust through greater disclosure. It is our belief that this value of classified advertising businesses such as Zillow
will, in the long run, lead to a reduction in the considerable and Schibsted, the depth of the competitive advantage of
gap that exists between Naspers’ market capitalisation and the Chinese internet leaders and the growth opportunities
our estimated value of all its assets. within food delivery.
Today, we are proud of having built, over many years, As we mention on multiple occasions throughout this
a trusted mutually beneficial relationship with Naspers. document, stewardship and engagement with company
Being a supportive, loyal and large shareholder who is management teams form the backbone of our investment
prepared to provide critical feedback when required has process. This is true not only for Monks, but also across
nurtured this relationship. We have gradually been given Baillie Gifford. We all work together to achieve sustainable
deeper access to management and have learnt a great deal investment returns for our clients.
Comparing Naspers’ initial investment to the current estimated value
CLASSIFIEDS
(ex.letgo) FOOD DELIVERY
$136bn $7.8bn $1.6bn $2.5bn
$1.4bn
$3.2bn
$0.6bn
$0.03bn
Accumulated Market Value Accumulated Market Value Accumulated Market Value Accumulated Market Value
Investment (US$) Investment (US$) Investment (US$) Investment (US$)
(US$) (US$) (US$) (US$)
Note: Accumulated investments includes invested capital to 30 September 2017. Cumulative return based on market valuation as at 30 September 2017 calculated using
(i) prevailing share prices for publicly listed assets; (ii) average valuation of sell-side analysts currently covering Naspers; and (iii) post money valuation based on most
recent transactions when analysts’ consensus is not available.
Source: Naspers.
14Monks’ Carbon Footprint
MONKS’ CARBON
FOOTPRINT
Climate change is a threat to our environment and society but
also to economies and companies across the globe. Companies
that are high emitters of carbon and which do not seek to
make material improvements are likely to place themselves
at a competitive disadvantage. This may come in the form of
increased regulation, lower operational efficiency, or even
missing important technological shifts.
We therefore conduct carbon footprint analysis of the Monks
portfolio to give us a clearer understanding of which companies
are the most significant emitters of carbon. This allows us
to focus our research and engagement efforts to increase our
understanding of the actions being taken by these companies to
manage and minimise their emissions. We expect management
teams to take their responsibilities seriously.
15– Monks Stewardship Report 2018
Carbon footprint data and analysis are still at an early stage of development
and company disclosures are improving. While we utilise data from third party
specialists, in close collaboration with our Governance and Sustainability team,
we conduct our own research and engagement with companies in this area.
Our work focuses on emissions which are derived directly from a company’s
operations, such as fuel combustion and electricity usage (commonly referred to
as Scope 1 and Scope 2 emissions). We believe this to be the most effective way
of analysing the impact of individual businesses as these emissions are a direct
result of the company’s operations and are within the company’s reasonable
control.
The following charts show that the Monks portfolio has a 54 per cent lower
relative carbon footprint and a 48 per cent lower carbon intensity than the
FTSE World index. The relative carbon footprint chart shows the total carbon
emissions of the portfolio versus the index per £1 million invested. The carbon
intensity chart looks at the total carbon emissions per £1 million of revenue
generated and shows the efficiency of the portfolio with regard to emissions per
unit of financial output.
We do not manage the portfolio to produce a low carbon footprint / intensity,
however, given our focus on investing in well-managed long-term businesses,
these results should not be a surprise.
Relative Carbon Footprint and Carbon Intensity
350
300 282.1
48%
250
200
168.8 54%
146.6
150
100 78.3
50
0
Relative Carbon Footprint Carbon Intensity
(tCO2e/GBP million invested) (tCO2e/GBP million revenue)
Benchmark Portfolio
Source: Baillie Gifford. All data as at 31 March 2018.
Perhaps most importantly, the analysis also shows us which holdings are
the largest contributors, on a percentage basis, to the carbon footprint of
the portfolio. These results are a function of the size of the holding in each
company, as well as the company’s carbon emission. As can be seen, just four
companies are responsible for over half of the portfolio’s carbon emissions.
16 This analysis allows us to focus our research and engagement to understand
what the top contributors are doing to reduce the impact that carbon emissions
could have on their business in the future.Monks’ Carbon Footprint
Top Largest Percentage Contributors to Carbon
in the Portfolio
(Function of Holding Size and Emissions)
CRH (London)
Other
22.1%
24.0%
– What is important to us
is that management are
Fiat Chrysler
considering how to reduce
Automobiles
4.0% their emissions and how in
Royal
Caribbean
Cruises
AP Moller
Maersk B doing so it might enhance
12.4%
5.1%
Kirby
their competitive position.
6.1% Ryanair
Holdings
Apache Corp 10.0%
8.1% Stericycle Inc
8.2%
Source: Baillie Gifford. All data as at 31 March 2018.
Clearly not all industries are alike and some will carbon emissions and what actions they are taking.
inevitably have much higher carbon profiles. We believe that carbon emissions are high on
What is important to us is that management are management’s agenda and that they are aware of
considering how to reduce their emissions and the importance of making improvements to enable
how doing so might enhance their competitive the business to flourish into the future. They have
position. The outspoken Michael O’Leary at tough carbon reduction targets in place; they are
Ryanair doesn’t pretend that the company is good taking suitable action so that they are on track to
for the environment. However, aviation fuel is one meet these targets; and they are taking a proactive
of the company’s biggest costs and so it operates approach to ensuring that the company and the
one of the youngest, most fuel efficient fleets in industry itself continue to address the risks and
the industry which helps it keep the cost-base opportunities that carbon emission reduction offers
lower than that of competitors. Similarly, Royal over the longer term.
Caribbean Cruises has designed its latest ships
to be as fuel efficient as possible, incorporating As investment managers, our key goal is to
fuel cells to run the auxiliary power needs and produce attractive returns for our clients, over
microscopic technology to reduce resistance the long term. The portfolio is a low carbon one.
through the water. This is not because we manage it to produce a
low carbon footprint, but because of the types of
CRH, the building materials producer, is companies that we believe will produce attractive
unsurprisingly the biggest carbon contributor, sustainable growth and will be good long-term
given that it is one of the larger holdings in the investments. The carbon footprint of the portfolio
portfolio (1.5 per cent) and that a significant will vary over time as the investment opportunities
percentage of its revenues are generated from the that we find change. However, conducting this
carbon intensive process of cement production. analysis on an annual basis is helpful to us, as it
As the following case study outlines, we have enhances our research process and increases our 17
examined how seriously management consider understanding of the companies.– Monks Stewardship Report 2018
CASE STUDY – CRH
S U P P O RT I N G P O S I T I V E C H A N G E
As just discussed, CRH is the largest meet this target and is in the process
contributor to the Monks carbon of producing an emission reduction
footprint. It is a vertically integrated roadmap for post 2020.
and diversified global building
materials group that produces cement, More specifically, CRH is reducing
aggregates and other building emissions across the life-cycle of
materials. Over 85 per cent of the its products. It is using alternative,
group’s carbon emissions derive from lower carbon emitting raw materials;
cement manufacturing. is increasing the use of biomass and
other low carbon fuels (these fuels
It is estimated that 5 per cent of total already account for 45 per cent of
global carbon dioxide emissions are the company’s fuel consumption in
produced by the cement industry, the EU); and is looking to make its
therefore, this is an industry that end products more energy efficient
is exposed to future tightening of and easier to recycle. All in, this is a
regulatory requirements. We believe company taking action.
that the management of CRH is
acutely aware of this and how it CRH’s management is also taking
could impact the company. This is leadership in driving improvements
reflected throughout the company’s across the industry. This year, Albert
business strategy, its Key Performance Manifold, the company’s Chief
Indicators, and operational risk Executive Officer will become the
factors. It is also encouraging to Chairman of the Cement Sustainability
see that elements of management’s Initiative. He has stated that one of
remuneration are linked to the delivery his priorities will be to reduce global
of emissions improvements and related cement carbon dioxide emissions
operational efficiency targets. This is by 20–25 per cent by 2030. This is
not just an issue that management is a challenging target that will require
paying ‘lip service’ to. a collaborative approach across the
industry and with other stakeholders.
The company currently has an
ambitious target of a 25 per cent Our engagement with company
reduction in cement plant emissions management is ongoing. We will
by 2020 compared to 1990 – a continue to encourage and challenge
reduction target that the index provider them to ensure that reducing carbon
MSCI believes believes is “one of emissions remains high on their
the strictest carbon reduction targets agenda and that of the broader
in the industry”. CRH is on track to industry.
18Carbon Footprint Case Study – CRH
– CRH is reducing emissions across
the life-cycle of its products.
19– Monks Stewardship Report 2018
PROXY VOTING ACTIVITY
This document illustrates that engaging with When we do take the decision to abstain, or vote
company management is a key component of our against, a management resolution it represents a
stewardship activities, allowing us to communicate combined view of the portfolio managers and the
support and provide constructive feedback to the governance specialists. These decisions are rarely
companies held within the portfolio. Proxy voting straightforward and so we ensure we communicate
is intrinsically linked to this. Our thoughtful, the rationale with company management. This
investment-led approach to voting must be viewed honesty and the ensuing discussions demonstrate to
in the context of our stewardship responsibilities. them that we take our stewardship responsibilities
We are motivated by the dual purpose of protecting seriously, and often serves to strengthen our
our clients’ rights as shareholders while also relationships with the companies concerned.
providing a positive influence on management to
deliver their long-term strategy.
The Baillie Gifford Governance and Sustainability
team has primary responsibility for coordinating
proxy voting across all of the firm’s holdings. The
team works closely with the portfolio managers Proxy Voting Statistics
and a designated analyst will manage the proxy
Abstain
voting for each strategy. To further complement 15 votes
our investment research the analyst will also Against 1.2%
48 votes
provide bespoke governance and sustainability 3.8%
analysis for relevant holdings and issues.
The following chart is a summary of Monks’
proxy voting activities in in the 12 months to 31
March 2018. The data show that we support the
majority of management resolutions. This should
For
not be seen as a failing or a disappointment: a key 1271 1208 votes
component of our investment research process is Total votes
95%
identifying high quality management teams that
will drive attractive, sustainable long-term growth.
Accordingly, our voting activity can be seen as a
logical consequence of this.
20Proxy Voting Activity
Management Resolutions: Breakdown of Voting Activity
The charts below provide a breakdown of Monks’ voting activity across different
resolution categories, including some of the most prominent voting decisions we have
taken in the past year. More detail of the votes can be found in Appendix 2.
Remuneration
TESLA
We supported the new stock
plan for CEO Elon Musk.
129 Following extensive engagement
with the board we believe the
votes
For – 113 (87.6%) award supports the company’s
Oppose – 12 (9.3%) long-term strategy and provides
Abstain – 4 (3.1%) good alignment with
shareholders.
Voting result:
For – 73%
Share Issuance/Share Repurchase Oppose – 27%
SAP
96 We opposed the discharge of the
votes Supervisory Board1 due to its
For – 83 (86.5%)
failure to respond appropriately
to shareholder concerns over
Oppose – 13 (13.5%)
executive remuneration. Having
opposed the executive
remuneration proposal in 2016
we escalated our voting action
as we were dissatisfied by the
Directors
efforts made by the Board to
implement improvements.
Voting result:
710 For – 50.5%
Oppose – 49.5%
votes
For – 691 (97.3%)
Oppose – 10 (1.4%)
CYBERAGENT
Abstain – 9 (1.3%)
We opposed the election of three
directors due to a lack of board
independence. We have
engaged with the company
Dividend/Allocation of Capital extensively to encourage
improvements to board
composition, however, after they
failed to increase the board’s
independence we decided to
34 vote against them.
votes
Voting result:
For – 34 (89.5%) For – 88%, 57%, 63%
Oppose – 4 (10.5%) Oppose – 12%, 43%, 37%
21
1. German public companies typically have a two-tier board structure, consisting of a management
board (executive directors) and a supervisory board (non-executive directors, shareholder and employee
representatives). The decision to oppose the discharge means that shareholders do not endorse some or all
of the decisions and actions taken during the previous financial year.– Monks Stewardship Report 2018
CASE STUDY – ELON MUSK’S LONG-TERM
INCENTIVE PLAN
The following article provides further detail on the thought process behind one of the more high profile voting decisions
of the past 12 months – Elon Musk’s recent incentive plan.
Elon Musk, the founder of Tesla and Space X, is no Musk is a character who divides opinion, but is a man of
stranger to controversy. Images of his cherry red Tesla huge ambition. Through Tesla he has a vision of radically
Roadster flying off into space with a mannequin at the improving the environment and society by directly
wheel, David Bowie’s ‘Space Oddity’ playing on the sound addressing the risk of climate change and accelerating the
system and the words from the cult classic, Hitchhikers advent of a more sustainable energy future. Whilst Tesla
Guide to the Galaxy, ‘Don’t Panic’ across the central will not be the silver bullet that solves climate change, it is
consul, recently captured the world’s attention. More already playing a vital role. It is demonstrating that we can
controversial, but creating fewer photo opportunities, tackle these problems and so is encouraging others, and
however, was the announcement of Musk’s proposed society as a whole, to join in. Tesla has already achieved
new Long Term Incentive Plan (LTIP) at Tesla. much, but we are still at an early stage in this journey and
we believe that having Musk at its helm will be critical if
In true Musk fashion, it is an extraordinary incentive plan. the company is to achieve its full potential.
It is truly long-term – it covers a 10-year performance
period with a five-year post-exercise holding requirement. With this in mind, one of the biggest outstanding questions
It is performance based – Musk has to achieve a series of of our investment case is ‘how committed is Musk to
market cap and financial milestones and remain as CEO staying at Tesla?’. Unlike other entrepreneurial founders
or executive chairman and chief product officer to get any he has other interests outside of Tesla. Will the excitement
reward. If he fails he gets nothing – no salary, no cash of space exploration with Space X lure him away? If
bonuses. It is suitably challenging – to be fully successful, so, a strong and competent management team would
Musk has to increase the size of Tesla from its $55 billion undoubtedly be able to safely take over the steering wheel
value today to $650 billion by 2028. The quantum of the at Tesla, but we believe they would lack the ambitious
potential award, however, is staggering. If he achieves vision that Musk has. They could achieve much, but not
all the milestones, then he will receive 20.3 million stock all that Musk could help them achieve. We believe this
options, which when fully vested could be worth in the LTIP is of sufficient magnitude to ensure that he remains
region of $56 billion. the driving force behind Tesla and that Tesla’s success will
be at the top of his agenda as it will help to facilitate his
broader aims. The monetary reward will allow him to fund
his other ventures and developing Tesla into one of the
world’s largest companies will help achieve his aspirations
of a more sustainable energy future.
Importantly, it also aligns his interests with yours as
minority shareholders. He will only be rewarded if you
make a very significant return on your Tesla shareholding.
If, and it is a big if, he manages to accomplish all the
22 milestones then he will have grown the company by
approximately $600 billion over the 10 years. This will be
a 12-fold increase from today’s value or a 24 per cent per
annum increase over the decade. To put this in context,
it would be like adding two Bank of Americas (current
© FilmMagic, Inc/Getty Images. market cap: $300 billion) to today’s Tesla.Case Study – Elon Musk’s Long-Term Incentive Plan
© Space X.
We have also been impressed by management’s willingness others trying to copy or benchmark against the quantum
to engage with us directly on governance topics. Baillie of this LTIP. However, there are characteristics of this
Gifford, on behalf of our clients, has been a shareholder plan that we would encourage other committees to adopt:
in Tesla since 2013 and over this period we have engaged its ambitiousness; the combination of market cap and
with management on a number of topics including board financial targets; the disregard for some of the more
composition, voting rights, executive pay and the Solar generic practices that we see in the market; and its 10-year
City acquisition in 2016. This has enabled us to build a focus is genuinely long-term, particularly compared to
strong relationship with the company, helped by the fact the three-year norm for most LTIPs. Ultimately, this is a
that Tesla has responded positively to the constructive package that will incentivise Musk to not only stay at Tesla
feedback that we have provided over the years – whether it but to achieve his ambitious vision for the company. In the
has been around executive pay structures, clear and timely end the Monks portfolio managers, along with portfolio
shareholder notifications or adding two new independent managers for other strategies at Baillie Gifford, decided
directors to the board. Management initially consulted us to vote in favour of the proposal. The vote was held and
about the possible structure of Musk’s new award in July passed on 21 March 2018 with 73 per cent of eligible
2017 and since it was announced we have spoken in detail independent shareholders backing the proposal (Musk and
with the Senior Independent Director, Antonio Garcias and his brother both recused themselves from the vote).
the CFO, Deepak Ahuja, to further our understanding of
the deal. We firmly believe that Elon Musk is central to Tesla’s
long-term vision. Without him, we think, the current
Unsurprisingly the LTIP has generated a lot of discussion management team could continue to scale the business
and debate amongst our investors at Baillie Gifford, and increase the market cap. However, in order to fulfil
and weighing up the positives and negatives has not its desire to become one of the world’s largest companies
been an easy job. We like the fact that the plan is and lead the transition towards a sustainable energy future,
performance-based, long-term and challenging, but we we consider Musk’s relentless energy and stewardship
are very conscious of the sheer quantum of the award as crucial. The possible payout figures are very high, but 23
and also, more broadly, of what message it conveys to we believe justified when considered in the context of
other remuneration committees around the world. We the future potential of the company and the returns that
believe that this is a unique situation and the ambitious shareholders and the company’s broader stakeholder group
challenges that Musk and Tesla are attempting to address will ultimately make.
are not normal and so we would be very much against– Monks Stewardship Report 2018
APPENDIX
24Appendix 1 – Monks Portfolio
APPENDIX 1
M O N K S P O RT F O L I O
Approximate Growth Stalwarts Rapid Growth Cyclical Growth Latent Growth Total
Holding Size 20.5% 40.1% 23.8% 15.6%
Prudential Amazon.Com TSMC
Anthem Inc Naspers Ltd - N shares Royal Crbn.Cruises
Moody’s Corp Alibaba Group Holding CRH (London)
2.0% 29.4%
SAP Sponsored ADR
Mastercard Inc-Class A AIA Group
Alphabet Inc Class A
Visa Inc-Class A Shares Ryanair Holdings Banco Bradesco Pref MS&AD Insurance
Schindler PC HDFC Corp Markel Corp Samsung Electronics
Thermo Fisher Scientific Lendingtree Richemont Fiat Chrysler Automobiles
Resmed Inc ICICI Bank Ltd Atlas Copco A Sberbank Spon ADR
Bureau Veritas SA Grubhub Inc TD Ameritrade Apache Corp
Verisk Analytics MarketAxess Holdings Holding Corp Philips Lighting
Pernod Ricard SA Facebook Cl.A EOG Resources Fairfax Financial Holdings
AJ Gallagher & Co Baidu.com SMC Bank of Ireland (Dublin)
Olympus Corp Sponsored ADR Martin Marietta Materials AP Moller Maersk B
Waters Ctrip.com Intl CH Robinson Worldwide
1.0% Sponsored ADR 46.6%
First Republic Bank
CyberAgent Inc Deutsche Boerse
Abiomed Leucadia National
58.com Inc Adr Hays
Renishaw
Seattle Genetics
Trupanion
M3
NVIDIA
MercadoLibre
Kansai Paint Co Ltd Chegg Siteone Landscape Supply Howard Hughes
Autohome Inc - ADR Persol Holdings Co Ltd Rohm
Tesla Inc Teradyne Veeco Instruments
Schibsted Wabtec Tsingtao Brewery ‘H’
Interactive Brokers Group Svenska Handelsbanken A Toyota Tsusho Corp
Netflix Inc Advantest Corp Sumitomo Mitsui Trust
B3 S.A. Jardine Strategic Holdings Holdings
Zillow Group Inc OC Oerlikon Iida Group Holdings
Infineon Technologies AG Pagegroup plc Lindblad Expeditions
Holdings
Myriad Genetics Inc Orica
Kirby
Genmab Now Inc/DE
0.5% Silk Invest Africa Food 24.0%
Alnylam Pharmaceuticals Sands China Fund Class A
Spotify Technology SA B Ritchie Bros Auctioneers HTC Corp
iRobot (USA)
Advanced Micro Devices
NetEase.com ADR Lincoln Electric Hdg.
Stericycle Inc
Yandex Dia
Line Corp MTN Group
Grail Inc Series B Ferro Alloy Resources
Preferred
25
IP group PLC
China Biologic Products
Holdings Inc
Mail.ru Group GDR
As at 30 March 2018. Excludes Cash. Figures may not sum due to rounding.– Monks Stewardship Report 2018 26
Appendix 2 – Proxy Voting Data
APPENDIX 2
P R O X Y V O T I N G D ATA
The following is a summary of the proxy voting activity for a representative Monks portfolio over the 12 months
to 31 March 2018.
Votes Cast in Favour
Company Meeting details Resolution Voting Rationale
Banco Bradesco AGM 11.2 We supported the reappointment of the incumbent candidate of the fiscal council.
12/03/18
LendingTree Annual 6 We supported a shareholder resolution requesting the adoption of a majority voting
14/06/17 standard for director elections as we believe it is in shareholders best interests.
Martin Marietta Annual 5 We supported a shareholder resolution on proxy access as we believe it is in
Materials 18/05/17 shareholders best interests.
Stericycle Annual 8 We supported a shareholder proposal regarding provisions for accelerated vesting
24/05/17 of awards during a Change in Control.
Waters Annual 6 We supported a shareholder resolution on proxy access as we believe it is in
09/05/17 shareholders best interests.
Company Voting Rationale
ABIOMED, AIA Group, Alibaba, Alnylam Pharmaceuticals, Alphabet Inc Class A, Amazon.com, Anthem Inc, We voted in favour of
Apache, Atlas Copco A, Autohome Inc – ADR, B3 S.A., Bank of Ireland, Brambles, Bureau Veritas, CarMax, routine proposals at the
CH Robinson, Colgate-Palmolive, CRH, CyberAgent Inc, Deutsche Boerse, Dia, DistributionNOW, Doric aforementioned meeting(s).
Nimrod Air One Limited, EOG Resources, Facebook, Fairfax Financial Holdings, Fiat Chrysler Automobiles,
Financial Engines, First Republic Bank, Grail Inc Series B Pref., Grubhub Inc, Hays, HDFC Corp, Howard
Hughes, HTC, ICICI Bank Ltd, Infineon Technologies AG, Interactive Brokers Group, Intuitive Surgical, IP
Group, iRobot, Japan Exchange Group, Jardine Strategic, Jefferies Financial, Juridica Investments, Kansai
Paint Co Ltd, Kirby, LendingTree, Liberty Tripadvisor Holding A, Lincoln Electric Hdg., M3, Markel,
MarketAxess Holdings, Martin Marietta Materials, Mastercard, MercadoLibre, Moody’s, MS&D Insurance,
MTN Group, Myriad Genetics Inc, Naspers, NVIDIA, OC Oerlikon, Olympus, Pagegroup plc, Prudential,
Qiagen, Renishaw, Resmed Inc, Richemont, Ritchie Bros Auctioneers (USA), Rohm, Rolls-Royce, Royal
Caribbean Cruises, Ryanair, Samsung Electronics, Sands China, SAP, Schibsted, Schibsted B, Seattle
Genetics, Silk Invest Africa Food Fund Class A, SMC, Stericycle, Svenska Handelsbanken, TD Ameritrade
Holding Corp, Teradyne, Tesla Inc, Toyota Tsusho Corp, Trupanion, Tsingstao Brewery ‘H’, TSMC, Veeco
Intruments, Verisk Analytics, Visa Inc-Class A Shares, Wabtec, Waters, Yandex, Zillow Group Inc Class A
Votes Cast Against
Company Meeting details Resolution Voting Rationale
Alphabet Inc Class A Annual 3 We opposed the Stock Plan as it includes a repricing provision.
07/06/17
6–12 We opposed seven shareholder proposals which were too prescriptive.
Amazon.com AGM 6–8 We opposed three shareholder proposals which were overly presciptive. For
24/05/2017 example, disclosure on the criminal background checks of new hires is not
something that is of material relevance to shareholders.
Autohome Inc – ADR Special 1 We opposed the adoption of a Share Incentive Plan as it allows the Board to reprice
27/06/17 outstanding options which we do not believe is aligned with shareholders’ interests.
Bank of Ireland AGM 7, 9 We opposed two resolutions which sought authority to issue equity because we
28/04/17 believe the potential level of issuance and therefore dilution would not be in the best
interests of shareholders.
Bureau Veritas AGM/EGM O.13, O.16 We opposed two resolutions which sought support for the CEO’s remuneration.
27
16/05/17 There is a lack of disclosure regarding performance conditions for the bonus, and
the company fails to disclose a cap on long-term awards.
E.24 We opposed the resolution which sought authority to issue equity because the
potential dilution levels are not in the interests of shareholders.
CarMax AGM 6 We opposed a shareholder resolution which requested increased disclosure on the
27/06/17 company’s political contributions.– Monks Stewardship Report 2018
Votes Cast Against (Continued)
Company Meeting details Resolution Voting Rationale
CH Robinson AGM 5 We opposed a shareholder resolution which was subsequently withdrawn from the
27/06/17 agenda ahead of the annual meeting.
Colgate-Palmolive AGM 3 We opposed the resolution to approve the Remuneration Report because
12/05/2017 additional one year awards were made in 2015 and 2016, and disclosure of forward-
looking long-term performance goals is limited.
5 We opposed a shareholder proposal which is too prescriptive.
CRH AGM 3 We opposed the resolution to approve the Remuneration Policy as we do not
27/04/17 believe the chosen metrics are appropriate.
7 We opposed the resolution which sought authority to issue equity because we
believe the potential level of issuance is not in the interests of shareholders.
CyberAgent Inc AGM 4.1-4.3 We opposed the election of three directors because we have been dissapointed by
15/12/17 the continuing lack of independance on the board.
Facebook AGM 3-7 We opposed five shareholder resolutions which we believe are too prescriptive at
01/06/17 this point in time.
Fiat Chrysler AGM 2.E We opposed the discharge of directors due to on-going investigations into the
Automobiles 14/04/17 company’s operational practices.
First Republic Bank AGM 7 We opposed a shareholder resolution which requested the company disclose
09/05/17 additional information regarding its diversity policy. The company currently
discloses information on its Supplier Diversity Program and Equal Opportunity
Employment Policy.
IP Group OGM 1,2 We opposed two proposals relating to the acquisition of Touchstone Innovations
10/08/17 due to concerns with the hostile nature of the takeover.
14 We opposed the proposal that gave the company the right to issue up to two-thirds
of its issued share capital via a rights issue under Section 551 of the Companies Act
2006. We do not believe that it is in our clients’ best interests to forego the right to
vote on a large rights issue at an EGM.
Juridica AGM 6 We opposed the resolution which sought to approve the market purchase of shares
Investments 04/05/17 as no commitment is provided that any purchase will only be made at prices below
the prevailing net asset value.
Kansai Paint Co Ltd AGM 1 We opposed the low dividend payment as we believe the company’s capital
29/06/17 strategy is not in the interests of shareholders.
7 We opposed the resolution to approve a poison pill (anti-takeover device). We are
concerned that a poison pill could entrench management and preclude a takeover
which could be in our clients' best interests.
Mastercard AGM 6 We opposed a shareholder proposal which requested a report on the company’s
27/06/16 gender pay gap. Mastercard provides information related to its diversity and
inclusion initiatives and oversight mechanisms.
MS&AD Insurance AGM 1 We opposed the low dividend payment as we believe the company’s capital
15/06/17 strategy is not in the interests of shareholders.
MTN Group AGM NB1 We opposed the resolution to approve the remuneration policy due to concerns
25/05/17 regarding a lack of alignment between pay and performance.
Qiagen Annual 7A We opposed the authority to issue equity up to 100% of issued capital.
21/06/17 7B We opposed the authority to exclude pre-emption rights from issuance up to 20%
of issued capital.
Rohm AGM 1 We opposed the low dividend payment as we believe the company’s capital
29/06/17 strategy is not in the interests of shareholders.
2.1 We opposed the election of the President over concerns around performance of the
business and independence on the Board.
2.10 We opposed the appointment of a new inside Director given the low ratio of
28 independent directors on the Board.
SAP AGM 4 We opposed a resolution to discharge the Supervisory Board. At last year’s AGM
10/05/17 the Remuneration Report received a sizeable oppose vote. We opposed last year
due to concerns regarding the ability of management to be rewarded for
underperformance. As there has not been a substantial change to the
Remuneration Report it has not been put forward to shareholder vote at this AGM
and our concerns regarding alignment between pay and performance remains.You can also read
