Meeting documents

Return to Agenda

ITEM PF14

PENSIONS FUND COMMITTEE – 21 FEBRUARY 2003

SOCIALLY RESPONSIBLE INVESTMENT AND CORPORATE GOVERNANCE ISSUES

Report by Director for Business Support & County Treasurer

1. During the quarter a number of issues have arisen, which will have a bearing on future voting at company meetings. A brief summary of the issues is provided below.

Best Practice on Executive Contracts and Severance – A Joint Statement by the Association of British Insurers and the National Association of Pension Funds

2. There has been a great deal of criticism recently where companies have awarded large pay-offs to outgoing chief executives even though they may have brought their businesses low. As a consequence of these concerns the Association of British Insurers and the National Association of Pension Funds have drawn up a non-statutory code of best practice that they will police.
3. The code wants company boards to take full account of severance costs when they draw up contracts and to include clauses in contracts that would stop compensation when dismissal is for financial failure, such as a very significant fall of the share price relative to the sector.
4. The code also states that shareholders prefer short contracts of one year or less and that the one-year period provided for under the Combined Code of best practice should thus not be seen as a floor. In some circumstances shorter contract periods are more appropriate.
5. The code also covers the issue of bonuses and says, "Investors do not expect executives to be automatically entitled to bonuses." The code wants bonuses to be cut or eliminated when individual performance is poor and goes on to say "a remuneration policy that favours relatively low base pay and a higher proportion of variable pay is a good way of linking remuneration to performance."
6. All these issues are going to become increasingly important for shareholders because of new legislation, which will give shareholders an annual vote on company remuneration reports.
7. The Oxfordshire Pension Fund votes in accordance with the voting guidelines provided by the National Association of Pension Funds, who helped draw up this code, so this should ensure the Fund is exercising a proactive policy on its voting rights.

Higgs Review on the Role and Effectiveness of Non-Executive Directors

8. In January 2003 the Higgs Review was published, which over time will encourage radical changes in the composition of boardrooms, with a fundamental shift towards non-executive directors. This review forms part of a revised best practice code of corporate governance for listed companies, which will come into effect from 1 July 2003.
9. The main recommendations of the review are set out in Annex 1. The code is subject to self-regulation but the government intends to review progress of the recommendations in two years’ time.
10. Christine Farnish, chief executive of the National Association of Pension Funds, says the Higgs review represents a "significant step forward. It is now up to shareholders and people like us to make sure the recommendations are adopted." However, she warned that investors would have to be realistic about the adoption of the Higgs reforms. She said, "It will take some time for the reforms to work their way fully into the system. Some companies will move faster than others."

Report by the Financial Reporting Council (FRC) on the role of audit committees (Smith Report).

11. On the same day as the Higgs Review was published another report, by the Financial Reporting Council (FRC) on the role of audit committees, was also published.
12. The report by Sir Robert Smith, chairman of the Weir Group, was asked to review the role of audit committees in the wake of last year’s US accounting scandals. The main recommendations of the Smith Report are set out in Annex 1. The report will also lead to revisions to the best practice code on corporate governance.

New Corporate Responsibility Index

13. Industry group Business in the Community is setting up a new corporate responsibility index for the UK’s leading companies so that companies and individuals can compare levels of corporate responsibility in different firms.
14. When the index is established it will provide:
    
    

1. Companies with a systematic process to compare themselves with others in their sector.
2. A measure of how much a company integrates corporate responsibility within its business practices.
3. A way of identifying gaps in performance and help to find ways in which performance can be raised.
   
   
15. The index will be published on 11 March 2003 and the National Association of Pension Funds hopes to use the index as part of its voting issues service, to which the Oxfordshire Pension Fund subscribes.

SRI Local Authority Pension Fund Lifts Tobacco Ban

16. During the quarter it was reported in Professional Pensions that the Shropshire County Council Pension Fund, which had excluded the tobacco sector from its portfolio for around 30 years, had decided to reintroduce it following advice from its investment consultant. The exclusion of tobacco stocks had proved costly to the Shropshire Fund, as the tobacco sector had been one of the few that had produced positive investment returns during 2002. It was intimated in the article that excluding stocks could leave a fund open to challenge.
17. Following the publication of this article the Society of County Treasurers carried out a survey of county council pension funds to see if any other county council pension funds applied SRI restrictions but only one other did. This was Northumberland who have instructed their managers to avoid investing in companies that are implicated in serious crime or in countries covered by the UN trade embargo. The Oxfordshire Fund whilst adopting a policy of positive engagement with companies does not apply any restrictions.

RECOMMENDATIONS

18. The Committee are RECOMMENDED to note the issues contained within the report.

CHRIS GRAY
Director for Business Support & County Treasurer

Background Papers: Best practice on Executive Contracts and Severance – a Statement by the ABI and NAPF, Higgs Review Smith Report

SCT survey on pension fund SRI restrictions.

Contact Officer: Tony Wheeler, Directorate for Business Support Tel (01865) 815287

January 2003.

Return to TOP