LONDON - U.K. pension funds would be required to vote their shares under an amendment to the pensions bill the House of Lords will consider this week.
If adopted, the amendment by Lord Haskel could shift British pension funds toward more of a U.S.-style approach to corporate governance. In the United Kingdom, major shareholders tend to work out problems with portfolio companies behind closed doors.
The amendment "would transform corporate governance in this country," said Anne Simpson, joint managing director of Pensions Investment Research Consultants Ltd., London. The consulting firm has worked closely with Lord Haskel on the proposal.
The amendment is opposed by many pension experts, who believe that making voting mandatory will not necessarily lead to better corporate governance. Making voting compulsory doesn't mean people "will vote responsibly," said Graham Allen, vice chairman of the National Association of Pension Funds' investment committee.
Lord Haskel, chairman of textile company The Perrots Group PLC, expects to propose the amendment Feb. 7. His amendment would require money managers that handle pension assets to cast their votes at annual general meetings, except for smaller companies that are exempt from compliance with the Cadbury Code of Best Practice. The code provides voluntary corporate governance guidelines for publicly held companies.
Lord Haskel would make maintenance of voting records and reporting to plan participants a condition for receiving tax-qualified status from the Inland Revenue.
Rarely are more than 15% of shares cast at company meetings, Lord Haskel told the House of Lords, citing data from ProShare, an organization representing individual shareholders. That figure jumps to only 20% to 30% when there's a hot issue, Lord Haskel maintained.
"Exhortation (to get pension funds to vote) just doesn't seem to have worked," Lord Haskel said in an interview. He notes private U.S. pension funds have been required to vote their shares since 1988, and believes it makes sense to bring U.K. practice into line.
But voluntarism appears to be working better than Lord Haskel's figures suggest. Chris Mallin, a lecturer in accounting and finance at the Warwick Business School, Coventry, has found the top 20 institutional investors of the 250 largest U.K. companies vote their shares an average of 70% of the time, with voting levels reaching 100% in some instances.
What's more, Stuart Valentine, director of research at ProShare, said the firm surveyed individual shareholders only. The survey found 23% of respondents said they always voted and an additional 32% said they usually vote. Mr. Valentine acknowledged the survey group was self-selecting.
No survey covers the whole shareholder universe.
Lord Haskel - who was named a peer in 1993 because of his long service on the Labour Party's Finance and Industry Group - said U.K. pension funds might get involved in a variety of corporate governance issues, including executive pay, environmental issues, ethical issues and policies toward employment.
He also would like a reformed Cadbury committee, expected to be named later this year, to make it easier for investors to propose shareholder resolutions. Now, at least 5% of shares or 100 shareholders with shares worth a total of at least (pounds) 10,000 are required to propose a resolution, but the cost of distribution is borne by the shareholders.
He added increased involvement by pension funds in corporate governance matters "will encourage the long-term relationship between shareholders and companies, which I think is healthy for industry."
He does not expect pension funds to determine details of corporate strategy, but to make their voice heard on matters of principle, such as those laid out by the Cadbury Code.
The code says "voting rights attributable to shares can be regarded as an asset," Lord Haskel noted.
The problem is the code is not being implemented, he said. Nor is institutional encouragement to link executive pay with performance being followed, he said.
A new study by PIRC found only 47% of the top 190 U.K. companies comply fully with the Cadbury Code.
The most common violations related to whether a company's directors and board committees were sufficiently independent, according to PIRC's strict interpretation of the code.
PIRC found 40% of companies failed to have an audit committee composed solely of independent directors, while 38% lacked a majority of independent directors on the board.
PIRC's Ms. Simpson, however, believes U.K. companies have made sound progress in implementing the code. "From a standing start, I think 47% is quite good," she said.
Lord Haskel is less clear when it comes to deciding how corporate governance should be carried out. For example, he said major shareholders should communicate directly with directors - a policy that is carried out now but is not reflected in voting tabulations. Smaller shareholders, he said, should rely on the voting process.
What's more, when asked whether shareholders should vote on executive pay packages, he said that would depend on "the ethos" of the company. Executive pay has become a hot button in Great Britain lately (see related story on page 18).
In some cases voting may be suitable, he said, but in others it should be left to the audit or remuneration committee. He did not say how it would be determined whether to put pay packages up for a vote.
Lord Haskel also is somewhat vague as to whether shareholders should approve corporate policies directly or exercise their votes by voting for or against board directors. The latter policy is more widely advocated by institutional shareholders.
Some U.K. institutional shareholders, while agreeing voting is important, oppose forcing pension funds to exercise their vote.
The NAPF's Mr. Allen said pension funds have a responsibility in corporate governance, but mandatory voting is "not particularly helpful." He also questioned why pension funds should be "singled out" among different types of investors.
Pension experts also argued citizens have the right not to vote in an election, and pension funds should enjoy the same right.
Paul Haines, investment director for consultant Sedgwick Noble Lowndes Ltd., Croydon, England, added it might be impractical for fund managers to vote on all of the companies in which they hold stock. There is a cost involved in voting, he added. Mandatory voting shouldn't be required until it can be demonstrably shown that voting adds value, he said.
Lord Haskel responded that pension funds and their managers hold a fiduciary responsibility and thus differ from other shareholders. He also said the consideration of a pensions bill provides a rare opportunity to address the issue.
He said he would be amenable to permitting funds to abstain. The important part is there is a record of their abstention, and the decision to abstain is based on sound reasoning, he said.
Instead of mandatory voting, the NAPF's Mr. Allen said it would be helpful if trustees voluntarily devised and announced voting policies, which their fund managers would implement.
Richard Regan, head of investment affairs for the Association of British Insurers, London, concurred.
Lord Haskel's amendment does enjoy some institutional support. Alastair Ross Goobey, chief executive of PosTel Investment Management Ltd., London, which manages (pounds) 25 billion for the Post Office and British Telecommunications pension funds, said he favors the proposal.
In a recent speech, Mr. Ross Goobey said trustees should insist that proxies are voted in every case and that money managers draw up "a coherent corporate governance strategy by which the use of that vote is determined."
He said voting is a fiduciary duty and he had hoped the government would have said so in the pensions bill.
"Investment managers may kick and struggle to avoid such an obligation if asked by trustees, since it would not pay them any extra in fees but would involve them in extra monitoring and execution costs," Mr. Ross Goobey added.
"It might also involve them in voting against the management of some of their actual or potential clients. But they might be prepared to do that if they could point out that this was under instruction from other clients."