Stewardship in 2012 Presentation to Hounslow Pension Fund Panel
Introduction Presentation to London Borough of Hounslow Pension Fund 17th December 2012: Alan MacDougall, Managing Director Janice Hayward, Client Services Director David Dando, Client Services Executive Stewardship in 2012 Regulated by the FSA PIRC client presentation: Stewardship in 2012
About PIRC Who we are and what we do – Focused on shareowners: PIRC was set up by pension funds to provide research and advice to them. – A dedicated resource: we operate a large team focused purely on corporate governance and social responsibility issues. – Completely independent: we are entirely owned by current and former directors of PIRC - we are manager-owned. – Global reach: we cover any company that our clients hold, whatever the market. – No conflicts: we only provide services to shareholders, not the companies we research. – Transparent: we are the only adviser to publicly disclose our voting recommendations. – Governance advocates: we are regularly contacted for our views and frequently quoted in the media. PIRC client presentation: Stewardship in 2012
Corporate Governance and Shareholder Value Adding value through active stewardship I – Cadbury Report 1992: “ (The) shareholders as owners of the company elect the directors to run the business on their behalf and hold them accountable for its progress. The issue for corporate governance is how to strengthen the accountability of boards of directors to shareholders.” – The Myners Review 2001: The review concluded that voting proxies and activism were necessary and legitimate responsibilities of pension funds and asset managers. Subsequently incorporated into the Myners Principles for LGPS funds with CiPFA advice. – Governance and Performance: “We find a clear link between standards of CG & share price performance, equity risk & profitability measures. Companies with the highest quality of governance structure & behaviour have outperformed those with the lowest.” Deutsche Bank, Beyond the Numbers 2006. PIRC client presentation: Stewardship in 2012
Corporate Governance and Shareholder Value Adding value through active stewardship II – Investment Consultants: “The balance of academic evidence supports the thesis that good corporate governance adds value…. The benefits gained may be return-enhancing, but may equally be risk-reducing in nature.” WatsonWyatt, Remapping Our Investment World , October 2003. “We believe that active ownership can help enhance long-term shareholder value and are therefore supportive of pension funds being more active.” ‘No action, no option’, WatsonWyatt, May 2009 (Towers Watson) – Stewardship Code 2010: “The Stewardship Code (must) give a sharper emphasis on long-term company strategy, reinforcing the message that engagement has to be more than a box-ticking exercise. Instead, it requires genuine dialogue with companies about the long-term prospects for growth.” PIRC client presentation: Stewardship in 2012
About PIRC Our services for London Borough of Hounslow – Global governance research: PIRC provides governance research and customised proxy voting recommendations on all UK, US and Global listed equities held by the Hounslow Pension Fund. Reports are accessed by the fund’s members & officers through a unique client web-site portal. – Custom Template: In conjunction with the Fund’s officers, we have created and we maintain a voting template customised to LB Hounslow’s voting policy. – Proxy Vote Recommendations: We provide customised vote recommendations based on LB Hounslow’s voting policy. – Consultancy: We provide guidance on new or unusual voting issues not covered by the existing voting template. – Voting: We provide vote execution based upon the agreed vote recommendations. – Quarterly Reports: We provide quarterly reports summarising the voting activity that took place during the quarter. PIRC client presentation: Stewardship in 2012
About PIRC Our services for London Borough of Hounslow – Communications: We publish a weekly client newsletter ‘PIRC Alerts’ available for Councillors & Officers of the LB Hounslow Pension Fund. – Conferences and seminars: We provide 2 free places for the LB Hounslow Pension Fund at each governance event organised by PIRC. – Expert consultancy: We provide additional support as required to the officers of the LB Hounslow Pension Fund. Stewardship in review: Looking back on 2010
LB Hounslow Pension Fund Voting Template – The LB Hounslow Pension Fund voting template is divided into three segments: UK, Global & US. – The UK voting guidance is based upon the UK Corporate Governance Code and is designed to support best practice at UK companies. – The Global template follows the principles of the UK Corporate Governance Code but reflects the various differences in local best practice at European and Global companies. – The US template also follows UK Corporate Governance best practice as set out in PIRC’s US Shareholder Voting Guidelines & seeks to improve the level of governance at US companies . Stewardship in review: Looking back on 2010
LB Hounslow Pension Fund Voting Template – Report & Accounts – Based on adequate disclosure of information. – Requires companies to submit their remuneration report to a shareholder vote. – Requires companies to seek shareholder approval for dividends paid to ensure that the dividend is appropriate and covered by earnings. – Requires companies to have an adequate environmental policy disclosed. – Requires clearly identifiable financial KPI’s. – Requires disclosure of a company’s employments policies. Stewardship in review: Looking back on 2010
LB Hounslow Pension Fund Voting Template - Boards & Independence – Opposes combined roles of Chairman and Chief Executive. – Opposes non-independent directors where less than half the Board including Chairman are not independent. – Opposes executives with termination provisions in excess of one year’s salary and benefits. – Opposes Board committee chairman where the committee is not comprised solely of independent directors. – Opposes directors with excessive time commitments. – Opposes directors where there are serious concerns over previous conduct or competence of individual directors. Stewardship in review: Looking back on 2010
LB Hounslow Pension Fund Voting Template - Remuneration – Support remuneration where the structure is transparent, clear and comprehensible. – Require a significant portion of remuneration to be performance- based. – Oppose executive pay where excessive compared to peers. – Oppose executive pay where performance hurdles are not sufficiently challenging or are non-existent. – Oppose re-pricing of options and re-testing of performance conditions attached to share awards. Stewardship in review: Looking back on 2010
LB Hounslow Pension Fund The Shareholder Spring – What happened? Was the ‘shareholder spring’ significant in voting terms? – The average vote against pay policies was definitely up & there were more defeats. – Companies across the board have experienced more opposition. – There is some evidence that voting against do change policies. – Investor opposition grew during the season. – Directors (chief executives) were also forced out, but votes against remain surprisingly low. PIRC client presentation: Stewardship in 2012
Appendix 1 – Recent Developments – BIS strengthens shareholder powers on pay – The Davies Review – The Kay Review – LAPFF Quarterly Engagement Review – IFRS Action Plan Stewardship in review: Looking back on 2010
Developments in stewardship BIS strengthens shareholder powers on pay – A binding vote: A new forward-looking vote on pay policy that will be binding on the company if defeated. It will be an annual vote, unless companies commit to a three year policy. – Advisory vote: The existing advisory vote remains and will be focused on implementation of remuneration policy. – Exit payments: The company must set out its position in the remuneration policy, which will bind the company. – Vote thresholds: A simple majority on both votes, but if a company receives substantial minority opposition they should issue a statement . The Govt had floated a higher threshold. – What we think: The binding vote will certainly give shareholders more power, but will they use it? Also the retreat on thresholds could mean only a handful of companies face serious pressure. PIRC client presentation: Stewardship in 2012
Developments in stewardship The Davies Review –Davies Review – 25% women by 2015 –30% Club Investors Group – Aviva Investors, The Co-operative Asset Management, F&C Investments, Jupiter Asset Management, Legal & General Investment Management, Newton Investment Management and Railpen –14.6% female directors on FTSE 100 –11 all-male FTSE 100 boards: – Aggreko plc, Amec plc, Antofagasta plc, Essar Energy plc, Fresnillo plc, Glencore International plc, Intertek Group plc, Kazakhmys plc, Randgold Resources plc, Vedanta Resources plc, Xstrata plc 15
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