Author: mcpadmin

Since the establishment of Mobius Capital Partners, integrating ESG+Culture factors into our research and engagement has been a core component of our investment process. Given our focus on a single strategy, combined with running a highly concentrated portfolio, our ability to conduct thorough research an engagement with all portfolio companies differentiates us from our peers. Accordingly, our ESG+C™ reporting aims to provide transparency on a range of factors, using a framework which is systematic and consistent. What do we mean by ESG+Culture and why is it important? Whilst a focus on Environmental, Social and Governance (ESG) factors has become common over the years, we believe a crucial and missing component within this is Corporate Culture. Whilst some may categorise this factor within governance or even social, we believe culture warrants a distinct and separate categorisation. This is particularly true for emerging market investors, who interact and engage with an incredibly diverse range of corporate cultures throughout the world. There is strong evidence showing that ESG leaders outperform their peers. We believe that by integrating corporate culture into our research process, the outperformance should be greater.

Chart 4, Source: UNPRI Report: ESG and Alpha in China/MSCI, all risk and return figures are annualised (USD)

From 1980 onwards, the concept of corporate culture started gaining attention from academics as well as managers (1). According to the Harvard Business Review, there is evidence that a strong corporate culture benefits a company’s performance. Harvard academic James L. Heskett states that corporate culture “can account for 20–30% of the differential in corporate performance”(2). Furthermore, Andrew Chamberlain, chief economist at Glassdoor, investigated the relationship of a company’s share price development after the companies’ inclusion in the ‘100 best firms to work for’ ranking (3). Chamberlain constructed a portfolio of 36 publicly traded companies of the 2009 Glassdoor “Best Places to Work” ranking. The portfolio consisting of companies such as Netflix (4.4 Glassdoor score) and Procter & Gamble (3.9 Glassdoor score) performed 236% over a five-year period. This equals an outperformance of 115.6% versus the S&P 500 (4). By weighting the companies within the portfolio according to their Glassdoor score, the performance could be improved by 6.7% over a five-year period.

Chart 5, Does Company Culture Pay Off? -Andrew Chamberlain, Ph.D. Chief Economist, Glassdoor

Within emerging markets, we are yet to find a consistent ranking of ‘best firms to work for’ and accordingly it is difficult to replicate the Glassdoor study. LinkedIn for example published a list of top companies in China to work for using data from 40 million users. Top companies included Chinese companies (Alibaba) as well as U.S. companies operating in China (Tesla). However, we believe more consistent rankings will be published over the next decade. What is clear is that assessing corporate culture provides us with a differentiated lens and allows us to select outstanding companies to hold for the long-term. **The ESG+Culture Factsheet:**Within the process of creating the ESG+C™ factsheet, we faced two major challenges:**Our Framework:**By adding culture to the assessment of ESG factors, we decided to create a proprietary framework which allows us to assess corporate culture. Our culture framework consists of five focus areas: “Equality”, “Freedom”, “Recruitment”, “Innovation” and “Remuneration”. The five focus areas within culture are subdivided into different factors influencing the focus area. Many of these factors cannot be quantified themselves. However, proxies can be used to ensure the inclusion of different factors on a quantitative basis.**Data Sources and Limitations:**Information from companies is only considered if it is publicly available and traceable to the source. Accordingly, we avoided private questionnaires or surveys as such a process is difficult to replicate on a quarterly basis. Based on this principle, annual reports are one of the central data sources. Unfortunately, not every company is reporting in English in emerging markets. Furthermore, the reliability of existing data sources is sometimes questionable. Many companies have recognised the importance of ESG and therefore include it into their reporting. Still, there exists a great inconsistency among the various ESG reports. Data is always subject to adjustments due to regulatory requirements from national stock exchanges. **Quantifying qualitative data:**ESG reporting from many of our competitors running emerging market portfolios typically utilises case studies of single portfolio companies. These individual assessments do not show a holistic picture nor do they show the development of the overall portfolio. Culture is often assessed by conducting surveys, a complex and resource intensive approach. Both are lacking transparency and are not objective.Quantifying qualitative data helps to evaluate the overall portfolio and provides comparable data. In general, three different groups of proxies can be identified. First, proxies based on a binary evaluation verifying the existence or implementation of standards or services. Secondly, the weighted average of factors such as the proportion of women in leadership positions. Thirdly, by using external scores such as ratings from the Carbon Disclosure Project.**Portfolio findings:**Whilst this is by no means an empirical exercise, we have several observations from the data within our portfolio. Within the environmental category, whilst 50% of the portfolio publishes an environmental report, only 13% of portfolio companies’ (13%) formulated concrete environmental targets. Among the social factors, more than 40% of the portfolio companies report on their contribution to the UN Sustainable Development Goals (SDG). Most of these portfolio companies contributed to the 8th goal (decent work and economic growth), the 3rd goal (good health and well-being), and the 4th goal (quality education).Reporting according to the standards of the “Global Reporting Initiative (GRI)” has been identified as one of the governance metrics. Across the portfolio, 42% of companies report in line with GRI reporting standards. This is closely correlated to companies which report on the UN SDG goals. While it is common in Latin America to report in line with the GRI standards (100%), Asian companies within the portfolio tend not to utilise the GRI framework (21%). This is not surprising as Brazil became one of the first GRI hubs already in 2007. GRI hubs in Asia were launched later und usually cover multiple countries, increasing the complexity of integrating the GRI standards into different regulatory systems. Reporting in accordance with the GRI standards enables companies to disclose their environmental, social and governance activities. The GRI standards include, for example, reporting on the contribution to the UN Sustainable Development Goals.As previously described, remuneration is one of the five areas of the culture framework. From our decades of experience of investing in emerging markets, share option schemes can provide employees the opportunity to take real ownership within a business. Furthermore, share option schemes create a long-term incentive to act in the interests of a company.72% of portfolio companies offer share option schemes to their employees. The assessment of share option schemes revealed regional differences. Companies within the portfolio incorporated in Europe, Middle East, or Africa (EMEA) tend not to (33%) offer share option schemes to employees. In contrast, Asian (68%) and especially Latin American (100%) companies offer share option schemes to a large extent. Employee satisfaction and engagement is an important dimension to assess culture. Typically, internal surveys are used to measure these factors. As these surveys often lack transparency and their reliability needs to be questioned, we decided to only use publicly available data. Therefore, job and recruiting websites such as Glassdoor appeared to be a suitable data source. Using Glassdoor data is supported by an approach published in the MIT Sloan Management Review. The main reasons for utilising this approach is the reduction of polarization through a series of policies designed to promote honest and representative reviews by Glassdoor. Additionally, unlike other platforms, Glassdoor reviews gravitate towards the centre of the distribution, with fewer extremely positive or negative ratings, drawing a more realistic and less extreme picture. Whilst not all companies in the portfolio have a Glassdoor score, 71% do. Across the portfolio, the average Glassdoor score has an average of 3.63 on a five-point scale.**What are the implications of the ESG+C findings for our engagement:**Based on the reporting, we were able to derive implications for future engagement. Across the portfolio, 18% percent of board members and 17% of management teams are female. As a result of this observation, we will continue to engage on improving gender diversity at the board level as well as across the C-suite. Only 16% of portfolio companies set quantitative environmental targets. We will continue to engage on this area to significantly increase the percentage of portfolio companies with concrete environmental targets. Quantitative environmental targets include the reduction of waste production, reduction of water consumption and CO2 emissions. These quantitative targets can be directly linked to the executive compensation and therefore play a central role in improving the sustainability profile of portfolio companies.Whilst ESG reporting has become more common for portfolios investing in developed markets, the data challenges within our investment universe have made this task difficult for our portfolio. Nonetheless, we anticipate more companies across the market cap spectrum in emerging and frontier markets will improve their reporting over the next decade. At Mobius Capital Partners, we will continue to act as long-term stewards of your capital by engaging with all portfolio companies and will continue to enhance our ESG+C reporting.

**Footnotes:**The Handbook of Organizational Culture and Climate,Sonja A. Sackman – Neal M. Ashkanasy et al.Does Company Culture Pay Off? – Andrew Chamberlain – GlassdoorWhat Great Companies Know About Culture – John Coleman, Harvard Business Reviewhttps://www.glassdoor.com/Award/Best-Places-to-Work-2009-LST_KQ0,24.htm

Further Reading:

‘We cannot “see” corporate culture but it has a clear impact on returns’ ESG Clarity speaks to MCP’s Usman Ali about our ESG+Culture approachTarget top employers to beat the stock market, study finds, The Daily Telegraph on culture driving outperformanceThe ESG+Culture FactsheetPhoto by Jonathan Chng on Unsplash

For Professional Investors onlyInvestment Outlook 2021: Opportunities and Threats in Emerging MarketsLIVE-Stream: 20 January 2021The Investment Team provides an update on performance and engagement for the Mobius Emerging Markets Fund and the Mobius Investment Trust and introduces the new ESG+Culture reporting framework. From January 2021, MCP is reporting on the progress the portfolio is making in areas such as diversity, ESG reporting, company culture and board independence on a quarterly basis. During the webinar, China expert, Arthur Kroeber, joins from Beijing to talk about China’s economy and what to expect from China over the coming years.Please email Anna von Hahn at anna@mobiuscapitalpartners.com should you have any questions or would like further information.

https://vimeo.com/467273550Carlos Hardenberg, Founding Partner of Mobius Capital Partners (MCP) and Marcin Lewczuk, Partner and Investment Team member at MCP, give an update on the Mobius Investment Trust’s performance, portfolio as well as the Investment Team’s active engagement with portfolio companies.MMIT has seen strong performance YTD with the NAV and share price up more than 10% and the Trust outperforming the MSCI EM Mid Cap Index (GBP) over 1/3/6/12 and 18 months.

www.mobiusinvestmenttrust.com

One of the most exciting aspects of being a global emerging market investor is the ability to follow companies, news flow, and trends throughout all continents. Since the start of the current pandemic, we have spoken to companies across sectors and geographies; be it in China, Vietnam, Korea, Egypt, South Africa, Poland or Brazil. It has been a fascinating experience to observe how corporates and countries have prepared, rapidly adapted and in some cases, are beginning to see green shoots of recovery.Whilst much has been written about the ESG implications of Covid-19, there has been little focus on how adhering to good corporate governance during the crisis impacts companies in the emerging and frontier universe. We believe the pandemic presents governance challenges and opportunities. We know from previous studies that companies with stronger governance benefit from a lower cost of capital and better operational performance.1 We argue that companies which demonstrate strong governance will weather this crisis more effectively, whilst the companies which fail to adapt and show robust leadership, may struggle to survive. We explain these issues by assessing and sharing our experiences on the following topics in emerging and frontier market companies: (1) long-term strategic horizons, and (2) the duty of the board of directors.1) Long-term strategic horizons: Many listed companies in emerging and frontier markets have some form of family ownership. In India, over 56% of the largest companies by revenue are family-controlled businesses. In 90% of these family businesses in India, there is managerial involvement by family members.2 One may ask why this is relevant. In a recent article in the Harvard Business Review, the authors stated, “through exercising their rights, family owners have the ability to position the company for long-term success or doom it to failure.”3 In a crisis like now, long-term thinking must not be underestimated; a privilege which many family businesses are poised to benefit from. Difficult decisions will have to be made from scaling down the workforce, reallocating capital to new priorities, and suspending dividend payments. Whilst some companies may be forced to take short-term measures to focus on the next quarter, we believe companies with an engaged and a long-term focused shareholder base (such as families) are better equipped to weather the crisis. Families are often focused on the next generation and not the next quarter. Many of these companies have weathered multiple crises before and their seasoned family members are able to share their retained learnings.In the Middle East, we spoke to one company where the Founder and Chairman has been in his position since 1993. He has sailed through multiple crises, including revolutions, terrorist attacks, and currency devaluations. The company rapidly provided an update to investors providing a detailed outline of how the company has adapted during Covid-19. With an outstanding management team, a strong balance sheet, and clear and transparent communication with shareholders, the company is well-positioned in the current crisis. The conservative approach taken by the controlling family for decades has also resulted in no workforce layoffs. Indeed, the Covid-19 crisis is unique, but a steady hand is an important strength, and in many cases should be viewed as an asset.2) The duty of the board of directors: Boards have been unable to convene like they have in previous crises and have had reduced interaction with management. Whilst management teams must be supported and should not be overburdened at this difficult time, letting accountability sweep under the carpet would be a negative outcome for all stakeholders. One of the dangers of leading through a crisis is the long-standing issue of conformity. Whilst family-controlled businesses in emerging markets offer many advantages, it is important that board members and in particular, independent directors are not afraid to challenge management during this crisis. The psychologist Irving Janis has argued that individuals are more susceptible to group thinking during a crisis in order to reach an agreement.Even outside of businesses where there is family involvement, many emerging market companies suffer from a lower percentage of independent directors compared to their developed market peers. Whilst there is evidence to suggest that board independence in many emerging markets has improved since the global financial crisis, let us not be fooled by the statistics. The various definitions of “independence” have almost become an orthodoxy globally. Yet they do not necessarily prevent board members from turning up (for the foreseeable future on Zoom) to board meetings having rigorously read the board materials, nor do they consider that “independent” directors do not always adequately challenge management.The risk of groupthink is a heightened risk during this crisis. We believe this could be mitigated by following the actions below:1) The role of the chairman: This is a time when the true leadership and capability of a chairman becomes evident. A chairman will find the right balance to work with the management team to see where the future of the company should be. Both the chairman and the CEO must agree on the future vision of the company. It is crucial that if the chairman position is not held by the CEO, management are sufficiently challenged and are pushed on strategic planning post-COVID-19. In the absence of an independent chairman, it is the duty of independent directors to ensure this occurs.2) Utilizing expertise: The board must contribute to the debate on the future of the company by providing experience from the past, in addition to their deep industry knowledge. It often takes a crisis to show if directors are the right fit for board and have a thorough understanding of the business and the industry of the company. A lack of debate across the board and acquiescence to what the CEO or the chairman say does not show true competence.3) Data: data analytics are more useful today than ever before: management must present frequent updates to the board about the performance of the business, not only in financial terms but also by demonstrating how the company is managing relationships with its customers and suppliers. The board can only develop a clear vision of the future by understanding where the stakeholders of the company are moving towards.4) Learning from peers: The board has a duty to challenge management and to assess peers in the industry on a global scale within their industry and niche: if management do not benchmark themselves to best in class industry practices, they should be challenged.Boards are ultimately responsible for the strategy of the business and more specifically, ought to be asking the following questions:

• Are employees healthy and safe? How have management teams assessed this?
• Have board members received a complete risk assessment of the implications of Covid-19 across all aspects of the business? Have they been able to confirm the resiliency of the business model they follow?
• Have P&L stress tests taken place which considers extreme scenarios?
• Does a separate board committee need to be established to address business continuity and contingency planning?
• Does the company have the liquidity it needs to weather the crisis?
• Is it prudent to pay a dividend or engage in buybacks?
• Should the company be re-investing in the business to prepare for the recovery? Where should capital be (re)allocated?
• Are managers clearly communicating with all employees? Are they leading by example and reducing their own compensation?
• How is the company thinking about the communities it is operating in?

We have found the majority of companies in our portfolio to be rising to the challenge and taking robust action. Boards have performed their supervisory function diligently and management teams have taken the necessary measures to secure the survival of the company. Despite boasting a solid balance sheet, in China, a QSR chain has reacted with caution and has suspended its dividend and buyback programme for the next two quarters. The board and management also went further and cut their compensation, whilst extending health insurance for employees’ family members and their parents aged over 75. In India, the Managing Director of an industrial conglomerate has foregone his entire salary until the company’s earnings are back to their pre-outbreak level. Board members and other senior leaders for this company will also see a 30-50% cut in their compensation.ConclusionThe primary goal of corporate governance is to ensure that management and directors make good business decisions. Given the circumstances, today, making good decisions is far from easy. We believe following the crisis, companies will broadly fall into one or more of the following three categories:

• Companies which have failed to adapt their business models and may face significant liquidity issues, with bankruptcy as a bear case;
• Companies which can show resilience in a highly uncertain and rapidly changing post-pandemic world and survive with some necessary adaptations;
• Companies that can grow faster than before, innovate, and create value for all stakeholders. These companies will not only have adapted but will have strategically thought about their business model and will have started to design and implement changes that will allow them to be future leaders in their sector(s).

Whilst boards and management teams have never been in such a situation before, now is the time to show leadership and rise to the challenges. Companies which had previously been prudent and are fortunate to sit on a healthy balance sheet and an engaged and long-term focused shareholder base, should come out stronger. Yet this alone will not suffice; robust, transparent, and exemplary governance from all senior leaders is important today, more so than ever before. Ultimately, strong governance is a prerequisite for emerging as a leader in the post-pandemic world. The winners of tomorrow will be the companies which show leadership today: the companies which look after their employees, who adapt where necessary, who (re)allocate capital to focus on the long-term, and the companies who communicate with all stakeholders more powerfully than they have ever done so before.Usman Ali is a Partner at Mobius Capital Partners1 https://www.smithschool.ox.ac.uk/publications/reports/SSEE_Arabesque_Paper_16Sept14.pdf2 https://www.bcg.com/publications/2016/what-makes-family-businesses-in-emerging-markets-sodifferent.aspx3 https://hbr.org/2020/04/a-crisis-playbook-for-family-businesses

Photo by Dane Deaner on Unsplash