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ITEM PF14
PENSION
FUND COMMITTEE – 25 FEBRUARY 2005
SHAREHOLDER
ACTIVISM AND CORPORATE GOVERNANCE
Report by
the Head of Finance & Procurement
Background
- In August 2002
Local Government Pension Scheme regulations came into force requiring
administering authorities to report, in their Statements of Investment
Principles, to what extent 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".
- Two reports went
to the Pension Fund Committee during 2002, which reported that the Oxfordshire
Pension Fund complied with all the principles, except on shareholder
activism and the monitoring of transaction costs. The Pension Fund’s
latest Statement of Investment Principles reports that these two principles
are still not complied with.
- This report investigates
the current position on shareholder activism. A report on the monitoring
of transaction costs is being considered separately at this meeting.
What is
shareholder activism?
- Activism is where
shareholders or their agents, which in Oxfordshire’s case is its fund
managers, pursue proactive policies in their dealings with company managements.
This involves not just voting but also active dialogue and intervention
where necessary.
- The Myners Review
said on activism that it was "concerned by the value lost to institutional
investors through the reluctance of fund managers to actively engage
with companies in which they have holdings, even when they have strong
reservations about strategy, personnel or other potential causes of
corporate underperformance." The review went on to say that "there will
be times – certainly more than at present – when intervention is the
right action to take".
- The principle
on activism contained in the CIPFA document "Principles for Investment
Decision Making in the Local Government Pension Scheme in the UK" refers
to the need for having sound voting policies in place and engaging the
services of external voting agencies and advisers to assist compliance
in activism. The Oxfordshire Pension Fund has always complied with this
aspect of activism.
- However, the activism
principle also says that "trustees should ensure that managers have
an explicit strategy, elucidating the circumstances in which they will
intervene in a company; the approach they will use in doing so; and
how they measure the effectiveness of this strategy".
- In November 2002
the Institutional Shareholder Committee (ISC) produced a best practice
paper on shareholder activism in the UK entitled "The responsibilities
of Institutional Shareholders and Agents – Statement of Principles".
The ISC comprises the Association of British Insurers, the Association
of Investment Trust Companies, the National Association of Pension Funds
and the Investment Management Association. This paper is shown in Annex
1.
The Oxfordshire
Pension Fund and Activism
- Prior to the appointment
of the current four managers in July 2003, officers and the Independent
Financial Adviser held detailed discussions with Schroders and Deutsche
Asset Management, its previous managers, on their Corporate Governance
and SRI policies. It was concluded that though steady progress had been
made in this field neither manager had incorporated activism within
their investment process. There was little evidence of active engagement
and no evidence of intervention. It was therefore decided that we did
not fully comply with the CIPFA principle on activism.
- During 2004 officers
discussed with the Pension Fund’s new managers how they dealt with corporate
governance and shareholder activism. In the officers’ opinion all four
managers have demonstrated that they take their corporate governance
responsibilities seriously and furthermore comply with the industry
best practice on activism explained in paragraphs 7 and 8. Annexes 2
to 5 summarises the managers’ policies on Corporate Governance and activism.
- All four managers
report their proxy voting and the company engagement they have carried
out to the quarterly Pension Fund Committee. There is clear evidence
over the past eighteen months that the degree of company engagement
being undertaken by Oxfordshire’s four managers is higher than it was
under the previous managers.
- Officers now consider
that the CIPFA principle on activism is being fully complied with and
that the Pension Fund’s Statement of Investment Principles should be
updated to reflect this.
RECOMMENDATION
- The Committee
is RECOMMENDED to note this report and to amend the Pension Fund’s Statement
of Investment Principles to reflect that the CIPFA principle on activism
is now being fully complied with.
SUE
SCANE
Head of Finance
& Procurement
Background papers: CIPFA Pensions Panel booklet "Principles for Investment
Decision Making in the Local Government Pension Scheme in the United Kingdom",
Myners Review on Institutional Investment in the UK, Institutional Shareholders’
Committee – The responsibilities of institutional shareholders and agents
– statement of principles, the Fund Managers’ policy papers on shareholder
activism and corporate governance.
Contact
officer: Tony Wheeler, Pension Fund Investments Manager Tel: (01865)
815287.
February
2005.
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