The G of ESG: governance reimagined

As with any investment, your capital is at risk.

Imagine if the preferred definition of corporate governance was:

“The means by which shareholders secure a fair return on investment.”

Rather than the textbook:

“The set of rules, practices and processes used to direct and control an organisation.”

Now, consider what might happen if the financial world dropped global governance principles in favour of treating each company individually, reflecting the unique amalgam of industry, geography, culture, ownership structure and size of businesses around the world.

Suppose the investment industry prioritised governance choices and behaviours over narrow but easy-to-measure governance structures.

Or, if you prefer a concrete example: what if governance theorists celebrated, rather than criticised, Mark Zuckerberg’s super-voting rights at Meta? That they recognised his special class of shares has repeatedly empowered him to make longer-term, bolder bets than he would otherwise have done, from blocking a takeover of Facebook in its early days to, more recently, committing billions of dollars to developing state-of-the-art AI and virtual reality technologies.

Governance is a vital component of Baillie Gifford’s investment process. And it’s been integral to our approach to stock selection long before it was bundled with ‘environmental’ and ‘social’ to create ESG. But the way we think about corporate governance can be at odds with others. 

This paper explains how we integrate governance as an investment theme, focusing on fair consideration of unique and unconventional structures rather than an overly simplistic acceptance of a global standard.

While we can’t claim to have all the answers, we can encourage others to reimagine today’s excessively formulaic approach to governance. Together, we can improve ownership quality and outcomes for some of the world’s leading companies.

The origins of governance

Corporate governance worked its way onto the investment agenda following an unusual decade of company failures. First, Mirror Group and Polly Peck collapsed in the UK in the early 1990s. Then, Enron, WorldCom and Tyco failed in quick succession in the US. These implosions involved criminal behaviour among executives and weak board oversight. In response, the authorities determined that increased shareholder oversight of corporate boards and management was necessary.

However, the focus on avoiding failure can discourage ambition and opportunity. If misapplied, it can constrain or suppress company success. With hindsight, perhaps a better response to those rare early cases would have been clearer accountability and punishment of the guilty few rather than the blanket imposition of additional regulation on the well-managed and conscientiously governed many.

A notable aspect of the first wave of governance regulation was the remarkable speed by which jurisdictions worldwide implemented a common response. Adrian Cadbury, chair of the world-renowned chocolate maker Cadbury, prepared the first code of governance in the UK in 1992. By that decade’s end, nearly every OECD country had adopted such a code and enshrined it in national stock exchange listing standards. Almost irrespective of national legal frameworks or distinct corporate cultures, the UK’s principles formed the core pillars of every subsequent effort.

Another common feature of these global codes was the UK’s novel approach to regulation. All listed companies had to comply with its principles or explain why they did not. And so ‘comply or explain’ has become the (almost) universal approach to corporate governance regulation and monitoring. It remains the settled, chosen approach after more than 30 years and has been a resounding success.

Global governance principles

There are two key pillars to global corporate governance principles:

1. Board effectiveness
2. Shareholder protection

Typically, these are further subdivided into five broad themes:

• Board composition and director responsibilities
• Leadership and independence
• Executive remuneration
• Shareholder rights
• External audit

We fully subscribe to the key pillars and themes that set the framework for successful corporate governance. Our challenge, however, is the investment industry’s preference to look for easily measurable metrics to establish compliance. It has led to an overreliance on binary-outcome structures. For example:

• One share class with equal voting rights: good. Multiple share classes with differential voting rights: bad
• Separate chief executive and chair: good. Combined chief executive and chair: bad
• Majority independent board: good. Non-majority independent boards: bad

Baillie Gifford’s approach

We recognise that effective corporate governance is essential to underpin long-term company success. Without an effective governance framework securing a well-functioning board and equitable treatment of all shareholders, the long-term investment prospect is jeopardised. We want to invest in companies that can demonstrate a commitment to exemplary corporate governance standards and outcomes.

Our preferred approach is to look beyond the governance structure and instead focus our analysis on the outcomes delivered by our investee companies. For example, French family-controlled companies such as LVMH and Hermès International have chosen to have non-independent family representatives on their board of directors. This may be at odds with the global principle of maximum independence, but we consider the families’ day-to-day involvement a clear governance asset rather than a liability.

Similarly, Google’s parent Alphabet listed on the US Nasdaq exchange in 2004 with multiple share classes and differential voting rights. Governance principles flag this as a risk, yet Alphabet’s treatment of minority investors has been demonstrably excellent for 20-plus years, and the return to shareholders in all share classes has been outstanding.

Put simply, we favour a deep due diligence of governance behaviours rather than overly simplistic governance structures. The latter is certainly easier to measure, but there is no evidence that simple structures such as majority independent boards and single share class companies are more successful than their more unconventionally governed peers.

This is the central conundrum we grapple with when analysing companies. It requires a somewhat time-consuming analysis of each company from first principles. So we understand why the easy-to-scale and simple-to-measure application of global principles is our industry’s preferred approach to corporate governance analysis.

But it doesn’t work for Baillie Gifford. We start with the presumption that every company is unique and, consequently, its corporate governance framework won’t necessarily conform to a global standard.

Perhaps we are drawn to unconventionally governed companies because our investment success for our clients has often been driven by some of the world’s most unique and unconventional firms and the entrepreneurs running them.

But in our view, the key to active management isn’t to follow the crowd. Rather, it’s to form our own conclusions about a firm’s governance practices on an individual basis and with an emphasis on outcomes as part of our broader efforts to find and back exceptional companies for our clients.

Risk factors

The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in January 2025 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

Potential for profit and loss

All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. 

This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.

All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.

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