Meeting documents

Return to Agenda

ITEM PF15

PENSION FUND COMMITTEE – 21 NOVEMBER 2003

CORPORATE GOVERNANCE AND SHAREHOLDER ACTIVISM

Report by the Head of Finance

1. Following a presentation by Hermes to the Pension Fund Committee on 29 August 2003, members asked officers to report back on any issues arising from the presentation, and to advise whether the Oxfordshire Pension Fund should be taking any further action to comply with the Myners Review on shareholder activism/engagement.

Brief Summary of the Hermes Presentation

2. Hermes explained how it was created from the merger of the BT and Post Office pension funds and how it recognised very early in the 1990s the need to improve corporate governance standards.
3. Hermes described how its independence enables it to totally focus on managing clients’ assets and not have to compromise in any banking or insurance activities. They said that 26 people were employed on corporate governance and engagement activities, which is substantially more than other investment institutions.
4. Hermes explained that activism, which is really another name for engagement, should not be just about criticising companies when they performed poorly. It should also be about supporting good management over the long term. This meant monitoring a company’s performance, intervening where necessary, establishing strong links and a healthy dialogue with the management. The Hermes investment style was to invest for the longer term and avoid a short-term mentality.
5. Hermes concluded its presentation by describing its Focus funds and how these were made up of a tiny universe of stocks. It explained how it invested in companies, which in its view had fallen below their true value but where good management had the potential of turning things around.
6. Hermes firmly believes that over the longer term companies that are well managed will produce superior investment returns for shareholders.

Oxfordshire’s Current Policy on Corporate Governance

7. The Oxfordshire Fund’s voting policy is that its managers should vote in accordance with the NAPF Voting Issues Service, unless there are exceptional circumstances, which in the managers’ judgement would not be in the Fund’s best interests. Where managers take a contrary view to the NAPF they must obtain permission from officers to vote differently.
8. The Fund’s new managers were asked about their policy on corporate governance and engagement during the interview and appointment process. They said that an informed proxy voting and corporate governance policy was an important part of their investment process and they were keen to engage with companies as and when this was necessary. All three managers whose briefs include equities provided examples of where they had carried out engagement.

Review of Existing and Future Arrangements

9. Local Government Pension Regulations require local authority pension funds to set out how they comply with the ten investment principles contained in the CIPFA document "Principles for Investment Decision Making in the Local Government Pension Scheme in the UK", which we are required by Local Government Pension Regulations to state where we do and do not comply. The Pension Fund Committee received reports on this issue in May and October 2002. The Pension Fund’s SIP (Statement of Investment Principles) is periodically updated to report any issues which are not fully complied with and Activism is one of these.
10. We would not recommend any changes to the Fund’s Corporate Governance policy for the time being. Managers have been instructed to report on their proxy voting and any engagement with companies that they carry out. Over the next twelve months it will emerge to what degree the new managers are proactive on Corporate Governance and voting.
11. Regarding the Hermes Focus Funds we would not recommend any investment in these for the time being, following so shortly after the Pension Fund’s major management restructure. Their recent investment performance has also been a little disappointing.
12. The principle on activism (see paragraph 9) says that "Local Authorities may wish to consider seeking alliances with either other pension funds in general, or a group of local authority pension funds, to utilize the benefits of collective size where there is a common interest to influence a company to take action on issues relating to corporate governance."
13. Such an organisation called the Local Authority Pension Forum exists to advise and coordinate the collective voting of local authority pension funds. Details of this organisation are shown at Annex 1.

RECOMMENDATIONS

14. The Committee is RECOMMENDED to:

1. maintain the Pension Fund’s current arrangements on corporate governance for the time being and monitor how the new managers vote and engage with companies; and
2. ask officers to include an item in the 2004/05 Business Plan to explore the option of becoming a member of the Local Authority Pension Fund Forum.

CHRIS GRAY
Head of Finance

Background Papers: CIPFA document "Principles for Investment Decision Making in the Local Government Pension Scheme in the UK"

Contact Officer: Tony Wheeler, Pension Fund Investments Manager. Tel (01865) 815287

November 2003

Return to TOP