When we invest in an equity holding, we act in the capacity of a partial owner of the company on behalf of our clients. In contrast, when we invest in a corporate bond, we are lenders to the company. As a lender, our return profile is generally asymmetric to the downside—not being paid back—compared to the upside of being paid back the principal and interest on time. In addition, while we can engage with company management teams as a bondholder, we do not typically have the ability to exercise proxy voting rights like equity holders.
Because of these differences, our Credit Research Analysts are highly attuned to potential governance issues when lending money to a company and they put additional emphasis on downside protection. We pay attention to relevant bond covenants, which are bondholder protections, and we may attempt to negotiate stricter covenants where possible. Within our valuation framework, we may also evaluate ESG-linked bond issuances such as green bonds, whose proceeds are used to advance positive environmental objectives, or sustainability-linked bonds whose coupons are linked to ESG-related key performance indicators.
Our fixed income portfolios can invest in sovereign bonds, municipal bonds, and securitized products. These asset types present their own nuances in the context of ESG integration, which we take into consideration as a part of our research when relevant to our investment thesis and when sufficient information is available.
How We Engage With Issuers
Engaging Directly with Companies
We believe that our role as an active manager extends beyond selecting securities for our portfolios. Maintaining a dialogue with company management teams and boards helps us build our understanding of their priorities and strategies over time. When we believe a certain issue could impact our investment thesis, we look for opportunities to engage directly with the issuer. With respect to ESG, we engage most often on governance factors, but if we view an environmental or social issue as financially material, we may choose to share our views on those issues as well. Conversely, management teams, investor relations, and company boards may also seek our input on various topics, including ESG issues.
Our long-term holding periods encourage productive relationships with companies. We define engagement as expressing our views to a company or issuer specifically on the ways ESG-related issues could affect the company’s ability to generate long-term value or the issuer’s ability to meet its debt obligations. When we choose to engage, we aim to improve business practices on ESG-related issues, encourage certain proxy voting outcomes and best practices, or improve public disclosure. We incorporate the company’s response to our engagements into our investment decision making and monitoring, as well as in our proxy voting.
Methods of Engagement
We have multiple avenues for engaging with companies. We estimate that our analysts and Investment Committee members conduct over 1,000 due diligence meetings per year, including meetings with company management teams and boards. In addition, we regularly speak with consultants, a company’s competitors, customers, and suppliers, and other sources to broaden our understanding of a company’s strengths and weaknesses. If relevant to our understanding of a company, we may also decide to engage with a company on what we learn from these conversations with third parties.
Our proxy and governance team may request to engage with an issuer, or an issuer may request a meeting with us, for proxy voting-related discussions. In 2021, our proxy and governance team conducted 66 meetings with 50 different companies, representing over a quarter of our widely-held equity holdings. We track the key takeaways from these meetings and consider these conversations when implementing proxy voting decisions. Our analysts often attend these engagement meetings.
We believe that better outcomes can often be achieved by engaging directly and privately with companies. Thus, we do not typically file shareholder resolutions or join public campaigns unless we believe it would serve the best interests of our clients.
When we decide to engage with a company, we typically find these conversations to be productive and sufficient for us to express our views. We evaluate and assess the potential outcomes of engagements on a case-by-case basis, based on management’s actions, reaction to points of conversation, and long-term performance. Because of the long-term view we take on investments, we monitor the issues we have identified at certain companies over an extended period of time. If direct engagement does not result in progress toward our stated objective, we may consider escalating the engagement through additional meetings with management and the board. We may also vote against the election of members of the board or other relevant proposals, or we may formally communicate our views to the company through a letter.
As an active manager, we also have the option to adjust our position in a company if our investment thesis has changed or if we believe the value proposition that we originally identified no longer exists due to certain risks and lack of improvement. We will weigh the potential benefits of such action for our clients and consider on a case-by-case basis whether escalation is likely to contribute to a better long-term outcome for the investment.
How We Exercise Our Rights And Responsibilities
We view exercising our proxy voting rights as an important component of our stewardship responsibilities. We have adopted a detailed Proxy Voting Policy that contains guidelines to address the majority of proxy matters that commonly arise.
Our Proxy Voting Process
We vote proxies according to our Proxy Voting Policy. Our designated Proxy Officer, or delegate, reviews all proxies. Our analysts may also review proxies for the companies they cover when deemed appropriate by the Proxy Officer or delegate.
When items are not covered under our policy, our Proxy Officer, or delegate, works directly with the analyst and a member of our Proxy Policy Committee to perform additional review. We believe that having multiple individuals review our rationale and voting decisions best serves our clients. A few examples of topics that we consistently review on a case-by-case basis are mergers and acquisitions, golden parachutes, related party transactions, and contested elections. When considering vote decisions, we will vote proxies according to our policy in a way which, in our opinion, best serves the interests of our clients in their capacity as shareholders of a company. Dodge & Cox’s 2021 proxy voting activities are summarized below in Figure 6.