The majority of UK pension funds have made a commitment within their Statement of Investment Principles that they will take account of social, environmental and ethical factors.
But how are these responsible investment intentions put into practice? In particular, do the day-to-day activities of fund managers accurately reflect the important corporate governance aspirations of their pension fund clients?
To tackle this practical issue, Universities Superannuation Scheme (USS) has produced its own in-house manual, ‘How to be a responsible pension fund’ to appraise the performance of its external and internal fund managers. It consists of a 40 page checklist of key questions and background guidance notes and is freely available on the fund’s web site
It is now becoming increasingly recognised that corporate responsibility and governance performance is a significant indicator of intangible assets and therefore future share value and is at least as important as backward-looking financial reports.
It follows that the nature of mandates, benchmarks, performance systems, trustee training (so that they can be more informed clients) and the assessment of fund managers (so that they can deliver against their contractual commitments) needs to be reviewed.
In the case of USS, the third largest pension fund in the UK, the directors have made a clear commitment to encourage good practice standards in both corporate governance and corporate responsibility, because of their judgement that this will, in the long term, serve the financial and other interests of its members.
During the research to produce the in-house manual, several fund managers in the industry said that this was the first time that they had ever been asked detailed questions about their work in the area. In sharing its methodology, USS hopes to be able to learn from the experience of other pension funds and their service providers and create a community of fellow practitioners.
The manual focuses on four key areas: engagement on corporate governance; engagement on corporate responsibility; integration, and leadership/culture. In turn, these are broken down into sub-headings.
The criteria for governance and responsibility engagement are nearly identical, but they are treated separately as they are often dealt with by different specialist staff and the degree of interest in the two aspects is also frequently quite different.
The questions that the manual suggests include: Does the manager have a policy which explains its approach to the corporate governance performance of investee companies? Is corporate governance work prioritised in a systematic way? Does the manager collaborate with other fund managers in this area? Is the depth and persistence of engagement appropriate to the fund size? How much of the portfolio is covered? Is there access to quality corporate governance research?
In terms of resources, a key question is posed: does the manager have a corporate responsibility specialist in-house? The manual suggests that this is needed to provide assurance of a consistent approach and that the process is working. Mainstream fund managers and analysts need access to and support from corporate governance and corporate responsibility specialists. Some issues, for example directors’ remuneration, cannot reasonably be dealt with unless there is access to specialist resource or quality research.
The manual also highlights the importance of proper integration of responsible investment into investment decision making. It argues that new thinking must have in-house ‘champions’ if it is to thrive and suggests numerous other questions and reminders: Are staffing budgets for recruiting and retaining specialists appropriate? Do mainstream fund managers/analysts get the training they need to be competent in corporate governance and corporate social responsibility issues?
Under the heading of “Leadership, culture, human capital strategy and management systems”, the USS publication provides further checklists: What is the attitude of top leadership? Do the corporate governance/corporate social responsibility specialists have an appropriate reporting relationship to top leadership and each other?
Is there an appropriate internal assurance/learning process to ensure the development stays on track? Is this development reflected in the appraisal, reward and career progress decisions made by management?
The point is made strongly that leadership is a prerequisite of acceptance and that reporting to senior level is necessary if the specialists are to be effective.
Pension funds are significant owners of companies through fund manager or life company intermediaries. What they do, or do not do, has a significant impact on how companies are run.
Since the Myners report, and with the advent of the Institutional Shareholders’ Committee principles on shareholder activism, few pension fund would feel comfortable asserting that they were not interested in corporate governance.
The USS manual can be downloaded at the USS website Follow links to ‘Special Interest’, and then ‘RI’ and then ‘How to be a responsible pension fund’.