Trustees are still in the dark over ethical investing

From Engaged Investor 2 December 2013 "As a trustee, is my duty to maximise return or invest responsibly? Or can I do both?”

Recently one of the funds that I serve on as a trustee held a special training event on socially responsible investment and fiduciary duty.

 Our scheme advisers and external experts made presentations, followed by wide-ranging Q&A sessions. It was a fascinating experience and I feel that all pension trustee boards should consider holding similar events.

The basic principles of trust law are loyalty, prudence and impartiality, in order to act in the best interests of beneficiaries

The charity ShareAction gave us a presentation based upon their recent paper The Enlightened Shareholder, which for the first time made me feel confident that I really understood the conflicts that many trustees feel about this topic. The basic principles of trust law are loyalty, prudence and impartiality, in order to act in the best interests of beneficiaries.

Rightly or wrongly, there is no trustee duty to maximise returns.

Trustees have been given considerable discretion as to how to act in these ‘best interests’, subject to the core legal principles and acting within their statutory duties. If trustees also act on professional advice then it is unlikely that their decisions can be challenged, since courts are loath to second guess trustees.

The infamous Scargill v Cowan case was a pretty unusual set of circumstances. Miners’ leader Arthur Scargill wanted the pension scheme to exclude all overseas investments and all investments competing with coal. He was found to be putting the interests of the union first and not acting in the ‘best interests’ of all the beneficiaries.

The judge did, however, make the specific point in his judgement that he was not saying that only the financial interest of the beneficiaries could be considered.

A report by law firm Freshfields made it clear that, not only was it permissible for funds to have a responsible investment policy, it was arguably their fiduciary duty to do so

A report by law firm Freshfields in 2005 made it clear that, not only was it permissible for funds to have a responsible investment policy, it was arguably their fiduciary duty to do so, and trustees could be sued if they did not have one.

Finally and most importantly, not being obliged as a trustee to maximise return does not mean that you are uninterested in financial consequences, but it does gives trustees the confidence to challenge their managers and advisers on non-financial issues that are of concern to beneficiaries.

It also should give trustees the confidence to consider and take advice on the negative financial consequences of investing in companies that may be irresponsible.

And how much money has your fund lost in disastrous mergers and acquisitions?

There is also the belief, which is beginning to be backed by empirical research, that in the long term companies that act responsibly and do not, for example, destroy the environment or employ child labour ultimately produce genuine superior returns for all beneficiaries.

This is surely in everyone’s best interests.

John Gray is a member-nominated representative of the Tower Hamlets’ Local Government Pension Fund 

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)

TUC Trustee Pensions Conference 2010: “Shareholder Resolutions”

This post is yet another very late "catch-up".  The  annual TUC Pension Conference is the "Trustee" event of the year.  It was held at Congress House in London on 22 November 2010 and was packed out.

I missed most of the morning due to a regional committee meeting and came in during the end of the Stewardship Panel Q&A. 

I then went to a workshop on “Shareholder Resolutions” led by Tom Powdrill from PIRC, the notoriously shy and retiring UNISON National Capital Stewardship officer, Colin Meech and Unite National officer, Jack Clarke (see above left to right).

Tom explained that in December 2010 fund managers must explain why not or publish their voting record at the AGM’s of the companies whose shares they “hold” on behalf of investors.

To be able to table a motion at a British AGM you need 5% of total voters or 100 x £100 nominal value (Nominal £10k). You must table this motion within strict time limits to prevent the company charging you the full costs of circulating details of your motion.

There have been 8 Environmental Social and Governance (ESG) motions in the last 5 years. Mostly led by trade unions. Warning that many companies see such motions as a confrontational tactic. So you should try and make it appear constructive? Not "anti-company". Instead of appearing to give instructions make suggestions. However, direct motions may well be the only realistic option if companies are being unreasonable. To get the vote out you must contact all major shareholders, investor representative bodies and meet them - preferably face to face.

But you must demonstrate you have tried to engage with the company first. Note fund managers generally vote against ESG motions. Even those who claim to be supportive of ESG principles.

The LAPFF "Marks and Spencer" motion against a combined company chief executive also being the company chair was a landmark occurrence. There had been significant engagement beforehand about best practice. Stuart Rose now says that it was his worse mistake (not to separate the roles of Chair and CEO). Marks and Spencer have now a separate Chair and CEO and comply with best practice. The panel were "disappointed" that L&G tracker fund managers voted against this (why on earth did L&G do this?) and that they had 4.5% share of the company. Remember that there is only usually 50% turnout of shareowners at AGM's.  So you can have a greater affect even if you only have control of a smaller number of shares.  The ESG motion on anti-trade union activities of First Group in the USA did result in significant change in company behaviour.

Colin talked about the Fair Pensions BP/Shell Tar Sands motions and the UNISON staff pension fund which helped bring it about. UNISON staff pension scheme has a broad screening programme such as not to invest PFI contractors.They cleared the proposed motion with the Canadian PSI trade unions beforehand. The motion fitted UNISON policy on climate change. It was crucial to get the support of the large American public sector funds. 45% global pension funds are in the USA. He reminded us all of the Freshfields legal opinion's that such “responsible” investment is a fiduary duty of Trustees. Colin recommended the book Hawley and Williams “The Rise of Fiduciary Capitalism”.

Jack Clarke pointed out that Unite spend 10% of their budget on organising. He talked about the Meat workers campaign. They gained 10,000 new members and 250 new stewards. A key issue was agency working. Agencies undercut permanent workers and exploited staff. The Union wanted equal treatment. They worked on a supply chain strategy. 85% of the meat market goes to retail shops. They pushed Tesco and other large UK retailers in a pincer movement, above (by share motions) and below (from workers). Tesco is a key market driver. They tabled a solution at the AGM with West Yorkshire Pension Fund on this issue. 11% shareholders voted in favour and 7% abstained. There was widespread press coverage. ASDA signed a deal with Unite for equal treatment in the UK and Ireland. 50,000 workers affected in the UK and gained parity of pay and were now usually made permanent after 13 weeks agency work. Lessons: Resource intensive; you need to have economic as well as morale case. Needs to be more active engagement with trade union trustees. It is vital to deliver bottom up pressure on fund managers.