UK – Pension fund trustees must take more responsibility for overseeing investment strategy, and must use their power as shareholders to intervene at underperforming companies if markets are to be reformed, says Pensions Investment Research Consultants, or PIRC.

In its 2002 corporate governance review, PIRC researched all companies within the FTSE All Share Index that held an AGM between January 1 2002 and September 30 2002.

“Over-evaluation of markets and stock volatility has shown up inefficiencies in the financial markets, and pension funds and other investors must look beyond market valuations to identify ‘good’ companies,” says the report.

Areas identified as requiring attention by shareowners are: independent auditing; board reform; better accounting; realistic incentive structures; policies for managing staff; environmental and social responsiveness; accountability and commitment; and improved shareholder rights.

As for auditing, the report reveals that personal connections between auditors and company persist in a number of cases – an area PIRC believes shareowners should step in and stop.

In terms of board reform, PIRC suggests that a majority of directors should be independent, rather than just a majority of the non-executives. At the moment boards comprise independent non-executives, but also directors (company employees). And often non-executives which are ex-company employees. “There should be renewed emphasis on independence from management and other corporate influences,” says the report.

Shareholders should encourage the accounting standards bodies to “develop policies that fully capture and value all corporate transactions,” says PIRC, as “companies should be providing far fuller information on their strategies and underlying businesses.”

Shareholders are also encouraged in the review to take more interest in company activities, involve themselves in debates over corporate strategy, and be critical but supportive.

There are significant challenges for pension funds, investment managers, professional advisers and companies, says PIRC, that if not faced will result in the loss of a “major opportunity to reform market practices and structures.”