In practice

Helping one company boost competitiveness through better ESG practices

Background

Sustainable results through deeper engagement

Our ESG Research Team met with several members of management to discuss decarbonization strategies in the face of climate change, executive compensation, and the stock’s dual-class share structure.

Approach

Finding carbon-efficient solutions

This company is working to lower its carbon footprint in part by designing efficient packaging solutions and shifting to intermodal (rail) transport. We believe it has the scale and data to devise more carbon-efficient options, including integrating liquefied natural gas (LNG) vehicles and electric vehicles (EVs) into its fleet, realizing fuel and maintenance expense savings.

Taking a good look at governance

In discussing governance issues, we learned that the board has used negative discretion in its bonus plan to reduce realized executive pay and better align with shareholder experience. Performance measures for the company’s long-term incentive plan are not disclosed until the measurement period has ended, however, making it impossible to assess the rigor of the plan in advance of payout. The company recently reduced its bonus-vesting schedule from five years to one, aiming to bolster recruitment.

Assessing share structure

Most minority shareholders have supported a measure to create a single class of publicly traded shares, but voting control remains with majority owners, including current and retired employees. The company says its ownership structure helps recruit and motivate employees; however, its retention rates are merely on par with peers, so we fail to see a direct correlation.

We do acknowledge that if employee satisfaction and productivity are indeed strong, those benefits may accrue to the company in ways that are more difficult to quantify. We do not expect the company to change its dual-class share structure, but we note that it has made other improvements, including voluntarily adopting proxy access.

Results

Better positioned for profitability

We believe governments and consumers will focus more on carbon efficiency in the future, and we think the company is well positioned for that development. Regarding compensation, we prefer to see more consistency between the stated basis of pay and actual payout, with less reliance on the board’s discretion. We provided our feedback about the potentially negative impact of the dual-class share structure on shareholders as well as our preference for an annual vote on compensation.

The case study shown is presented for illustrative purposes only and is not to be viewed as representative of actual holdings.

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