A core assumption of the responsible investment community is that company directors should be answerable to their long-term shareholders. This article makes the case that institutional investors should, in turn, be answerable to the underlying savers whose funds they invest, particularly where those savers bear investment risk as they do in mutual funds and defined contribution (DC) pension schemes. Drawing on 20 years of reform to make company boards fit for purpose, we make the case for parallel reforms to drive improvement in the performance of fiduciary investors. Over the last 20 years, a range of codes, guidelines and laws has been assembled in the UK to give shareholders the rights they need to play the role of engaged owner and to raise corporate standards of reporting and accountability. Despite persistent concerns about box ticking in the field of corporate governance, most people with an historical perspective on the scene agree that boards today function better and achieve more as a result of the corporate governance regime that has emerged through two decades of tweaking and review. Indeed, since the financial crisis, criticism of companies’ governance and in particular of short-termism in boardrooms has focused at least as much on the problematic role of investors as on directors themselves. Beginning with Paul Myners’ observations about the ‘ownerless corporation’ through to John Kay’s critique of misaligned incentives in the investment chain, we are starting to confront the possibility that dysfunctional companies are to a considerable extent a symptom of dysfunctionalities in the investment community. The emergence of the Stewardship Code in 2010 was a major acknowledgement that raising standards amongst institutional investors had become at least as important a policy priority as further tinkering with thecorporate governance regime. Drawing explicit parallels between the ways in which companies account to shareholders and the ways in which institutional shareholders account to risk-bearing savers is highly illuminating. Below, we take three elements of the corporate governance regime that have helped to raise standards at companies, and consider how pension providers and other investment institutions who take in funds from individual savers might put into practice the same ideas themselves. The first of these is the Annual General Meeting. Whilst many professional investors never attend the AGM of an investee company, no-one disputes the value of having one formal opportunity each year for shareholders to hear in person from the directors about a company’s strategy and to question directors on matters of interest or concern. It is rare indeed for a shareholder to have all their invested assets tied up in one company, but common enough for pension savers to have all their retirement savings with one scheme or provider, indeed they are often encouraged to consolidate their pension pots. Despite this concentration of pension provider risk, it is almost unheard of for savers to have the opportunity to meet their trustees and the executives running their pension fund. Were this opportunity to exist on an annual basis, doubtless only a tiny minority of members would attend, just as a minute fraction of shareholders attend company AGMs. Nevertheless, it would remind trustees and pension fund executives of the real people whose interests they serve, allow poor investment performance to be queried and explained, and enable ESG issues to be raised by members with an interest in them. There is no bar on pension funds from providing their members with this opportunity and a tiny number in the UK do offer it. The West Yorkshire Pension Fund is one. Their annual
meeting is apparently well attended with an intelligent discussion of issues pertinent to the fund undertaken during the meeting. Corporate reporting has been the subject of intense discussion and incremental reform over a long period. Views differ about the best way for companies to tell their story, explain performance, present financials and their analysis of forward-looking risk, but there is no question companies should have to do all these things in order that investors can engage intelligently with them and make informed use of their shareholder rights, including the right to sell up. The reporting requirements for pension providers are astonishingly thin in comparison with the equivalent requirements for companies, despite the fact that some pension funds are many times larger than listed companies. There is no requirement on pension funds to explain how their investment strategy is designed to perform over the time horizons relevant to members (many of whom will be decades from retirement). There is minimal standardisation with respect to reporting on the complex costs and charges that fall upon the members of a defined contribution pension scheme, nor on management of conflicts of interests through the investment chain. Pension providers could learn much from evolving best practice in corporate reporting but their audience is a different one. Pension funds should seek to explain their actions and investment policies in language and terminology that is accessible to ordinary members. NEST and Environment Agency Pension Fund have both made a serious effort to report in language that makes sense to their membership base. More comprehensive pension fund reporting should largely be on-line to minimise cost and to maximise the potential for independent third parties to compare performance and thus drive up standards in the sector.The right to vote directors off boards of listed companies, whilst rarely exercised, is a fundamental tenet of modern corporate governance. No such right exists for pension fund members. While some trustees join boards following an open election and are then subject to term limits, this is a rarity in the sector. Few of the newly emerging Master Trusts set up for pensions automatic enrolment are designed with the kind of basic accountability mechanisms taken for granted in the listed corporate sector, and indeed there are serious concerns about conflicts management in the new trusts being established by big insurance firms. Of course people standing for election as pension trustees should have the requisite expertise (or be willing to acquire it within a reasonable time-frame if they join as member-elected trustees) but, just as on corporate boards, trustee powers should be balanced by voting rights for the underlying members who bear the risk in the scheme. The six million people joining private pension funds for the first time thanks to automatic enrolment provide six million new reasons to make sure our pension sector is fit for purpose into the twenty-first century. Long-term investment is not getting easier yet more of us than ever depend on pension schemes to deliver good results. The suggested reforms of pension fund governance outlined above will doubtless strike many in the sector as outlandish and radical, which of course echoes perfectly the response over 20 years ago to those in the corporate governance community who pioneered ideas for making company boards more accountable to shareholders. Today we take those ideas for granted; tomorrow we may see the merits of a pension system where savers are empowered to hold their fiduciaries and investment agents to account.
ShareAction today launches a new report, Our Money, Our Business: Building a More Accountable Investment System, as well as a best practice guide for pensions schemes on engaging members about stewardship and responsible investment. Both are available at: link