Comment: NAPF misses the point on Stewardship?

The UK National Association of Pension Funds (NAPF) has missed the point of the Stewardship Code in its new guidance to investors.
The NAPF this week issued a 13-page booklet to help pension funds deal with the new code. In its favour, it calls on UK pension funds to sign up to the Stewardship Code: only a small number have so far done so. But it’s a weak document compared to the ambitious and comprehensive language used in the Stewardship Code’s guidance by the Financial Reporting Council (FRC), which oversees the Code. Where the FRC guidance tried to push forward debate about the role of pension funds as ‘owners’, the booklet from the NAPF, the trade body for asset owners, focuses almost exclusively on process and the relationships between pension funds and their managers. The NAPF barely mentions the key responsibility of the asset owner in ensuring that it has oversight of the companies it ultimately ‘owns’. Take Principle 3 of the Stewardship Code: “Institutional Investors should monitor their investee companies”. The NAPF boils this bold statement down to another “review process”. “For most pension funds,” the NAPF states, “the application of this principle will be delegated to their investment managers. Thus their responsibility is to monitor this as part of their review process.” This surely misses the spirit of the code, which aimed to counter the absentee-landlord behaviour that contributed in part to the financial crisis. On Principle 6, which covers institutional investors’ policy on voting and disclosure of voting, the NAPF’s wording is similarly slanted towards the dependence of pension funds on their managers: “Funds should expect their managers to exercise their voting rights in all markets unless it is against their clients’ interests to do so.” Such vague language: “monitor”, “expect” hardly stirs the loins. Worse, the problem is that it encourages pensionfunds to continue to rely on their managers and consultants and not take action on their own. Granted, the Stewardship Code is addressed “in the first instance” to firms running assets for institutional shareholders. But it makes clear the vital role of pension fund trustees and other owners can make to promoting stewardship via mandate instructions to fund managers. If we can’t convince our asset owners that Stewardship is a rigorous process of reflection and application, then what point in having created the rules in the first place? They just become another box to tick. Where the FRC calls for active dialogue with company boards and the integration of stewardship within investment processes, the NAPF contents itself with: “Funds should satisfy themselves that they have in place a process for monitoring how their asset managers apply the Code and the input of their consultants into that process.” The FRC wants investors to be sure that board structures are effective, that there are clear audit trails and records of meetings. It wants investors to attend the AGMs of companies where they have major holdings. And it calls on institutional investors to “endeavour to identify problems at an early stage to minimise any loss of shareholder value”. There is little of this flavour in the NAPF guidance. The NAPF says it is a strong supporter of the code and that it encourages funds to sign up to it, but it hasn’t taken the opportunity to pick up the gauntlet of responsible ownership presented by the new code. At a lecture in London last week, Lord Myners, the former UK finance secretary, was scathing about the chain of agents in the investment industry extracting rent from end owners. He said pension trustees needed to become more professional, businesslike and less influenced by their advisors. And he blasted institutional investors for their “supine” role in the financial crisis. This latest guidance from the NAPF looks like it is thumbing a nose at that view of asset owner stewardship. Link to NAPF guidance