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ITEM PF12

PENSION FUND COMMITTEE – 26 AUGUST 2005

CORPORATE GOVERNANCE – VOTING AUDIT REPORT

Report by the Head of Finance & Procurement

1. The Oxfordshire Pension Fund fully exercises its voting rights in respect of all its share holdings. With regard to the Fund’s UK holdings, managers have been instructed to vote in accordance with RREV (Research Recommendations and Electronic Voting), which is a joint venture between the NAPF (National Association of Pension Funds) and ISS (Institutional Shareholder Services). However, in exceptional circumstances managers may vote differently to RREV, if in their judgement this would be in the best interests of the Fund. Where managers take a contrary view to the RREV they must obtain permission from the officers to vote differently. With regard to the overseas equity holdings, managers vote in accordance with their in house policies of best practice.
2. RREV’s research and voting recommendations cover all companies in the FTSE All-Share index and selected UK companies that fall outside. RREV’s guidelines are based on the Combined Code of Corporate Governance best practice and covers such issues as:

• Governance and financial performance
• Board structure
• Remuneration
• Auditing and accounting disclosure
• Shareholder Relations

3. Prior to the appointment of the independent global custodian, ABN Amro Mellon on 1 April 2003, and the appointment of the current four fund managers in July 2004, the proxy voting of shares was carried out by the custody arms of Schroders and Deutsche Asset Management. Under this arrangement it was difficult to verify independently whether Oxfordshire’s voting instructions had been correctly carried out.
4. Under the new custody arrangements ABN Amro Mellon is responsible for physically exercising the voting rights. ABN Amro employ a specialist voting agency, ADP (Automatic Data Processing), to undertake this task and they act on the voting instructions received from Oxfordshire’s managers.

Voting Audit for the Three Months ended 30 June 2004

5. In November 2004 the Pension Fund Committee received a report, which reported the findings of a proxy-voting audit undertaken on the Fund’s three equity managers, for the quarter ended 30 June 2004. ABN Amro produced a report on how Oxfordshire’s managers had voted and this was compared to the individual voting reports supplied by the managers.
6. The audit showed that there was only one discrepancy on Baillie Gifford’s voting, three for Alliance Bernstein and twenty-one for UBS. Because of the high number of errors on the UBS portfolio, officers wrote to their Head of Corporate Governance and asked for a detailed explanation. A letter of apology was received, which explained that the errors were due to their voting service provider, Institutional Shareholder Services (ISS), not properly carrying out their instructions. Following the audit UBS promised to review their future voting arrangements.
7. The Pension Fund Committee noted the report and instructed officers to carry out a similar exercise twelve months later.

Voting Audit for the Six Months ended 30 June 2005.

8. A voting audit was undertaken for the six months ended 30 June 2005. The results show that Baillie Gifford voted at 52 and UBS at 66 company meetings and in all instances voted in accordance with the RREV guidelines. Alliance Bernstein voted at 38 company meetings but voted against the RREV advice at four of these meetings, but without having obtained prior approval. The four meetings in question had 47 voting resolutions but it was only on 6 of the resolutions that Alliance voted differently. Full details of these 6 resolutions are shown in Annex 1.
9. Officers wrote to Alliance Bernstein and asked for explanations on the voting discrepancies. Their response is attached as Annex 2 (download as .doc file). Officers will continue to work with Alliance Bernstein in respect of their voting practices to maximise the effective use of their extensive research skills, whilst maintaining the need to ensure all fund managers vote the Pension Fund’s shares in a consistent manner.

Overseas Voting

10. RREV also operate an overseas voting service but the level of research is not as detailed or comprehensive as the coverage provided on UK companies. Corporate Governance and voting standards in overseas markets are generally not as advanced and transparent as those in the UK. There may also be obstacles when voting overseas such as "share blocking", whereby shares are blocked from trading for a certain period ahead of a meeting, which is an impediment in the exercise of voting rights.
11. The RREV fee for its overseas voting service is also quite expensive. Research is £38 per company report, except for the US where the cost is £22. In addition there is a voting advice charge of £2.30 per ballot or £2.80 if it is a US company ballot. At 30 June 2005 the Alliance Bernstein global equity portfolio was holding 221 overseas stocks of which 38 related to US Companies. At the same date the UBS multi asset portfolio was holding 289 overseas stocks, in the Global Optimal Third Fund and Global Emerging Markets Fund, in which the Oxfordshire Fund invests. The UBS overseas holdings included 51 US Companies.
12. Officers have discussed with Alliance Bernstein and UBS the policies they have in place on overseas voting. Both managers operate their own in house policies based on best practice and employ the services of the overseas voting provider, the ISS (Institutional Shareholder Services), to advise them.
13. For the six months ended 30 June 2005 Alliance Bernstein voted at 86 overseas meetings and UBS voted at 149 meetings.
14. Officers are satisfied that both Alliance Bernstein and UBS have sound policies in place for their overseas voting and do not feel there would be any additional value were Oxfordshire to subscribe to the RREV overseas voting service.

RECOMMENDATION

15. The Pension Fund Committee is RECOMMENDED to note this report and to ask officers to keep them informed of any changes to the existing arrangements.

SUE SCANE
Head of Finance and Procurement

Background papers: ABN Amro Mellon proxy voting report. Alliance Bernstein and UBS corporate governance and voting guidelines. Details of RREV’s overseas voting service.

Contract officer: Tony Wheeler, Pension Fund Investments Manager Tel: (01865) 815287

August 2005

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