Welcome to April's Arcus, in this issue I will walk you through how we find our portfolio candidates, our panvestments.
At Panarchy Partners, respect and resilience are the key elements we look for when identifying companies for our portfolio. Respect of the material issues that impact all four forms of capital (financial, environmental, social and human) is the first step for a company to become sustainable. Resilience is the second step which is achieved through successfully targeting material issues that are critical to a company’s business through innovation and flexibility. Thus, respect and resilience makes our companies deliver sustainable financial returns and progress, not only for shareholders but for all stakeholders. Actually let’s start with you. Which of the following company’s targets do you most identify with and would invest in… which is your preferred company?
Company A – by 2023 increase sales by 25%, improving margins and EPS growth of 7.5% -10% pa
Company B – by 2020 GHG emissions down to 2000 baseline and carbon neutral by 2025
Company C – by 2020 84-86% human engagement index and 20% increase in women in management by 2022
Company D – by 2020 having customer loyalty targets such as net promoter score increase by 25%, $22mn investment in education, 2.8mn youth trained in STEM
So have you selected your company? To determine which of the above companies will make it to our portfolio, we first start with our respect test by looking at a company’s governance. We believe that without an independent board that is i) active and engaged, ii) appropriately incentivised and monitors the executive team, and iii) has a history of financial/business discipline, a company cannot deliver financial returns let alone progress on human, social and environmental capital. So now let’s see the some of the governance metrics of our selected companies.
Company A – Board has 47% independent directors and average tenure is 8 years
Company B – Management receives 0% performance bonus if <75% of the board targets are met
Company C – Board has overseen return on capital of 24% pa for last 10 years
Company D – Board has not allowed debt to go above 1x Pre Tax Earnings
Now you know a bit more about your company’s Governance. Is another company looking better on Governance? Do you want to keep your choice of company? Good governance is not limited to respect shown to shareholders but also to other stakeholders, who represent non-financial capital. As part of our governance and respect test, we look for companies that have also conducted genuine stakeholder engagement. Stakeholders (in no particular order) are a company’s shareholders, employees, customers, suppliers, peers, regulators, social space they operate in, and the environment they impact. Only through a proper stakeholder engagement program can a company identify material issues that matter to their stakeholders (including shareholders), which in turn matters to them as a business and going concern. Let’s complete the respect test by looking at our selected companies and the material issues which they have identified as critical to their business and their stakeholders. See if you are comfortable with your company’s material issues:
Company A – Innovation and customer loyalty
Company B – Human capital development
Company C – Business conduct, revenue and market share
Company D – Human and digital rights
By now you may have a company that you like for i) its targets, ii) its governance track record and iii) understanding of the material issues it has identified. Not an easy choice I am sure. Fret not, we are making good progress through our panvesting process. Whilst respect is of paramount importance, it is a necessary but not sufficient precondition for success. As I mentioned at the beginning, under our panvesting philosophy and process, respect is only the first element to a company being sustainable. We want companies that take their respect and convert that into resilience. Companies convert respect into resilience when they use the material issues they have identified for the four forms of capital to help them set their own targets. Through innovation and flexibility, they then deliver on those targets to become resilient. This process makes them resilient to risks associated with human, social, environmental and financial capital and also allows them to treat these material issues as opportunities for growth. We believe that this path to resilience needs to be determined by the company itself and that can only happen if the targets they choose are S.M.A.R.T. S – Specific and not too vague M – Measurable in an objective manner A – Attainable for not only current but future management teams R – Relevant to the material risk that has been identified T – Time sensitive and not left open ended To finish off, now look back to the company you selected, do you think that the targets they have for themselves in relation to the various forms of capital are S.M.A.R.T? I am sure that you could have selected one or more of the other companies on that list as they also had SMART targets that you may want in a company, governance aspects you consider key and material issues that matter if targeted properly. There was not one single company that looked perfect, was there? All of them had features you would like in your portfolio companies. So which one of the companies did we select for our portfolio? The company from the above list that passed our process has been listed for 22 years and it has delivered US$ annualised returns of 12% p.a. for those 22 years, 14% p.a. for the last 10 years and 8.7% p.a. in the last 5 years. So which company was it….A, B, C or D….. drum roll….. Company A, B, C and D are actually one in the same - Company X! Company X has committed to all those targets we offered, has all the governance features we shared and is targeting all the material issues we highlighted. Furthermore, company X, through innovation and organisational flexibility is delivering on their targets. Hence, to us company X shows respect and resilience, the key ingredients for success and sustainability. Our panvesting process identifies companies like company X, who have a good chance of sustaining financial returns and progress on all forms of capital. Special Prize for anyone who can guess the name of company X? Reply to me with your answers and company X’s identity will be revealed in next month's ARCUS. 😊 In coming issues, we hope to look at Governance in detail and also how Human Capital should not be treated just as an expense. Happy Panvesting!