SRI and Corporate Governance are logical extensions of our investment philosophy and process. We are long-term investors supporting quality companies with excellent management teams in niche markets. Several years ago we began to include SRI and Corporate Governance criteria in our selection process. We have since become signatories to the Principles of Responsible Investing, an investor initiative in partnership with UNEP Finance Initiative and UN Global Compact. The PRI initiative uses the acronym ESG (Environmental, Social and Corporate Governance) to describe a range of SRI issues. Their six main principles are as follows:

we will incorporate ESG issues into investment analysis and decision making processes

we will be active owners and incorporate ESG issues into our ownership policies and practices

we will seek appropriate disclosure on ESG issues by the entities in which we invest

we will promote acceptance and implementation of the Principles within the investment industry

we will work together to enhance our effectiveness in implementing the Principles

we will each report on our activities and progress towards implementation

Further details can be found at www.unpri.org.

SRI

We do not have specialised SRI funds, or funds with the label “SRI”, but all companies in which we invest go through a SRI screening process. This is performed by our team of in-house analysts with the help of outside sources, and is discussed during the extended meetings we hold with management. SRI compliance is included in our qualitative checklist. The companies are assessed on three main criteria:            

1. Social (Corporate Governance, Community, Health and Safety);            
2. Environmental (Pollution, Energy, Waste Management);            
3. Ethical (Alcohol, Human Rights, Gambling, Military Regimes).

In most cases, unless a company is involved in the controversial activities outlined in point 3 above, companies are not excluded from our research but invited to reach better standards of social responsibility.  Additionally, our SRI screening can be tailored for clients with specific requests and for segregated mandates.

As part of our investment process we meet the top management of companies and the middle managers in charge of operations.  If necessary, we make suggestions on ways to improve internal policies.  It is not our role to dictate but we can help companies think about the impact of their business in the context of wider SRI issues. If a company refuses to do so, or procrastinates about improving its policies and operations, we may then decide not to invest or to pull out as shareholders.

Corporate Governance

In our view companies that promote good corporate governance and that adopt a socially responsible attitude tend to be companies that offer above average long-term growth prospects.  Good corporate governance and SRI aid good long-term performance for our clients (and for us, as we invest in our own funds). Some of our clients are charities and pension funds which also share Montanaro’s investment philosophy and SRI commitment. We therefore aim to promote good standards of corporate behaviour wherever possible, aided in this by having close and regular contact with the management of the companies we invest in.

We have adopted principles from the International Corporate Governance Network (ICGN):

1. Corporate objectives-shareholders’ returns
2. Corporate boards
3. Disclosure and transparency
4. Corporate citizenship and stakeholder relations
5. Shareholders’ voting rights and remedies
6. Corporate remuneration policies
7. Audit
8. Corporate Governance implementation
9. Ethical conduct of business

Every company that Montanaro invests in is subject to a rigorous in-house research programme and to on-going reviews.  Montanaro has consistently been a supportive and long-term investor.  Meetings, typically one on one, take place regularly with the management of our investee companies. These meetings help us to develop strong and open relationships.  Sound Corporate Governance is considered important: we believe that good governance will help create and enhance shareholder value and forms a key part of the due diligence process and the qualitative checklist.   Qualitative issues include:

The Business

What is the perceived quality of the product or service? Are there any ethical issues?

The Board

What is the quality and experience of the board members? What are their areas of responsibility? What is the structure of the board (at least two non-execs)? What is the policy with regard to re-election of non-executive directors? What is the structure of the board’s remuneration? Share options?

Ownership

Does ownership include the founder, the board, the management, employees? Are interests aligned with shareholders? Who are the external investors?

We are keen to see evidence of the close alignment of shareholder and management interests and we review all proposals for shareholder meetings.  We will attend shareholder meetings and, if appropriate, will participate.

We instruct custodians to vote in support of management.  If we identify an issue of concern we will instruct otherwise, we also engage with a company directly to discuss any contentious issues.