Deep Research Insights

Active own­e­r­ship is a key com­p­o­nent of our inv­e­s­tment str­a­t­egy. In this Ins­i­ght, we would like to exp­lain how we think about exe­r­c­ising our voting rights and pre­sent a short sum­mary of our int­e­rnal voting gui­d­e­lines. While by no means exh­a­u­stive, this Ins­ight also sheds light on the cha­l­l­enges ari­sing from unique voting pro­p­o­sals and how we app­r­oach them.

Introduction

Purpose

We see our­s­e­lves as owners of the com­p­a­nies that are part of our por­t­f­olio. As we only invest in pub­l­icly traded com­p­a­nies, we the­r­e­fore hold shares with voting rig­hts. This gives us the pri­v­i­lege to exp­ress our opi­nion on man­a­g­ement by exe­r­cis- ing those rig­hts. As we are a sig­n­a­tory of the UN Pri­n­c­iples for Res­p­o­nsible Inv­est- ing, we also have a duty to vote. We exe­r­cise our voting rights in an active and or- derly fas­h­ion, fol­l­o­wing the voting policy of the Deep Res­e­arch Fund. The pur­pose of this Ins­ight is to pro­vide tra­n­s­parency on how we make our voting dec­i­s­ions.

Time line

As a lon­g­-­term inv­e­s­tor, the Deep Res­e­arch Fund app­r­o­aches voting by con­s­i­der- ing the com­p­a­ny’s future for at least the next five years. Our votes aim to sup­port the inv­e­stee com­p­a­ny’s sus­t­a­inability eff­o­rts, strong gov­e­r­nance and lon­g­-­term str­a­t­egy. We always pri­o­r­itize lon­g­-­term cre­a­tion of sha­r­e­holder value over short- term gains.

Abs­t­e­ntion and dis­a­g­reements

There are many dif­f­e­rent ways a vote can be str­u­c­tured. Som­e­t­imes, if a share- holder doe­sn’t vote, it is con­s­i­dered voting aga­inst a pro­p­o­sal, and som­e­t­imes it is con­s­i­dered simply a vote not cast. We avoid abs­t­e­ntions as a means to ind­i­cate our pre­f­e­rences in order to avoid mis­i­n­terpretation. Ins­t­ead, we vote act­i­vely and follow up thr­ough inv­e­stor rel­a­t­ions whe­r­ever we have mat­e­rial dis­a­g­reements.

How­e­ver, voting rights need to be exe­r­c­ised on an inf­o­rmed basis. If suf­f­i­cient infor- mation for a wel­l­-­informed dec­i­sion is not ava­i­l­able, we deem abs­t­e­ntion to be ap- pro­p­r­iate, com­b­ined with a pro­a­c­tive req­uest for more tra­n­s­parency and inf­o­rma- tion from the com­p­any.

We try to be con­s­t­ructive about our exp­r­e­ssion of dis­a­g­reement with the compa- ny’s pro­p­o­sals. For exa­m­ple, our dis­a­g­reement with rem­u­n­eration pac­k­ages res­ults in voting aga­inst the inc­e­n­tive str­u­c­ture, rather than voting aga­inst the rem­u­n­era- tion com­m­i­ttee mem­b­ers’ ree­l­e­ction. Add­i­t­ionally, we follow up by pro­a­c­tively see­king dialog with the com­p­any. Sim­i­l­arly, dis­a­g­reements with the com­p­o­sition of the board of dir­e­c­tors res­ults in voting aga­inst the ree­l­e­ction or ele­c­tion of spe­c­ific board mem­b­ers, rather than voting aga­inst the nom­i­n­ation com­m­i­ttee mem­bers col­l­e­ctively. Again, we follow up with the com­pany dir­e­ctly about our views on the board com­p­o­sition. We see voting aga­inst an entire com­m­i­ttee as pot­e­n­tially detri- mental to our eff­orts of bui­l­ding a com­p­e­tent and wel­l­-­diversified board of dir­e­c­tors.

Con­f­l­icting pre­f­e­rences

Som­e­t­imes, we may find that our pre­f­e­rences are at odds with each other. For in- sta­nce, a new member of the board of dir­e­c­tors may lower div­e­r­sity while adding the needed acc­o­u­nting kno­whow to the audit com­m­i­ttee. We res­erve the right for a jud­g­e­ment call as a team on whe­ther the seq­u­e­ntial imp­r­o­vement in one area out- weighs the seq­u­e­ntial det­e­r­ioration in ano­ther area. Sub­s­e­quently, we would seek a dialog with the com­pany to exp­ress our con­c­erns and work on fin­ding a better sol­u­t­ion.

Operational Matters

1. App­r­oval of Fin­a­n­cial Sta­t­e­ments

Pri­n­c­iple

We base our ass­e­s­sment of com­p­a­ny’s pot­e­n­tial on the com­p­a­ny’s own rep­o­r­ting; we do not use thi­r­d­-party data. The­r­e­fore, we req­uire suf­f­i­ciently det­a­iled and trans- parent rep­o­r­ting in order to eva­l­uate the ope­r­a­tional per­f­o­rmance, risk pro­file and cur­rent course of bus­i­ness of the com­p­any.

Guidance

• The com­pany must report in suf­f­i­cient detail and tra­n­s­parency for us to be able to form a wel­l­-­informed opi­nion on its cur­rent sta­tus, its pro­g­ress tow­ards its lon­g­-­term str­a­tegy and vision and the risks to which the bus­i­ness is exp­o­sed.
• Rep­o­r­ting needs to be timely and in a lan­g­uage in which our ana­l­ysts are pro­f­i­cient.
• The com­pany must res­pond in due course to gen­eral inq­u­i­ries and req­u­ests for fur­ther cla­r­i­fication.

2. Ele­c­tion of Aud­itor

Principle

Ind­e­p­endent aud­i­tors play a key role bec­ause they ensure that the com­p­a­ny’s re- por­ting is rel­i­able and tru­s­t­worthy. The ele­cted aud­itor must be com­p­e­tent and per­form its duties ind­e­p­endently.

Guidance

• The audit must be con­d­u­cted by a cer­t­i­fied public acc­o­u­nting firm.
• The aud­itor shall not rec­eive any fees during any fiscal period that con­f­lict with the aud­i­t­or’s abi­lity to ind­e­p­endently assess the com­p­a­ny’s rep­o­r­ting.

3. All­o­c­ation of Ear­n­ings

Principle

As a lon­g­-­term inv­e­s­tor, we care about the com­p­a­ny’s lon­g­-­term fut­ure, which we define as at least five years. The all­o­c­ation of ear­n­ings must be in line with the com- pany’s lon­g­-­term str­a­tegy and keep the com­pany con­s­e­rvatively cap­i­t­alized.

Guidance

• The first pri­o­rity to all­o­cate ear­n­ings should be red­u­cing debt to a lon­g­-­term sus­t­a­inable level.
• Acq­u­i­sitions should only be made in line with the lon­g­-­term str­a­tegy and be pur­sued with the intent of str­e­n­gthening the com­pany rather than the pur­suit of gro­wth.
• Div­i­dend and share buy­back pol­i­cies should be eva­l­u­ated in light of tax impli- cat­i­ons, cur­rent com­pany val­u­a­tion and cur­rent and target cap­i­t­alstructure, and should in gen­eral remain fle­x­i­ble.

4. Remuneration

Principle

Sim­i­l­arly, we want the com­pany man­a­g­ement to del­iver on the lon­g­-­term view rather than be rew­a­rded for sho­r­t­-term stock price inc­r­e­ase. In our opi­n­ion, man- age­ment should be inc­e­n­tivized in line with the com­p­a­ny’s lon­g­-­term str­a­tegy and sus­t­a­inability ini­t­i­atives. Sho­r­t­-term ris­k­-­taking should not be enc­o­u­raged.

Guidance

• The var­i­able com­p­e­nsation should not lure man­a­g­ement into taking exc­e­s­sive risks.
• The size of the total com­p­e­nsation should be rea­s­o­nable.
• The per­f­o­rmance tar­gets and payout str­u­c­ture should be ali­gned with the lon­g­-­term str­a­t­egy.
• The ach­i­e­vement of the per­f­o­rmance tar­gets should be within man­a­g­ement’s con­t­rol.
• A sig­n­i­ficant por­tion of the com­p­e­nsation should mot­i­vate the man­a­g­ement to focus on the com­p­a­ny’s per­f­o­rmance rather than the stock price.

Board of Directors

1. Board Composition – Skillset

Principle

The board of dir­e­c­tors plays an imp­o­r­tant role as the sup­e­r­visory body of the com- pany’s man­a­g­ement. We want the board of dir­e­c­tors of our por­t­f­olio com­p­a­nies to col­l­e­ctively pos­sess suf­f­i­cient kno­w­l­edge and exp­e­r­ience to exe­cute this sup­e­rvi- sory role. The com­p­o­sition must be chosen in a way that keeps the board fun­c­t­ional and kno­w­l­edgeable.

Guidance

• The board must have a suf­f­i­cient und­e­r­standing of the com­pany and ind­u­stry to art­i­c­ulate a smart lon­g­-­term vision and str­a­t­egy.
• The board must exh­ibit proper risk man­a­g­ement abi­lity as ref­l­e­cted in the capi- tal str­u­c­ture, str­a­tegy and choice of inc­e­n­tive str­u­c­ture.
• Audit com­m­i­ttee mem­bers col­l­e­ctively must be fam­i­liar with rel­e­vant acc­o­u­nting pri­n­c­iples and rep­o­r­ting sta­n­d­ards, while pos­s­e­ssing the rel­e­vant edu­c­a­tion and pro­f­e­ssional bac­k­g­round.
• The number of dir­e­c­tors on the board shall allow for acc­u­m­ulating suf­f­i­cient kno­whow while kee­ping ind­i­v­idual con­t­r­ibution and res­p­o­nsibility mea­n­i­ngful.

2. Board Composition – Diversity

Principle

We are firmly con­v­i­nced that div­e­r­sity leads to better risk man­a­g­ement, better dis- cou­rse, and better lea­d­e­rship and red­uces the risk of gro­u­p­-think and con­s­e­rva- tism. There should also be no con­c­e­ntration of power.

Guidance

• The board should be div­erse in gen­der, age and com­p­a­ny-relevant cul­t­ural bac­k­g­rounds.
• Board mem­bers should have div­erse edu­c­a­tional and pro­f­e­ssional bac­k­g­rounds to cover ind­u­stry kno­w­l­edge, fin­ance kno­w­l­edge and other rel­e­vant kno­whow (e.g. mar­k­e­ting, log­i­s­tics, pol­i­tics and reg­u­l­ation, etc.).
• The board must con­sist of a hea­lthy mix of fresh eyes and mem­bers with know- ledge of the com­p­a­ny’s his­t­ory.
• There should be a power bal­ance bet­ween key pos­i­t­ions such as CEO, chair- man, fou­n­der, or major sha­r­e­holders.

Other

1. Shareholder Proposals

Principle

In add­i­tion to the sta­n­dard com­pany pro­p­o­sals on which the sha­r­e­holders vote, sha­r­e­holders the­m­s­elves can pre­sent their own pro­p­o­sals that would req­uire the com­pany and/or its board of dir­e­c­tors to take cer­tain act­ion. Due to the unique nature of each sha­r­e­holder pro­p­o­sal, they need to be rev­i­ewed car­e­f­ully on a case- by-­case basis. The gui­d­ance below should help det­e­r­mine whe­ther we sup­port a given pro­p­o­sal.

Guidance

We sup­port sha­r­e­holder pro­p­o­sals that…

• aid or imp­rove the com­p­a­ny’s abi­lity to exe­cute aga­inst its lon­g­-­term str­a­t­egic goals.
• imp­rove the sus­t­a­inability sta­n­d­ards and goals of the com­pany or fur­ther expand such goals.
• aim to inc­r­ease tra­n­s­parency wit­hout rev­e­a­ling com­p­e­tition sen­s­i­tive inf­o­r­mation.
• imp­rove sha­r­e­holder rights and equal tre­a­t­ment of all sha­r­e­holders.

2. Unique Situations

Principle

There are a var­iety of pot­e­n­tial other voting mat­t­ers, such as cha­n­ging the compa- ny’s fiscal term or rep­o­r­ting cur­r­e­ncy, ame­n­d­ments to the art­i­cles of ass­o­c­iation, etc. For each unique sit­u­a­tion, the fol­l­o­wing ove­r­a­rching pri­n­c­iples pro­vide guid- ance on how to vote.

Guidance

• The matter at hand must be pro­p­osed with the best int­e­rest of sha­r­e­holders, emp­l­o­yees and other sta­k­e­holders in mind.
• The matter at hand cannot be det­r­i­mental to the com­p­a­ny’s abi­lity to exe­cute its lon­g­-­term str­a­tegy and sus­t­a­inability eff­o­rts.
• The matter at hand should not dec­r­ease the com­p­a­ny’s tra­n­s­parency and sus­t­a­inability sta­n­d­ards.
• The matter at hand should not lead the com­pany to take on more risk.

First release: December 2022
Recent version: December 2024