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ITEM PF16

PENSION FUND COMMITTEE – 29 AUGUST 2003

SOCIALLY RESPONSIBLE INVESTMENT AND CORPORATE GOVERNANCE ISSUES

Report by the Head of Finance

1. In July 2003 a revised Combined Code of Corporate Governance was published by the Financial Reporting Council (FRC), which built on the recommendations of the Higgs review. The FRC is an independent body that oversees changes to the code. The original Higgs recommendations were reported to the Pension Fund Committee in February 2003.
2. The final draft gained strong support from both business and shareholder groups after several months of debate. A few of the original Higgs proposals received criticism for being too prescriptive and the final version is viewed as being more flexible. Annex 1 sets out the key points of the new code.
3. Nearly all of the Higgs 50 recommendations were retained. The only significant proposal dropped was a recommendation that the chairman of a company should not also chair its board nomination committee.
4. Several other key proposals were modified or clarified. For example the rule that a chief executive should not become chairman was made more flexible with the provision that if in exceptional circumstances a board decided a chief executive should become a chairman then it should consult with its major shareholders. Reasons for the decision should also be disclosed in the next annual report.
5. Another key area of concern was the bolstering of the role of the senior independent director, or SID as it has now become known. It was feared that this could weaken the position of the chairman by creating an alternative power base in the boardroom and that the SID may misrepresent the views of the board in meetings with shareholders. The final daft answers this by stressing the SID should attend shareholders’ meetings primarily to listen to shareholders’ views.

Expansion of the NAPF Voting Service

6. In May 2003 the National Association of Pension Funds (NAPF) announced plans to radically expand its voting service on boardroom pay and corporate governance.
7. The NAPF, which represents £600bn of institutional investment, is setting up a new company – called RREV – that will give corporate governance analysis and voting recommendations on the FTSE All Share index, rather than just the top 350 companies that it currently covers.
8. RREV (Research, Recommendations and Electronic Voting) is a joint venture between the NAPF and the US-based shareholder lobbyist company, Institutional Shareholder Services. Further details of this venture can be obtained from an NAPF Press Release, which is shown in annex 2.

The Oxfordshire Pension Fund’s Current Voting Policy

9. The Oxfordshire Pension Fund subscribes to the NAPF voting service and should benefit from the expanded service. The Fund uses the FTSE All Share Index as its new benchmark for UK Equities, which means that most of its UK equity holdings will now be covered by the new service.
10. The Oxfordshire Fund’s current voting arrangements is that its managers have delegated authority to exercise the voting rights. They are instructed 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 Fund’s best interests. Where managers take a contrary view to the NAPF they must obtain permission from officers to vote differently.

RECOMMENDATION

11. The Committee is asked to note the report.

CHRIS GRAY
Head of Finance

Background Papers: Combined Code of Corporate Governance published by the Financial Reporting Council (FRC). NAPF Press Release 22 May 2003.

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

August 2003

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