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ITEM PF14

PENSION FUND COMMITTEE – 25 FEBRUARY 2005

SHAREHOLDER ACTIVISM AND CORPORATE GOVERNANCE

Report by the Head of Finance & Procurement

1. 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".
2. 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.
3. 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?

4. 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.
5. 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".
6. 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.
7. 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".
8. 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

9. 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.
10. 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.
11. 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.
12. 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

13. 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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