“We believe that active ownership can help enhance long-term shareholder value and are therefore supportive of pension funds being more active.”
That’s the message from a recent study published Watson Wyatt U.K., “No Action No Option,” which concludes that pension funds worldwide will come under increasing pressure to use their ownership rights to push for improved corporate governance.
The study recommends that pension funds take four of specific steps to help them assume a more active role in governance oversight:
- Make an explicit commitment to the principles of active share ownership and document how these principles will be implemented in the scheme’s Statement of Investment Principles (SIP)
- Communicate this commitment to the scheme’s external managers, making it clear that the pension fund takes governance seriously
- Clearly set out the pension fund’s expectations of external managers with regard to active ownership. This should be formalised in investment management agreements or in a scheme’s SIP
- Monitor manager performance against the active ownership requirements set out by the trustee board. This should form an integral part of the ongoing evaluation of manager performance and where this falls short trustees should reiterate their expectations to the manager.
Commenting on the research, Jane Goodland, investment consultant at Watson Wyatt, said: “Unsurprisingly, governments are now keener than before to reform corporate governance with a view to addressing poor alignment of incentives and remuneration as well as ineffective shareholder oversight and challenge of company boards. They will want to explore the efficiency of existing best practice standards and contemplate whether the ‘comply or explain’ approach alone is adequate. As a result pension fund trustees are likely to come under increased scrutiny about the robustness of their policies, systems and records.”
Monitoring governance activity can be particularly time consuming for trustees coping with a packed investment agenda, which is why Manifest launched GovernanceWatch after the publication of the Myners’ Principles to help funds monitor their managers’ shareholder activism activities.