UNISON has for the last three years running a Capital Stewardship Programme, trying to explain to our members that their pension funds own the economy. A new stewardship code has been launched by the government which gives pension fund members more power over their savings which are invested in the economy. Ruth Sutherland of the Observer points out the key issues that are covered by the code. http://www.guardian.co.uk/business/2010/jul/04/pension-funds-corporate-governance-investors
The banking crisis exposed the dangers of the "ownerless corporation", as it emerged that large investors in the financial sector had neglected their responsibilities as stewards and allowed the likes of Sir Fred Goodwin to do as they pleased.
The new stewardship code from the Financial Reporting Council, which oversees corporate governance standards, has a stab at addressing this failure of ownership. The code sets out a number of principles for investors on disclosing how they vote, monitoring companies and engaging with management. Large shareholders must either comply with it, or explain why not.
It's a start, but it will not iron out the deep flaws in the current system, which have left pension fund members - the ultimate owners - nursing huge losses in the banks and now in BP. There have been some signs that investors are becoming more vocal if they believe a CEO is suffering from folie de grandeur - as Tidjane Thiam of the Prudential, who failed in his over-reaching bid for AIA after protests from shareholders, could testify. And at Tesco's annual meeting last week, there was a serious rebellion against executive pay awards.
Pension funds have £1.5tn of assets under their control and are meant to be long-term investors, so they should be ideal candidates to put up some of the capital. But there is no guarantee they will do it. They have not ventured much on low-carbon projects that could benefit society and the economy, as these are seen as risky. Instead they have stuck to their traditional template of shares, gilts and commercial property, with results we all know.
The chain connecting the end owners - us - to the boards of companies is long, opaque and complicated, involving massed armies of money managers, analysts, brokers and advisers, each taking their cut. The view of successive governments is that shareholders, not politicians, should be the overseers of boardroom behaviour, but there are too many weak links in the chain.
The interests of the end owner - the pensioners on whose behalf all this activity is supposed to take place - are at best seen as a sideshow, at worst totally ignored. Many pension funds do not even engage with company managements directly, but outsource their judgments to proxy voting agencies. Some are concerned at the costs of becoming more active owners, and fear rivals will hitch a free ride.
One answer is for pension funds to work collectively to challenge managements and improve corporate governance, as the new code advocates. Another is to look for ways to enfranchise pension fund members so their concerns can be heard.
The UK has a banking crisis, an energy crisis and a pensions crisis. The custodians of our retirement funds have, by their laissez-faire behaviour, aided and abetted business in its pollution of society by dirty oil and toxic banking. It is time they started to act like real owners, for the sake of pensioners - and for the sake of their children and grandchildren.
