Christian Rasmussen, lead manager of our European small cap strategy at Danske Bank Asset Management, calls himself a quality-driven portfolio manager. He manages the strategy with his colleague Alexander Zola, and the quality parameters they look for are absolute by nature and not related to any benchmark.

“Focus is on identifying changing dynamics in a company, its business model or competitive landscape. Quality in terms of business model, management, market position, balance sheet and cash-flow dynamics is essential when selecting companies. We are benchmark agnostic as such, and risk to us is investing in a poor-quality company,” says Christian Rasmussen.

Earlier this year, the company proposed a compensation plan that we found excessive ... In meetings with the board, we stressed that we found the plan far too excessive.  Christian Rasmussen, lead manager of our European small cap strategy.

Lack of quality ESG data
Talking about quality, Christian Rasmussen points to the lack of quality ESG data as one of the challenges but also opportunities when investing in smaller European companies.

“An important aspect of the investment management process is to systematically compensate for the poor data coverage. Only around half of the companies in our investable universe report on material ESG data points, so we as an investment team more or less have to build the sustainability analysis from scratch. We perform analyses and engage with companies to get the ESG coverage we need for our assessments. Long-term relationships based on trust and open dialogue with each of the portfolio companies are thus of fundamental importance to the investment process."

Extra attention on governance-related aspects
Given the poor ESG data coverage of smaller European companies, the investment team regularly conduct their own qualitative materiality assessment that effectively serves as the ESG score for a company.

The team prefers companies that are founder-led or family-controlled, as there is a better alignment of long-term interests. However, a strong majority owner requires extra attention on governance-related aspects. For example, Christian Rasmussen emphasises the importance of understanding and mapping the second-level management team. This level constituting a solid structure in the company essentially makes it less vulnerable to, and protects it from, too much power being concentrated at the CEO/founder level.

Focus on salary levels
Starting last year, the investment team also seek to address selected Principal Adverse Impact indicators (PAIs) through bottom-up company analysis and active ownership activities. One of these indicators is CEO salary levels, which can become an issue if the governance structure of the company is sub-optimal.

Christian Rasmussen mentions a UK company in his portfolio as an example:

“Earlier this year, the company proposed a compensation plan that we found excessive. We could see no justification for a setup that would entail a significant bonus plan for the CEO and CFO of the company. In meetings with the board, we stressed that we found the plan far too excessive. While there were definitely interesting aspects to the plan, for example some of the payouts were linked to ESG performance, it lacked details on specific ESG metrics and/or targets, so it was difficult to evaluate whether the ESG metrics were ambitious enough."

“You really feel you make a difference"
A few weeks after the meeting, Christian Rasmussen and his team heard back from the chairman, who told them the company had amended the compensation plan. Apart from capping CEO and CFO rewards at lower levels, the response also included a clear intention to work further with the integration of ESG-based targets into future reward programmes.

“What was especially fulfilling in this process was not only the actual outcome, which was fully in-line with our suggestions and as such a great example of us influencing smaller companies directly, it was also the response we got whereby the chairman explicitly thanked us for our valuable input, acknowledging the role it had played in the company’s decision. This is the kind of feedback where you really feel you make a difference on behalf of our investors and their money, which we manage every day to generate attractive returns and at the same time influence our investee companies,” says Christian Rasmussen.

This publication has been prepared as marketing communication and does not constitute investment advice. Note that historical return and forecasts on future developments are not a reliable indicator of future return, which may be negative. Always consult with professional advisors on legal, tax, financial and other matters that may be relevant to assessing the suitability and appropriateness of an investment.