Environmental, social and governance factors
Environmental, social and governance (“ESG”) factors are of increasing concern to investors. While we have addressed many of the ESG factors relevant to Burford on a piecemeal basis in prior annual reports, for the convenience of investors we are providing here a comprehensive summary of our approach.
In creating this summary, we have relied on recently-published guidance from the London Stock Exchange on the integration of ESG into investor reporting and communication1, and we have had reference to the United Nations-supported Principles for Responsible Investment, to which many of our investors are signatories, the influence of which has been seen in the recent amendments to the UK Stewardship Code.
As an initial matter and to set some context for Burford’s reporting, it must be remembered that Burford is a finance firm with a small workforce of little more than 100 people. All our employees are “knowledge workers”. Burford does not manufacture or produce anything tangible and its entire physical footprint is contained in relatively small offices that house our employees, their technology and their files – and little else. The tools of our trade are words and numbers, telephones and computers. We are not participants in any global supply chain. Thus, many ESG factors that are of deep concern with respect to other multinationals simply do not apply to Burford.
We would also note that lawyers are regularly at the forefront of social change, and Burford’s team is no exception. Many of our lawyers have litigated – often pro bono – some of the most significant social issues of the day and continue to be involved in such issues while at Burford. Indeed, Burford is a paradigm of a firm with deep focus on ESG issues simply by virtue of who we are, what we do and our culture.
We also do not believe in focusing on ESG issues simply because investors are, but because they make sense for us as a business matter. An example of our approach is found in an innovation this year, The Equity Project. In October 2018, Burford launched The Equity Project, a groundbreaking initiative designed to help close the gender gap in law by providing an economic incentive for change through a $50 million pool of capital earmarked for financing commercial litigation matters led by women. Law continues to present significant and woefully-persistent gender-based inequities. For example, just 19% of equity partners at US law firms are women, and women are significantly underrepresented in leadership positions in law firms and in first chair roles in litigation. The Equity Project provides an incentive for change by providing a pool of capital reserved for matters led by women, including matters in which a woman litigator is first chair; a woman serves as plaintiffs’ lead counsel or chairs the plaintiffs’ steering committee; a women-owned law firm is representing the client; a woman litigator earns origination credit; or a woman partner is the client relationship manager. Cases financed by The Equity Project must also meet Burford’s standard investment criteria. Since launching The Equity Project, Burford has seen a meaningful uptick in investment proposals from women, including over $30 million of requests for financing that have made it into our underwriting process for further review.
With capital from The Equity Project:
- Women litigators and women-owned firms can pitch clients knowing that they can offer alternative fee arrangements
- Law firms committed to gender diversity can share risk with Burford and encourage women litigators to pitch client-friendly alternative billing arrangements to their management committees for new business
- Women can pursue leadership positions in significant matters and ease pathways towards origination and client relationship credit with a competitive edge for them and their firms
We now discuss in more detail Burford’s approach to the twelve ESG themes set forth in the FTSE Russell ESG model. As investor reporting expectations continue to develop, Burford will adapt its annual reporting accordingly.
i. Climate change
As inhabitants of the planet, Burford and its employees are deeply concerned about climate change and its accelerating impact on the world in which we all live.
While Burford has much less impact on climate change than many companies, we nonetheless are focused on what we can do. A key initiative at Burford is to try to limit our carbon footprint. We make extensive and increasing use of videoconferencing to minimise physical travel and when we do travel, we endeavour to do so efficiently and to combine multiple initiatives into a single trip. We emphasise choices such as ridesharing in preference to higher footprint activities such as rental cars.
In our offices, we are sensitive to environmental issues. Our Chicago office is located in a LEED (“Leadership in Energy and Environmental Design”) Platinum building. We are in the process of relocating our New York office to a building with pending LEED certification. London presents greater challenges in terms of environmentally-efficient buildings for tenants of our size and budget, but our new London office will encourage environmental stewardship by providing abundant bicycle storage and shower facilities, encouraging employees to bike to work. As a general matter, however, Burford is not a sufficiently large tenant to control any of the building systems or operations where our offices are located and thus we are reliant on our landlords; nor are we able to obtain actual data about our own activity levels around items such as emissions.
ii. Pollution and resources
Burford has two approaches around combatting pollution.
First, we discourage the creation of potentially polluting materials. In our business, that means mostly paper. This is an excellent example of a valuable ESG theme arising out of a sound business justification separate and apart from its societal benefits. We strongly discourage printing of materials and encourage our employees to work on-screen with digital copies. There are cost and environmental benefits to such an approach, to be sure, in that we use less paper, less toner and require fewer printers, but there are also core security benefits; printing the kind of routinely sensitive material with which we work increases the risk of disclosure of that material.
Second, we operate a robust recycling program in each of our offices and we discourage single-use items such as plastic water bottles; we have installed water filtration systems in each office instead.
iii. Water use
Our only water use is in-office bathroom and drinking use. As part of our tenancy in LEED-certified buildings our bathrooms use less water than traditional fixtures.
This theme has little relevance to Burford’s business.
i. Human capital (a/k/a labour standards)
Burford’s team is one of its key competitive advantages, and we expend considerable effort to create an environment that is appealing to the kind of people we recruit and to continue their development once employed. Competitive compensation is certainly an important part of that dynamic, but so too is a collaborative environment and mutual respect. We also devote considerable resources to training and developing our team, especially as incoming employees are generally coming into the litigation finance industry from adjacent industries for the first time – and indeed that is a limitation on our growth, as we believe that there is a limit to the number of people we can properly assimilate at any given time in light of the need to develop and inculcate them in not only Burford’s approach but the fundamentals of the industry.
We also have a workforce with significant diversity across many differing metrics. We do this not merely because we believe that diversity is a social good, but because it helps our investment decision-making. Fundamentally, our business is about trying to predict litigation outcomes. Those outcomes are determined by a wide range of people from differing backgrounds and with built-in predilections based on their own backgrounds and experiences. We will do a better job of predicting outcomes if we can field diverse teams who will consider possible investments from multiple perspectives.
When it comes to gender diversity, Burford has a long track record of having a substantial population of senior women. We have a much flatter organisational structure than many firms and as a result the Hampton-Alexander test does not fit us particularly well, but taking the intent of the test and applying it to Burford, we stand at 41% women in leadership (seven of 17 executives). Moreover, we have a plethora of very senior women at Burford: the Chief Financial Officer, Senior Managing Director (functionally the head of our US business), Chief Marketing Officer, Chief Process & Innovation Officer, Chief Compliance Officer and Deputy General Counsel roles are all filled by women. The heads of our New York and Chicago offices are both women. We also have 15 women in our Managing Director, Director, Senior Vice President and Vice President roles, with at least two women at each level.
But gender is not our sole focus. We actively seek other differing backgrounds and life experiences, and create an environment where all are welcome. For example, we have a number of openly gay men and women, including in senior positions, and we have parental leave and other policies that accommodate the diversity of lifestyles present in our firm. We seek out people with multicultural or multijurisdictional experience and have many people who are multilingual or have professional qualifications in more than one country. When hiring, we actively consider diversity in all of its forms, including but not limited to gender and race.
As Burford has grown, we have focused on management depth, succession planning and the removal of key person risk, and we are very pleased with our progress. We have a deep bench of experienced, sophisticated managers and we have been able to create redundancy across the organisation, along with a substantial record of promoting from within. Indeed, we just announced 17 internal promotions as part of our annual review process.
As to compensation, our traditional model is that of base salaries and performance-based annual bonuses. Historically, that has made up the considerable majority of our compensation and reflects the origins of our team members, who typically hail from law firms and finance firms that also use this compensation approach.
In 2016, shareholders approved a long-term incentive plan and we have added grants under that plan to our compensation mix, which creates additional alignment between the team and public shareholders and also creates a long-term retention vehicle. We made an initial Long Term Incentive Plan (“LTIP”) grant to every employee in the business at the time of the plan’s inception, and we make grants to virtually all new employees as they join. We also use annual LTIP grants as a further compensation vehicle for our investment team and other senior employees. All LTIP grants come with performance criteria, three-year cliff vesting and clawbacks for malus. The plan has a cap of 10% of Burford’s shares over a 10-year period; after three years, we have used 0.32%.
We also use more tailored compensation devices for incentivisation and retention depending on individual circumstances, in some cases sharing direct investment upside with relevant employees. However, our general compensation philosophy is team-based rather than individual as we believe that investing in this asset class benefits from a team approach and not from assigning individual ownership of and responsibility for individual investments. When we use incremental compensation devices, our focus is on a combination of performance incentivisation and retention.
Burford has historically enjoyed quite low employee turnover after employees have been with us for a period of time. There can, however, be an assimilation period upon joining that does lead to some turnover as we are generally hiring people who have not before done litigation finance, and some recruits ultimately do not fit as litigation financiers. Of the 36 employees who have worked for Burford for at least three years, only two left during 2018.
Burford engages in a number of practices around employee engagement and development. We need again to put this in context; we remain a small organisation. The senior management team knows personally every employee. The CEO has quarterly lunches for every new joiner. We regularly hold drinks events to which every employee is invited and we conduct Q&A sessions with senior management. We have an entrepreneurial culture where anyone is welcome to email the CEO about anything. But we also do more traditional things, like annual 360° performance reviews during which we also actively solicit feedback about the business and its initiatives. And, of course, we have channels for reporting misconduct or other workplace issues. Employees are asked to escalate any known or suspected compliance policy violations or misconduct to the Chief Compliance Officer. Burford also maintains a global anti-retaliation and whistleblower policy. Nothing in the policy prohibits an employee from reporting potential violations of law or regulation directly to a government agency. Retaliation of any type against an individual who reports any suspected misconduct or assists in the investigation of misconduct is strictly prohibited.
We are proud to have assembled what is clearly the leading and most experienced team in the litigation finance industry. Not only do we bring hundreds of years and billions of dollars of litigation experience, but our team is multidisciplinary as well, with senior and experienced finance and investment professionals – a critical component in any investment decision-making undertaking. We would encourage shareholders to visit our website to review the biographies of all of our team members.
ii. Health and safety
Burford does not face many traditional health and safety issues in its workplace given the nature of its business. We have never had a material workplace accident or injury.
However, we are focused on employee health and wellness. To that end, because the US does not have a national healthcare scheme, Burford offers its US employees and their families a package of benefits that includes fully-paid health insurance and a contribution to a US device called a “health savings account” that can be used to pay for uninsured medical expenses. The economics of US healthcare are such that healthcare costs can be a source of very considerable stress and distraction for employees, and we are pleased to be able to offer this benefit to remove those strains – and to ensure that nothing stands in the way of employees obtaining medical care.
As to benefits more broadly, we offer competitive benefit plans in each of the countries where we operate, and those plans are offered to all employees across the business.
iii. Customer responsibility
Clients are at the heart of Burford’s business and it is a measure of our management of client relationships that 75% of initial clients return for incremental transactional business. We inculcate a culture of client-focused business. We seek to add real value to our interactions with clients and to work together to maximise successful outcomes. We strive for clarity and fairness in our dealings with clients, including clear and straightforward legal documents and honest appraisals of the investment prospects of potential matters.
iv. Human rights and community
While not the typical ESG discussion around this theme, Burford does have an unusual take on this issue. Our capital can change outcomes in litigation matters, and in particular our capital can create outcomes that may be legally correct but challenging when viewed through a broader lens. Said another way, how do we decide whether there are cases we will elect not to finance, even if their merits are strong and they are likely to prevail and generate returns? That is a core function for our Investment Committee. We not only consider legal and economic analysis, but also the holistic viewpoint of a potential investment. As just one example, Burford refrains from financing litigation against impoverished small states, even when the underlying cases may well have merit, because we do not wish to put those governments in a position of having to reduce essential services to their populations in order to satisfy our returns.
We also consider carefully the underlying claims and their societal impact. This is less commonly an issue with corporate claimants as we are simply not often asked to finance companies in, for example, the tobacco industry; those companies tend to be defendants rather than plaintiffs. Nonetheless, the issues are very much front of mind when we review potential investments.
We endeavour to be good citizens within the legal communities in which we operate, and we support a variety of initiatives. For example, we are a member of the Justice 60, a group of 60 key supporters of JUSTICE, a longstanding all-party law reform and human rights organisation working to strengthen the justice system – administrative, civil and criminal – in the UK. We are also supporters of the work of the RAND Institute for Civil Justice, which is dedicated to making the US civil justice system more efficient and more equitable by supplying government and private decision-makers and the public with the results of objective, empirically based, analytic research. Its research analyses trends and outcomes, identifies and evaluates policy options, and brings together representatives of different interests to debate alternative solutions to policy problems. We do not make any political contributions and our charitable contributions are limited to the law-related organisations discussed above along with a modest budget for charitable events to support clients or Burford people.
Burford is highly sensitive to issues around corruption, sanctions and money laundering. We run extensive compliance programs to ensure we are in the right place on these issues, and we take seriously allegations of corruption in matters we finance and diligence them with great care. We rely not only on our legal and compliance team but also on specialised outside counsel.
ii. Corporate governance
Burford is composed of its publicly traded parent company, Burford Capital Limited, and a number of wholly-owned subsidiaries in various jurisdictions through which it conducts its operations and makes its investments. Burford Capital LLC is the principal operating entity in the US and Burford Capital (UK) Limited is the principal operating entity in the UK. Those two entities provide various corporate and investment advisory services to other Group companies. Burford Capital Limited, the public parent, does not have any employees itself.
Burford Capital Limited has a single class of ordinary shares which are traded on the AIM market of the London Stock Exchange. Subsidiaries have issued bonds traded on the Main Market of the London Stock Exchange.
Burford Capital Limited is governed by its four-member Board of Directors. All four directors are independent non-executives, and all four have been directors since Burford’s inception.
- Sir Peter Middleton GCB, Chairman: Sir Peter Middleton was until 2013 UK Chairman of Marsh & McLennan Companies and Chairman of Mercer Ltd. He was previously Permanent Secretary at HM Treasury and Group Chairman and Chief Executive of Barclays Bank PLC. Sir Peter remains active in a number of other business ventures which are set forth on our web site.
- Hugh Steven Wilson, Deputy Chairman: Mr. Wilson was a senior partner with Latham & Watkins, where he was Global Co-Chair of the Mergers and Acquisitions Practice Group and former Chairman of both the National Litigation Department and the National Mergers and Acquisitions Litigation Practice Group. He is the former Managing Partner of Tennenbaum Capital Partners. He has served as a director of other US entities as set forth on our web site.
- David Lowe OBE, Director: David Lowe was until recently Senior Jurat of the Guernsey Royal Court. He was previously the Chief Executive of Bucktrout & Company Limited and a former director of Lazard and Barclays Capital in Guernsey.
- Charles Parkinson, Director: Charles Parkinson is President of the States of Guernsey Trading Supervisory Board and formerly the Minister of Treasury and Resources for the States of Guernsey. He is a past Partner/Director of PKF Guernsey, accountants and fiduciaries, and is a barrister and an accountant.
The Board holds an in-person meeting every quarter during which it reviews thoroughly all aspects of the business’ strategy and performance; the directors spend at least one evening and one full day together for each meeting, and every director attended all such meetings held in 2018. Burford’s Chief Executive Officer and Chief Investment Officer participated in the entirety of each board meeting (other than the closed session discussed below), joined as appropriate by other senior members of management. The Board reviews its performance and director compensation annually and regularly discusses succession planning and management oversight. The Board meets in closed session without management present at each of its meetings.
The Board also operates through three committees composed entirely of independent directors, Audit (Parkinson (Chair) and Lowe), Investment (Lowe (Chair) and Parkinson) and Remuneration (Wilson (Chair), Middleton, Lowe and Parkinson), all of which meet throughout the year as required. The Remuneration Committee reviews and approves compensation and LTIP awards for all staff. The Audit Committee plays an active role, not only in overseeing the audit process and managing non-audit services to ensure the continued independence of the auditors, but also in addressing investment valuations, an area of key judgement for the business.
No members of management sit on the Board; while atypical for a UK business, we believe this structure maximises independent oversight of the business. As a result, the Board is smaller than many. The Board composition is also dictated by the provisions of Burford’s Articles, which limit the proportion of US persons that can be directors, thus making it impossible to add executives to the Board without expanding its size considerably, which we consider undesirable for both cost and functional reasons. Sir Peter Middleton also chairs the Board of Burford Capital Holdings (UK) Limited, a significant Burford subsidiary, to ensure non-executive oversight.
We suggest that a number of the precepts of current corporate governance need to be considered in the relatively unique context of Burford. We have built a large and complex business quite rapidly; Burford only came into existence in late 2009. Moreover, our business, and the industry in which we operate, has seen seismic changes during the decade of our existence on a regular basis. We believe that there is enormous value in a board at this stage of our existence that is deeply experienced in the business and has lived through its growth and history. We believe shareholders would be very poorly served by rotating our directors off the Board now simply because they have served for nine years, for example.
We are also mindful that the Board is composed of all-white, older men. This would not be the case if Burford had a more typical English board that included senior executives, as both our CFO and the head of our US business are women, and thus we do not believe the issue should be considered in isolation even though we do not fit neatly in a box. These issues have been considered in the Board succession discussions as well. But at the end of the day we believe that constancy, experience and longevity matter more to the business right now than anything else.
iii. Tax transparency
Burford has historically been very transparent about its tax status, including disclosing tax paid by jurisdiction in the notes to our financial statements.
Burford’s gradual progression from a tax-free fund prior to 2012 to a multinational taxpayer was altered somewhat by the Gerchen Keller Capital (“GKC”) acquisition in 2016. Under US tax law, given that GKC had very few tangible assets, the bulk of the acquisition price of $160 million was characterised as goodwill and other intangible assets for US tax purposes, and those assets are amortised for tax purposes, significantly reducing future US taxable income for some years while the tax benefit of that amortisation is used over time. The value of that tax offset has been impacted by the 2017 passage of tax reform legislation in the US that lowered US corporate tax rates substantially (although it may also have the impact of limiting some interest deductibility and some other tax planning opportunities).
In addition, 2018 saw the increase in value of our net deferred tax asset as detailed in note 5 to our accounts with a commensurate further positive impact on the tax line of the income statement. We believe that our tax cost will remain below our expected future run-rate level for some time while we continue to reap the benefit of the US tax amortisation and the deferred tax asset, although there will be annual variations. Once those benefits are exhausted, we would expect long-term tax rates for our business to ultimately land in the low teens.
iv. Risk management
Burford manages risk in a number of ways. In the investment portfolio, Burford employs a disciplined, comprehensive, multi-stage process to evaluate potential investments and benefit from the judgement and experience of Burford’s highly qualified team of experienced lawyers and finance professionals. Burford also uses an internal, proprietary risk tool to assess risk during the investment process and regularly after the investment has been made and engages in substantial portfolio management activities using a risk-based approach. Burford believes that its approach to risk management has enabled it to improve materially on investment results in challenging situations where a more conventional approach would likely have yielded diminished performance.
Burford also regularly considers business and systemic risk in its business units and overall. We have long been focused on operational risk and have a system of internal controls around the integrity of our internal processes and data. Among other steps, we have a dedicated team focused on operational controls and data.
Moreover, while perhaps trite to say, Burford is fundamentally a business run by experienced lawyers, including some who have functioned in senior legal roles in major global corporations. The challenge in many businesses is reining in business people who take on unacceptable or ill-considered risk, and it is the function of the lawyers to hold those reins – so here, we have a business run by the people accustomed to that role. Burford’s culture is a disciplined, risk-focused one. We augment that culture with a seven-member in-house legal and compliance team.
In addition to our ongoing risk management activities within the business, we make a comprehensive risk presentation to the Burford Board at every quarterly meeting.
While a species of risk, IT and cybersecurity risk deserve their own dedicated discussion.
Burford has always been very alive to the risk associated with the dissemination of its confidential information publicly, especially as that information contains highly sensitive client litigation information. We have also focused on the risk associated with attacks on our financial systems. Happily, we have never had a widespread data breach although we do have protocols in place should one occur.
From our inception, Burford has been sensitive to these issues and has operated on an entirely cloud-based platform. Our data does not sit on our own servers, even virtual cloud servers, but rather on the servers of world-class technology companies such as Microsoft and Salesforce. While that is no guarantee of perfect security, it is probably as close as one can come in this day and age. The use of those platforms also comes with state-of-the-art built-in disaster recovery protection.
However, data security is much more than protecting data against invasive hacking. Human error and inattention is arguably a greater risk than sophisticated penetration attacks. Thus, we engage in a variety of training and testing, and we also introduce restrictions on technology use designed to minimise those risks. We regularly review best practices from both the legal and the financial services industries and are engaged in a program of continuous improvement, including adopting a wide range of measures designed to improve security and minimise risk. We have an internal Cybersecurity committee, composed of senior representatives of all our offices, and we regularly benchmark and audit our own performance against peer norms, including those promulgated by the US SEC and best practices identified in the legal industry.
Finally, we strive to create a pervasive culture of information technology security, focusing particularly on tone from the top when it comes to these issues. Burford’s senior management regularly spends time on these issues and communicates about their importance to all staff.
In addition to data security we are also focused on privacy, and are sensitive to the various obligations we face in that regard. Given that Burford does not deal with consumers and is purely a corporate business, the burdens on us are far less than on businesses amassing considerable personal data. Burford also has procedures in place to address conflicts of interest under the oversight of the Board; those procedures have operated effectively.
1. London Stock Exchange Group, Revealing the full picture – Your guide to ESG reporting – Guidance for issuers on the integration of ESG into investor reporting and communication, January 2018.