Matt Picone

Investors should pay closer attention to management quality and corporate governance in 2025 to ensure they are not caught off guard by the misbehavior of CEOs and senior executives, which have the potential to curb investment returns, according to research by global systematic investment manager, Acadian Asset Management.

Secret affairs, sexual harassment and systemic abuses of power were some of the scandals that engulfed Australian companies in 2024.

Events like these may impact company valuations, demonstrating the importance of having the right checks and balances in place to ensure that management behave in a way that is aligned to shareholders’ interests, said Matt Picone, Portfolio Manager at Acadian Australia.

“When making investment decisions, it’s important to consider corporate behaviour and culture. These measures go deeper than the glossy statements and usual governance metrics quoted in annual reports,” he said.

Based on research by Acadian, companies with poorer corporate behaviour and culture have consistently under-performed their peers both in Australia and globally.

Acadian observed this trend in the group’s management behaviour factor signals in 2024.

“This underperformance wasn’t necessarily because of public scandals, and it is difficult to predict such events, however, there can be red flags that may point to corporate executives not acting in shareholders’ interests and this may lead to negative behaviour,” Picone said.

“Not only did companies that scored poorly at the start of the year become more involved in negative events that played out in the media, but they also significantly under-performed from a share price perspective.”

In the past year, an array of management indiscretions impacted Australian listed companies including misuse of company resources for personal interest, bullying and harassment, failed whistleblowing procedures, undisclosed investments, and systemic breaches of professional conduct.

Regardless of the truth behind incidents, Picone noted that such events and speculation had potential financial consequences including loss of momentum, project delays, earnings and revenue downgrades, share price volatility, and weak investor sentiment. LEVEL 9, SUITE 3, 20 MARTIN PLACE, SYDNEY NSW 2000 //// ACADIAN-ASSET.COM Acadian Asset Management (Australia) Limited – ABN 41 114 200 127 – AFSL No. 291872

In many cases, they attracted regulatory attention and director resignations.

While corporate Australia exhibited strong governance practices, with the average governance rating of Australian companies currently higher than the company average in other major regional and global market indexes, based on MSCI Governance Pillar Scores, Picone said investors should not be lulled into a false sense of security.

“Australian investors could be forgiven for thinking that they don’t need to worry too much about the quality of management, however, the behaviour of CEOs and senior executives both in the office and outside, although more challenging to observe, is a critical component in measuring a company’s overall management quality,” he said.

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The Australian market has roughly a 20% probability of achieving a net zero target by 2050. This is based on Acadian’s systematic analysis of the ASX 300, which leveraged technology including Artificial Intelligence and Large Language Models (LLMs) to gather and interrogate volumes of company data and information at speed.

The group’s research has implications for sustainable investors and the financial advisers, superannuation funds and asset owners charged with constructing and managing climate-aware portfolios on behalf of members and clients, said Matt Picone, Senior Vice President and Portfolio Management, Acadian Asset Management Australia.

“Many companies are heading into difficult territory because they have tackled the low-hanging fruit, such driving operational efficiencies, using existing renewable energy sources and adopting EV fleet solutions, to get them to a certain point and now they need to work much harder to get the rest of the way,” he said.

“This will require investing in technology and exploring more theoretical options to develop their decarbonisation strategies. With so much uncertainty, we can’t say for sure a company will or won’t hit their targets but our model examines corporate communications and information, including historical data, track record of strategy execution and forward-looking statements, to produce a range of likely outcomes for each company and then aggregates that for a market view.”

“The probability of the Australian market achieving its targets is worryingly low.”

Mr Picone said changing investor expectations and growing demand for sustainable investments made it critical that portfolios were accurately positioned to meet any climate-related objectives.

Acadian’s analysis follows the recent launch of the group’s Net Zero Credibility Assessment model, which is available for use by its institutional investors to help assess the likelihood of companies and markets achieving their sustainability targets. It is the first of its kind to integrate Large Language Models, the same technology that underpins ChatGPT.

According to Gillian Savage, Chief Executive Officer, Acadian Asset Management Australia, the group’s processes, systems and technology positioned it strongly to build and manage sustainable portfolios and generate alpha for its wholesale and institutional clients.

“We’re able to gather, monitor and digest company information, including annual reports, investor presentations and analyst research reports in a fraction of the time it takes traditional fundamental managers,” she said.

“Companies in the MSCI World Index release about 2,500 sustainability reports per annum and each report would take an analyst an average of 80 minutes to read but we’re doing it in about 15 seconds.”

Matthew Picone added: “Utilising LLMs, Acadian can assess information and, importantly, linguistic cues to determine, for example, if companies are being specific or vague about their decarbonisation plans. We can track changes in what companies are saying over time. Our process applies a higher score to companies that are consistent and use quantitative language, as opposed to unsubstantiated motherhood statements.”

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