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Institutional shareholders own more than 80 per cent of UK corporate

equity and the Government clearly recognises that fund managers have

considerable power to influence the behaviour of the companies in which

they invest. It also believes that pension scheme members and ordinary

savers with the financial institutions would like to see such influence

used to advantage and to reflect their aspirations, which may be social and

environmental as well as financial.

This is a fair assumption to make. While traditional app^_roaches to

institutional investment have tended to focus purely on the financial

aspects of fiduciary duty, there is a growing consensus that individuals

expect more from the fund management institutions as well as from the

investee companies themselves.

This was borne out recently in research by the Co-operative Insurance

Soc^_iety. In a sample survey of more than 800 adults, 91 per cent agreed

that companies have a duty to behave as a responsible member of

society.While 76 per cent reg^_arded rate of return as their primary

concern, 81 per cent said they would like to be kept informed by their

pension scheme or ins^_urer about its investment policy.

Respondents were very supportive of companies which adopted

environmentally friendly practices, a policy of equal opportunities and

gave a firm commitment to customer service.

With more individuals then ever having direct or indirect stakes in

companies and with faster and more comprehensive news coverage on

individual company performance now available via the media and online, it

is hardly surprising that this is becoming a more topical issue.

The Government believes that pension fund trustees should drive forward

the debate on socially responsible investment when new regulation comes

into effect in July. It could be right but other forces are at work which

could have a more significant impact in the future.

Under the regulation, which builds on the disclosure framework of the 1995

Pensions Act and takes on board recommendations made in The Turnbull

Committee Report, occupational pension scheme trus^_tees will have to state

their policy, if any, on social, environmental and ethical investment


The regulation will also require trustees to state their policy, if they

have one, on exercising voting rights. Traditionally, pension fund managers

and institutional investors generally have had a fairly passive voting

record at company meetings.

The Government would like to see a more active stance. In fact this is

already developing, not just because of the new regulation, and

institutional investors are adopting common industry standards with the

prospect of becoming much more active in this area.

The Government&#39s thinking on these issues was outlined in July 1998 by

John Denham, then Parliamentary Under Secretary of State for Social

Security, in a speech to the UK Social Investment Forum. While recognising

that trustees should not “pursue ethical goals in such a way as to

prejudice the financial interests of the members”, there was, he suggested,

act^_ion that ethically minded trustees might wish to take. He referred to

situations where ethical considerations might sway the choice bet^_ween

competing investment options which were otherwise of equal merit.

Interestingly, he also referred to the process of engagement – contact by

fund managers with an inv^_estee company with the object of changing its


He also noted that disengagement was a further option. In other words,

selling the fund&#39s holding in a company whose behaviour was ethic^_ally or

soc^_ially unacceptable.

A policy consensus has now emerged among institutional shareholders about

the corporate governance of the companies in which they invest.

The Cadbury committee began by defining standards of best practice during

the early 1990s, identifying the importance of having independent directors

on a company&#39s board, increased accountability of executive directors to

shareholders and the separation of the offices of chairman and chief

executive. Subsequent committees looked to address topics such as

executive pay levels and incentive schemes and the requirement for periodic

re-election of board members. Some can legitimately argue, especially in

the light of recent news stories, that further work is still needed in this


Today, there is a variety of specialist organisations able to offer

information services to institutional investors, receiving companies&#39

stances on corporate governance, analysing resolutions put to them and

making recommendations on voting policy.

The National Association of Pension Funds, which launched its voting

issues service to members as long ago as 1992, recently announced its

support for electronic voting – a step that will encourage more active

participation by pension fund managers.

Other trade bodies, such as the ABI and Autif, have shown increasing

interest, encouraging their members to become more active inv^_estors. The

outcome is likely to be the widespread adoption of common positions by many

institutional shareholders on corporate governance issues and hence on

voting at company meetings. Company exe^_cutives will have to make sure

that any proposals requiring shareholder approval observe best practice.

The Government is not suggesting that ethically scr^_eened funds, which

are still a niche market worth just over 2bn, should overnight bec^_ome the

mainstream investment vehicles of corporate or, indeed, individual


There is every chance this market will continue to grow and the real

opportunities are for fund managers and companies that embrace the concept

and issues of SRI.

Studies, including one in connection with the Dow Jones sustainability

index, suggest there is a correlation between a performance of an

organisation in terms of its share price and its policy on a range of

social and environmental issues.

Fund managers and the financial services organisations they represent have

a crucial role to play in grasping the opportunities that the Government&#39s

initiative offers. These opportunities lie not only in the general

acceptance and implementation of SRI but also in the development of new

products and best working practices.

Examples of recent industry developments are the tracker fund launched by

Legal & General which takes a best of sector approach acc^_ording to

criteria or those of Prudential which
has engaged a third party,

Ethical Investment Research Service, to screen its investment

CIS has woven SRI into the much bigger project of a social

accountability programme, the first of its kind within the UK life


The key aim of the programme is to benchmark performance aga^_inst a key

set of parameters and business objectives in line with the expectations of

stakeholder groups.

In terms of SRI, this means encouraging best practice in the companies

invested in and being able to account for actions to customers and

interested parties. Such “360-degree communication” is made possible

through a rob^_ust and clear set of actions and guidelines. These should


A stated policy on the key issues surrounding corporate governance and

voting policy.

A responsible investor policy to pursue all legitimate concerns raised by

customers in any company invested in and to report back on the results.

A commitment, as active investors, to exercising voting rights on all

possible occasions.

As greater understanding develops among the stakeholder groups and

interested parties, it will become more important for companies to address

issues of public concern such as pollution, poor employment practices and

consumer exploitation.

Just as institutional shareholders, including the pension funds, are

starting to adopt a more common approach on corporate governance, it is

possible that common views on some key ethical issues could emerge and be

pursued through engagement and an active voting policy. The result may lead

to further pressure being exerted when it is felt it is needed.

Investee companies that generally flout acceptable standards of behaviour

will not be popular with their institu^_tional investors. Those that also

incur adverse attention from the media, powerful consumer groups and other

lobbyists will be even less popular.

By the same token, companies that have excellent processes in place or

have made big improvements to their corporate behaviour should hope to see

these efforts rewarded, both thr^_ough press comment and positive movements

in their share price.

There is no doubt that the Government would approve of such institutional

developments, which are shaping up perhaps more for the longer term. As to

the shorter term, we await news of just how many occupational pension

scheme trustees will accept the challenge of socially responsible

investment and will announce their policies in July.

A CIS social report will be issued toward the end of May. It has

a rolling survey of some 500 companies where information will be

sought on
a range of issues ranging from consumer protection through

environmental track record and community involvement. The results of the

survey will form the basis of a dialogue and engagement to enc-ourage best



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