ESG in action

U.S.

Equities

Key Points

Voted against a shareholder proposal brought to AutoZone that we believed would hinder its ability to work on its sustainability goals.

Conducted calls with industry analysts and subject experts to better understand the digital content landscape and potential risks to Meta (Facebook) and Alphabet (Google).

Engaged with Dollar Tree’s management team and the independent committee regarding its pace of change and changes to the board.

Environmental

In 2022, we made the decision to vote “against” a shareholder proposal brought to AutoZone, a retailer of aftermarket automotive parts and accessories. The proposal requested that, within one year, AutoZone generate a report covering specific greenhouse gas (GHG) emission targets over the short, medium, and long term as well as operational and product-related emissions. It is worth noting that the specific requirements of any proxy proposal are evaluated and given due consideration.

Prior to voting, we spoke with the company’s Chief Executive Officer (CEO) regarding AutoZone’s ESG strategy and its ongoing work with a global energy management and ESG specialist. Over the past couple of years, we have seen AutoZone significantly enhance its disclosures and board oversight around its ESG efforts.

The company has also played a significant role in the disposal of used oil, automotive batteries, and other chemical products. In our discussion, the CEO explained the current process of developing short, medium, and long-term sustainability goals to us, which was initiated prior to the submission of the proxy proposal and included reducing GHG emissions and conducting an ESG materiality assessment to develop a multi-year roadmap.

Over the past couple of years, we have seen AutoZone significantly enhance its disclosures and board oversight around its ESG efforts."

Our conversation gave us a clearer understanding of the company’s position. In order for AutoZone to make more informed decisions on allocating its resources and determining its priorities, the company wanted to finish its current process. By voting against this proxy proposal, we supported the company’s position. We felt it was better for all stakeholders if the company finished its current work on its sustainability goals, understanding that we could revisit the matter in the following year.

Social

Digital content consumption has created powerful business models, but it has also fueled discourse around its deleterious effects on society, including implications related to privacy, mental health, and user safety. Given our exposure to companies such as Meta Platforms (formerly Facebook) and Alphabet (Google), we are actively monitoring the situation.

As various stakeholders navigate this complicated and evolving topic, they are still in the early days of figuring out how to capture the positives of social media while reducing potential negative effects. Changes in the communication medium often create disruption, but the magnitude of this shift requires different solutions than in the past. So far, governments have struggled with this challenge. Of note, Facebook has requested additional regulation to provide more rules of the road.

Despite all the negative press, we think social media can provide several positives to society, including giving a voice to marginalized groups and improving responses to natural disasters. These outlets also allow small businesses to connect more efficiently with their targeted customer base.

To help promote greater accountability, we have voted on proxies in favour of more disclosures and enhanced oversight/risk controls."

We have had calls with industry analysts and subject experts to better understand the landscape and potential risks. To help promote greater accountability, we have voted on proxies in favour of more disclosures and enhanced oversight/risk controls. We do not expect the debate to subside soon, and we will continue to analyze information holistically. While we believe that the companies continue to make improvements, there is more to be done, and we expect our holdings to show leadership in the process.

Governance

While the discount variety store Dollar Tree has a long history of providing value for consumers, the company has experienced a few bumps in the road in recent years.

Dollar Tree struggled with its acquisition of the Family Dollar banner and, more recently, was negatively affected by cost headwinds. We worried about the pace of change and evolution of the model, and we spoke with company management to share our thoughts on the opportunities for the business as well as areas requiring attention.

In December 2021, the investment firm Mantle Ridge proposed a new slate of board members for Dollar Tree, including Rich Dreiling, a distinguished retail executive who was previously CEO of one of Dollar Tree’s competitors, Dollar General. Following this news, we wrote a letter to the board, believing that the Board was not adequately reviewing any proposals for change.

In an effort to share our views and better understand everyone’s position, we also subsequently engaged with the independent board committee and with Mantle Ridge. In March 2022, Dollar Tree reached a settlement with the investment firm, adding seven new directors, including Rich Dreiling as Executive Chairman. This was a change we fully supported.

Sources: Company filings, Burgundy research

About the Author

Doug Winslow, CFA

Vice President,

Portfolio Manager

Doug stumbled upon value investing during the late 1990s tech boom. Benjamin Graham’s investment classics – Security Analysis and The Intelligent Investor – opened his eyes to a rational approach to investing and made an indelible impression on his views of the financial markets. Doug is currently responsible for Burgundy’s investments in U.S. large-cap equities. While the value philosophy is the foundation of his approach, he actively studies disruptive business theory to help understand the dynamic business environment in the U.S.