Case study: Sparinvest engagement

It selects companies for engagement based on a range of criteria (engagement topic, company size and resources, etc.), however it is ultimately materiality which determines priorities. Past issues and controversies can cause a company to be considered for engagement, with the aim of understanding how the company is responding to and addressing these weaknesses.

Sparinvest has approximately 250 companies in active funds, and it votes on these holdings. If it votes against management, this would usually involve some dialogue with the company. Dialogue on voting issues usually take place with approximately 90-100 companies annually. In addition to this, the investment manager carries out approximately 25 selective engagements per annum. Half of these are conducted by a service provider who engages on normative breaches. The rest are done by the investment manager and range from basic, low level fact-finding issues to widerranging discussion on a variety of topics.

Between 2013–2015, Sparinvest held a dialogue with the management of a telecoms company headquartered in Japan, with the aim of improving both the substance and the transparency of anti-bribery and corruption strategies, policies, and systems. Through meetings and regular communications with the management, the investor encouraged the company to improve on a number of indicators, including:

• greater disclosure around whistleblower policies and incidents;
• the application of anti-bribery and corruption policies to contractors, subcontractors, and suppliers;
• internal risk assessments and regular monitoring of the internal anti-bribery and corruption programme.

During the engagement, the company issued, for the first time, an annual report with information on the integration of its sustainability and corporate social responsibility practices, as well as its first anti-bribery handbook for its increasingly global workforce, covering such risks as facilitation payments. Most significantly, the company issued a clear statement of zero tolerance of corruption. 

Other areas of anti-bribery and corruption engagement were initially met with cultural obstacles.

• The company did not immediately understand what was meant by ecompany level risk assessment. Upon further discussion, they explained that they have different risk structures in place, but it is something they never thought would need disclosing. While they are improving in this regard, there needs to be more of a holistic view from the holding company.
• The company fs code of conduct for contractors, subcontractors and suppliers does not require contractual obligation. Although the company did have a strong policy for third parties in both Japanese and English, it holds no contractual obligation. On this point, the company explained that, much like other institutional investors, they believe in gengagement, not exclusion h with regards to their supply chain.
• The framework used appeared to apply a ewestern f mindset. The investor found the TI research and scorecards helpful in opening up the dialogue with the company. However the terminology used in the framework did not fully resonate with the company. For example, ezero-tolerance f is deemed to be a negative statement (implying that something is wrong), which grates against the Japanese norm of preferred strong, positive statements. Nevertheless, the use of good practice examples allowed cultural differences to be explored. The investor was successful in convincing the company that a clear zero tolerance statement regarding anti-bribery and corruption was important from an international perspective, as a strong indication of governance rigour.