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. We focus on finding the best countries to invest in, where we pick companies with a strong franchise, market-leading positions and strong growth prospects. Given that our holdings are leaders in their respective industry, we of course also want them to excel when it comes to shareholder value creation and corporate gover­nance. And this is where this brochure comes in.

Many ways to unlock shareholder value of a company

There are many ways to unlock the true value of a company, and one factor often overlooked is good corporate governance. By applying some very simple measures it is possible to significantly improve the market’s confidence in the company, reduce perceived risks and make the company best in class. In turn, this will lower the company’s cost of equity and debt, and thereby increase its value.

This is our guide to Corporate Governance and Shareholder Value Creation – the Dunross way.

Guiding principles

For us it is extremely important that the companies we invest in are committed to proper information disclosures, that we get reasonable access to the company’s management, and that the company treats all shareholders equally. The above is especially important to bear in mind for companies where the controlling shareholder holds 50, 60 or even 70% of the shares. Minority shareholders should be regarded as an important and valuable long-term asset and not as a nuisance.

Transparency

Misunderstandings are the cause of many troubles, and to avoid these, we encourage companies to be transparent about everything that can be of interest to investors. Even if something is completely clear to the company internally, it might not be so for investors, so we advocate that companies always explain the background and rationale behind all decisions and suggestions to investors beforehand. This is especially important regarding significant changes such as a property acquisition, nomination of new directors, or a proposed mandate to issue new shares. A transparent company will command a lower risk premium and thus have a lower cost of equity and debt, creating a competitive advantage in the long-term. There are many ways to accomplish and communicate a company’s strategy and goals, for example through quarterly reports, annual reports, press releases, the website etc., but one very effective way from our experience, is to arrange regular capital markets days, inviting among others all substantial and interested shareholders, institutions, brokerage firms and banks.

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 to 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”.

Avoid becoming a value trap

No company ever sets out to become a value trap, i.e. one which over time requires more capital from shareholders than the combination of the capital generated internally and what is distributed as dividends and buybacks. But some companies do end up as value traps anyway. Why? We believe this has to do with misaligned targets and incentives. For example, if the company has aggressive growth ambitions and management is incentivized based on growth, revenue and assets will increase but shareholder returns will suffer.

In order to avoid becoming a value trap, a company should have a strict adherence to profitable growth, because ”growth for growth’s sake is the ideology of the cancer cell”. As such, we discourage all growth targets and endeavours to increase market share etc. if it’s not combined with sustained or increased profitability. Exactly how a company balances growth vs. profitability also becomes a valuable tool in discerning whether the company is actually run with the sole intention of creating value for all shareholders, or for some other conflicting interests, e.g. as a power base for management, ”ego-enhancer” or as an extension of the government.

Growth that in the short run only creates a need for new equity must convincingly be demonstrated as a more profitable strategy in the long-run than otherwise, or else it will be regarded by the market as a value trap, resul­ting in a higher cost of equity and debt.

Capital structure

One of the most fundamental corporate governance measures a company should implement is to decide on an appropriate capital structure to set the framework for the company’s total cost of capital, and seek to minimize both cost of equity and cost of debt.

We don’t encourage companies to over-leverage, but rather to take on an optimal amount of debt depending on the business, thereby optimizing the cost of capital. For example, capital-intensive businesses with high earnings’ visibility such as infrastructure or real estate generating recurring income, should have a higher amount of debt, whereas highly cyclical companies or those with very lumpy revenue streams should carry less debt. Examples of other factors that affect the suitable debt level are the interest rate level, the quality of the company’s franchise, potentially hidden or overstated values in the balance sheet, as well as political and regulatory risks. The figure below visualizes how a company can minimize the cost of capital (WACC – Weighted average cost of capital) by optimizing leverage. Note also the acceleration effect of the cost of capital at gearing levels higher than the optimum:

From experience, we also know that it’s very important that companies set well-founded and sound targets for their capital structure (e.g. debt to equity, net debt to EBITDA, and/ or interest coverage ratio) because this framework will affect all the decisions by the company and in the end how the shareholders’ invested capital is allocated, for example either retaining capital or distributing it through dividends and share buy-backs (with necessary cancellation). Naturally, these targets also need to be communicated clearly to the market so everyone knows what to expect from the company.

Dividend and share buyback policy

A well-defined policy of returning capital to shareholders is one of the most important ways in which a company can communicate financial strength and its commitment to shareholder value creation.

The shareholder remuneration policy is an important communication tool for the company, and should first of all state that all shareholders should be treated equal to the main share­holder. Second, annual dividends should ideally be based on a percentage range of earnings per share rather than a fixed amount, making shareholders feel that they are part of the company’s successes or failures and not like a bond holder, with a fixed coupon.

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

Share buy-backs should be part of the dividend policy and are normally a more cost-effective way to return capital to shareholders compared to cash dividends, since dividend payments almost always are subject to taxes for shareholders, especially for international investors. Share buy-backs are of course an extra suitable and profitable alternative to dividends if the company’s share price is undervalued by the market. In order to increase visibility even further in this regard, the company could for example have a policy saying that should its’ shares trade below a certain discount to its ”intrinsic” value (defined in a transparent and credible way), then capital will be returned to shareholders through buybacks rather than dividends.

Cancellation of treasury shares ­necessary and extremely important

If and when a company decides to buy back shares it is of utmost importance that the acquired shares are cancelled. If the company chooses to keep the shares as treasury shares, investors will not subtract these treasury shares in the denominator when calculating earnings per share (EPS), resulting in an unchanged EPS and no increase in value. Furthermore, a buy-back program without cancellation of treasury shares will be interpreted as if the company will sell the treasury shares back into the market eventually, thereby creating an overhang that will negatively impact the cost of equity. Or even worse, the treasury shares could be interpreted as a power tool by the management or the controlling shareholder, creating mistrust between the stock market and management/main owner. Should local regulations for some reason not allow cancellation of treasury shares, the company should be very transparent about how and when it will resell the shares into the market.

Major transactions

It is paramount that all major transactions by the company – be it asset disposals, share issues, acquisitions etc. – 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, such as the right to issue shares or options or to conduct major transactions, because this can create a feeling of mistrust from investors.

Pre-emptive rights

When conducting 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 to other parties.

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 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 wider distribution of the shares, thereby ensuring liquidity in the divested business’s shares. Remember that the shareholder base is a valuable asset.

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 must be a transparent framework which clearly states the process and terms of such transactions. Also, of great importance is that the connected shareholder should be restricted to vote on related party transactions, so that the decision on the transaction rests with the minority shareholders, and that there is an independent valuation of the transaction.

Independent directors

When nominating independent directors, we urge companies to think long and hard about which candidates to propose, because they will be the voice of the minority shareholders on the board. As such, it is not enough for candidates to be classified as independent on paper. For this reason, the board should consider whether they can be viewed as credible and truly independent, because in our view a de facto independent board member will bring more value to the board’s work than someone who might fit the bill but in the end just thinks and votes like all the other board members. Nomination of independent directors of the company should ideally 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 should be satisfactorily rewarded if they do a good job, but not if they don’t deliver. To understand what is expected of management, their pay should be tied to the company’s financial targets (which of course also need to be clearly communicated), and 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. It is also very important that the goals set must be relatively bold and aggressive, making it clear that bonus should only be paid out if these goals are reached, thereby securing above par per­for­mance. By being transparent on pay and setting remunera­tion – whether being cash, options or shares – at a long-term performance-based and morally justi­fiable level, in­vestors will feel in­creased confidence in the management and the company. Management and directors should also be encouraged to acquire shares of the company at market price, making their long-term interests more aligned with that of shareholders.

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 major shareholders and members of the board and management. Exactly how this should be done is up to the company (if not regulated) but the important thing is that investors receive transparent and frequent updates on how insiders act.

The Dunross Guide to shareholder value creation and Corporate Governance

  • Open, informative and constructive dialogue with all shareholders.
  • Focus on the core business.
  • Avoid becoming a value trap by focusing on profitability over growth.
  • Set appropriate targets for the capital structure.
  • Design a well-defined dividend policy and within that, introduce a policy for buy-backs with cancellation of treasury shares.
  • Ensure that major transactions are resolved by shareholders and not by the board.
  • Safeguard pre-emptive rights in share issues.
  • Use existing shareholder base for disposals and spin-offs.
  • Minority shareholders should have deciding power on related party transactions.
  • Allow minority shareholders to nominate independent directors.
  • Introduce transparent and justifiable remuneration policies.
  • Disclose all insider shareholdings and transactions.

…and last but not least, you’re always most welcome to use Dunross as a discussion partner on how to create shareholder value.

stewardship policy

Introduction

The Dunross & Co Group (“Dunross” or “the Group”) is a long-term value investor in the global equity markets. This document is intended to provide guidance on our position on corporate governance and shareholder matters, and should be read in conjunction with our brochure “Our thoughts on Shareholder Value Creation and Corporate Governance – The Dunross way”. Said brochure provides fundamental principles and overall guidelines while this policy further specifies how we are likely to act in a number of given situations. The policy is only applicable to listed holdings.
We are active in numerous countries around the world, and although the intention is for this policy to be applicable everywhere, we know that it’s impossible to find a “one size fits all” solution for each possible scenario in every single market. Therefore, we might deviate from this policy from time to time.

Framework

Dunross expects the companies we invest in to follow applicable laws and regulations. National corporate governance codes also serve as useful guidelines, and should generally be encouraged to comply with. We also expect our portfolio companies to seek guidance in our Shareholder Value Creation brochure on how to approach corporate governance matters in order to lower the cost of capital, and thereby enhance their competitive advantage. In return, companies can expect a trusting, listening and constructive partner for the long term.
The Group approaches stewardship in three ways:

  • Proactive
  • Reactive
  • Ad hoc

Proactive stewardship comprises the continuous dialogue we have with our portfolio companies in person or by other means of communication. To better shape company’s expectations, clarify our views on specific governance matters and how we are likely to vote on these, while also displaying how the company compares to others, we have developed the Dunross Annual Letter. The letter is based on a yearly internal corporate governance ranking of our portfolio companies and will be sent to all of the Group’s significant holdings in due course before the annual general meeting, to allow for companies to provide feedback and potentially adjust in time for the meeting. We also encourage proactivity from companies, especially when it comes to major proposals being contemplated by the company at an upcoming general meeting, such as changes to the articles of association, share capital increases, share issue mandates or new remuneration policies. If companies reach out early to the major shareholders and discuss proposals with them, transparency will increase and there will be fewer surprises at general meetings.

Reactive stewardship refers to voting on general meetings or engagements initiated by Dunross in response to new events. It is our goal to minimize the amount of purely reactive stewardship to provide for a transparent relationship between the Group and the portfolio companies.

Ad hoc stewardship can involve collaborative efforts with fellow shareholders, if we believe this to be a better way to gain influence compared to acting alone. Dunross does not view ourselves as an activist investor, but we intend to keep a close and constructive dialogue with all our portfolio companies, and will put forward proposals to the general assembly if we believe them to be in the interest of all shareholders. We generally don’t seek board representation, but we are open to be represented on the nomination committee in companies where this is made up of the largest shareholders.

Voting at general meetings

It is our ambition to vote at every general meeting held by all our portfolio companies. However, in order to utilize our resources in the most efficient way, we might refrain from voting in companies where our holdings represent an insignificant part of Group assets. Voting can be conducted either by Dunross representatives present at the general meeting, or by proxy, but since we want to build long-lasting relationships with our portfolio companies, the ambition is to be present physically.

Outlined below are our guidelines for voting on the most common general meeting matters.

Meeting notices and information

In order for international shareholders to be able to prepare voting instructions before general meetings, we encourage companies to issue notice of meetings no later than four weeks before the meeting. Such notice should be made by way of press release distributed via e-mail to ensure that all investors receive the information. And in order for shareholders to make an informed decision on how to vote, supporting information and related explanations about the agenda items should be made available in English on the company’s website at the same time that the meeting notice is issued.

Auditors

We generally support the company’s proposal of auditor, unless there is any indication of compromised independence, malpractice or other serious issues. We monitor the audit fees paid by all our portfolio companies, and encourage companies to regularly review their audit firms in terms of pricing and quality. To the largest extent possibly, we urge companies to use the same audit firm for the parent company as well as for all significant subsidiaries. In situations where the audit firm consistently earns significant revenue from non-audit services aside from the audit fee, we will consider voting against the auditors, since such circumstances risk jeopardizing the auditor’s independence and judgment.

Board members

In our view, board members should be nominated by a committee comprised of the largest shareholders as well as a representative for minority shareholders, and not by a committee made up of board members. Having shareholders suggest board members for approval at the general meeting creates a direct link between ownership and stewardship, which risks getting lost if a board gets to choose among themselves whom to include or not. Regarding board composition, we encourage companies to create a good mix of skills and age. We generally support company proposals regarding board nominations, but would consider voting against board members who display any of the following characteristics:

  • If the board member has attended less than 75% of meetings in the previous year
  • If the board members is considered independent on paper but where circumstances point to the opposite
  • If the board member has a significant number of other similar board positions. What exactly can be considered “significant” must be viewed in context of the company in question, but in order to put in the time necessary for meaningful board contribution, having more than eight board positions should be avoided
  • If the board member is employed by the company in a managerial position (with the exception of the chief executive officer)

The above should be interpreted in context of the whole board, meaning that if only one person displays any or more of the above characteristics, we are less likely to vote against this one person than if more than one board member displays many of the characteristics. We would also like to point out that many years of service on the board is not a disqualification in itself, but could rather be seen as a merit. In our view, many corporate governance codes – although well-intended – risk creating a short-term mindset when specifying term limits for independent directors that don’t extend beyond the peaks and troughs of a normal business cycle.

In order to keep the board efficient, we advocate that companies limit the board size to no more than eight members. For companies whose board exceeds this number, we could be inclined to vote against the whole board.
We encourage companies to conduct an annual assessment of the board’s composition and effectiveness – especially in relation to the factors mentioned above – and to publicly disclose the findings.

If CEO = Chairman

In situations where the chief executive officer (or similar) is also the chairman of the board, we would be inclined to vote against this person unless there are other safeguards in place to protect minority shareholders from the concentration of power that such a setup creates.

Management and board remuneration

We would generally vote against all management remuneration proposals that don’t have a clear link to company performance and to a reasonable extent can be verified using publicly available information. The same applies for proposals that we consider unsound in any way.

Remuneration to board members should be a fixed annual fee and not be based on the number of board meetings conducted. For companies who do not apply a fixed fee system, we could be inclined to vote against the whole board.

Dividends

We generally support dividend proposals that fall within the limits of the company’s dividend policy, unless such dividend would jeopardize the financial health of the company.

Share buybacks

We generally support buyback proposals, provided that the scope is reasonable and there is a stated intention to subsequently cancel the shares unless they are to be used for share based remuneration. We would be inclined to vote against a buyback proposal if the company at the time of the proposal has outstanding treasury shares and there is no stated intent to cancel these or use them for share based remuneration.

Share capital changes

We will vote against increases in the authorized share capital unless the proposal increase is explicitly tied to either a defined share issue or a defined share issue mandate. Regarding decreases in the authorized share capital, we generally support such proposals if they are intended to facilitate share cancellations due to buybacks.

Share issue mandates

We will vote against share issue mandate proposals unless there is a stated purpose for the mandate. This applies to mandates regarding pre-emptive rights issue as well as directed share issues. The purpose must not be “general corporate purposes” or likewise, but should be more specific and adhere to the company’s strategy, capital structure policy and other related frameworks.

Related party transactions

If sufficient information on proposed related party transactions have not been issued in accordance with what is outlined under “Meeting notices and information” above, we will vote against all such proposals.

Other transactions and corporate changes

If sufficient information on proposed other transactions or corporate changes – such as amendments to the articles of association – have not been issued in accordance with what is outlined under “Meeting notices and information” above, we will vote against all such proposals.

Other matters

We will generally vote against agenda items labelled “Other matters” or similar, if it has not been specified in the meeting notice what exactly will be discussed and resolved under said item.

Approved by the board of directors of Dunross & Co Holding Ltd on 2019-03-19

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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This is Dunross

Shareholder value creation