LAPFF Conference: Engagement with Ryanair & Sports Direct

“LAPFF’s deputy chair John Gray presents the successful outcome of engagement with Ryanair which is showing signs of progress on labour rights and board independence plus the challenges of engaging with SportsDirect”.

Hat tip Local Authority Pension Fund Forum Conference. 

Engagement Panel at LAPFF14

The next item at the Local Authority Pension Fund Forum (LAPFF) conference was a panel on  "engagement" with Cllr Kieran Quinn GMPF, Chair Sir Merrick Cockell, Cllr Richard Greening LBI and Cllr Cameron Rose LPF.

Investor engagement is probably one of the most significant things that LAPFF does on behalf of its members. "By bringing local authority funds together to work collectively, the Forum is able to maximise their influence" .

Cllr Quinn started by pointing out how important it was for investors to engage and keep an eye on  all the companies they invest in - who would have expected Tesco's to have behaved in such a way? Trinity Mirror refused to accept that they had a problem with the Hacking scandal but all the information from "Hacked off" proved to be true. How could Barclay's justify giving three times as much money in bonuses as they returned to investors?

One of the most positive engagements he experienced was after the Rana Plaza garment factory collapse in Bangladesh when reputable companies were coming to us to explain what they had done and what they were planning to do. There was no investor rush to exist Bangladesh which would have not helped.

Sir Cockell pointed out that with engagement "you may lose the vote at Company AGM but still win the argument"

Vice Chair of LAPFF, Cllr Rose discussed the engagement he has had on Carbon risk with the UK major oil majors and the fall out from falling prices.

Cllr Geening talked about how engagement can take time and be difficult. Such as the lack of progress with National Express on their anti trade union activity in the USA. Management don't think there is a problem. However, it took time for similar issues to be dealt with at First Bus and engagement did eventually work.

I raised a question to the panel about whether they would support disinvestment in a company as a last resort if engagement failed?

The panel response was as a very last resort they would consider disinvestment but it would have to be at the very end of the road. The whole purpose of engagement is to change company behaviour and if we walk away from a company then it won't necessarily change anything.

There was a good point made about what would be the future of engagement if the LGPS was forced to invest only in passive (tracker funds) and therefore could never disinvest.

Responsible Investment: A long view

(this article was published in Professional Pensions 12 September 2013 on behalf of the AMNT. There is a typo at the beginning in the web link)

"When I first became a member representative on a British Pension Scheme in the middle 1990's many advisors and fund managers saw their role as maximising return and had little or no interest in responsible investment.

Ethical or Green funds were dismissed as fit only for tree hugging, sandal wearing muesli eaters. Engagement was something couples did before they got married and most attempts to discuss the social impact of investments were blocked in hushed, reverend tones with the magical words "Scargill v Cowan".

Followed by the explanation that the law forbids any mention of such evil thoughts on pain of instant surcharge. I do of course exaggerate but only slightly.

Since then there has been on the face of things, a profound change in attitudes towards responsible investment and governance. We found out that the Judge who presided over the infamous Scargill v Cowan case had actually hinted in his judgment that pension funds could have an ethical policy.

The report by international legal firm Freshfields in 2005 said not only was it permissible for funds to have an ethnical policy it was arguable their fiduciary duty to do so and trustees could find themselves sued if they didn’t have one! Nearly all investment houses now have (or claim) a responsible investment team.

There is also increasing recognition that pension funds should be focused on the long term and not simply obsess on short term volatility. The concept of “engagement” with companies by shareholders has become pretty mainstream. Schemes have a duty to try and ensure that the companies they invest in are properly run and well managed.

This is not only a duty but self interest. The 18th Century Father of Economics, Adam Smith, warned investors that they will be ripped off by those they employ if they do not play an active part as “owners”. But has it all really changed from “the bad old days”?

Pension trustees were accused of being asleep on duty during the lead up to the financial crisis of 2007. Lord Myners "Where were the owners when these disastrous decisions were taken...?”

How much influence do the corporate governance teams actually have? Is it only a marketing ploy and mere “window dressing”?

BP had a pretty rotten record for many years on environmental issues. So why didn’t investors change the company culture and prevent the Gulf oil disaster and the resulting shredding of billions of pounds of shareholder value?

Have any fund managers or advisors been sacked due to poor performance on engagement? If not, why not?

If responsible investment issues are so important why don’t pension advisors start each trustee meeting with this as their first agenda item?

Why do most managers reports to trustees make no reference whatsoever to Responsible investment?

I think on balance it has been a case of two steps forward and one step back. There is acceptance of engagement even if it is too often noise not substance. So there is still a job of work for trustees to do.

I think that it is easy to blame trustees and to forget how isolated many pensions trustees feel at their meetings. It takes a lot for lay people to feel confident enough to challenge professional advisors and fund managers. Yet this is a fundamental part of our job as trustees.

While we should not be micro managing those we employ to advise us we should be holding them very firmly to account.

Finally, never forget that Responsible investment is actually all about maximising return. Our mantra must be that such investment in companies with good governance will produce superior returns".

(Great picture of Miners Union leader, Arthur Scargill after a visit to a coal mine. Arthur sacked the union's legal team and unwisely represented himself at court in "Scargill v Cowan" case)

Why the Archbishop is wrong over pension investing in Wonga

I think that the Archbishop of Canterbury is a decent, honourable man and I certainly support his campaign for the Church of England to help credit unions compete and drive Wonga out of the payday loan business.

It was obviously embarrassing for him to find out a day after the launch of his campaign that his £5.5 billion Church pension fund had a small investment in Wonga but I think he was wrong to call for its disinvestment.  Wonga has a despicable business model based on ripping off its vulnerable customer base but hey, "welcome to capitalism", this is what happens when you get poor corporate governance of a company coupled with wholly inadequate state regulation.

Engagement by responsible investors with the companies they own is key. If the Church of England pension fund just sells up and leaves every company it has a problem with then this will just undermine other responsible owners who may be trying to change it for the better.

According to this BBC report the Church Pension fund can already invest in companies that benefit from "3% of their income from pornography, 10% from military products and services, or 25% from other industries such as gambling, alcohol and high interest rate lenders". 

What the Church pension fund should be doing (and to be fair it does good work on this already) is working with other responsible investors in trying to challenge and change their business practices.

Engagement does have its limits. Last Wednesday evening I went to a social event run by the pension website Mallowstreet. I had a discussion with people present who support engagement but believe that fund managers should be allowed to invest in any publicly quoted company that complies with the law. I disagree. There must be the exception that proves the rule. What do you do with a company or market that engagement has just totally failed? Engagement must have some bite and as a last resort - disinvestment must be a final option. I think of South Africa in the 1980's and the worldwide Tobacco industry now.

"Active Responsible and Engagement Investment Approaches: Do they deliver positive returns?"

Last Tuesday evening I went to a seminar organised by the Pension Investment Academy and the University of Westminster Business School(Marylebone Campus) via the AMNT. The seminar was about whether responsible investment and engagement approaches actually work. Which is a pretty fundamental topic I posted on recently here.

Why I believe as a pension investor and trustee that investments should be made in a social responsible manner. I have to ask what empirical proof or evidence is there that such a policy actually achieves a positive return especially when compared to investments on behalf of those who don't worry what happens to their investments as long as they make money. 

I can remember being told many years ago that it is the duty of pension trustees to maximise the performance of their fund and nothing else. Which is clearly nonsense (then and now).

There was a pretty high powered panel of speakers from the Pension Protection Fund, Mercer, BT Pension fund and Henderson Global Investors.

The good news is that it seems that there is now research that engagement can add to returns and could reduce risk and volatility. However, the evidence is so far patchy. Certainly there is the argument that such active stewardship in Banks could make a "rerun" of the recent global banking disaster "materially less likely" (Walker Review 2009).

In the Q&A I did respond to the points made by some members of the panel that voluntary regulation is better than the state being involved, by saying that the lessons from the Banking crisis is that laissez faire capitalism failed and that you need more state regulation not less.

Also that until our investment advisers start advising trustees that it does make financial sense for the fund to be active then most trustees will not have the confidence to do so. Many fund managers (not all) in my experience see SRI as a unnecessary interference  in their right to manage money as they see fit. They simply pretend otherwise to win and keep business.  Regardless of the Stewardship Code you will need the support of your advisers to take them on.

Update: evidence on positive returns by Helene Winch from BTPF  here ; here; here and here 

Hat tip cartoon Kevin Wong

(I spent 3 years on a day release at the Westminster University site in the late 1990's to do a CIH post-graduate diploma. It was nice to be back but due to expansion and building works the campus is now unrecognisable).