Pension Funds Insider

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Fighting for good corporate governance

11 October 2011

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The corporate governance director of Aviva Investors has told Pension Funds Insider that pension funds "don't seem to understand what corporate governance is about or what to do about it." 

Anita Skipper of Aviva claims that many UK pension schemes have failed to understand the ideas behind the 'Stewardship Code' issued by the Financial Reporting Council (FRC) in July 2010. The code was designed - in the FRC's own words - to "enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders". 

Skipper says that the short-term focus of many pension funds threatens to undermine the Stewardship Code, as when it comes to investment, funds are "only interested in quarterly returns", despite claiming to be striving to be as good a steward as possible.

She bemoans that only 24 UK pension funds have put their names to the code so far, wonders where "the rest of them" are.

"It would give much more power to our elbows if our clients are behind our stewardship strategy," she says.

Part of the problem in getting schemes on board, she suggests, is that pension funds lack knowledge of the issue, with some of the investment house's clients having asked what corporate governance means, and others fearing a big effort is needed to put it into practice.

Skipper adds that the code is nothing to be afraid of: "You can start from a very low base like a meeting with your investment consultant. It's striking that some pension funds think the stewardship code is something to be afraid of whereas there's no charge at all if you incorporate it in cooperation with a fund manager."

It is possible that as pension funds are in less of a sellers' market than investment managers, they have less marketing incentives to take a lead on stewardship, a point that Skipper concedes may have some truth.

She also, however, blames pension fund members for failing to realise that pension funds offer a means for influencing the financial system, saying that "part of the problem is that members don't realise they have the influence to make a difference. The vast majority of society care about the environment and executive pay, but they don't realise they have a stake in these companies that can be used to spur change."

Brits – slow off the mark

The apparently muted activism of British pension funds is in contrast to some of their overseas counterparts, with two major US pension schemes sending representatives to London recently to oppose BP's annual report owing to its handling of the deepwater horizon oil spill (California Public Employees' Retirement System and Florida State Board of Administration).

The California fund's global equity portfolio manager Bill McGrew wrote in an official statement in October 2010, that "publicly disclosing a clear policy on voting and voting activity is a fundamental responsibility that should be adopted by all institutional investors".

The pension fund, arguably, goes one better than most UK investment managers, who have embraced the corporate governance agenda. It publicly releases voting intentions before AGMs take place, rather than reporting on votes some months afterwards, for example.

Aviva has been amongst the most vocal investment managers on UK shores in supporting the seven-point stewardship code. The firm assisted the UK's National Association of Pension Funds (NAPF) in recently launching an information manual to help funds adopt the code, called Stewardship made simple.

Advocates of the code see it as a vital chance for the investment industry to regulate itself after the financial crisis and fend off more stringent regulation from Westminster or Brussels.

Practising what they preach

Meanwhile, some trustees are concerned that asset managers are not easily accountable when it comes to exercising their own fiduciary duty for funds, claims a new report from the FairPensions foundation.

The author of the charity's report, Christine Berry, told Pension Funds Insider that "we feel that monitoring that agents are fulfilling their fiduciary duties is one of the most important roles of a trustee."

Conflicts of interests between asset managers and pension funds were highlighted as a major concern in the report, with Berry explaining: "Trustees tend to be well aware of any conflicts of interest within their own board, but they often neglect to properly spot conflicts of interest further along the investment chain. Trustees need to take an interest and challenge asset managers when these arise."

Voting patterns of asset managers therefore should be monitored closely, she adds.

Berry also says that the prospect of confronting asset managers often brings out the timid side of trustees, some of whom have told the charity that they would like to be trained in ways to challenge typically well-oiled investment houses.

The report, entitled Protecting Our Best Interests: Rediscovering Fiduciary Obligation, also says that information requests from trustees to asset managers are sometimes not being answered, which, it suggests, reflects a lack of transparency.

All this fits within a wider campaign point for the charity. This involves a push to re-evaluate the 200-year-old legal concept of a fiduciary, given that fiduciary duties apply well beyond trustees in the modern pension system.

First published 19.04.11