Moving centre stage
Pamela Atherton reports on changes that will take place in July. placing
onerous levels of responsibility on pension fund trustees. the aftershocks of
which could have implications across the industry.
The requirement for all pension funds to include a statement of voting
policy as part of their Statement (SIP) of Investment Principles from 3 July
2000 has given corporate governance a new prominence in the vast array of
issues which trustees must master.
No longer can corporate governance
simply be delegated to a scheme's investment managers without further thought.
The SIP will have to state trustees' policy on ethical and environmental issues
and whether trustees vote their schemes' shares, and if not, why not.
The Newbold report went some way to address the issue of whether
trustees should exercise voting rights as part of their fiduciary duties to
scheme members. Some trustees and fund managers interpret the report's
assertion that voting rights are assets as confirmation that shares should be
voted wherever appropriate.
It is not yet known whether Paul Myner's root
and branch review of Britain's fund management industry will look at voting
issues but a consultation document is due to be issued at the end of April
which may shed further light on this.
The main corporate governance issues today remain executive
remuneration, the separation of powers between chief executive and chairman,
the re-election of executive directors every three years and making non
executives subject to annual re-election by shareholders.
So will the new
requirement for trustees to state their voting policy in their SIPS have any
effect on voting levels or will the majority of schemes continue to delegate
voting to their fund managers without further amendment?
John Rogers, director of the National Association of Pension Funds
(NAPF) voting issues service (VIS), replies: "Not yet, but change will come
soon. There is intense interest in corporate governance among NAPF members and
various initiatives will encourage trustees to be more proactive on
voting".
The first of these initiatives is the NAPF's 'engagement
partnership' with Business in the Environment, EIRIs and the Institute of
Business Ethics which will supply investment managers with research and
information to help engage with companies on ethical and environmental
issues.
The second is the NAPF Voting Issues Service's (VIS) link up with
'E-Vote'. Rogers says that institutional voting levels have remained at around
40% for some years and that the NAPF expects proxy voting levels to increase to
around 60%. Otherwise it will welcome the government's threats to make voting
compulsory.
The NAPF E-Vote' offer of a new and innovative electronic voting service
for major institutional investors should do much to encourage a higher level
and quality of proxy voting by NAPF members.
The service will allow
shareholders to vote according NAPF/VIS recommendations, use the E-Vote
processing and monitoring service, access VIS research and view up to date
information on resolutions tabled at forthcoming meetings and combined code
reporting for companies in the FTSE All Share index.
The deal comes ahead
of the electronic communications bill which is due to receive royal assent this
summer and which will lead to changes in company law to permit the use of
digital rather than written signatures.
John Rogers comments: "The new service will enable members to vote
quickly and simply at general meetings of the UK's top 400 companies and will
help them bypass the present cumbersome paper-based process. We are confident
that voting will increase in line with the government's proposals."
Other voting services include those offered by the Association of
British Insurers (ABI) (for insurance companies), Pension Investment Research
Consultants (Pirc) and Manifest. The process is set to grow.
But
the requirement to have a statement on voting policy in pension scheme SIPs is
not having a dramatic effect on trustees' voting policies, according to
lawyers. Chris Mullens, pensions partner at Biddle & Co says that smaller
schemes are not modifiying their existing policies which are usually to
delegate voting to their fund managers.
Mullens says: "Some of the larger schemes are reviewing their policies,
especially some of the local authorities, but for smaller schemes the trustees
have much more urgent concerns such as the MFR, mortality costs, part-timers
and the equalisation of OMPs. If the investment managers come up with a policy
that the trustees are happy with, they tend to go along with that."
But are fund managers doing more to consult and report on voting
pension fund investments as a result of the new SIP requirements? The answer
seems to be not unless asked to.
One fund manager who asked not to be quoted said: "Pension fund clients
fall largely into one of three categories: politically sensitive local
authorities, large corporations with quite highly developed social and
environmental policies and the great unwashed who couldn't care less,
Investment managers will cater for all these groups but it is very much
reactive. If you ask for a very detailed voting policy you can have it, but
there is no incentive for fund managers to do more than is asked for."
There is also the question of cost. Implementing detailed voting policies and
the monitoring of them costs money and there is concern that increased voting
activity may trigger an increase in fees, across the board.
Alternatively, some investment houses have been actively discouraging
small segregated mandates for some years by hiking fees so that such clients
are encouraged to switch into pooled funds or go elsewhere.
Investment
managers are generally prepared to accept a client's voting policy for
segregated funds but for pooled funds, managers expect to be able to apply
their own voting policy.
One investment house admitted that it was considering charging explicit
fees for voting services but did not want to be quoted. A spokesman said: "We
prefer to vote one way on behalf of all our clients because we believe this is
far more powerful and gives us more influence with corporations than proxy
voting on behalf of a minority of clients. If lots of clients want us to vote
in different ways, there will come a time when we have to charge a separate fee
for this."
Michael Perry of the Fund Managers Association agrees: "The cost
of voting will have to be looked at when e-voting comes in. It might not
necessarily be an extra, but it will have to be broken out."
Consultants have also been busy preparing clients for the 3 July 2000
SIP deadline by reminding clients that they should have a policy and need to
discuss how they should vote.
Nick Sykes, a senior consultant at William M
Mercer said: "Most trustees recognise that there is no logic in separating the
voting decision from the buying and selling decision. The basic encouragement
we give to schemes is that trustees should tell their manager that they should
vote."
Schemes generally ask their managers to provide a schedule of their
voting activity or ask to be informed where they vote by exception. But
investment managers are at pains to point out that many issues which are voted
on are not particularly important, and vice versa.
"Some of the most
important issues are not voted on and it is the influence that investment
managers can wield behind closed doors which counts. It is there that
investment managers can influence what managements are doing just as much as
through proxy voting," says Sykes
Bob Collie of consultants Frank Russell sees a potential problem with
pooled fund clients who have specific voting requirements: "With pooled funds,
the client's voting requirement need to concur with the investment manager's.
Otherwise they must go segregated where the investment manager will do as
instructed. "But segregated funds are more expensive, so smaller schemes are
likely to continue to delegate their voting decisions to their managers. Pirc's
joint managing director Stuart Bell says that the majority of corporate
governance activity currently concerns executives remuneration issues.
"Most large companies are broadly in compliance with the main tenets of
the combined code, but there is a large gap in compliance in some smaller
companies. The main areas of non compliance are executive contracts of more
than one year and non independent directors on remuneration committees. There
is also some avoidance of the combined code on remuneration issues where US
executives are involved - such as currently at Barclays and Reuters. They argue
that the Combined Code doesn't apply in the US," says Bell.
Michael Perry of the Fund Managers' Association says that investment
managers were against executive remuneration being treated as a separate item
at the AGM: "We said we would support a vote on the membership of the
remuneration committee."
He says that fund managers take the view that if
there is an issue of economic importance, they will always vote and that "on
significant issues, voting levels are pretty high." But he sees the obstacles
to voting as being the time, resources and costs involved and that there are
complicated issues to be resolved.
The shareholders' working group which is chaired by Terry Pearson, a
consultant to State Street Global Custodians is looking at these issues in
particular at the crucial role played by custodians in the registering of
votes.
The working group has brought together representatives from the
ABI, the NAPF ProShare, the Investor Relations Society; the Association of
Private Client Investment Managers and Stockbrokers, Association of Unit Trusts
and Investment Funds, custodians and registrars.
As custodians are the
legal owners of the shares, the mechanics of voting mean that it is the
custodians which ultimately have to lodge votes on behalf of clients.
Pearson's working party is looking at ways of cutting down the paper chase of
documents at AGM time from the issuing company to the registrar; the custodian,
the fund manager and the client.
Pearson comments: "For voting the paper
chase works in reverse: from client, to fund manager; to custodian, to
registrar; to the company. There are time constraints in that votes have to be
registered before the AGM. This is why so many funds don't bother to vote."
Pearson concludes that the UK will have to switch to a voting system similar to
that in the US - where voting is mandatory by a third-party company whose
services are paid for by the companies themselves and not the pension funds or
fund managers.
When this system was considered by the NAPF, there was concern that the
company administering the votes would have a monopoly, but Pearson believes
that such a system deserves further consideration: "The shareholders working
group is looking at what the problems are in registering votes on time and how
to make the process more streamlined.
"Custodians have largely failed to
get a grip of this issue even though they are at the hub of the process, but we
are making progress and the working group is finally getting down to the nitty
gritty"
Pensions Management
May, 2000
Return to News Index |
