Environmental, Social and Governance (“ESG”) has emerged as a more pronounced concern among many investors. While ESG includes some of the attributes of a well-run company, our evaluation approach is broader, allowing us to maintain a diligent and detailed look at all the companies in our portfolio, as well as those we may wish to add in the future. We classify these broader characteristics into two categories: Managerial Competence and Governance Structure.

Managerial Competence is the demonstrated ability to articulate and manage the risks inherent in a business. Risks relating to environmental impact and corporate citizenship are two of many that management teams must address. Good managers understand that there are explicit and implicit costs to companies that intentionally and repeatedly violate both the law and the spirit of good corporate citizenship. We believe that management teams who have considered their policy impact on all business issues, including ESG concerns, will invariably be more competitive in their respective industries.

With respect to Governance Structure, any issues we uncover when evaluating a company are addressed in our due diligence process on a case-by-case basis. In the past, these issues have included dual-class ownership structure, staggered board seats, cumulative voting, and poison pills. We rely on our own analysis, and the opinions of outside consultants, to evaluate Governance Structure issues as they arise.

In summary, we avoid investing in those companies that do not manage risk well, or ignore the interests of their shareholders. The principals of Pacific Ridge have been incorporating this approach to investing for nearly three decades and will continue to do so in the future.