Month: March 2024

Bob Herr| Director of Corporate Governance—Responsibility

Ryan Oden| Research Analyst—US Growth Equities

Investors have long theorized that companies with poor corporate governance practices may be more prone to mismanagement and weak returns. To investigate further, we’ve looked inward to a key data source: our proxy votes.

Specifically, we draw a correlation example between governance and returns through AllianceBernstein’s (AB’s) proxy-voting track record in recent years. We think proxy voting is one of the most expressive tools investors can use to communicate a view on the quality of a firm’s governance, providing that it’s based on careful analysis and accountability, not a rubber stamp.

Specifically, leveraging proxy voting and direct engagement* with companies can help to improve them, ideally resulting in better long-term outcomes. Several studies, which include our own findings, have made this connection much more apparent.

The Governance-Return Nexus 

In one study, professors at Harvard Law School constructed an entrenchment index, or “E-index,” based on six key governance provisions. Their findings linked poorer E-index ratings with reductions in firm value and returns across US equities from 1990 to 2003.

More recently, S&P Global found that, between 2000 and 2017, companies in the bottom quartile of S&P Dow Jones Indices’ Governance Scores underperformed those in the top quintile by about 2% on an annualized basis.

Inspired by these observations and our own experience, we built an internal study to determine if a similar association exists between our proxy-voting record and returns. We found that on average companies for which we voted against management on any number of proposals later underperformed those with which we were more strongly aligned.

Standing Up for Governance—One Company at a Time

Evaluating governance isn’t a one-size-fits-all proposition. We utilize a proprietary proxy-voting policy to vet each company’s alignment with our basic expectations, followed by a collaborative review process that leverages analyst expertise and engagement data. This two-pronged approach enables us to incorporate company-specific fundamental insights to implement more constructive voting strategies.

When we surmise a company’s governance practices aren’t supporting our clients’ best interests, we may vote against management to signal our objection. For instance, seeing internal accounting problems, we may record our opposition to the chair of the audit committee; if executive compensation is misaligned with performance, we vote against it. Some governance issues may warrant a stance against the specific board member(s) responsible–also known as an “accountability vote.”

Entered into Evidence, Thousands of AB Proxy Votes

Within this backdrop, our study retraced approximately 34,000 shareholder meetings, consisting of votes on more than 266,000 individual proposals across global firms from 2018 through 2022. Then, we linked each proxy vote to the company’s total stock return the following calendar year.

To help categorize our degree of alignment with management, we grouped the companies into equal-weighted baskets based on our number of votes against management (VAMs). For example, zero VAMs may reflect stronger alignment based on what we believe is sound governance and oversight across the firm. One VAM indicates a single “no” vote on any of the proposed matters, from capitalization and audits to compensation and director elections. Two VAMs reflects our disapproval on two such measures and so forth.

Zero VAMs occurred in 45% of all shareholder meetings during the period, which means we pushed back—whether on minor issues or proposals of greater consequence—a majority of the time. This reflects our rigorous standards and desire to improve upon the status quo. Multiple VAMs can be vital to voice material concerns, especially if a firm’s governance has been a growing issue for several years.

We found that zero-VAM companies—those we fully supported—outperformed those in the other VAM baskets by at least 250 basis points per year. We observed this general trend among similarly sized peers and across most—but not all—sectors and regions. For the five-year period, the average annualized return for zero-VAM companies was 11.5%, almost double that for companies in the three+ VAM basket (Display).

Mind over Matter—Proxy Voting Should Be Thoughtful

Proxy voting should be more than a compliance exercise. It’s a fundamental tool in active management, empowering investors to sway companies from pitfalls that can impede long-term performance. In matters of governance especially, we’ve found that well-thought-out proxy votes can make a positive impact on important business decisions, from leadership and disclosures to compensation and capitalization.

Landon Shea, Proxy and ESG Engagement Associate at AB, and Peter Højsteen-Ljungbeck, ESG Data Research Associate at AB, were instrumental in the research that formed the basis for this blog.

*AB engages issuers where it believes the engagement is in the best interest of its clients. 

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

Learn more about AB’s approach to responsibility here.

This article originally appeared in Newsweek on March 19, 2024.

Globally, over 3.5 billion people lack access to adequate sanitation and safe water. It’s a staggering statistic and the ramifications extend beyond easy access to clean water and toilets. Without sanitation, many of these already at-risk populations, of which women are especially vulnerable, are also more susceptible to life-threatening water-borne diseases and malnutrition.

Despite the urgent need, funding for programs that help provide safe water and sanitation to at-risk communities is severely short. According to the recently published 2024 Water Funding Gap report from Action Against Hunger, only 36 percent of global appeals for water and sanitation-related funding were met in 2023, leaving a 64 percent gap. With World Water Day around the corner, the international community must act faster to address these inequities.

Our report examined data from countries with the most urgent needs seeking financial support for water, sanitation, and hygiene (WASH) programs through the U.N. humanitarian system. Our analysis found that the global community would need to quadruple its progress on water and sanitation programs to meet U.N. Sustainable Development Goal (SDG) 6, access to water and sanitation for all by 2030. The inconsistent and unreliable funding for WASH programs is a chronic pattern, however, and it has grim results.

Insufficient progress on WASH is contributing to an upsurge in cholera worldwide, with a new case every 45 seconds, and more than 4,000 deaths reported in 2023. Known as the disease of inequity, cholera is preventable and treatable, but can mean death for people dealing with poverty and hunger.

Cholera is a waterborne infection caused by the bacterium Vibrio cholerae, which seeps into food and water supplies. When someone ingests contaminated food or water, they contract the disease. Symptoms typically include severe diarrhea, serious dehydration, rapid weight loss, and extreme fatigue. It also can lead to septic shock and can kill within hours if not treated.

While treatment is typically straightforward, access to even rudimentary health care is a life-threatening challenge where cholera thrives. Cholera does not discriminate by age or gender, but typically impacts populations that lack access to safe and clean water sources. People trapped in unsanitary conditions, from refugee camps to rural villages, are more likely to contract the disease.

The disease’s short incubation period, between two hours and five days, means it is highly contagious and can spread swiftly through a community. It is such a grave threat that the detection of even one case is considered an epidemic.

In the last 100 years, cholera has been almost completely eradicated from Europe and North America. But in countries with weak or damaged WASH infrastructure, tens of millions are getting ill and tens of thousands died from the disease last year. Most cases occurred in low-income countries, including countries in Africa and the Eastern Mediterranean regions, which accounted for 90 percent of reported cases.

In 2010, Haiti suffered one of the world’s worst cholera outbreaks, with over 10,000 people dying. By 2020, Action Against Hunger had helped the country to reach a point of near-eradication. Recently, there has been an uptick in the disease due to a collapse of sanitation services amid a rising wave of violence, which is also making it hard for aid to reach those who need it most.

In Sudan, conflict has continued since April 2023, triggering massive displacement and food insecurity for 1 in 3 people. Many now live in overcrowded refugee camps with inadequate water and hygiene support. With nearly 25 million people—including 14 million children—in desperate need of humanitarian aid, the situation is dire. As of February 2024, reported cases of cholera surpassed 10,000, with nearly 300 deaths. We fear the number may be even higher.

Similarly, after more than 13 years of conflict in Syria, the country’s vital infrastructure has been destroyed and hunger is widespread. Millions rely on humanitarian aid to survive. The country has been burdened by economic collapse, complex political issues, recurrent epidemics, destroyed infrastructure, and widespread hunger. In September 2022, the Syrian Ministry of Health declared a cholera outbreak. Between August 2022 to August 2023, 14 governorates reported over 173,000 suspected cases across the country.

Inadequate WASH funding is directly linked to malnutrition and disease. And, for billions of people, a lack of sanitation and drinking water isn’t just an issue on World Water Day, but every day. Climate change has accelerated the crisis, with droughts and floods making access to safe water even more scarce. We must respond with critical funding and climate-smart solutions to save lives.

Michelle Brown is an associate director of advocacy at Action Against Hunger.