There’s a burst of activity globally at the moment, but notably in the UK and Europe, about how to reform corporate governance and avoid short-termism in the wake of the financial crisis. It’s a once-in-a-generation opportunity to make some serious long-term structural changes to the way institutional investment works. On top of the implementation of Dodd-Frank in the US, there’s the Long-term Focus for Corporate Britain project, the UK Stewardship Code and revisions to the Corporate Governance Code. A House of Lords Committee in the UK has weighed in with criticism of the corporate audit sector; which should be a vital safeguard for investor interests, but needs seriously toughening up.
Fair Pensions, the NGO lobby group, is among those looking at the scope of pension fund fiduciary duty. Integrated corporate reporting of ESG and financial issues is gaining ground. The European Commission has added to the mix with its Green Paper consultation on corporate governance.
In short, there’s a lot of well-meant, valid soul-searching about the ‘chains’ involved in the investment and corporate process: from asset owner to investment consultants, advisors, asset managers and corporate directors. It’s no less than is merited. Everyone from proxy voting firms, the audit profession, lawyers and ratings agencies was implicated in the near-meltdown which pushed capitalism to the brink. Few have decent alibis: they were all at the scene of the crime.
But one group has hardly rated a mention and does not have a loud enough voice in the debate: the beneficiaries; the people who ultimately pay everybody’s salary.
The word “beneficiaries” occurs just once in the summary of responses to the Long-term Focus for Corporate Britain consultation. There’s just one mention in the Stewardship Code and none in the guidance to the code. There’s no reference at all in the Corporate Governance code. To be fair to the EU, it does in fact define institutional investors as those with long-term obligations towards beneficiaries, but only really in passing.
Whenever the United Nations-backed Principles for Responsible Investment is mentioned, it’s usuallyin terms of signatories’ assets, not in terms of numbers of beneficiaries.
We need clarity about what all these reviews and codes aim to achieve, and with a clear eye on the raison d’être of institutional investment.
Responsible Investor believes that one of the main outcomes of the current reforms must be to ensure that the conditions exist for long-term, sustainable (in both senses of the word) returns for beneficiaries. Without this guiding principle, there is a serious risk of inertia. A roadmap without a destination is of little use.
We believe that is axiomatic that all members of pension funds ‘implicitly’ require stable financial markets, corporate longevity, relatively predictable investment returns and risk sharing. None would tick a box marked ‘boom and bust every 8-10 years’ for something so serious as their retirement future.
One of the major problems, however, is that that the beneficiaries’ representatives, the pension fund trustees and managers, are the weakest link in the entire chain. Many are unpaid and their expertise falls far short of what is needed to manage the increasingly complex investment world and its agents.
It is perhaps unsurprising, for example, that the UK National Association of Pension Funds, is chaired by an asset management executive; albeit a well-respected one. The reasons for these weaknesses in the asset owner world are manifold. But it is interesting to note that where asset owners are well resourced the rationale of responsible investment is recognised as a vital component of risk management and holistic good practice. Most of the world’s biggest pension funds already ‘do’ responsible investment. And they have started engaging with governments and regulators about what constitutes the best environment for long-term sustainable finance.
But if we really wish to see meaningful change amongst medium and smaller-sized schemes we have to address their structure and resourcing. The trustees of beneficiaries’ pension money – the anchor of the investment/corporate chain – need to be professionalised and properly funded, otherwise all attempts at reform – no matter how numerous the reports and reviews – will likely flounder.