GLOBAL - Donald McDonald, director of the trustee board at the £40bn British Telecom pension fund, has identified a lack of executive independence and 'fat cat' pay as the largest obstacles hindering corporate responsibility.
McDonald, who is also the chair of the board at the United Nations Principles for Responsible Investment (PRI), told delegates at the World Cup of Investment Management conference in Paris: "The largest problem is if the chairperson and chief executive officer are one and the same. This creates virtually no independence, as there is no senior person to challenge and question executive management."
He added executive compensation is another important factor for corporate social responsibility, and suggested: "It is a particularly large problem, mainly in the US. There are grotesque transfers of money to executives while they did not do anything to improve the corporate social responsibility."
McDonald outlined how, after the BT fund - the largest occupational pension fund in the UK - interfered in the SRI practices of oil giant BP, executive compensation at the company is now being tied "in a meaningful way" to performance.
"At BP, there is going to be a factor in compensation related to health, safety and environment," he said.
Referring to a recent study by the ABI, which concluded the single most important factor in performance is executive compensation, McDonald said the companies which have the best policy, outperformed the company that had the worst policy. (See earlier IPE story: Good governance increases returns by 18%)
"This is meaningful, and should trigger more research," he said.
Also speaking in Paris, Fiona Stewart, of the financial affairs division with the Organisation for Economic Co-operation and Development (OECD) stressed the same counts for pension funds.
"You must define the role of the board clearly, and you must very clearly define who is operation and who is oversight," she said.
She argued pension funds need to look more closely at how they themselves are governed, and not only question the governance of the companies they hold shares in.
According to Stewart, the link between corporate governance and performance is also clear for pension funds.
"Pension funds that are well governed tend to perform better. Very few pension funds question if they have the governance tools to manage the new investments," said Stewart.
IPE learnt in October last year the OECD is revising its guidelines for pension fund governance. (See earlier IPE story: OECD to revise governance guidelines)
Stewart told IPE the OECD now expects to publish these new guidelines this summer.
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