UK funds and insurers seek SWF’s and foreign partners for new governance network: ISC report

Investors warn, however, of potential problems with acting in concert rules.

UK pension funds and insurance companies are seeking to build an international network of investors and sovereign wealth funds with an interest in long-term value, in a bid to put some major weight behind their lobbying of companies on important issues and their subsequent voting at annual general meetings. In a widely-anticipated report, the UK Institutional Shareholders Committee (ISC) said its chairman, Keith Skeoch, chief executive officer at Standard Life, would initiate discussions with senior practitioners from the global investment industry to plan ways to build the network. The ISC is run jointly by the UK’s four big institutional investor bodies: the Association of British Insurers, the Association of Investment Companies, the Investment Management Association and the National Association of Pension Funds. It was created in the wake of the 2001 Myners Review on institutional investment, although it recently came under fire from Paul Myners himself, now UK Financial Services Secretary, who dubbed it a “rather low profile entity”. The ISC said its report aimed to beef up investor engagement following the banking crisis and would feed into the forthcoming UK review of corporate governance in banks bySir David Walker, former chairman of Morgan Stanley, and the UK Financial Reporting Council’s review of the Combined Code on corporate governance. Its key objective in building an international investor network, it said, was to create a simple, non-bureaucratic system that would enable and encourage more institutions to participate in corporate lobbying and form a “critical mass” on controversial company issues. It said its main focus would be “dialogue” with companies to resolve difficulties, but warned that it could instruct members to vote down resolutions and “follow-up afterwards” if investors believe the company’s response to investor concerns falls short. It said: “The ISC considers that investors have on occasion been too reluctant to act in this way.” However, the ISC said it also needed regulatory certainty that rules on acting in concert and insider dealing would not be a deterrent to building the network: “The authorities should make it clear that collective dialogue is permitted. Also the authorities should make it clear that it is possible for individuals to receive price sensitive information in the course of dialogue provided there is appropriate ring-fencing.” Amongst its other recommendations, the ISC said that

asset owners should specify in their mandates to fund managers exactly what type of commitment to corporate engagement, if any, they expect.
It added:” Where shareholders delegate responsibility for such dialogue to third parties, they should agree a policy and, where appropriate, publish that policy and take steps to ensure it is followed.”
The report also said that investors had become concerned that matters they raised with companies were sometimes not reported to or discussed with theboard. It said one way of making boards more accountable to shareholders would be for the chairs of leading company committees to stand for election each year, and for the company chairman’s position to be put to a vote if support for any committee chair falls below 75%, including abstentions. The ISC said it would also review its own Statement of Principles on the Responsibilities of Institutional Shareholders and their Agents and back it more strongly as an ‘ISC Code’ that investors can sign up to and report publicly on how they apply it.
Link to ISC report