NAPF Update

Securing the future of pensions

Stronger Corporate Governance – the benefits are obvious

Institutional shareholders, including pension funds, have been taken to task by politicians and others over the past year or so for their failure to address eff ectively the looming fi nancial crisis before the dam burst in 2008. The NAPF has long argued that pension funds and their managers played a relatively minor role compared to bank boards and their regulators. However the truth is that no one can carry on as if nothing has happened and we, like others, have spent much of the recent past reconsidering our approach to engagement and asking how it can be made more effective.

Soon companies will have to “comply or explain” with an updated combined code, institutional investors will be subject to a new Stewardship Code and the coming voting season will rightly see increasing scrutiny on remuneration.

The object of good governance practices is to improve corporate performance over the longer term. That is good for pensioners, good for employees and good for the economy.

Playing its part in improving standards, early in February, the NAPF published a guide to assist pension fund trustees fulfil their obligations under the evolving Stewardship Code. At the same time, we supported this initiative by setting up a web-based group which will provide a vehicle for collective engagement. On the same day, Lord Myners, while commending the eff orts of many pension funds, exhorted the industry to raise its game. The key links in the chain are accountability of managers to trustees and accountability of company boards to their shareholders.

A robust discussion of the effectiveness of a manager’s engagement policy will provide better insights into his investment abilities than any debate over the latest performance data or his economic overview. In my experience trustees grasp the importance and relevance of company behaviour quickly and will willingly hold fund managers to account for their stewardship of the pension fund assets. This “engagement on engagement” is only just beginning. We want funds to ask how best they can apply the Stewardship Code in their own circumstances, including size, complexity and investment management arrangements.

The Financial Reporting Council has announced a number of changes to the Combined Code which will come into eff ect later this year. Of these the most important in our view is the increased emphasis on the eff ectiveness of the board and the renewed call for boards to make greater use of external evaluations. Many companies already do this but what shareholders want to see is better disclosure of the process and its outcomes. Done well it gives investors real insight into the quality of the board and its leaders.

More immediately, I anticipate that AGMs will again be dominated by the debate over executive pay. We wrote to the Chairmen of the FTSE 350 in November urging restraint when making pay awards. In our discussions with companies since then it has been disappointing to see too many driven by peer benchmarking and too few looking at the performance of the business when assessing executive pay. For most companies our starting position in 2010 is: no increase in base pay or benefits; and where an increase in performance pay is justified, more stretching performance conditions should be introduced. I expect that in 2010 we will see significant votes against remuneration policies at a number of companies.

The benefits to pension funds from building a stronger corporate governance culture and holding managers to account are obvious: better long term returns and a better understanding of their managers’ investment processes.

David Paterson,
Head of Corporate Governance

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Editor of NAPF Update: Ruth Wharram Tel: 020 7601 1718 or e-mail: ruth.wharram@napf.co.uk

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