Peter Carvill examines how much the increased focus on corporate governance has been talk and how much has been action

In recent weeks, much talk and chatter has buzzed around issues of stewardship and corporate governance, in so far as they relate to the pensions industry. September saw the launch of the Financial Reporting Council’s (FRC) Feedback Statement: Revisions to the UK’s Stewardship Code, the result of a consultation launched five months previously. The code itself had been launched in 2010. Following the launch of its revised form, the National Association of Pension Funds (NAPF) released its stewardship policy in November, in which it set out six principles of best practice. This was in turn followed in early December by the European Commission’s Action Plan: European Company Law and Corporate Governance.

That such changes and proposals should occur now is of little surprise, given the recent ‘stakeholder spring’ and government missives of working together towards ‘responsible capitalism’. In delivering the keynote speech at the NAPF’s Corporate Governance Conference, the secretary of state for business, innovations, and skills Vince Cable said: “The long-term pursuit of value creation has been crowded out by a focus on short-term goals.”

Cable’s earlier remarks were more colourful; in the same speech, he had already declared, “Equity investment has become increasingly complex and intermediated, with more and more links in the chain. As a result, the different players are often working to their own agendas and timescales to the detriment of long-term value creation. Too often, traders go after a quick buck rather than looking for sustainable returns based on sound stewardship of companies. Holdings are bought and sold to turn a short-term profit with no thought given to the underlying fundamentals. This phantom chase was at its most frantic in the financial markets, where banks took dross and sold it as gold. But that lack of responsibility – the failure to take calculated investment risks based on sound principles – is more widespread.”

Scottish Life investment marketing manager Lorna Blyth agrees that the current atmosphere results from the UK economy’s ongoing suffering. “What 2008 did,” she says, “was bring forward much more transparency. It became apparent that there were a lot of things that people weren’t sure about and didn’t understand. The Financial Services Authority (FSA) may not have been on the ball. What all this caused was people wanting to know what was being done on their behalf. If you invest in a fund that holds shares in a company, are they passively investing or are they active shareholders?”

Despite being widely used, ‘responsible capitalism’ and ‘stewardship’ are terms that in this context have widely escaped definition: part of the remit of the FRC’s Feedback Statement was to improve the definition of the latter term, which the NAPF defines in its stewardship policy as, ‘the active monitoring of and engagement with companies’.

Definitions aside, there is general consensus that funds are increasing their commitment, with the recent NAPF Engagement Survey saying that its own results “clearly demonstrate that pension funds are taking their stewardship responsibilities every more seriously”. Further on, the report adds: “The NAPF believes that engagement with investee companies is a vital part of the investment management process, and the NAPF survey provides evidence that UK pension funds share this belief and take this responsibility seriously.”

The apocryphal evidence is telling. “The FRC set out up the stewardship code in 2010,” says Blyth, “and this year we signed up to it as Scottish Life. Royal London Asset Management was already signatories to the code so what we did was write to our 26 fund manager partners to ask who had signed up, who hadn’t, and where they stood in relation to the code. All that information is on our website now.”

There are a number of findings outlined in the NAPF Engagement Survey that would seem to support the proclamations of the NAPF: 93 per cent of respondents agreed that institutional investors have stewardship responsibilities; half believed that institutional investors had played active roles in 2012; engagement was adding value and influencing change; more than 90 per cent of funds had discussed the code or corporate governance in the last year; and a majority of respondents had signed up for the code.

But dig a little deeper and those statistics do not look so impressive. To start with, there were only 42 respondents to the survey, all major funds with each holding more than £1 billion in assets under management. In total, the NAPF Engagement Survey reported that the combined assets of respondents totalled £323 billion. Yet the NAPF’s own website declares that its members operate almost 1,300 separate pension schemes and have combined assets of nearly £900 billion. How representative the survey is of the pension fund industry is debatable.

J.P. Morgan global pensions executive Benjie Fraser says he thinks the industry is broadly right behind the code. He adds: “The issue would be around things such as governance, which is the capacity to have the resources to manage a fund in ways that the larger funds are able to. I think that there’s a huge amount of willingness and interest to look at the code, and to embrace it, but the issue with smaller funds is that they don’t have the same resources that the big funds do. In terms of monitoring the code and in working on these excellent principles, it is a slightly different experience. That’s not to say that the NAPF’s work in working with the mid-sized funds isn’t a good way forward. This is when associations like the NAPF provide their value because they represent the interests of all their members.”

Despite the NAPF’s positive outlook as to the attitudes of the funds themselves, Pensions Age reported in December that despite the statistic that the proportion of funds engaging in stewardship activities had risen from 48 per cent in 2011 to 71 per cent in 2012, there was still room for improvement amongst investment consultants: only 38 per cent were proactive in bringing up the issue of stewardship when talking with pension funds and, of that minority, just 45 per cent were recommending signing up to the stewardship code.

There are reasons for that, says Curtiss. “Of course, smaller- and medium-sized pension funds rely on their fund managers to apply stewardship and to engage with companies. It’s less practical for a small scheme to do that. But they can do more than sit on their hands. They can ask tough and challenging questions of their fund managers and then hardwire this into statements of investment principle, include stewardship criteria in relative searches, and, once a manager is appointed, include the criteria in the ongoing review process. These are essentially the actions that the NAPF has identified.”

The strength and relevance of the stewardship code is almost certainly to be tested in international waters. The European Commission’s Action Plan: European Company Law and Corporate Governance states that a number of ‘concrete lines of action in the area of company low and corporate governance’ have been identified as necessary for…further improvements in these areas’.

Furthermore, it adds: “These include in particular initiatives increasing the level of transparency between companies and their shareholders, initiatives aimed at encouraging and facilitating long-term shareholder engagement and initiatives in the field of company law supporting European businesses and their growth and competitiveness. The initiatives in the area of corporate governance do not aim at altering the current approach, but ensure, by encouraging proper interaction between companies, their shareholders and other stakeholders, that this approach becomes more efficient. As regards company law, the initiatives proposed focus in particular on providing companies more legal certainty, in particular as regards cross-border operations.”

For RPMI’s corporate governance counsel Deborah Gilshan, the future is simple. “We envisage more stewardship responsibilities across global portfolios,” she says. “Those responsibilities don’t just stop at Dover. We’ve done a lot of work on stewardship in many markets around the world. We see collaboration as being an important part of the work that we do in terms of collaborating with other asset owners. We also collaborate with our fund managers; we see it as a partnership with their responsibilities in assessing them for their stewardship capabilities.”

Written by Peter Carvill, a freelance journalist

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