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Vigilante armed with a torch

Pension funds in the UK are battling to deal with a public loss of confidence in them. Not only are asset values dwindling for the third year in a row, but high profile cases of excessive pay for top executives at some of the country’s biggest corporations has led to calls for the funds to do more as shareholders.
The National Association of Pension Funds is getting to grips with the problem. As part of its drive to strengthen its corporate governance area, the association has harnessed the expertise of experienced investment manager Geoff Lindey.
Lindey has taken on the role of strategic adviser on corporate governance, having retired from JP Morgan at the end of March. His involvement with the NAPF goes back 20 years.
He has taken on the post at a time when shareholders have been publicly protesting at the huge pay deals given to some executives at companies including GlaxoSmithKline, Cadbury Schweppes, Prudential and Royal Bank of Scotland.
Are there systematic issues here, or are these isolated cases? Lindey says it is a bit of both. There are some widespread problems to be faced, but it is important to see that not all public companies have this type of remuneration imbalance. “What’s been neglected in all of this is that the majority of companies haven’t been involved at all,” he says. “It’s a minority, but a large minority.”
“My ambition in this job is to see in a few years’ time no remuneration issues at all,” he says. Remuneration committees at these large public companies should be doing their jobs. They should be ensuring that executives at these companies are rewarded for good, and not for poor performance. “That is the sort of alignment that we should all be aiming for.”
However, although it has been a red-hot issue in the public sphere recently, Lindey says that remuneration is a bit of a side issue within corporate governance. Corporate governance, he says, is all about maximising the long-term wealth potential. Management and shareholders should be at one on this.
“If you believe in the free enterprise system, by maximising the wealth of shareholders, and private enterprise… then you maximise the wealth of the whole economy. That’s something that I happen to believe in.”
Share ownership gives you entitlements such as dividends, he says, but the status also gives you duties. “You are the owners,” he says. Although some chief executives have a tendency to refer to the company they run as their company, it should be remembered that they do not own it; the shareholders do.
There has to be accountability, says Lindey. “Proper accountability is fundamental to the workings of the free enterprise system. Shareholders should take their duties seriously and management should welcome this.”
Companies do not exist in isolation from their shareholders. No one should be surprised when the head of a blue-chip corporation accepts an extraordinarily high pay package. “People who rise to the position of chief executive are by their nature driven and bright, and anyone in that position will do their best to maximise their wealth. It’s just human nature.”
This is why it is up shareholders to control the situation properly. They have a duty to be vigilant and to exercise their vote, he says. If their investment is indirect, they have to make sure that the voting is carried out on their behalf, for example, by the investment managers who run portfolios for them. Some investment managers, he says, are more enthusiastic about voting than others.
Where does ‘socially responsible investment’ (SRI) fit in? Lindey says SRI and corporate governance are two separate things. Investors have a clear responsibility to make sure the companies they invest in are run properly, but SRI is harder to grapple with because it covers issues on which there is often no consensus.
Lindey admits he finds the issue of ethical investment for collective vehicles difficult. It is an area that the association needs to think about, he says. “The problem is that manufacturing weapons, for example, which is clearly legal, is unethical in the views of some people but not others. If a legitimate government says something is legal, I can’t think why funds shouldn’t invest in it, although individuals are free to adjust their personal portfolios to their own ethical principles. One person’s ethics are not another’s,” he says.
Through engagement, however, a company can be encouraged by its shareholders to improve its ethical stance, something which cannot be done if a fund does not own the stock.
How involved should shareholders become in companies? There is a whole spectrum of different levels of involvement shareholders can have with the companies they own, says Lindey. This ranges from total indifference through to taking an interest in voting and engagement, to the other side which is confrontation.
Some investors take a particularly active approach to their involvement in companies, notably the Hermes Focus Fund. Hermes runs the £50bn (E72bn) British Telecom and Post Office pension funds and is and its Focus Fund is an active campaigner for better corporate governance. “That kind of very high profile activism has its place in the spectrum,” says Lindey.
The NAPF does have systems in place to help pension funds in their duties as shareholders. Its Voting Issue Service, which members can subscribe to, analyses the proxy statements for companies and gives advice on how the funds can vote. The association also offers its members the opportunity to engage with the companies they invest in, through the agency of the NAPF in one way or another, he says.
Pension funds cannot engage directly with companies, unless they are very large. “We have to find ways of doing this,” he says.
Companies should be articulating key facts about their business strategy clearly to shareholders. They should be stating what their medium and long-term goals are, and how remuneration relates to this. If shareholders know the objectives and think they are inappropriate, they should have the opportunity of discussing this with management. If they don’t like what they hear, then they can choose to cease holding that stock.

But if pension funds were to use their collective shareholder muscle – as they have done in the past – they may be more effective in influencing management behaviour, he says.
This has been done before through the NAPF, and could happen again, he says. At the latest NAPF Investment Conference in March, this issue was brought up. Some participants discussed the possibility of trying to reinitiate case committees.
Case committees were part of a system the NAPF used to organise for bringing concerned investors together. If a member of the association had worries about the way a company was being run, the association would inform the other members. Then, if other members had similar views, it would put together a group of people – who might together own 15-20% of a company – who would then meet and discuss what their
concerns were.
“This was very effective,” says Lindey. “We are now investigating why it had fallen into disuse and see whether it could be reactivated. It could work well.”
The case committees were held away from the public spotlight, and even when management was persuaded to abandon an unpopular course of action, the way this result had been achieved was not splashed in the press.
Adamant though he is that shareholders should take their responsibilities seriously, Lindey does not favour legislation forcing investors to do so. Attempts to give legal force to that responsibility have had the opposite effect.
“The one law you always run into is the law of unintended consequences,” he says citing ERISA in the US. Private sector pension funds are subject to this law which requires pension funds to treat a vote as an asset. They are obliged to vote, even on issues where they have no opinion and this applies to companies worldwide.
This had led to a situation where pension funds that are not genuinely interested in corporate governance vote with management all the time. So perversely, says Lindey, this well-meaning law has entrenched the position of management, weakening the position of the shareholders who do care about the issue.
Instead of legal change, he says, the NAPF would rather follow the route of vigilance, moral persuasion and holding controversial issues up to public oversight.

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