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's 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's holding in a company whose behaviour was ethic^_ally or
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's 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'
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's
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
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
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
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
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
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