Governance

As with any investment, your capital is at risk.

Good corporate governance is a foundational condition for achieving long-term value creation and positive impact. It is important for every company, but we believe particularly for those that make it their business to address large environmental and social challenges. For these companies, governance structures which allow a company to invest in longer term ambitions and to appropriately balance profit and purpose, at the right time, are vital.

But good governance does not look the same for every company. There are common features that we value and seek to encourage, such as a board that brings relevant skills together and is able to support and challenge a management team. Executive remuneration incentives that align with our clients’ experience are also important to us, as is the culture among a company’s leadership. However, we also see the benefits of unique governance practices, particularly for earlier stage companies that need to be agile, and those who may benefit from being insulated from competing shareholder demands.

Our engagements concerning company governance reflect this view and often seek to understand why a company believes a certain governance practice is appropriate. As you will see in this report, we often discuss governance matters with non-executive directors. As well as helping us gain important strategic insights into a business, this also allows us the best opportunity to influence a company’s governance where we believe that will lead to better financial outcomes and sustainability impact.

Conversations in 2024

Engagement case studies

Tesla

Board independence

© Tesla

Tesla designs, manufactures and sells electric vehicles, energy storage systems and solar panels, and is investing in autonomous driving and robotics.

Objective: To encourage board refreshment and enhancement of governance independence and processes. We have long been aware of the risks posed by Tesla’s unique governance circumstances, and the influence of its CEO and founder, Elon Musk. We feel the company will need a greater level of independence among the board and robust governance processes for its next phase of growth.

Engagement: We engaged on various governance topics since we took a holding in Tesla in 2017. Topics covered included key-man risk, concentration of power and lack of board independence. In 2024, we twice met with Tesla’s chair, Robyn Denholm. 

In our first meeting, we discussed the AGM agenda, which included complex and contentious management and shareholder proposals, requiring extensive analysis and discussion with the company and external experts. Specifically, we discussed the process culminating in the board putting forward reincorporation and ratification proposals and why the board considered their proposals necessary for Tesla’s long-term strategy. We also queried the independence of the process and how the board thinks about the infancy of Texas corporate law relative to Delaware, over which we had reservations and ultimately opposed at the AGM.

Following our discussions, we voted to support shareholder proposals calling for a reduction in director terms and removing supermajority provisions, as we believed these measures would help support robust governance at the firm. We also voted against Tesla’s reincorporation in Texas, given the infancy of the Texas business courts and concerns over the fiduciary duties of controlling shareholders to other stockholders.

We spoke again with the chair in late 2024 to understand how the reincorporation – having been passed at the AGM – was progressing and how corporate law was developing in Texas. We took this opportunity to understand better what role Tesla’s CEO plays in the company – which mainly involves new areas of development and engineering. We advocated for greater independence on the board and discussed Tesla’s efforts to do this. We also explored the quality of the senior management involved in the day-to-day running of Tesla’s businesses.

Outcome: Our discussions with Tesla’s chair, which we have had at least annually since she was appointed in 2018, are critical for us to make informed voting and investment decisions that are in the company’s and our clients’ best long-term interests. Ultimately, we believe the long-term success of Tesla’s existing businesses will lead to substantial positive environmental benefits. With that in mind, we are encouraged by her commitment to refreshing the board and increasing independence, and we hope to see new members appointed shortly. We were, however, disappointed that a supermajority of shareholders passed the proposal to incorporate Tesla in Texas. We will follow developments there very closely.

Moderna

Board enhancements

© DIEGO AZUBEL/EPA-EFE/Shutterstock

Moderna is a biotechnology company that focuses on developing messenger RNA (mRNA) therapeutics and vaccines that can then be used to prevent, treat and cure diseases.

Objective: To encourage board refreshment. We believe Moderna to be a well-governed company, but we think that, at this stage of its growth, the board would benefit from adding directors with new skills and relevant experience to support its financial and impact objectives.

Engagement: We had previously engaged with Moderna’s chair, Noubar Afeyan, and CEO, Stéphane Bancel, on this matter in 2023. We expressed the view that board enhancements were needed, due to the company’s increasing maturity. Moderna experienced a dramatic rise in its fortunes throughout the Covid-19 pandemic, but as it enters a more usual regulatory and customer environment, it needs experienced directors who can provide the necessary strategic guidance and oversight.

This year, we held two calls with the company’s chief legal officer and her team to learn about the progress that the board is making on adding new independent directors. These discussions revealed that the board has been thinking internally about refreshment, focusing on acquiring pharmaceutical expertise and experience in responsible AI and government affairs. This aligns well with Baillie Gifford’s perspective on the essential skills needed for Moderna’s future ambitions and our previous discussions with the company on this topic. In addition to searching for directors with specific expertise, Moderna is placing an emphasis on cultural alignment as a key criteria.

Outcome: Moderna appointed two new board members in 2024. Both new directors bring extensive and relevant experience, and we believe that their appointment will support Moderna’s strategy to launch 10 new vaccines/treatments by 2028. One of the new directors, David Rubenstein, brings insights on policy and governmental affairs. The other, Abbas Husain, has been a leader in the pharmaceutical industry for over 35 years. We expect additional governance changes in the coming years and will continue to engage with Moderna’s leadership on this.

Illumina

New management

© Anthony Kwan/Bloomberg/Getty Images

Illumina is a global leader in gene sequencing. It is at the centre of the global genomics revolution and its products are used by researchers and clinicians worldwide to study human health and diseases in order to develop new treatments and improve healthcare.

Objective: Since Positive Change invested in Illumina in 2017, its impact has been far-reaching, with over 25,000 gene sequencing machines delivered to customers. It has supported progress which has reduced the cost of sequencing per genome from $1,000 to
$200, enabling innovation across a number of fields and opening up the possibility for its gene sequencing machines to be used beyond research labs, and into applied and clinical settings.

Following its decision in 2020 to re-acquire liquid biopsy company Grail, Illumina has experienced a tumultuous few years, marked by regulatory disputes and a proxy battle. This has taken place amid a backdrop of increasing competition in the gene sequencing space as new entrants vie for a share of a market that Illumina has dominated. Our engagements in 2023 and 2024 focused on furthering our understanding of actions taken related to the acquisition, on urging the board and management team to prioritise its core business opportunities, and to establish relationships with the incoming management team and new board members.

Engagement: In 2023 we set out to engage with Illumina’s management team and board to further understand Illumina’s rationale for acquiring Grail and to express our concern that it proceeded with the acquisition without regulatory approval. Illumina’s decision to
acquire Grail in 2020, a liquid biopsy company that it spun out in 2015, proved costly and disruptive. Illumina offered to acquire Grail at a valuation of $8bn, despite opposition from regulators in the US and EU. The result was a record €400m fine from the EU Commission (which was subsequently dropped), and an order from the US Federal Trade
Commission to divest. A legal battle and proxy fight followed with an activist investor criticising Illumina for proceeding with the Grail acquisition and calling for management changes. By June 2023, Illumina’s CEO resigned and its chair was ousted.

We met with the new CEO, Jason Thaysen in December 2023, shortly after his appointment, to hear about his plans for Illumina and to share our views. We continued to emphasise the importance of a long-term approach and a renewed focus on the core business. Hearing about his aims to bring clarity to the Grail situation and to take steps to
capitalise on the core gene sequencing business was encouraging.

In 2024, we continued our efforts to build relationships with the new leadership team and to assess progress. We twice met with Illumina’s new CFO Ankur Dhingra, whose knowledge of the business and ability to speak in depth about his priorities were impressive. We expressed our support  for his focus on growing demand for Illumina’s machines, bringing the cost of sequencing down further to unlock that demand and re-establishing close working relationships with customers.

Outcome: Management changes have brought an end to the Grail acquisition saga (it was spun-off in June 2024) and seem to have re-energised the company in its focus on addressing the needs of its customers and capitalising on its emerging opportunities in clinical and applied genomic sequencing applications.

Our long-term approach to investing means that it is crucial that we have a good understanding of the priorities of the businesses in our portfolio as well as good working relationships with management teams. Our long track record of engagement with Illumina
provides an effective platform for understanding and questioning decisions and advocating for strategic focus on long-term growth and impact.

We believe the new management team’s passion for Illumina’s core business and customer-centric approach should help revive growth and ensure that the company continues to positively impact the healthcare sector.

Portfolio considerations

Governance practices should be appropriate for a company’s business and phase of growth. For this reason, we do not set much store by aggregate portfolio metrics, believing that different companies will have different structures that work for them. For example, 46 per cent of portfolio companies are founder-led – and we would expect these companies to have very different structures from the 21 per cent of our companies that are widely held in the market, the 23 per cent with a principal shareholder or the 9 per cent that are considered to be controlled. We expect companies in the Positive Change portfolio to have very different characteristics – and what is essential is that we are engaged owners. Two important areas on which we engage frequently include executive remuneration and board composition.

Remuneration

In 2024, we spent significant time considering executive remuneration, a core component of corporate governance. Effective remuneration plans are crucial for attracting, retaining, and incentivising key management personnel. We believe a thoughtful, well-structured remuneration policy focuses executives on long-term value creation and aligns their interests with shareholders.

Following extensive internal research, and in consultation with governance expert Tom Gosling, and we updated our firm-wide Executive Remuneration Principles in 2024. These Principles aim to support an evidence-based approach to executive remuneration and outline a clear preference for simple incentive structures prioritising equity ownership and longer pay duration. We do not advocate for a one-size-fits-all approach but use the principles to guide our engagement and proxy voting regarding executive remuneration.

These new Principles have already influenced how we engage with companies regarding remuneration. For example, we spoke to the remuneration committee chair at Soitec. During this conversation, we outlined our reservations over the complexity of its executive pay plans. We encouraged the company to simplify its plan and implement mechanisms that promote more significant levels of equity ownership for executives. Soitec was receptive to the feedback. We have also discussed these principles when advocating for improved incentivisation plans at Autodesk, ASML and Moderna.

Board composition

While market attention is often on management teams, we believe in the fundamental importance of an effective board for companies to be financially successful and to meet their impact objectives. We often focus our board engagement on the chair. Doing so provides us with differentiated insight into management and how the board composition is optimised for the business’s long-term strategy. Boards require different skill sets for governance to be constructive and productive at different times. 

Where we identify gaps in expertise or experience on the board, we will first try to understand the company’s thinking on this area, and often will then encourage board refreshment or appropriate succession planning. This year, several portfolio companies added valuable new skills to their boards. Shopify, for example, added directors with leading communications and financial expertise. We also engaged with companies where we felt we needed to understand more about board dynamics, such as Ecolab and Coursera, but also those where we wanted to encourage action, such as Tesla and Moderna.

Proxy voting

Proxy voting is one of the tools at our disposal to influence a company’s governance. It can be a powerful method to influence strategy but also an opportunity to express a specific view which we believe is in the company’s and society’s best interests. Discussions with management teams and boards often accompany proxy voting. In 2024, we voted at 32 AGMs and have had 41 meetings covering a range of governance topics.

We vote at every AGM and do not outsource voting analysis or recommendations. Instead, we have a dedicated in-house voting team that works with our investment managers and impact analysts. This means that our voting and investment processes are fully integrated, ensuring that voting decisions focus on factors that are material to the company’s long-term success and its environmental and social impact. There is no top-down house view imposed on us at Baillie Gifford, and investment teams can choose how to vote.

Generally, the companies in the Positive Change portfolio have been selected for investment because they are well-run. As such, we generally vote in favour of management proposals, but when we choose to oppose them, we always communicate our rationale to the company. One example was at Xylem’s 2024 AGM, where we opposed Xylem’s executive remuneration plan. We have been engaging with Xylem on this topic for several years and although performance metrics have improved, we still believe its vesting horizons are too short to incentivise long-term value creation. In addition to opposing the proposal, we communicated the reasons to Xylem and hope to see future improvements.

Tom Gosling Tom Gosling is an executive fellow at London Business School and the European Corporate Governance Institute, and he sits on the ESG Advisory Committee at the UK’s Financial Conduct Authority.

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