our beliefs

Contrarian thinking

When a sufficient number of people all claim that something is true long enough, it will eventually become true. But is it really true? When everyone else is looking in the same direction, we’re usually looking the other way. At Dunross & Co we happen to be convinced that there are business concepts and companies with potential to be found in all sectors. Not just the one that is attracting all the attention from the media, analysts and other investors right now.

Value investing

For us, value investing is the only true doctrine. We believe in investing in companies with great underlying values, which are not appreciated enough by the market. This is how Dunross & Co has become what it is today.

Trial and error

By exploring new paths we can develop and arrive at new insights. These paths don’t always lead us where we thought they would. We believe in learning from our mistakes. As long as we don’t stray from our fundamental values, we can make the journey without fear.

our thoughts on share­holder value creation

Dunross is a long-term value investor in the global equity markets. For us it is extremely important that the companies we invest in maintain a high standard of corporate governance, thereby enhancing shareholder value creation by lowering the cost of equity.

 

Most important are transparency and proper disclosures, access to the company’s management, and that the company treats all shareholders – big and small – equally.

The above principles, together with the straight-forward measures we recommend, form the basis for good corporate governance which will lower the company’s cost of equity.

Hence, this pamphlet can be regarded as a quick reference guide on how to build high standards of corporate governance the Dunross way. And, on the following pages we will elaborate on some very important steps to increase shareholder value.

Many ways to unlock shareholder value of a company

There are many ways to unlock the value of a company. However, one factor that often is overlooked is good corporate governance, which through very simple measures can improve the market’s confidence in a company and reduce the perceived risk. This in turn will reduce the cost of equity and debt of a company, and thereby increase its value. It is one thing to meet all the necessary legal and regulatory requirements set by stock exchanges and supervisory bodies, but another­­ thing to truly demonstrate commitment to openness, transparency and good corporate governance, which really make the difference.

Below are Dunross’ thoughts on some very simple measures to achieve this and that all can reduce the cost of capital and increase shareholder value. This is by no way an exhaustive list of measures to establish good corporate governance, but more a starting-point on how to improve corporate governance and to create value for all shareholders.

Dividend policy

A well-defined dividend policy is one of the most important ways in which a company can communicate finan­cial strength and commit­ment to shareholder value creation. By distributing part of annual earnings, companies demonstrate belief in the future. A transparent dividend policy also sends a strong signal to the market about good corporate gover­­nance, and that minority share­holders are an im­por­tant group for the company and its main shareholders.

Moreover, it is also important to declare the dividend payments together with the record and ex-dividend dates in a timely manner to allow all investors to settle any transactions in connection with such payments and eliminate any ambiguity that otherwise may arise.

From our experience as a global equity investor, we also know that a transparent dividend policy will, over time, increase the value of a company. There are also investors who are required to invest only in companies with well-defined dividend policies. Hence, a dividend policy will also attract a wider shareholder base and increase the liquidity of the share, which in turn is useful for capital market operations, including future capital raising activities.

A well-defined dividend policy should ideally be based on a percentage of annual earnings rather than a fixed amount, otherwise the divi­dend will exhibit similar qualities to that of a coupon of a bond. This will also align the investors interests with that of the company, making shareholders feel more as a part of the company and its profits (rather than being just a bond holder), its progress and its growth story. Allowing shareholders to feel a stronger connection with the company also rewards the com­pany with more interested share­­holders that will work as marketers of the company. This will further enhance the liquidity in the stock, which also lowers the perceived risk for shareholders.

However, the dividend policy does not necessarily need to be a fixed percentage of earnings, but could also be stated as a percentage range to allow for flexibility depending on the company’s investment and/or business cycles that may require more or less capital at any given point of time. For example, a dividend policy stating a payout ratio of 30-50 % could give the company the desired flexibility to adjust dividends according to current needs of capital depending on the business cycle, the kind of profits (extraordinary or core earnings) and/or onetime opportunities that may arise.

Share buy-backs

If and when a company decides to buy back shares, it is important that it is executed when the company’s shares are conser­vatively valued. If executed it is also of ut­most im­portance that the acquired shares are can­celled. If ­the company chooses to keep the shares as treasury shares, in­vestors and the market will always include these treasury shares in the denominator when calculating per share earnings, resulting in an unchanged EPS.

In other words, a buyback program without cancellation of treasury shares will not increase shareholder value and, potentially, it could also be interpreted as if the company has plans to resell the treasury shares, thereby creating an overhang that will negatively impact how the company is valued by the market. Or even worse, the treasury shares could be interpreted as a power tool by the management or the controlling shareholder. Again, to send a clear and strong signal to the market by having a transparent policy regarding treasury shares and cancellation of the same, will be seen as a very positive signal from a corporate governance perspective. This in turn will decrease the perceived risk of the company, reduce the cost of equity and enhance its value. Furthermore, it should be pointed out that a share buyback normally is a very positive and cost-effective way to redistribute value to shareholders than by direct dividends, and could also be part of the company’s dividend policy.

Major transactions

It is paramount that all major transactions by the company – be it asset disposals, share issues or acquisitions – are to be resolved at a general meeting where all shareholders can vote (except of course when it comes to related party transactions where only unconnected shareholders should be allowed to vote). As such, the board of directors should not be given any wide-ranging mandates to conduct major transactions, because this can create a feeling of mistrust from investors and the market.

Pre-emptive rights

When doing a share issue it is very important that all shareholders are entitled to pre-emptive rights, i.e. the right of existing shareholders to have the first right of refusal to subscribe to any new shares issued by the company. To allow existing shareholders the possibility to take part of a share issue is not only fair, but more importantly, will lower investors’ perceived risk of being diluted by directed share issues.

Nomination of Independent directors

Nomination of independent directors of the company should be approved by the minority shareholders of the company. Alternatively, the minority shareholders should be represented in the nomination committee appointing the independent directors.

Remuneration policies

Directors and management of companies should be satisfactorily rewarded if they do a good job, but not if they don’t deliver. In order to avoid excessive pay for sub-par performance, it is important that companies keep policies for bonus payments and share option grants transparent and subject to shareholder ratification at the general meeting. By being transparent on pay and setting remuneration – whether it’s cash, options or shares – at a performance based but still ethically and morally justifiable level, investors will feel increased confidence in the management and the company.

Management and directors should also be encouraged to hold and continuously acquire shares in the company, making their long-term interests more aligned with that of the shareholders.

Related Party Transactions

To the largest extent possible, avoid transactions (and by transactions we mean all kinds: disposals, acquisitions, loans, guarantees etc.) connected to affiliates and/or with companies related to board members or management of the company. If, however, related party transactions are being pur­sued, there should be a transparent frame­work which clearly states the process and terms of such transactions. Also, of great importance is that the connected shareholder is restricted to vote on such matters, so that the decision on the transaction rests with the minority shareholders, and that there is an independent valuation of the transaction.

Insider shareholding disclosures

Even if it’s not required by stock market regu­lations, we advocate for companies to keep investors informed about all transactions in a company’s share conducted by the major shareholders and members of the board and management. Exactly how this is done is up to the regulations and the company, but the im­por­tant thing is that investors receive transparent and frequent updates on how insiders act.

Focus on Core Business

A company should solely focus on its core business, since a strict focus always will be rewarded by the market and the company’s shareholders. If, however, an amendment to the business focus is justified, this should be subject for approval at a shareholders’ general meeting. Naturally, we also discourage all types of non-core investments and crossholdings that could be viewed as part of a “power strategy”.

Disposals and Spin-offs

As with share issues, we also believe that the company should apply the same pre-emptive rights principles on disposals and spin-offs. If a company decides to divest and IPO a part of its business, it is important that the board always con­siders the option to either sell the business to the parent company’s shareholders by using purchasing rights allocated on a pro rata basis, or to distribute the shares as a special dividend. In this way, the shareholders can decide for themselves if they want to be owners of the divested business or not, and it also creates the possibility for the company to use the shareholder base to get a wide distribution of the shares, thereby ensuring liquidity in the divested business’s shares, reducing the cost of equity and making future fundraising much easier. Remember that the shareholder base also is a valuable asset in this sense.

Conclusion

By being proactive and implementing good corporate governance policies, the company will not only demonstrate to the market that it is a role model for other publicly listed companies, but also, and maybe more importantly, it will lower its cost of equity, cost of debt and perceived risk. A good starting point to build corporate governance according to Dunross is to review, implement and enforce the below standards, which all form an important part of our quick reference guide on how to establish good corporate governance and to create shareholder value:

The Dunross Guide to Good Corporate Governance & value creation

  • An open, informative and constructive dialogue with all shareholders
  • A well-defined dividend policy
  • A policy to cancel shares after buy-backs
  • Major transactions resolved by shareholders and not the board
  • Pre-emptive rights in share issues
  • Allow minority shareholders to nominate independent directors
  • Transparent and justifiable remuneration policies
  • Transparency on related party transactions; minority shareholders having decision power
  • Insider shareholding disclosures
  • Remain focused on the core business
  • Use existing shareholder base for disposals and spin-offs
  • You are always most welcome to use Dunross as a discussion partner on how to create shareholder value.

mainstream vs dunross

If enough people maintain an assertion for long enough, eventually it becomes the truth. But how good is it really to run in the same direction as everyone else?

 

When you go with the flow and invest in sectors and companies in which everyone else is investing, you normally invest at higher multiples. The higher valuation limits any increases and profits. If the mainstream opinion fails, the high valuation results in a large drop in value and a major loss.

One of our values is to think in contrarian views. We search for companies with great underlying values. The low valuation by the market limits the potential loss. If the company develops, the low valuation and the sudden insight by mainstream, releases major potential and profit. If we fail, our losses are hopefully less than the knowledge gained.

mainstream

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dunross

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Potential market value

Market value

Potential market value
Market value

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Shareholder value creation