Redirection Confirmation

You'll be re-directed to the Financial Professional site.

For Financial Professionals

This site is owned and operated by Dodge & Cox on behalf of Dodge & Cox Worldwide Funds plc. Before continuing, please read the following important information and confirm that you have read and agree to these provisions and the Terms and Conditions of Use of this website.
 

This site is not intended for U.S. persons. If you are trying to find information about the Dodge & Cox Funds registered for sale in the United States or any other country, click on the country listing at the top of the page to change the country site version.

This site uses "cookies" as described in the Privacy Policy in order for Dodge & Cox to remember your personal preferences and to provide you with a better browsing experience. By continuing, you will be deemed to have accepted the site's use of cookies for this limited purpose. If you do not want this site to place cookies on your computing device, you can manage your web browser's cookie settings by navigating to the program's options menu.
 

TERMS & CONDITIONS OF USE

Use of the Dodge & Cox website ("Site"), owned and operated by Dodge & Cox®, signifies that you accept the following Terms of Use. Nothing contained in these Terms of Use is intended to modify or amend any other written agreement, if any, that may currently be in effect between you and Dodge & Cox or any funds managed by Dodge & Cox. Dodge & Cox may periodically modify these Terms of Use, and any such modifications will be effective immediately upon posting. We suggest that you periodically check these Terms of Use for modifications. If you do not agree to the Terms of Use, do not use this Site.

We suggest that you check the Terms of Use periodically for changes. The Terms of Use can be accessed from the link at the bottom of the Site pages. Dodge & Cox expressly reserves the right to monitor any and all use of this Site, without liability.


PRIVACY

Dodge & Cox expressly reserves the right to monitor any and all use of this Site; any such monitoring will be used for Dodge & Cox’s internal business purposes without liability. Dodge & Cox is committed to maintaining the confidentiality, integrity, and security of your personal and financial data. We consider this information to be private and held in confidence between you and Dodge & Cox. We would like you to know about our policies to protect the privacy of this information.

We may collect personal information about you from:

  • You or your representative in writing, electronically or by phone (e.g., in account applications or requests for forms or literature);
  • Transactions initiated by you or made on your behalf; and
  • Information we receive from third parties, such as financial advisers, consumer reporting agencies, consultants and custodians.

We do not disclose personal information about current or former clients or shareholders to any third parties except as necessary to effect a transaction, administer your account, or as otherwise permitted by law. For example, the Dodge & Cox Funds and Dodge & Cox Worldwide Funds use third-party transfer agents and third-party providers of systems who use your information only to process or analyze transactions you have requested. Contracts with these organizations contain provisions restricting their use of your personal information to those purposes for which they were hired.

We restrict access to personal information about you to those employees and service providers involved in administering or servicing your account(s) or helping us meet our regulatory obligations. We maintain physical, electronic, and procedural safeguards that comply with federal standards to protect your personal information. In addition, our Code of Ethics, which applies to all Dodge & Cox employees, restricts the use of your personal information.

For more information about privacy, please read the Dodge & Cox Privacy Policy.

LIMITED LICENSE AND RESTRICTIONS ON USE

Dodge & Cox grants you a limited, revocable, nonexclusive, nontransferable license to view, store, bookmark, download, and print the pages within this Site solely for your personal, informational, and noncommercial use or as expressly authorized by Dodge & Cox in writing. You are responsible for obtaining and maintaining all equipment, services, and other materials that you need to access this Site. Dodge & Cox reserves all rights not expressly granted in these Terms of Use. Except as otherwise stated in these Terms of Use as expressly authorized by Dodge & Cox in writing, you may not:

  • Modify, copy, distribute, transmit, post, display, perform, reproduce, publish, broadcast, license, create derivative works from, transfer, sell, or exploit any reports, data, information, content, software, RSS and podcast feeds, products, services, or other materials on, generated by or obtained from this Site, whether through links or otherwise (collectively, "Materials");
  • Redeliver any page, text, image or Materials on this Site using "framing" or other technology;
  • Engage in any conduct that could damage, disable, or overburden (i) this Site, (ii) any Materials or services provided through this Site, or (iii) any systems, networks, servers, or accounts related to this Site, including without limitation, using devices or software that provide repeated automated access to this Site, other than those made generally available by Dodge & Cox;
  • Probe, scan, or test the vulnerability of any Materials, services, systems, networks, servers, or accounts related to this Site or attempt to gain unauthorized access to Materials, services, systems, networks, servers, or accounts connected or associated with this Site through hacking, password or data mining, or any other means of circumventing any access-limiting, user authentication or security device of any Materials, services, systems, networks, servers, or accounts related to this Site;
  • Modify, copy, obscure, remove or display the Dodge & Cox, Dodge & Cox Funds, or Dodge & Cox Worldwide Funds name, logo, trademarks, text, notices, or images without Dodge & Cox’s express written permission. To obtain such permission, you may e-mail us at website@dodgeandcox.com; or
  • Include the term "Dodge & Cox®," or any Dodge & Cox trademark or executive's name, or any variation of the foregoing, as a meta-tag, hidden textual element, or any other indicator that creates an impression of affiliation, sponsorship, or endorsement by Dodge & Cox.
     

COPYRIGHT POLICY, NOTICE AND CLAIM INFORMATION

Dodge & Cox owns and operates this Site. All Materials on this Site, whether separate or compiled, including but not limited to, text, graphics, and audio clips. Logos, buttons, images, digital downloads, data compilations, software, icons, html code and xml code, as well as all copyright, patent, trademark, trade dress, and other rights therein, are owned or licensed by Dodge & Cox® and its third-party information providers, and are protected by United States and international intellectual property laws.

Pursuant to Section 512(c)(2) of the U.S. Copyright Revision Act, as enacted through the Digital Millennium Copyright Act, Dodge & Cox designates an agent as described below to receive notifications of claimed copyright infringement by mail: 
Roberta R. Kameda, Esquire, General Counsel, Dodge & Cox, 555 California Street, 40th Floor, San Francisco, CA 94104.

The designated copyright agent can also be reached by telephone at (800) 254-8494, by fax at (415) 986-1369, and by e-mail at website@dodgeandcox.com.


LINKING CONDITIONS

You may not link to this Site unless you comply with these linking conditions ("Linking Conditions"). Dodge & Cox grants you a limited, revocable, nonexclusive right to create a hyperlink to this Site ("Link"), provided you comply at all times with the following conditions:

  • The Link must be made to the Funds' home page at www.dodgeandcox.com.
  • The text of the Link must read either “Dodge & Cox”, “Dodge & Cox Funds”, “Dodge & Cox Worldwide Funds”,  or dodgeandcox.com. You may not use any Dodge & Cox logo or graphic or any other Dodge & Cox trademark, as part of the Link without Dodge & Cox's express written permission; and 
  • The Link and surrounding context on the linking site must not: (a) falsely represent or misrepresent any relationship between the linking site and Dodge & Cox, including suggestions of affiliation, endorsement, or sponsorship; (b) portray Dodge & Cox or its affiliates or their products or services, in a false, misleading, derogatory, or otherwise offensive manner; or (c) deliver the Materials in a framed environment or alter the layout, content, look, or feel of the Site.

If you have created a Link that conforms to these Linking Conditions, then you also may include one or more Links to any internal or subsidiary page of this Site that is located one or several levels down from the homepages (known as "deep links"), provided, however, that all such deep links must be in close physical proximity to the Link that conforms to the Linking Conditions. You may not maintain numerous or pervasive Links to this Site.

DATA, INFORMATION AND CONTENT

The Materials on this Site are for information, education, and noncommercial purposes only. Although Dodge & Cox may provide data, information, and content relating to investment approaches and opportunities to buy or sell securities and/or mutual funds, you should not construe any such information or other content available through this Site as legal or tax advice. You alone will bear the sole responsibility of evaluating the merits and risks associated with the use of any Materials on this Site before making any decisions based on such Materials. In exchange for using such Materials, you agree not to hold Dodge & Cox or its affiliates and their directors (trustees), officers, employees, or third-party information providers liable for any possible claim for damages arising from any decision you make based on the Materials made available to you through this Site. By providing access to other websites, neither Dodge & Cox nor any of its affiliates is recommending the purchase or sale of the stock issued by any company, nor are they endorsing services provided by any website's sponsoring organization.
 

OWNERSHIP OF OTHER MATERIALS

All trademarks, service marks, and logos appearing on this Site are the exclusive property of their respective owners.

All Dodge & Cox graphics, logos, page headers, and service names are trademarks, service marks, or trade dress of Dodge & Cox. Dodge & Cox's trademarks, service marks and trade dress may not be used in connection with any product or service that is not Dodge & Cox's, in any manner that is likely to cause confusion among customers or investors, or in any manner that disparages or discredits Dodge & Cox. Nothing contained on this Site should be construed as granting any license or right in or to any trademarks, service marks, or trade dress of Dodge & Cox.


THIRD-PARTY CONTENT

Data and other materials appearing on this Site that are provided by third parties are believed by Dodge & Cox to be obtained from reliable sources, but Dodge & Cox cannot guarantee and is not responsible for their accuracy, timeliness, completeness, or suitability for use. Dodge & Cox is not responsible for, and does not prepare, edit, or endorse, the content, advertising, products, or other materials on or available from any website owned or operated by a third party that is linked to this Site via hyperlink. The fact that Dodge & Cox has provided a link to a third party's website does not constitute an implicit or explicit endorsement, authorization, sponsorship, or affiliation by Dodge & Cox with respect to such website, its owners, providers, or services.  You will use any such third-party content at your own risk.
 

WARRANTY DISCLAIMERS

YOU EXPRESSLY UNDERSTAND AND AGREE THAT:

THERE ARE NO IMPLIED OR EXPRESSED WARRANTIES ON THE MATERIALS IN THIS SITE; THE MATERIALS ARE PROVIDED "AS IS" AND "AS AVAILABLE BASIS." DODGE & COX, AFFILIATES, AGENTS, DIRECTORS (AND TRUSTEES), OFFICERS, EMPLOYEES, LICENSORS AND ANY THIRD-PARTY INFORMATION PROVIDERS AND VENDORS DISCLAIM, TO THE FULLEST EXTENT UNDER APPLICABLE LAW, ANY WARRANTY OF ANY KIND, WHETHER EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER RELATING TO THIS SERVICE, INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT, AND ALL WARRANTIES REGARDING SECURITY, CURRENCY, CORRECTNESS, QUALITY, ACCURACY, COMPLETENESS, RELIABILITY, PERFORMANCE, TIMELINESS, OR CONTINUED AVAILABILITY, WITH RESPECT TO (I) THE SITE; (II) ANY MATERIALS, PRODUCTS, OR SERVICES AVAILABLE ON OR THROUGH THE SITE; (III) USE OF THE SITE, MATERIALS, PRODUCTS, OR SERVICES; AND (IV) THE RESULTS OF THE USE OF THE SITE, MATERIALS, PRODUCTS, OR SERVICES. FURTHER, DODGE & COX, AFFILIATES, DIRECTORS (AND TRUSTEES), OFFICERS, EMPLOYEES, AGENTS, LICENSORS, AND ANY THIRD-PARTY INFORMATION PROVIDERS AND VENDORS EXPRESSLY DISCLAIM ALL WARRANTIES WITH RESPECT TO ANY DELAYS OR ERRORS IN THE TRANSMISSION OR DELIVERY OF ANY MATERIALS, PRODUCTS, OR SERVICES AVAILABLE THROUGH THIS SITE. EXCEPT AS PROVIDED BY LAW, NEITHER DODGE & COX NOR ITS THIRD-PARTY INFORMATION PROVIDERS AND VENDORS HAS ANY RESPONSIBILITY TO MAINTAIN THE MATERIALS, PRODUCTS, OR SERVICES OFFERED ON THE SITE OR TO SUPPLY CORRECTIONS, UPDATES, OR RELEASES FOR THE SAME. USE OF THIS SERVICE IS AT YOUR OWN RISK. REFERENCE TO A FUND OR SECURITY ANYWHERE ON THIS WEB SITE IS NOT A RECOMMENDATION TO BUY, SELL, OR HOLD THAT OR ANY OTHER SECURITY. IF YOU LIVE IN A STATE THAT DOES NOT ALLOW DISCLAIMERS OF CERTAIN WARRANTIES, SOME OF THE ABOVE EXCLUSIONS MAY NOT APPLY TO YOU. THIS WARRANTY GIVES YOU SPECIFIC LEGAL RIGHTS, AND MAY HAVE OTHER RIGHTS, WHICH VARY FROM JURISDICTION TO JURISDICTION.
 

LIABILITY AND INDEMNITY

ANY MATERIALS DOWNLOADED OR OTHERWISE OBTAINED THROUGH THIS SITE ARE DONE AT YOUR OWN RISK. YOU ARE SOLELY RESPONSIBLE FOR ANY DAMAGE TO YOUR COMPUTER SYSTEM OR OTHER EQUIPMENT, OR LOSS OF DOWNLOADED OR OBTAINED DATA THAT RESULTS FROM SUCH DOWNLOAD.

NEITHER DODGE & COX NOR ITS AFFILIATES, DIRECTORS (AND TRUSTEES), OFFICERS, EMPLOYEES, AGENTS, LICENSORS, OR ANY THIRD-PARTY INFORMATION PROVIDERS AND VENDORS WILL BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL, PUNITIVE, OR EXEMPLARY DAMAGES, INCLUDING BUT NOT LIMITED TO, DAMAGES FOR LOSS OF PROFITS, REVENUE, INCOME, GOODWILL, USE, DATA, OR OTHER INTANGIBLE LOSSES, OR DAMAGES CAUSED BY THEFT, UNAUTHORIZED ACCESS, SYSTEMS FAILURE, OR COMMUNICATIONS LINE FAILURE, OR THE COST OR PROCURING SUBSTITUTE GOODS OR SERVICES, CAUSED BY THE USE OF OR INABILITY TO USE THE SITE, MATERIALS OR ANY PRODUCTS OR SERVICES PROVIDED HEREIN, OR ANY OTHER MATTER RELATING TO THIS SITE, EVEN IF DODGE & COX HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OR LIMITATION OF INCIDENTAL OR CONSEQUENTIAL DAMAGES, SO THE ABOVE EXCLUSIONS OR LIMITATIONS MAY NOT APPLY TO YOU. TO THE EXTENT THAT A JURISDICTION DOES NOT PERMIT THE EXCLUSION OR LIMITATION OF LIABILITY AS SET FORTH HEREIN, THE LIABILITY OF DODGE & COX AND ITS AFFILIATES, SUBSIDIARIES, DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, LICENSORS, AND ANY THIRD-PARTY INFORMATION PROVIDERS AND VENDORS IS LIMITED TO THE EXTENT PERMITTED BY LAW IN SUCH JURISDICTIONS.

You agree to indemnify, defend, and hold harmless Dodge & Cox, its affiliates, and each of its and their officers, directors (and trustees), employees, and agents, from and against all claims, demands, liabilities, damages, losses, or expenses, including attorney's fees and costs, arising out of or related to your improper access to or use of this Site, or any violation by you of these Terms of Use.

Dodge & Cox does not claim that materials in this Site are appropriate or available for use in all locations. Because of the global nature of the Internet, you agree to comply with all local rules with respect to your online conduct, including all laws, rules, codes, and regulations of the country in which you reside and the country from which you access this Site, including without limitation, all laws, rules, codes, regulations, decrees, acts, orders, directives, legislation, bills, and statutes pertaining to tax, contracts, intellectual property, securities, e-commerce, banking, technology, computers, fraud, and privacy.

Each investment product and service referred to on this Site is intended to be made available only to persons where that product or service is registered and/or licensed for sale or where such registration or licensing is not required. This Site will not be considered a solicitation for or offering of any investment product or service to any person in any jurisdiction where such solicitation or offering would be illegal.
 

TIMELINESS OF CONTENT

All content on this Site is presented only as of the date published or indicated, and may be superseded by subsequent market events or for other reasons. In addition, you are responsible for setting the cache settings on your browser to ensure you are receiving the most recent data.


TERMINATION

The rights granted to you herein terminate immediately if you fail to comply with the Terms of Use. Dodge & Cox, in its sole discretion, reserves the right to temporarily or permanently terminate your access to and use of this Site at any time and for any reason whatsoever, without notice or liability. Dodge & Cox will not be liable to you or any third party for any termination of your access to or use of this Site.
 

INTEGRATION AND SEVERABILITY

If any provision of these Terms of Use is deemed unlawful, void, or for any reason unenforceable, then that provision will be deemed severable from these Terms of Use and will not affect the validity and enforceability of the remaining provisions. The preceding Terms of Use represent the entire agreement between Dodge & Cox and the user relating to the subject matter herein.

Terms of Use as of: February 2022

Skip to main content
 

Evaluating Environmental, Social, and Governance Factors as Active Owners

April 2018

 

EXECUTIVE SUMMARY

Environmental, social, and governance issues, collectively called ESG, have become significant factors in investment decision making, especially over the last decade. However, investors’ approaches to ESG vary, ranging from the systematic integration of material ESG factors to portfolios constructed solely of investments in companies promoting social good. Some investors also run screens that help them avoid investing in companies they deem to have a negative impact on the environment (e.g., energy or manufacturing companies) or society (e.g., tobacco, alcohol, or gaming businesses).

At Dodge & Cox, we have operated with the same investment philosophy for over 85 years: we seek to identify well-established companies that have attractive long-term earnings and cash flow prospects not reflected in the current security valuation. To select investments, we employ a consistent and disciplined approach that focuses on intensive bottom-up research, a long term investment horizon, and a strict price discipline.

As part of this investment process, we assess many factors, including ESG factors, on a company-by-company basis, for their potential to materially impact a company’s risk/reward profile. As active owners, we pay particular attention to a company’s governance structure and practices as well as risks and opportunities associated with environmental and social factors, when applicable. We proactively engage with the board and management teams of companies in which we choose to invest, especially when a particular issue is significant to our investment thesis. We also vote proxies, including those addressing ESG-related issues, consistent with our approach as long-term investors.

Our Approach to ESG: Focusing on Material Factors


We look at the mosaic of ESG factors and evaluate them in terms of their potential impact on a company’s earnings and cash flow prospects. When we deem these factors to be material, we will incorporate them into our investment analysis and decision-making process. To emphasize our commitment, we became a signatory to the United Nations Principles for Responsible Investment (UNPRI)(a) in 2012. Dodge & Cox remains committed to considering the investment implications of ESG issues, when appropriate and consistent with our fiduciary duty.

Several academic studies support our approach, affirming that “materiality” matters when incorporating ESG factors in the investment process. For example, Harvard Business School researchers Mozaffar Khan, George Serafeim, and Aaron Yoon(b) found that “firms with good ratings on material sustainability issues significantly outperform firms with poor ratings on these issues. In contrast, firms with good ratings on immaterial sustainability issues do not significantly outperform firms with poor ratings on the same issues.” This suggests that focusing on material sustainability issues can enhance shareholder value. The authors examined ESG issues that were material or immaterial at the industry level, and measured the stock performance of companies with high and low ESG ratings on material ESG factors.

ESG exposures may also convey information about future risks that are not captured by statistical risk models. In their paper Assessing Risk Through Environmental, Social and Governance Exposures,(c) Dunn, Fitzgibbons, and Pomorski investigated the relationship between companies’ ESG exposures and the statistical risk of their equity. They found a strong positive relationship: “Stocks with poor ESG exposures tend to have higher total and specific risk and higher betas, both contemporaneously and as far as five years into the future.”

Integrating ESG into our investment process


Through our bottom-up approach, we evaluate investment risks and opportunities on a company-by-company basis. Analysis of ESG factors has been an important element of our investment review process for many years. Each Fund’s portfolio composition is a result of individual security selection, which takes these and many other factors into consideration.

STEP 1: Due Diligence


Rigorous research and due diligence are the foundation of our investment process, enabling us to develop a thorough understanding of each individual company and issuer under consideration. Our global industry analysts visit companies across the globe and meet with senior management teams in our office. We often attend industry conferences and talk with competitors, customers, and suppliers to develop a well-rounded view of a company’s fundamental strengths and weaknesses.

ESG-related issues may be material to the long-term sustainability of a particular company’s competitive advantage. Such issues may present unique challenges or opportunities for companies and industries that could impact long-term investment performance. Therefore, as part of our due diligence process, we consider various ESG factors, including:

Environmental

  • Chemical safety
  • Emissions, pollution, contamination
  • Management of environmental risks
  • Raw material sourcing
  • Supply chain management

Social

  • Community relations
  • Customer satisfaction
  • Employee and union relations
  • Human health impacts
  • Safety practices

Governance

  • Board structure
  • Capital allocation
  • Company bylaws & articles
  • Management incentive structures
  • Shareholder and bondholder rights

In addition to our own analysis of ESG issues, we review reports from MSCI ESG Research and other third-party providers to help alert us to any significant related issues pertaining to the companies and issuers we are evaluating. While taking this research into consideration, we ultimately make an independent evaluation of the material ESG factors for each company.

STEP 2: Written Analysis


Our global industry analysts develop three- to five-year growth, earnings, and cash flow projections, along with a detailed assessment of the risks and opportunities, to derive a range of potential investment returns over our investment horizon. They analyze the past drivers of the business and determine the materiality of selected ESG issues. Our analysts present their findings in thorough written reports that represent formal buy and sell recommendations based on the combination of a wide range of analytical inputs.

Analysts systematically integrate ESG considerations into their research reports and provide a qualitative overview of the significant ESG risks and opportunities they have examined. The qualitative ESG overview is recorded in an ESG Risks and Opportunities Checklist (see Appendix) that is included as part of the analyst’s recommendation report. If we have engaged with a company on ESG issues, the company’s responses will also be incorporated into our report.

STEP 3: Weighing Valuation Is Essential


As bottom-up, value-oriented investors, we weigh a company’s valuation against its risks and opportunities. Our emphasis on value often leads us to find opportunities where other investors have become overly pessimistic about current challenges. We may decide to invest in a company that has a significant ESG issue if we believe the company is making progress in resolving the issue or we conclude that the issue is exerting an unwarranted impact on the valuation.

STEP 4: Investment Decision-Making Process


Our analysts’ written analysis is subject to peer review by Sector Committees, whose members rigorously vet analyst recommendations, stress test assumptions, and identify areas for additional research. The Sector Committees will consider material ESG issues as part of their role in advising the Investment Committees on intra-sector relative value.

Our Investment Committees then review analyst and Sector Committee recommendations and consider a particular investment’s risks and opportunities before approving new investments or changes in the size of existing holdings.

Note: For separately managed accounts, we will adhere to specific ESG driven screens or restrictions when directed by the client.

Why governance matters to value-oriented, long-term investors


We believe governance factors—defined as the system of rules, practices, and processes through which a company is directed and controlled—are material for every company. Strong governance is expressed in the way a company makes decisions and balances the interests of all of its stakeholders, including shareholders, bondholders, employees, management, customers, suppliers, and the communities in which it operates.

As investors with a three- to five-year investment horizon and low portfolio turnover, we closely analyze a company’s governance structure and monitor related issues. We look for core attributes of an effective corporate governance system, as shown in the diagram below.(d) We seek to understand how the company makes decisions and

Core Attributes of an Effective Corporate Governance System

Source: Clayman, Fridson, and Troughton. “Corporate Finance: A Practical Approach.”

assess whether management is truly running the company for the benefit of its long-term owners. Management’s past behavior, in particular how they balance stakeholder interests, can provide valuable insights.

We also assess risks pertaining to business ethics, ownership structure, board composition, financial accounting and reporting practices, regulatory interventions, and litigation. For example: Has the company adopted takeover defenses or issued share classes with different voting rights that unduly favor incumbent management? Are board members qualified? Is there an independent majority on the Board?

We spend considerable time gathering information and corroborating our findings with a variety of sources, which may include:

  • Speaking directly with a company’s management and board members;
  • Cross-checking assertions of corporate management teams (e.g., holding in-depth conversations with providers of finance);
  • Talking with industry consultants, brokerage firm analysts, credit rating agency analysts, macro economists, competitors, and customers;
  • Reviewing information in trade periodicals and business publications as well as various database services; and
  • Enlisting legal counsel to research and evaluate corporate structures and legal entitlements.

WE ENGAGE WITH COMPANIES AS ACTIVE OWNERS, NOT AS ACTIVISTS


There is an important distinction between being an activist investor and an active owner in a company. Activist investors may purchase shares in a public company and/or try to obtain seats on the company’s board with  the short-term purpose of creating a major change in the company. Active owners expect management teams to run their businesses with a focus on creating long-term value.

As active owners, we seek to build constructive long-term relationships with boards and management teams, rather than filing shareholder resolutions or joining public campaigns. We engage with the management of a company when we believe their decisions are not aligned with the best interests of long-term shareholders. These may include decisions that provide short-term benefits but ultimately harm company stakeholders in the long run.

When we have concerns that we believe have not been addressed adequately to protect the long-term value of the company, we may choose to adjust our position or express our views through our proxy votes on management and shareholder proposals.

Engaging Directly With Management


We believe that undertaking and maintaining a dialogue with management is an important aspect of investment analysis and critical to building our understanding

Engagement: Akzo Nobel

Based in the Netherlands, Akzo Nobel is a leading producer of paints, performance coatings, and specialty chemicals. By May 2017, the company had received three acquisition offers from PPG Industries, the world’s largest coatings company by revenue, each at a significant premium to its share price.

 

Citing an internal strategy to drive an increase in value, Akzo Nobel’s management declined all three offers and denied shareholders an opportunity to vote on PPG Industries’ offer. We engaged directly with the management team and the Chairman of the Board to express our point of view.

 

Akzo Nobel has an anti-takeover defense provision in place that makes it very difficult to vote out the company’s supervisory board. While some shareholders went to court to try to remove the Chairman, we wrote the court a letter defending the essential shareholder right to vote. Akzo Nobel won the lawsuit, but the judge indicated in the ruling that the company needed to improve its relationship with shareholders.

 

After thoroughly reviewing the company, we decided to continue to hold Akzo Nobel because we believe the company’s discounted valuation relative to industry peers does not reflect the opportunity for revenue and earnings growth. Moreover, we are encouraged by recent steps taken by the board to improve Akzo Nobel’s governance practices.

of management’s priorities and strategies. We seek to understand management’s views on key issues that are important to its business. These could include capital allocation, investment decisions, cost structures, quality of workforce, environmental considerations, diversity of management, diversity of board, and a host of other issues. We do not have opinions on everything a company does, but when we do, we want to be able to share our views with management when merited. Conversely, management teams have sought our input on various issues, including capital allocation, remuneration practices, governance structure, and board composition.

 

Expressing Our Views Through Proxy Votes
 

Proxy voting is an effective mechanism to express our views about ESG issues. Our policy is to vote proxies in a way that we believe best serves the interests of our clients as long-term shareholders of a company, which includes voting on issues with ESG implications. We vote securities for which we have full proxy voting authority

Proxy Voting: Hewlett-Packard

When evaluating Hewlett-Packard (HP), governance played a significant role in our thinking. In 2011, HP’s decision to acquire Autonomy, a UK-based software company, for $11.7 billion—a 79% premium over market
price—led us to be concerned about capital allocation. HP had paid a high valuation for several other deals that had reduced its financial flexibility and ability to conduct large share repurchases.

 

We discussed these concerns with HP’s board and management team, and we ultimately decided to vote against certain board members who were strong advocates of the Autonomy transaction. The HP-Autonomy merger turned out to be one of the worst technology deals of all time. After conducting an internal investigation, HP accused Autonomy’s founder of fraud and ended up incurring an $8.8 billion loss on the transaction. Management later invited our input on board composition and governance initiatives.

 

Hewlett-Packard has since split into HP Inc. and Hewlett Packard Enterprise. We continue to actively discuss governance and capital allocation concerns with their management teams.

consistently across all of our portfolios in accordance with the Dodge & Cox Proxy Voting Policies and Procedures, which can be found on our website.

Just as we thoroughly research each investment, we also diligently evaluate each proxy initiative. In addition to undertaking our own analyses, our proxy team reviews research provided by Institutional Shareholder Services (ISS) and Glass Lewis prior to voting. Once the team has recommended a vote and the global industry analyst has ratified the decision where applicable, the proxy voting team implements the voting decisions.

While we do not vote proxies to conform to specific ESG criteria or an ESG mandate, the Proxy Voting Policy does address ESG issues. We evaluate each proposal on a case-by-case basis and vote in a way that we believe will best preserve the long-term value of our clients’ shares in the company.

When items are not covered by our Proxy Voting Policy, the global industry analyst recommends a vote, and the proposal and the analyst’s recommendation are then evaluated by one or more members of the Dodge & Cox Proxy Policy Committee.

Conclusion


In our opinion, ESG issues do not lend themselves to hard and fast rules or metrics. In fact, some ESG factors may be more salient than others in certain situations or for specific companies or industries.

At Dodge & Cox, ESG considerations are embedded in each phase of our investment due diligence and decision-making processes. Material ESG factors are important considerations when assessing the range of investment risks and opportunities. Our task as active owners is to identify whether the company is addressing issues we deem material or the market is overly pessimistic about the risks. As a value-oriented manager, we may invest in a company that has a significant ESG issue if we believe that the company is making progress or if the issue is overly discounting the company’s valuation. We invest for the long term and look for companies with sustainable franchises.

Examples of Dodge & Cox’s ESG Integration

Environmental Factors: Engie

For companies that face significant environmental risks, we consider how they manage these risks to reduce impact over time and prevent large-scale disasters. Environmental risks can lead to various direct and indirect financial liabilities, including regulatory fees and fines, litigation and remediation costs, or loss of customers due to damage to the brand. We also evaluate whether the company is taking advantage of environmental opportunities, such as renewable energy and resource conserving technologies.

 

Environmental factors played a significant role in our evaluation of Engie, a multinational electric and gas utility domiciled in France. Like many utility companies, Engie is exposed to environmental risks through power generation from coal, natural gas, nuclear, and renewable  sources of energy. Our global industry analysts discussed environmental concerns with Engie’s management, reviewed the company’s environmental safety and social responsibility reports, and used numerous third-party ESG resources. We believe Engie’s management has a long-term view and is actively working to moderate and reduce environmental risks. Engie is also capitalizing on opportunities to reduce regulatory and resource risks through its focus on low-emission energy sources.

 

In addition, Engie has taken steps to diversify its portfolio through an increasing emphasis on renewable energy. The company has invested in low-emission energy sources, which provide a hedge against regulatory and resource risks while providing reasonable investment returns in diversified markets. We see upside potential from Engie’s renewable energy production and expansion into emerging markets, and view the reduced environmental and regulatory risks favorably.

 

Social Factors: Axis Bank

Social factors are material to our investment thesis for Axis Bank, one of India’s largest banks. India has a fast growing economy and a young population (more than 65% of the population is below the age of 35); however, a significant portion of the population has limited access to banking products. It is common for people in India to save in cash and gold, and to borrow from informal moneylenders, who charge high rates of interest. Over the past several years, the Indian government has pursued a number of policies to push a greater portion of the population into the formal banking sector. One example is a financial inclusion campaign called Pradhan Mantri Jan-Dhan Yojana (PMJDY), which is designed to ensure access to affordable financial services, including checking and savings accounts and remittance, credit, insurance, and pension products. Axis Bank offers PMJDY accounts and has partnered with other organizations to implement several other financial inclusion initiatives, including microfinance and financial literacy programs.

 

In addition, state-owned banks control approximately 70% of the market in India, but generally provide a lower level of service than private banks. Over time, as more people are able to access bank products, private sector banks such as Axis have an opportunity to continue to take market share from state-owned banks and improve the level of service the end customer receives.

 

We believe Axis Bank has a positive social impact in India by providing better financial resources to underbanked populations. We consider the bank’s social impact to be a material part of our investment thesis, as the growth potential for Axis Bank lies in financial inclusion and making banking resources accessible to a larger population.

 

Governance Factors: Kinder Morgan

One significant consideration in our investment process is whether a company is balancing the long-term interests of all stakeholders, including bondholders. While we were mindful of the environmental and social factors associated with being an operator of oil and gas pipelines, governance played a particularly notable role in our evaluation of Kinder Morgan’s debt securities. When we initiated a position in Kinder Morgan’s bonds in 2014, we focused on the implications of the large equity ownership and active role of long-time CEO (now Chairman) Richard Kinder, as well as the company’s proposal to dramatically simplify its legal structure. Based on several meetings with senior management and our analysis of their track record (including bondholder-friendly aspects of their 2006 leveraged buyout), we believed the company’s long-term focus was highly aligned with creditors’ interests. This belief was confirmed in December 2015 by the company’s decision to reduce its dividend by 75% to strengthen the balance sheet and defend its investment-grade rating in an environment of heightened commodity price volatility.

Disclaimer

The use of specific examples does not imply that they are more or less attractive investments than the portfolios’ other holdings. Akzo Nobel, Axis Bank, Engie, Kinder Morgan, Hewlett Packard Enterprise, and HP Inc.were held in one or more of the Dodge & Cox Funds as of March 31, 2018.

Opinions expressed are subject to change without notice. Before investing in any Dodge & Cox Fund, you should carefully consider the Fund’s investment objectives, risks, and charges and expenses. To obtain a Fund’s prospectus and summary prospectus, which contain this and other important information,  visit dodgeandcox.com or call 800-621-3979. Please read the prospectus and summary prospectus carefully before investing.

1 For more information, see http://www.unpri.org/about/the-six-principles.
2 Khan, Mozaffar, George Serafeim, and Aaron Yoon. “Corpo-rate Sustainability: First Evidence on Materiality.” The Account-ing Review 91, no. 6 (2016): 1697-1724.
3 Dunn, Jeff, Shaun Fitzgibbons, and Lukasz Pomorski. “As-sessing Risk Through Environmental, Social, and Governance Exposures.” AQR Capital Management, LLC (2016).
4 Clayman, Michelle R., Martin S. Fridson, and George H. Troughton.Corporate Finance: A Practical Approach. Vol. 42. John Wiley & Sons, 2012.