UK: stewardship elusive as pension funds buck governance code

The move by three leading UK pension institutions to back firms that ignore new guidelines on the annual election of directors has come as the wider debate on stewardship is taking shape.
It emerged this week that Hermes, Railpen and the Universities Superannuation Scheme – with combined assets of £106bn (€126bn) – have written to companies in the FTSE 350 saying they would back them if they ignore the Financial Reporting Council’s recommendations on annual elections.
The trio are worried that annual elections – a key, though controversial, plank of the FRC’s new Corporate Governance Code – could lead to a “short-term culture” and undermine collective decision-making.
The issue was one of the most contentious points when the code was being drawn up, with clear divisions among the investor community apparent at the consultation stage. The National Association of Pension Funds, the Confederation of British Industry and Standard Life Investments also came down in favour of the previous system of three-yearly election. Other asset managers such as BlackRock, F&C Investments, Legal & General Investment Management – as well as the Local Authority Pension Fund Forum – had endorsed the idea.
Chris Hodge, the FRC’s Head of Corporate Governance, told Responsible Investor that Hermes et al had the same objectives as the FRC, long-term stewardship, although they were using“different tactics”. But he said he would advise companies that the views of USS, Railpen and Hermes “don’t necessarily represent the views of the majority of investors”.
He said the FRC would review the code in three years time. “We need to keep an eye on it and make sure we got that call right [on annual elections].”
Colin Melvin, chief executive of Hermes Equity Ownership Services, was quoted in the Financial Times as saying the letter was a plea for more dialogue and less regulation.
“What we need is for companies and shareholders to work together,” he told the FT. He called the FRC’s requirement “well-meaning” but expressed concerns about short-termism.
The spat comes as a paper by governance expert Simon Wong explores the reasons why the stewardship concept is proving so elusive.
Wong, of the Northwestern University School of Law and Governance for Owners, argues in Butterworths Journal of International Banking and Financial Law that investment management practices make genuine stewardship challenging for institutional investors. He cites churn, excessive portfolio diversification, a lengthening of the “ownership chain” and a misguided interpretation of fiduciary duty.
He calls for the elimination of unnecessary intermediation, the development of in-house investment management capabilities, revamped performance metrics, and smaller portfolio holdings.