Shareholder activism

March 01, 2005

“It’s all about share-owning as opposed to share-holding – ownership is both a right and a duty,” Mark Anson, chief investment officer of the influential California Public Employees’ Retirement System (CALPERS), told a roundtable discussion sponsored by AccountAbility and the World Economic Forum. In these few words, Anson encapsulated what should lie at the root of modern-day shareholder activism.

Being an active investor means seeking to engage in dialogue with a company and exercising votes at shareholder meetings. Engagement should not only be seen as the exclusive domain of specialist SRI fund managers, but as vital element of any institutional shareholder’s investment strategy. This is precisely the area the current legislation and industry codes seek to address.

Myner progress

Whether UK institutional schemes are properly fulfilling their duty as responsible owners of assets in the current investment climate is debatable. Undoubtedly progress has been made over recent years, but according to a Treasury review in December, there remains work to be done.

The Treasury found principles aimed at one of the largest group of investors in the UK – pension funds – proposed by former fund manager Paul Myners in 2001 were beginning to work. But there was ample evidence trustees generally lacked the skill and expertise to make the right decisions and properly oversee their investment advisers and fund managers. Of the 14 pension schemes surveyed, 70% were fully or mostly compliant with the principles, but 18% had taken no action in the two years since they were published.

Myners originally recommended the introduction of legislation to reinforce the issue of shareholder engagement, but following lobbying by members of the Institutional Shareholders Committee (ISC) – a coalition of investment industry bodies – the government backed off. Instead, ministers agreed that investors should pursue the ISC’s recommended code of practice on a voluntary basis.

“The government essentially believes that effective engagement requires informed consideration and judgment, and cannot be achieved by a ‘box ticking’ approach based on mere formal compliance,” it said.

The sigh of relief from the investment industry was almost audible. As a bonus to those living in fear of meddling, the government said it would not require pension schemes to disclose compliance in their statements of investment principles.

The government will be introducing a legal requirement in the upcoming Pensions Act to ensure that trustees have the relevant degree of knowledge and expertise. To this end, the Occupational Pensions Regulatory Authority (OPRA) is now working with stakeholders to develop a code of practice to provide detailed guidance on how to fulfil the legal requirements. So, while the law will not require strict adherence to the code, it will play a large part in determining whether or not trustees have met their obligations.

Regulation from within

The desire to pursue a ‘hands off’ approach is perhaps best illustrated by the government’s request that the National Association of Pension Funds conducts the next review of the Myners principles. This is not due for another two years.

The NAPF is a member of the ISC, encompassing the Association of British Insurers, the Investment Management Association and the Association of Investment Trust Companies. The policies the ISC lays down are not designed to force investors to micro-manage the affairs of the investee companies, but rather “relate to procedures designed to ensure that shareholders derive value from their investments by dealing effectively with concerns over under-performance”.

Other than complying with the principles, pension trustees are also responsible for ensuring that their fund managers have an explicit strategy, clarifying if and when they would intervene in a company, the approach they would use and how they measure their own performance. In addition, trustees should make available these assessments to the scheme membership, and should post on a fund website the key information they provide annually to fund members.

Mind the gap

Most initiatives involve breaking down one of the main obstacles to progress cited by pension trustees: the informational gap between investors and those companies they invest in.

Just Pensions, a programme of the UK Social Investment Forum, provides SRI toolkits for trustees, and engages with stakeholders on SRI best practice. UKSIF told Briefing it supports the recent Treasury report and the proposal to amend Myners’ sixth principle on activism. UKSIF is involved in the government’s consultation process, which ends on March 16.

Elsewhere, the NAPF runs a Trustee Development programme, which provides training in a range of areas including accountability. And in January, the body launched a new guide, Voting made simple, explaining how trustees can exercise their rights, as beneficial owners, to vote at company meetings. Geoff Lindey, the NAPF’s adviser on corporate governance, says the new guide “spells out to pension funds the simple and elegant solution to the problem of getting investment managers to vote on their behalf without getting drowned in data”.

Show me the SRI money

Apart from striving to engage companies on their financial performance, governance and remuneration issues, sceptics argue that pension trustees and their investment managers are just not interested in SRI per se. A Department of Work and Pensions survey between July and September 2003 found that only one in five of occupational pension schemes, but two in five of very large schemes, had an explicit policy of their own on SRI. And over a half accepted the policies of their investment managers.

Furthermore, a report by the World Economic Forum and AccountAbility concluded that institutional investors poorly represented the real owners of capital – pensions and savings policy owners – through their unwillingness to consider material social and environmental factors in investment decisions. Reforms should be aimed at the availability of information, competencies of participants and, most of all, institutionalised incentives, it said.

Efforts to encourage institutional investors to take a more activist approach are certainly commendable. Nonetheless, given evidence of the lack of progress (and maybe lack of will), one might be forgiven for feeling both policymakers and industry have not been bold enough. Perhaps when institutions begin to see the clear financial benefits of bringing about improvements in activism and management of SEE issues we may start to see wholesale reform.

Corporate Citizenship Briefing, issue no: 80 – March, 2005