LONDON - Hermes Investment Management Ltd. and Railpen Investments Ltd. have taken steps to start scrutinizing U.K. corporate strategies and suggest alternatives where needed.
This new focus on corporate strategies echoes efforts undertaken by the California Public Employees' Retirement System and other U.S. pension funds to pressure poorly performing companies to alter their corporate strategies before a crisis hits, such as a hostile takeover effort or a change in top management.
With the U.K. annual meeting season one month away, British pension funds and money managers are increasing their focus on corporate governance practices. The latest round of activity includes:
London-based Hermes will hire a "corporate focus executive" to review corporate strategies of U.K. portfolio companies, said Alastair Ross Goobey, chief executive of the in-house manager for the British Telecommunications and Post Office pension funds.
Shareholders have not been good at intervening in companies before a hostile takeover bid or change in top management, Mr. Ross Goobey said. Hermes, which manages some30 billion (U.S. $46 billion) largely in indexed assets, can try to maximize returns for its beneficiaries through active corporate governance policy, he said.
Railpen Investments, London, with10.5 billion (U.S. $16.2 billion) in pension assets, has sent detailed voting guidelines to its outside managers and informed chairmen of the Financial Times-Stock Exchange 350 companies in which its owns shares of the voting policies.
In addition, Railpen executives might try to steer the corporate governance agenda toward focusing on corporate strategies. An internal Railpen document obtained by Pensions & Investments noted some U.S. companies have seized the initiative by making annual appraisals of the performance of chief executives and board of the company, and requiring more detailed reports by corporate managers to independent directors.
The 800 million (U.S. $1.23 billion) Leicestershire County Council Superannuation Fund, Glenfield, has adopted a policy saying it will vote against resolutions that violate the Cadbury Code on corporate governance and the Greenbury guidelines on executive pay.
What's more, the council favors tightly regulating executive salaries, bonuses and share-option schemes. County Treasurer Robert Hale has asked for support for the policy from all of the U.K.'s public pension funds.
Standard Life Assurance Society, Edinburgh, has issued corporate governance guidelines that might become a model for U.K. pension funds.
The guidelines cover separation of the roles of chairman and chief executive, composition of boards and compensation and audit commitments, executive pay disclosures and length of directors' contracts.
British concerns about corporate governance issues have been escalating since the Cadbury Committee issued its guidelines on corporate governance in December 1992, followed by last year's publication of the Greenbury report on executive compensation.
The hottest button in the U.K. corporate governance arena has been on executive pay, especially with regard to high pay boosts for executives of recently privatized utilities.
But the agenda might expand to other issues. In particular, Granada Group PLC's bitterly fought bid to acquire Forte PLC has led pension fund trustees to question what their roles are, said John Rogers, secretary to the National Association of Pension Funds' investment committee.
The Labour Party, which appears likely to win control of Parliament in the next national elections, might take the debate yet further.
Stuart Bell MP, shadow minister for trade and corporate affairs, told the annual conference of the NAPF's investment committee that the Labour Party is consulting outsiders' views on whether companies should be allowed to create an advisory board composed of corporate stakeholders, through which financiers, employees, community representatives and directors play a role.
He also said a final policy document, to be issued around the time of the Labour Party's conference in October, probably would require compulsory voting of proxies for pension trustees, dismissing concerns about potential costs. That document also would spell out where the party believes legal changes need to be made and where voluntary codes of practice could be adopted.
Mr. Bell said the Labour Party accepts that pension funds' primary role is to "maximize the financial well-being of a company." Labour favors creating the framework to help that company "run efficiently and soundly in the interests of its stakeholders," he added.
But Graham Allen, the new chairman of the NAPF's investment committee, criticized Labour suggestions that a special committee be created to revamp the Greenbury and Cadbury codes. He said the recently formed Hampel Committee, the successor to the Cadbury committee, will do this job.
He also said making proxy voting compulsory would "lead to a box-ticking mentality and irresponsible voting."
Overall, he attacked a previously issued Labour Party paper on corporate governance as "far too prescriptive," focusing too much on emotional issues, such as executive pay.
Labour's arguments are based on "some deep-seated misconceptions," particularly that U.K. pension funds are short-term oriented, Mr. Allen said.
However the debate on corporate governance goes, British experts say it will not mirror the public battles that have occurred in the United States.
Even Hermes' Mr. Ross Goobey, who has a bigger public profile than any British pension executive on corporate governance matters, said British institutional investors tend to work more behind closed doors. He said Hermes will seek support from other shareholders on issues affecting corporate strategies, and would wage its battles publicly as a last resort.
He said, however, there is increasing pressure from pension trustees to act, and described creation of a corporate watchdog post as "a natural development" from Hermes' previous activities.
Railpen officials are just dipping their toes into the water. Noting that funds such as the California Public Employees long have published a target list of companies each year, Railpen's new guidelines said such activities usually are performed by external money managers. "Nevertheless, we might well see what our managers are doing along these lines," the document said.
The unpublished guidelines are far more explicit than the 1992 guidelines issued by Railpen, which oversees British Rail pension investments. The new guidelines also oppose rolling contracts for corporate executives longer than one year and fixed contracts longer than two years, favor separating the roles of chairman and chief executives, seek clear performance targets for share-option schemes, and will examine the role of independent non-executive directors on a case-by-case basis.
The guidelines also take a flexible approach on executive pay, given the difficulties in evaluating pay packages.
The Leicestershire County Council fund, however, takes a much tougher line on executive pay. Its policy would bar significant increases in basic pay for senior management unless justified by a change in duties. The council also said bonus and incentive payments should be awarded where investment returns exceed the average return of the relevant industry sector of the Financial Times-All Share Index. Strike prices for share-option schemes should be set no lower than market value and should be indexed, the policy said.
In addition, in the event of a takeover bid, the share price used in setting bonus or incentive payments should be the average daily price over the three-month period prior to the bid announcement, and outstanding options should be canceled.
Colin Pratt, investment officer for the county fund, said a great number of pension executives said there are practical problems in having such a rigid policy.
Alan MacDougall, joint managing director of the Pensions & Investment Research Consultants Ltd., London, welcomed the thrust of Leicestershire's approach but noted the guidelines would take "a considerable amount of monitoring" for funds to vote appropriately.