Taking the pulse of stewardship, as shareholder spring memories fade

Shareholders’ accusations of unfair pay and improper motives among the executives of big companies such as Barclays and Aviva led to a number of senior departures.

Aviva’s Andrew Moss and AstraZeneca’s David Brennan both stepped down. Later that year, WPP founder Sir Martin Sorrell found his £13m pay deal rejected by 60 per cent of investors at the group’s annual meeting.

Stewardship proponents argue that pension funds’ responsible ownership of their investee companies has improved in the past couple of years.

Louise Rouse, director of engagement at responsible investment charity ShareAction, says more asset managers are disclosing their voting records. But she sees other barriers to moving stewardship forward.

“There’s certainly a long way to go in terms of a feedback loop from asset managers to pension funds, and in turn from pension funds to the individual whose money is actually invested in those funds. There is not sufficient transparency and communication around those things.”

Keeping the lines open

Effective communication between asset managers and trustees is an issue that often surfaces when discussing responsible investment.

Andrew French, head of group compliance at consultancy JLT Employee Benefits, says that while larger schemes “recognise that they do need to be transparent and effective in the way that they operate”, smaller funds are less transparent.

He says people are talking more about transparency and stewardship in the institutional investment sector: “In terms of good governance, I think there is a general recognition that there needs to be effective oversight of the way schemes are managed.”

The key element that seeks to consolidate the definition and direction of this activity is the UK stewardship code, introduced in 2010. But after a year in place, only 22 UK pension schemes had signed up. It was reviewed in September 2012.

Richard Greening, chair of the pension subcommittee at the Islington Pension Fund, says nearly all asset managers now issue a statement of compliance with the code, but argues that it alone may not ensure good stewardship.

“We really need to examine what saying you agree with the principle actually means – whether, in blunt terms, someone is actually walking the walk and not just talking the talk.”

Nonetheless, Nina Tinn, director at independent trustee company ITS, explains some of the problems with managers signing up to stewardship codes.

“We don’t feel that we can go into the level of depth and detail to subscribe to each country’s code in which jurisdiction we might invest,” she says.

“We invest in global equities and we can’t look at every single jurisdiction [around] the globe… you’d spend your whole time looking at codes of practice rather than making decisions that would benefit your members in terms of investing in the right asset classes.”

Regional initiatives

An example of a regional initiative is the Japanese stewardship code, which came into effect in January this year.

The National Association of Pension Funds regularly publishes a series of questions for trustees to ask their asset managers, with last month’s focusing on the Japanese code. In response to the question, few UK-based asset management groups or trustees had heard of it.

Maria Stimpson, partner at law firm Allen & Overy, was aware of the code, but says: “I would have thought only the very largest and sophisticated funds are going to have that on their radar.”

She feels the same way about the UK code: “For the everyday pension scheme trustee, I suspect it’s something that they pay lip service to wherever they have to and they get managers to report, but I’m not sure how much real focus and attention it gets.”

Japanese investment company Daiwa SB Investments has most of its asset managers based in Tokyo. Alex Mander, business development manager at the company, says corporate governance remains an important factor for investors in general: “From an investor’s point of view, they want to check that their profit margins can be maintained.

“When you consider what’s going on in the market, a lot of people look for good corporate governance, and they look for asset overlays that have got [Principles for Responsible Investment] with them.”

Steven Robson, head of pensions at United Utilities, says managers will only sign up to different countries’ stewardship codes if they have stock in those places. Tinn takes a similar stance, adding: “It comes down to proportionality. Yes, you should exercise a good overview of what you’re investing in, but you can’t spend 90 per cent of your time monitoring 5 per cent of your assets.”

Indeed, Strathclyde Pension Fund’s head of pensions Richard McIndoe says that signing up to a country’s stewardship code without having investments there could be seen as tokenism.

The AGM season provides a unique opportunity for pensions investors to communicate with their asset managers and put stewardship into practice through asking questions and getting updates on returns.

Fresh powers

Investors at AGMs this year have also been able to use the enhanced, binding voting rights on remuneration policies introduced in 2013.

Greening represented his fund at the Vodafone AGM, which took place in July. He says the new voting rights have increased pressure on asset managers: “Executive pay has been a significant focus at a lot of the AGMs in any case. It adds to the opportunities for shareholders to challenge the executives on their pay settlements.”

On the other hand, Robson says the importance of the new voting rights depends on the structure of the fund.

In the case of segregated assets, the trustee’s voting rights become more important as the pension fund physically owns the shares, whereas for a pooled fund the appointed custodian is expected to ensure good governance and communication between the trustee board and the managers.

Nonetheless, Robson says in both cases “the key element for investors is the long-term nature of the way the company is being run and how the reward profile of the people running the company links to the long-term nature of the organisation”.

Tinn says chasing returns can be a barrier to the development of stewardship in general.

“I would like to think [stewardship] is becoming more important, but I think in reality trustees believe that their primary duty is to maximise returns for their pension scheme members.”

However, she adds that stewardship principles may affect this priority, as companies behaving in a way that may attract litigation and a bad reputation could dissuade investors from choosing them.