Shareholder activism and corporate social responsibility are at the top of the UK local authority pension funds agenda and was the main theme of the Local Authority Fund Forum annual conference, held in Bradford, last month. Pension funds not only have the duty to face these issues, but also have the opportunity to develop their social commitment further by sharing knowledge with other local authorities was the message to delagates.
“As an individual fund, no matter how big you are, you won’t be able to achieve as much on your own as you can achieve in alliance with other investors,” said Alan MacDougall, managing director at London-based pension investment consultancy PIRC. “Alliance between shareholders is the way forward to transform the corporate social responsibility agenda,” he said.
MacDougall explained the practicalities for implementing a shareholder action for institutional investors, saying that the key for success is in sharing experience and knowledge and setting up the right policies. “During the last couple of years we’ve been seeing an increasing interest in shareholder action,” he said. “Institutional investors know that by exercising ownership rights shareholders they can influence corporations and make a real difference in their operations.”
“It’s difficult to develop policy framework, but it’s crucial because it provides opportunities for action and defence mechanisms,” he said. MacDougall said that the starting point when drafting new policies on shareholder activism is to identify broad issues, such as environment or corporate governance, and then extend the agenda and make it more elastic by setting goals, timetables and considering tactics.
Talking about the state of the shareholder action debate in the US, Ken Sylvester, director at the pension policy unit of New York City pension fund said: “We have a long history of using the leverage of equity ownership to do social good and we believe that companies which are irresponsible in the communities where they operate bring an unacceptable risk to our investments in the long term.”
Sylvester added: “Social responsibility is affecting companies and communities in ways we never imagined a decade ago, this is happening locally, nationally and indeed globally. Increasingly companies are realising that the potential external impact of their business activities must be considered in their strategies.”
NGOs are also welcoming the increasing interest among institutional investors on developing strategies on a social responsible way. “Coming from the corporate world I’ve seen both sides of the issue and I strongly believe that it’s in a company interest and therefore in its shareholders interest to have the objective of a sustainable future and that the long term viability of the company is secure financially, socially and environmentally,” says Robert Napier, chairman of the World Wide Fund for Nature. Addressing the audience, Napier added: “It is very encouraging to see how some of the large pension funds present at this conference fully recognise the importance of engagement with these issues. You all have a very important role to play because you have a lot of money under your control.”
“We want to make a call for action to the pension funds represented here,” he said. “We don’t want superficial statements of investment principles coming for pension fund trustees, we want actual engagement.”
On the same line Roger Latham, county treasurer at Nottinghamshire County Council said that as a consequence of the new law requiring pension fund sponsors to include their statement of investment principles their approach to social responsibility, more institution seem to be considering these issues. “ What pension funds have to do now is to ask themselves if their statement of investment principles is for real.” Latham said. He explained that trustees should make fundamental reviews of their investment strategies implementing policy changes through awarding new mandates and applying different benchmarks. “We are talking here about long term issues which require long term solutions. You can’t simply have a benchmark operation which is incredibly short term focused and then expect managers to behave with tactical long term strategies.”
Ritu Kumar, London director of the Council on Economic Priorities, Accreditation Agency, discussed the impact of the implementation of social accountability standards. “Investors who would like to invest in social responsible companies should look for commitment to social accountability and not to a piece of paper,” she said. “Buyers in developing countries should share the costs of implementing social accountability practices with suppliers and get involved in the development of corporate codes standards.”
Regarding the controversial issue of directors’ pay and how shareholders could influence change, Stuart Bell, research director at PIRC commented that directors’ remuneration should be based in rewards and transparency, aligning interests with shareholders and other employees. In this respect Mike Bishop, head of pan European equities at Morley Fund Management said: “Regarding directors’ remuneration, things are not black or white. We have to be aware of the problems specific to each company and be flexible.” He added: “However, incentive schemes must be based on above average long-term performance”
The debate about the importance of shareholder action among UK local authority pension funds seems to be unstoppable. What would be interesting to see now is up to which extent the theory is taken into practice. What is clear is that the fact that more pension funds, including the largest, are already working on this along with the growing trend towards sharing experience with others and creating alliancs will help to transform these issues into common practice when it comes to investment strategies.