Engagement

Background:
OneMain Financial is the largest nonprime installment lender in the U.S. and engages in inclusive practices such as lending to underserved communities, with 25% of its customers living in credit-insecure or credit at-risk communities. Through a proactive, long-term process, we encouraged OneMain to take incremental steps to provide access to finance for underserved communities while enhancing its commitment to responsible underwriting and improving disclosure.

Scope and Process:
Our focus was to leverage our long-term relationship with management to guide them toward incorporating best-in-class ESG policies and establish long-term objectives that would reinforce the company’s commitment to responsible underwriting and expand its lending efforts for underserved communities and populations.

Our diligence process included 20+ discussions with senior management, including the CFO, chief risk officer, treasurer, general counsel, investor relations and equity stakeholders. We engaged with the company to establish an ESG strategy and enhance disclosures of its policies. In our view, formally establishing and publishing its ESG framework would increase transparency and reinforce the company’s commitment to responsibly servicing its communities and underserved customer population. We encouraged OneMain to establish a best-in-class social bond framework and engaged on the importance of transparency in oversight, reporting and performance tracking.

Outcome:
OneMain released its first ESG Report in July 2020 and established its social bond framework in 2021, which aligned with the International Capital Market Association’s Social Bond Principles 2020, received a third-party alignment opinion from Standard & Poor’s, and is intended to align with UN Sustainable Development Goals 1.4, 8.10 and 10.2. OneMain issued its inaugural social bond in June 2021, for which we served as an anchor order in the $750 million issuance.

Background:
CVSG is the largest integrated veterinary services provider in the U.K., with a presence in the Netherlands and Ireland. Its more than 400 U.K. sites include first opinion practices and referral hospitals, and its operations extend to laboratory, cremation and online retail. Long a key contributor to animal welfare and care, we believe CVSG had the potential to improve the extent and quality of its practices and disclosures.

Scope and Process:
Over several years, we engaged with CVSG on many occasions regarding business fundamentals and management. In 2019, the company experienced a business crisis where we intervened with detailed strategic advice and then watched as CVSG was able to “right its ship.” Extensive dialogue continued, with regular in-person meetings, site visits and conference calls involving multiple senior executives, with the focus shifting more squarely on material ESG topics.

Specifically, we suggested that the company seek to (1) improve its ESG disclosures, (2) focus on factors that were material to the business and (3) engage with ESG rating agencies to promote better understanding of its initiatives and impact. Its human capital policies and practices were particularly relevant given the essential role of its workforce in maintaining effectiveness and cost-efficiency. We also proposed the introduction of key performance indicators (KPIs) to help the company more effectively track and report its progress over time.

Outcome and Outlook:
The company accepted our recommendations and acknowledged the need to improve its external communications on ESG, which previously focused on internal information-sharing. Last year, for the first time, CVSG included ESG factors as part of its standard earnings reporting slides. It also began engaging on sustainability with MSCI, which upgraded its rating to AA in March 2021 thanks to better disclosures. Also, CVSG is working to improve its reporting on sustainability, and it expects to publish a sustainability update with relevant KPIs in its 2022 annual report. We have been pleased to see the company improve its human capital management practices. The firm’s emphasis on quality of care, as well as qualitative and monetary support for its staff, continued to drive improved retention and new hires, leading to a decline of its vacancy rate from 12% in 1H 2018 to 7.5% in 1H 2021.

Background:
Japan is undergoing significant corporate governance reforms, with the revision of its governance code in 2021 and the introduction of new requirements to occupy the preferred TSE Prime section of the Tokyo Stock Exchange. Many large companies are well prepared for this transition, but many smaller companies are working hard to catch up. As part of our focus on improving corporate performance around sustainability, we have had a receptive audience for our ideas. One example is the operator of a small Japanese company that runs the country’s largest press release distribution platform, which faced conflict of interest issues based on its majority ownership by a large technology company.

Scope and Process:
Since April 2020, we have engaged with the company on a number of key issues, including corporate governance (board independence and diversity), capital management (share liquidity) and material equity, environmental and safety issues. We started by meeting repeatedly with the company president, focusing on how the company could mitigate its conflict-of-interest issues. Moving into 2021, the discussion broadened to seek greater board independence in order to be aligned with the revised corporate governance code, which requires majority board independence or the creation of a special committee of independent directors and auditors, as well as the need to improve board diversity (there were no female directors at the time). We also addressed the company’s liquidity, noting that it fell short of the 35% “free-float” share requirement needed to meet new listing requirements starting in April 2022.

Outcome and Outlook:
In September 2021, the company announced that it would apply to become a member of the stock exchange’s TSE Prime section, and introduced a plan to be in compliance with the revised corporate governance code. It also announced the retirement of a board member from the parent company, replacing him with a female external director with strong management and board experience—still a rarity in Japan. In addition, the company negotiated a partial sale of the parent company’s ownership stake, allowing the company to meet exchange requirements.

Looking ahead, the next step will be to accelerate dialogue with the company around the mid- to long-term capital relationship with its parent and to strengthen measures around the protection of minority shareholder value in the event the company makes a final decision on its capital structure. In the interim, we will also be holding more concrete discussions on addressing material issues tied to cybersecurity, human capital management and responsible marketing.

Background:
Our team has built positions in leading retail companies that we believe are poised to benefit from investments in omnichannel capabilities. Given the human capital intensity of retail, we believe retailers that foster supportive and inclusive work environments are more likely to deliver financial outperformance. Following the U.S. anti-racism protests in 2020, many companies publicly pledged to increase their commitment to diversity and inclusion. Additionally, the ongoing pandemic fueled labor shortages that created headwinds for organizations reliant on customer-facing roles. In this environment, our team engaged with the senior management of five retail holdings to examine their commitment to equity, inclusion and diversity (EID).

Scope and Process:
To facilitate comparison across companies, we developed a series of questions around EID practices, disclosures and goals material to financial performance and to developing a more equitable society. Through our analysts’ longstanding relationships, we arranged meetings with management to pose the questions and gauge the responses. Overall, we found that the companies were keenly interested in moving forward in these areas, although some were at a more advanced stage than others.

Among the leaders, one large retailer has long championed diversity, and we believe that its EID efforts have enhanced its business. Specifically, a diverse workforce has helped it drive creativity, for example leading it to introduce cosmetics and food offerings catering to a wider array of ethnic and racial groups, and building broader and deeper connections with customers. Based on our use of proprietary web traffic data, we were able to confirm that this DEI-enabled “creativity engine” was helping to attract more consumer interest than for a key competitor.

Another company explained that it is working to introduce progress on diversity goals into executive compensation formulas—a key step forward which we believe demonstrates its importance and establishes accountability. In contrast, some mall-based retailers had given EID topics limited attention, and were unable to provide meaningful data on their practices. They generally acknowledged that more work needs to be done, particularly as it relates to narrowing diversity gaps between stores and headquarters—hence our ongoing support for their investment in “upskilling” and other efforts to drive career mobility.

Outcome and Outlook:
Our team was pleased that these companies were focusing on EID while acknowledging potential areas of improvement. In our view, a business’s talent often drives success, making staff well-being a key priority, particularly in employee-intensive sectors like retail. Although much has been accomplished over the past couple of years to combat pay, gender and racial inequality, we have found that few companies have incorporated EID metrics into management compensation, something we advocated for in our engagement campaign. Adding a “social” component to management’s incentives is essential to drive change and should rank with more traditional financial metrics in assessing company performance. Importantly, we understand that companies may be at different stages of their EID journey. Thus, we can serve as a resource for those who are just getting started, as well as offer perspective to those who are more advanced and may wish to fine-tune their efforts.