Governance Bites #116: corporate governance metrics for investment analysis, with Katie Beith

Discover how investors really measure governance quality in this thought-provoking conversation between Mark Banicevich and Katie Beith. From the most common governance metrics and where analysts source the data, to the red flags that warn of poor performance, Katie shares expert insights that link boardroom practices with financial returns. The discussion tackles disclosure gaps, the balance between quantitative and qualitative measures, and which governance factors will shape the next five years. With practical advice for New Zealand boards, this interview is essential for directors, investors, and anyone interested in how governance drives performance.
Katie Beith serves as the Head of Environment, Social and Governance (ESG) at Forsyth Barr, having joined in November 2021. In this role, she is responsible for integrating ESG principles across the firm's operations and investment processes, also supporting advisers with client-specific needs. Katie brings nearly 20 years of experience in responsible investment in the UK, Australia and New Zealand. Katie’s past roles include for the Responsible Investment Association Australasia, UN Principles for Responsible Investment, and the New Zealand Super Fund. Katie is a member of New Zealand’s Stewardship Code Governing Committee, a member of the External Reporting Board Advisory Panel, and a former board member of the Impact Investing Network.
#CorporateGovernance , #BoardLeadership , #InvestorInsights , #GovernanceMatters , #InvestmentAnalysis , #GovernanceMetrics , #SustainableFinance , #ESGInvesting , #RiskManagement , #BoardDiversity , #GoodGovernance , #Directors , #BoardOfDirectors , #NZBoards , #FinanceProfessionals , #BusinessLeadership , #GovernanceBites

Transcript

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Good afternoon, everybody. It's a pleasure to be here with Mark today to talk about corporate governance metrics and investment analysis. I'm Katie Beith. I'm the head of ESG [environmental, social and governance] at Forsyth Barr. I call myself an ESG professional. ESG stands for environmental, social, and governance, governance being corporate governance, and my job is to look at those sorts of issues, and how a company is managing them and changing going forward to ensure they're managing risks, taking advantages of opportunities, and positioning themselves for a more sustainable future. Hi, welcome to "Governance Bites." My name is Mark Banicevich, and again I have the pleasure of spending time with Katie Beith. Katie, thank you very much again for your time. I really appreciate it. I love the expertise that you've got in environmental, social, and governance through, you know, an extensive career in the space both here in the UK and Australia, so a great person to speak to on this topic. I'm stepping back a little bit this time from the narrow subject of ESG into how investment analysts make decisions, investment decisions, around companies, particularly around governance, and, you know, Forsyth Barr's been a company that's been around for a very long time [est. 1936]. It has used or evaluated governance in its investing decisions, you know, for a long time. What are the most common metrics that investment analysts use to understand the company, the qualities of a company's corporate governance? What do they look at? I'll just start with to say that there's a lot of things that go into making a financial decision and to making a decision to buy, hold, or sell a company. Corporate governance is just one of very many, many issues, many things to look at, whether, you know, the quality of a company's strategy, you know, how well it's functioning, its results, you know, its debt levels, its - Position in the market. - Exactly. There's so many, so many things that go into, you know, real analysis of a company, and corporate governance is another kind of lens to look through and another piece of information to collect in the jigsaw puzzle. Common, I guess, you know, commonly, the sorts of things that, you know, traditionally have been looked at is, you know, how a board is set up. What's the composition of the board? Are there, how many are, has the board got, has the board got enough independent directors on there to challenge appropriate decisions? How, what about the relationships with auditors and how long has that auditor been in a relationship? Things like protection of shareholder values, things like if a company capital raises, are they doing it in a way that's appropriate to all shareholders? There's really a lot of things in the corporate governance arena, and it, yeah, it sort of is as long as a piece of string, really. Where do the investment analysts source the data for these metrics? There's lots of data available in annual reports now. There's always corporate governance, especially of the big large listed ones, and there's requirements, as well. So, you've got the NZX[New Zealand Exchange] code, you've got the FMA [Financial Markets Authority] handbook driving, you know, good corporate governance. You've also got the New Zealand Corporate Governance Forum and their best practices. So, there's plenty of tools. The standards that they've got to be held to. That's right. Yeah. It's clearly, clearly defined. Yeah. So a lot of that data then is sourced from the annual reports? Annual reports. Yes, there's, that's where we find a lot of data these days and particularly around corporate governance setups of companies. Right. And as is common, I guess, in most countries, the listed companies have probably got more information available than the unlisted companies. Right. Is governance quality be better measured through quantitative data or through qualitative assessments? A mix of both, I would say. Quantitative data gives you some of the story, but not all, and the contextual information around that quantitative data is just as important as the actual data itself. And then I think, you know, more and more, particularly with the research we've done recently on how New Zealand companies are governed, it was really interesting working with the analysts about how much they pick up on, you know, signals in the boardroom, like body language or, you know, eye contact. I know those sorts of things are also all add to how you might think a corporate, the corporate governance of an organisation is functioning and whether it's functional and and going well. So there's a lot of - So there's sort of qualitative measures around the culture around the boardroom. Yes, all sorts of things. Yeah. Yeah, wow. And I'd love to actually talk to you a little bit more another time, if we can, around the research, as well, because that was very interesting. What is the strongest evidence you've seen that good governance drives better financial performance or financial returns in investing? There is quite a lot of research around about that. I think, like, where I sort of end up putting my time, is really when things blow up, and looking at what went wrong and sometimes it's fundamental corporate governance problems that may well have been the cause, whether it's, you know, family, I'm talking about some of those big US blowups back in the early 2000s, the Enrons and the Tyco, the Parmalat, a European company, and often there's, you know, some, you know, relationships on the, on the boards, all things have been hidden. Right. And then you have a look at what went wrong and why and you can generally unpack and pin it down to some. Lack of independence, quite often, in those US boards. Yes, that's right. Or changes in accounting practices or, yeah, all sorts of things that kind of give you signals that, you know, things weren't right in the first place. Right. So in your, your experience, you're getting more the other way, that bad performance is sometimes driven from poor governance practices. That's right. And I mean, how do you measure risk mitigation, you know, in a way? Like, it's how do you keep, you know, how do you measure a risk that's been avoided? It's a really difficult thing to do. So, you know, when things are going well for companies and we're really comfortable with their governance arrangements and setups and the strategy and they're doing what they're saying they're doing and their numbers are coming in in line with what they predict and expected, and when there's nothing kind of hidden or uncertain, you know, that's a great place to be. I think it's when, you know, disappointments come out or unexpected things that, you know, we weren't ready for or feel we should have had an indication of and didn't, you know, those are sort of, that's when we go digging and try to understand what's wrong. I understand that, when I work with businesses or when I'm talking to audiences about this stuff, quite often, I'll say that when things are going well, companies don't tend to fail. Companies tend to fail when something comes and blindsides them and they're not prepared for it, they're not good at managing or identifying or mitigating that risk. Yeah. Or being able to change when they need to, or adapt or, yeah, yeah. Yeah. Absolutely. Which governance red flags are most predictive of poor performance or higher risk? You know, you mentioned before the idea of independence on a board. What are the sorts of things that you would see in the data and say, "That's something we should be careful of"? Because there are so many governance indicators that you kind of collect and that make up a general, well-performing board. It's not, and you know, and there's also, and it's not always, you know, there's not necessarily one or two things. There's no hard and fast method, right. No, it's more like a culmination of things. But also, and particularly in New Zealand, when we're a small market with a limited pool of directors, it's not always the case that good corporate governance equals strong performance, either. So, there's, there's always exceptions to that rule. So, this is when the contextual and the qualitative side comes really important, is if a company is not operating at corporate governance best practice, do we understand why and are we comfortable with those reasons and do we have confidence that those reasons are fundamentally there and driving the company forward? Right. Right. How much weight should be given to board composition factors like independence, diversity, tenure, size of the board? Yeah, I sort of see it like they're all important, okay. And I sort of see it as a hygiene mechanism. The rules are there and the good guidance practice is there for a reason, and it's built on a strong research and analysis and history over time, you know, to get to where we are. So it's there and it's important. I see it more as a hygiene factor. You know, it's just how companies should be operating. It's the minimum standard. Yeah, that's right. It is. Well, some quick fire questions for you then. Optimum size of a board? Oh, gosh. Between six and eight. It will depend. Yeah. Six and eight. And it will depend on, from case to case. So six to eight. And independence, what portion of the board would you expect to be independent? Majority. The majority of the board independent. What do we mean by diversity, and what would you expect to see? Diversity is a really interesting one. Especially, you know, right now, there's a lot of politicisation around the use of the term. For me, it's really about diversity of thought on a board and is there enough independence around the table to challenge those decisions. Is there enough knowledge around the table, particularly, you know, especially important in really scientific or technical areas. You know, is there enough independent knowledge around that table to challenge the direction of travel? Because, you know, boards can often operate with one or two very strong characters, and, you know, how can you, how do you navigate those dynamics around the board table or the management of potentially a strong CEO, maybe a founder CEO, even, and challenge them with enough information and the right skill set to make sure the strategy's right, to make sure the risks are well understood and are being managed and that that direction of travel is clear. Yes, it's a very difficult one to measure with data, isn't it. Because we tend to look at proxies. The most common proxy is gender, and then you know, ethnic background, the professional background, these sorts of things can be looked at, as well. But again, they're still proxies for how diverse the thought is. I think it's a really interesting conversation right now because, you know, it's quite common practice for boards to put a skills matrice in, or matrix, sorry, in their annual report, which ticks the sorts of skills we're at. But I think, how I think corporate governance needs to evolve is, that's great that that's there. We can look at it, but it doesn't actually tell us how long ago that director got that piece of knowledge or education. What's the depth of that capability. That's right. And have they kept it refreshed over the years? You know, are they in their 60s and are they referring to a degree they got 40 years ago? You know, has it been kept fresh and up to date? And the other piece is looking ahead, and there's, you know, there's a huge amount of uncertainty on the horizon and more and more and more things that companies need to manage, whether it's, you know, climate disclosures, whether it's AI [artificial intelligence], you know, whatever it might be. How are boards ensuring that they have the right people at the table to look at those, you know, major future trends that can be a real disruption to business? Yeah, absolutely. The last quick fire question. Tenure. Tenure? There's some, you know, again, it's well defined, and again, it's a hard one because although there's good practice standards, sometimes you know, - There's always exceptions. - take Warren Buffett, right? You want him at the table and leading that organisation, and there's other examples in New Zealand like that. So I think, you know, when tenures get stretched too long, and you, what you really want to know is succession, about succession. Like how is the business planning, you know, should something sudden or untoward happen and is there the depth in the organisation that you aren't so reliant on this kind of key person? Right. Right. Do current disclosures give investors enough insight into governance quality? There's a lot of information. I think what a challenge is actually finding the time to decipher it. It is finding that and then if it all looks pretty good, which it often does, you know, when you interact because, you know, shareholders often interacting with, it's large institutional shareholders always interacting with company management, are we getting the signals from the companies to back up that good corporate governance is in practice or are there signals that are worrying us a little bit or niggling away at us? And then if you get that sense, finding the time to, like, dig in and explore and unpack what it is that you think might be going on and then being able to sort of, you know, talk to the company about it over time. So, there's no one solution here or one fix. Yeah. It's very much a living, breathing, evolving, you know, situation. Yeah. Pay the experts for their help. Which government metrics, governance metrics, do you expect will become more important over the next five years? There's one, you know, there's one issue that I have been writing about for a few years, which is around auditor tenure. New Zealand's a really interesting place in that there are a lot of companies that have very long relationships with auditors, like well over 10 years. So the good practice is that, and companies should review their, in New Zealand define good practice, that companies should review their auditor at the 10-year mark, and if they decide to keep it, it's fine, but you should do a big thorough review. Whereas the view that I've taken in some of my research is that actually the auditor should be changed at the 10-year mark because, you know, the sort of, the independence of the auditor can be compromised over that time, and although lead auditor partners need to change every five years, you know, that knowledge stays within an auditing or organisation. So, I think this is a really interesting thing in New Zealand. Last year we looked at 61 companies, and 32 of them had auditor relationships over 10 years. Yeah. Half of the companies. And it's an interesting one because the pushback I get is New Zealand is small, we don't have enough auditors, the cost is expensive, there's all sorts of things that kind of stop, will stop a company changing its auditor. But I think when things blow up, when things go wrong, or if you see accounting practice changes that are more aggressive or they move from aggressive to conservative, or there's just, you can sort of see, you know, you just hope that there's been some good discipline in the companies to review those relationships and really look independently at them to make sure that incremental risk doesn't just build up over time and suddenly become a big issue. So, yeah, I think that's an interesting one which we'll watch in New Zealand. And as much as we are a small market, we do have more than one audit firm, so there's still the opportunity to move. We do, we do. And our audit firms also have very long arms into global expertise around the world. Yeah. Yeah. So it seems like a bit of a weak counter argument to me. I get it. It's expensive, and you know, and New Zealand is small, but you're right. It's the risk, the risk of something going wrong well outweighs those. The cost of, yeah, absolutely. Now, those are data that are currently available. You look on annual reports, you'll see how long the auditor's been in place. If there was one new governance disclosure that you would like, you would be able to require for all public companies, what would it be? I think the sort of place that I've gotten to, you know, more recently in my thinking is the real intersection between, you know, how a company is run and it's operating and all its financial metrics, along with it the corporate governance metrics and how they can come together to tell us more of a story rather than looking at these things in isolation. So, you know, that's where I'd really like to drive my research into the future is really understanding those connections and how they can support or negate each other and what signals we get from it. Is there any, are there any particular data items that you'd love to be able to go to the, you know, NZX50 or the, the NZX listed companies and say, "I'd like these data, please,"to be able to do my research?" Oh, gosh. I think one thing that I would like to see, and I'd like actually the industry to come together on this is to really review and reconsider or consider whether the corporate governance metrics that, the best practice corporate governance metrics that are in place today are still fit for purpose for the future. As far as I know, you know, good corporate governance practice hasn't really changed over, I don't know, 30 years or so. Sure, it's tweaked around the edges here and there. There's better definitions, you know, NZX is always trying to define things differently. Last year it was, more about independence of the board, you know, independence. What does that mean? But we are operating now in quite, since Covid [-19] the economy is in quite a different situation and, you know, whether it's, you know, hybrid working, whether it's climate change and disclosures coming in, whether it's AI, it's a different economy, not to mention different interest rate environment, all of those sorts of things. The way we operate is different to how it was before Covid. And I think it would be a really great thing for the industry to come together and just reflect on what good corporate governance practice is now, and if it's still fit for purpose in going forward. Yeah, great. Thank you. One final question for you in your role with your expertise. If you were able to give one piece of advice to all New Zealand boards that you know some of them may not need the advice but the majority of them would, what would be the one piece of advice you would give to all New Zealand boards? I'd probably really like to see a more constructive relationship with shareholders, and I know that's hard. So we do a lot of guessing. We don't sit around the board tables, but we pick up a lot of signals. Oh, to be a fly on the wall sometimes, in a board discussion, but a really sort of open, sharing and trusted relationship with with shareholders, I think would would go a long way to helping us really understand how effective a board is being, and I think that's an area which I keep coming back to, is how do we really assess board effectiveness when we're not at the table? And one of the things in the recent research that I did was, you know, a couple of the companies that we wrote about that have performed really terribly over the last couple of years from an investment performance perspective. We looked at five of them. Three of the five didn't do self-reviews of, the boards didn't do self-reviews. And I think it's an interesting one, and I'd love to see boards do more of that. And I'd love them to share the findings with shareholders. What they think is going well, and what what they think their headwinds are, and then their plans in place to address them. I think that would really help the conversation between boards and shareholders to to build trust and understand where things are at. Yeah, great. So boards, please, stronger disclosure to shareholders and more relevant disclosure about what's happening. Their functionality, yeah. And their functionality. Yeah, great. Katie again, thank you very much for your time. Thank you. Really appreciate it. It's been a great conversation. Yes. I look forward to catching up again soon and maybe talking about your research. Thanks, Mark. And see you next episode. Thank you for watching this episode of Governance Bites. We have more episodes on YouTube and your favourite podcast channel where I interview directors and experts on various topics relating to boards of directors and governance. We'd love to see you back, and please like, subscribe, and share the videos and podcasts.