Guest Comment: How corporate governance reform changes trustee stewardship

Written by Sackers partner Stuart O'Brien

A number of recent business scandals have prompted the Government to consult on strengthening the UK's corporate governance framework, with implications for companies and investors. Pressure has mounted on trustees to engage with the companies they invest in on behalf of their members. However, in practice, most trustees are unlikely to have the resource to undertake significant stewardship activities and, for most schemes, these will be delegated to investment managers.

In July 2014 the Law Commission published its findings on trustee fiduciary duties, and while it recognises the importance of stewardship, its view was that there is no duty on pension trustees or other investors to undertake stewardship activities, other than in the unlikely situation where the trustees’ shareholding confers a substantial measure of control over a company. Trustees therefore have discretion over how far to engage with companies and to exercise their voting rights.

Stewardship is not confined simply to the voting of shares held. Stewardship activities can be broader and may include monitoring and engaging with companies on matters such as strategy and corporate governance, including culture and remuneration. Before considering how they might undertake stewardship activities, however, trustees do need to consider how their investments are held. Frequently this will be through pooled funds. Trustees will therefore need to consider the terms of their investment to ascertain the extent to which they can direct the pooled fund manager to undertake stewardship activities on their behalf. This may be limited.

In November last year the Government published its Green Paper on measures to strengthen corporate governance in UK businesses. A particular area of concern is the question of executive pay and the paper sets out options for increasing shareholder voting rights in this area. It notes, however, that stronger shareholder voting rights on pay will only have an impact if shareholders are prepared to cast their votes and the Government therefore wants to explore ways of encouraging shareholders to make full use of their existing and any new powers on pay, and engaging in active stewardship of the companies they own.

One option considered is the mandatory disclosure of fund managers’ voting records at annual general meetings (AGMs) and the extent to which they have made use of proxy voting. However, the Financial Reporting Council’s UK Stewardship Code already states that institutional investors should publicly disclose their voting records on executive pay and other resolutions put to shareholders. Most investment managers appointed by pension trustees already comply with this guidance so it is not clear that a new mandatory requirement would add very much. A more pertinent question might be the extent to which pension trustees take note of these disclosures as part of their monitoring of the manager.

There is some momentum for change from the pension scheme investor side though. On 17 January 2017, the PLSA published an updated edition of its Corporate Governance Policy and Voting Guidelines. The new guidelines call on investors to take a tougher stance on those who set executive pay and require companies to explain what steps they are taking to bring diversity to their boardroom.

As noted above, the extent to which trustees are able in practice to direct (or simply monitor) the stewardship activities of their appointed investment managers will depend on the manner in which the investment is made (pooled or segregated) and the contractual terms of the manager’s appointment. At one end of the spectrum, trustees may be able to organise their own voting activities at company AGMs, although for all but the very largest of pension schemes this is unlikely to be a terribly practical solution.

However, direct engagement is not the only answer and a number of options exist, including outsourcing stewardship activities to engagement or voting overlay service providers, pooling stewardship activities with other pension funds or subscribing to a ready-made set of voting instructions. Recently launched initiatives, such as the AMNT’s Red Line Voting, enable greater direction from smaller institutional investors.

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