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ITEM PF13

PENSION FUND COMMITTEE – 22 FEBRUARY 2002

CORPORATE GOVERNANCE VOTING ARRANGEMENTS

Report by Director for Business Support & County Treasurer

1. Over the last decade UK Governments have taken a keen interest in corporate governance issues, looking to shareholders to play a more active role in ensuring that company boards are run and structured efficiently, with the long term aim of providing greater shareholder value. In line with this aim, the Government has urged institutional shareholders to make greater use of their right to vote.
2. The Oxfordshire Pension Fund instructs its managers to vote on all its UK quoted company holdings, in accordance with the Fund’s own voting guidelines. The managers report on the way they exercise their vote, for each quarter year, to the Pensions Committee.
3. During the 1990’s Corporate Governance became a high profile issue in the UK. Three detailed committee reports were published during this period - the Cadbury, Greenbury and Hampel reports – culminating in the publication of the Combined Code of the Committee on Corporate Governance in July 1998. This Combined Code is now appended to the Stock Exchange Listing Rules. The Oxfordshire Pension Fund’s voting guidelines are primarily based on the Combined Code.
4. The Corporate Governance process within the UK has been an evolutionary one and the role of institutional shareholders in UK quoted companies has undergone substantial changes. This process is set to continue with the Government looking to introduce legislation that will force companies to get shareholder approval for remuneration reports.

Weaknesses in Oxfordshire’s Voting Guidelines

5. When the Oxfordshire Pension Fund drew up it own voting guidelines it tried to avoid a tick box mentality. In a few exceptional circumstances Fund Managers have advised that the Fund should vote differently to the guidelines and in the majority of instances their advice was accepted.
6. There are a number of voting issues that are not clear-cut and require a degree of subjective judgement. Many of these relate to directors remuneration, share options and incentive schemes.
7. In June 2001 the Pensions and Investment Sub-Committee agreed to subscribe to the NAPF’s (National Association of Pension Fund) Socially Responsible Investment and Corporate Governance voting service. The NAPF provides detailed voting reports on the top 350 UK quoted companies including voting guidelines on all company AGM and EGM resolutions. The NAPF’s guidelines are based on best practice and are more comprehensive than the Oxfordshire Pension Fund’s own guidelines. The NAPF has produced two booklets on corporate governance and voting entitled, "Towards better corporate governance" and "Voting policy on general meeting resolutions." These booklets have been given to members prior to this meeting.
8. Officers recently carried out a detailed exercise, which compared the way that the Oxfordshire’s managers voted with NAPF recommendations for the quarter ended 30 September 2001. This exercise highlighted a number of shortcomings with the Oxfordshire voting guidelines. For example the NAPF guidelines are more detailed in determining and defining an independent non-executive director compared to Oxfordshire’s (see page 3 of the booklet "NAPF voting policy on general meeting resolutions"). Consequently there were instances where the managers voted in favour of the appointment or re-appointment of directors when the NAPF recommended an abstention.
9. Directors remuneration, the awarding of share options and long term incentive plans are more complex and contentious issues and likely to become increasingly so. Similarly resolutions on socially responsible issues may require a great deal of time and research. These types of voting issues are not clear-cut and require a great deal of scrutiny, analysis and interpretation. Officers have neither the time nor the necessary skill and expertise to consider such issues. The NAPF voting service because of its resources is able to provide better-informed advice and guidelines on these issues.
10. The voting exercised at the Cable and Wireless, Vodafone and Kingfisher AGMs demonstrated the need for managers to be provided with clearer guidelines on remuneration related issues. In two instances the Oxfordshire managers exercised their votes differently. The NAPF voting service would overcome this problem because it offers advice on more complex voting issues, which require a degree of subjective judgement.

Conclusion

11. The NAPF voting guidelines are more comprehensive and sophisticated than Oxfordshire’s. The NAPF is better able to advise on contentious issues that are not clear-cut. Corporate Governance is an evolutionary process and guidelines need to be kept under regular review and updated, which a specialist voting service is able to do.
12. The NAPF voting service is highly respected by both institutional investors and fund managers. Both Oxfordshire’s managers subscribe to the NAPF voting service. The financial press and media frequently consult and quote the NAPF on contentious corporate governance issues.
13. The Oxfordshire Fund has subscribed to the NAPF voting service since June 2001 and should now take advantage of this by allowing it to supersede its own guidelines.
14. The NAPF are always quick to emphasise that voting decisions ultimately rest with shareholders and that they are only issuing guidelines to enable more informed decisions. However, the guidelines are based on best practice and unless there are exceptional circumstances managers should be expected to vote within these guidelines.

Financial and Staff Implications

15. There are none.

Environmental Implications and Implications for People Living in Poverty

16. There are no implications arising from this report.

RECOMMENDATION

17. The Committee is RECOMMENDED to:

1. instruct its managers to vote in accordance with the NAPF Voting Issues Service unless there are exceptional circumstances, which in the managers’ judgement would not be in the best interests of the Oxfordshire Pension Fund;
2. where managers take a contrary view to the NAPF they must obtain permission from officers to vote differently.

CHRIS GRAY
Director for Business Support & County Treasurer