CORPORATE GOVERNANCE AND CORPORATE SOCIAL RESPONSIBILITY

CORPORATE GOVERNANCE AND CORPORATE CORPORATE GOVERNANCE AND CORPORATE SOCIAL RESPONSIBILITYSOCIAL RESPONSIBILITY

THE ROLE OF LAPFFTHE ROLE OF LAPFF

A PRESENTATION TO THE A PRESENTATION TO THE TUC TRUSTEE NETWORK CONFERENCETUC TRUSTEE NETWORK CONFERENCE

B BAILEYB BAILEYHONORARY TREASURER – LAPFFHONORARY TREASURER – LAPFFDIRECTOR TO WEST MIDLANDS PENSION FUNDDIRECTOR TO WEST MIDLANDS PENSION FUND 5 June 5 June

20062006

LOCAL AUTHORITY PENSION FUNDS FORUMLOCAL AUTHORITY PENSION FUNDS FORUMWHAT WE ARE ABOUTWHAT WE ARE ABOUT

THE FORUMTHE FORUM

• Maximises pension funds’ influence as shareholders to Maximises pension funds’ influence as shareholders to promote Corporate Social Responsibility and high standards promote Corporate Social Responsibility and high standards of Corporate Governance.of Corporate Governance.

• Facilitates commissioning of research and policy analysis of Facilitates commissioning of research and policy analysis of issues more effectively than individual members.issues more effectively than individual members.

• Provides a forum for consultation on shareholder initiatives.Provides a forum for consultation on shareholder initiatives.

• Provides a forum for information exchange and discussion Provides a forum for information exchange and discussion about investment issues.about investment issues.

• Provides a forum to consider issues of common interest to Provides a forum to consider issues of common interest to all local government pension fund administrators and all local government pension fund administrators and trustees.trustees.

LOCAL AUTHORITY PENSION FUNDS FORUMLOCAL AUTHORITY PENSION FUNDS FORUMOUR STRUCTUREOUR STRUCTURE

MEETINGSMEETINGS

• Four Business Meetings a year, four Executive Meetings.Four Business Meetings a year, four Executive Meetings.• Annual General Meeting.Annual General Meeting.• Decisions at meetings reached by consensus.Decisions at meetings reached by consensus.• Each member Fund has one vote at meetings.Each member Fund has one vote at meetings.• Annual Conference.Annual Conference.• Forum ExecutiveForum Executive

CONTRACTSCONTRACTS

• PIRC contracted as research and engagement partner, PIRC contracted as research and engagement partner, supplying research, advice and assistance to LAPFF. supplying research, advice and assistance to LAPFF.

• Forum Officer – marketing, publicity, development.Forum Officer – marketing, publicity, development.

LOCAL AUTHORITY PENSION FUNDS FORUMLOCAL AUTHORITY PENSION FUNDS FORUMMEMBERSHIPMEMBERSHIP

• Currently 39 Local Authority Pension Funds.Currently 39 Local Authority Pension Funds.

• £60 billion in value.£60 billion in value.

• Membership open to all LGPS pension funds.Membership open to all LGPS pension funds.

• Representation at Forum Meetings by Councillors and Representation at Forum Meetings by Councillors and Officers.Officers.

• www.lapfforum.org.www.lapfforum.org.

LAPFF APPROACHLAPFF APPROACH

OBJECTIVE OF THE LAPFF APPROACH:-OBJECTIVE OF THE LAPFF APPROACH:-

• To be proactive – not reactive.To be proactive – not reactive.

• Recognise change takes time.Recognise change takes time.

• Drive performance up to match the best.Drive performance up to match the best.

• To facilitate active engagement with companies.To facilitate active engagement with companies.

ACTIVE ENGAGEMENT CAN BE CONSIDERED AS ACTIVE ENGAGEMENT CAN BE CONSIDERED AS

MANAGING INVESTMENT RISKMANAGING INVESTMENT RISK

BY IDENTIFYING THESE RISKS IN COMPANIES, A FUND AIMS, BY IDENTIFYING THESE RISKS IN COMPANIES, A FUND AIMS, THROUGH ITS ENGAGEMENT STRATEGY, TO IMPROVE THE THROUGH ITS ENGAGEMENT STRATEGY, TO IMPROVE THE GOVERNANCE WEAKNESSES AND PROTECT ITS LONG TERM SHAREGOVERNANCE WEAKNESSES AND PROTECT ITS LONG TERM SHARE VALUESVALUES

• ReputationReputation

• Falling short of its peers on social, environmental or ethical Falling short of its peers on social, environmental or ethical trends.trends.

• Slow in responding to social changes and trends.Slow in responding to social changes and trends.

• Falling short of its peers on meeting new OFR and other Falling short of its peers on meeting new OFR and other reporting standards.reporting standards.

• Comparatively weak broad structure in terms of make-up, Comparatively weak broad structure in terms of make-up, expertise, independence.expertise, independence.

ACTIVE ENGAGEMENT IS PART OF ACTIVE ENGAGEMENT IS PART OF INVESTMENT MANAGEMENTINVESTMENT MANAGEMENT

Active Engageme

nt

Investment Strategy

SIP/FSS

Myners’ Complianc

e

MYNERS’ PRINCIPLES MYNERS’ PRINCIPLES

The Myner’s principles indicate funds should follow an activeThe Myner’s principles indicate funds should follow an active

shareholder engagement approach using its position to shareholder engagement approach using its position to influence theinfluence the

corporate practices of companies in which it invests.corporate practices of companies in which it invests.

SHAREHOLDER ACTIVISMSHAREHOLDER ACTIVISM

• Myners - Principle 6Myners - Principle 6

Trustees should ensure they have an explicit strategy on Trustees should ensure they have an explicit strategy on

Activism elucidating the circumstances in which they will Activism elucidating the circumstances in which they will

intervene in a company; the approach they will use in doing intervene in a company; the approach they will use in doing

so; and how they measure the effectiveness of this strategy.so; and how they measure the effectiveness of this strategy.

• CIPFA Guidance states:CIPFA Guidance states:

Authorities may wish to seek alliances with a group of local Authorities may wish to seek alliances with a group of local

authority pension funds, to utilise the benefits of collective authority pension funds, to utilise the benefits of collective

size where there is common interest to influence a size where there is common interest to influence a

company/companies.company/companies.

• LAPFF enables LGPS Funds to meet their Myners LAPFF enables LGPS Funds to meet their Myners

requirements.requirements.

ENGAGEMENTENGAGEMENTTHE LAPFF APPROACHTHE LAPFF APPROACH

• Establishing Best PracticeEstablishing Best Practice - policy research, stakeholder views, international norms- policy research, stakeholder views, international norms

• Benchmarking Company PracticesBenchmarking Company Practices - PIRC database, surveys, bespoke research- PIRC database, surveys, bespoke research

• Engagement with CompaniesEngagement with Companies - Correspondence, discussions, private meetings- Correspondence, discussions, private meetings

• Escalation as NecessaryEscalation as Necessary - Public domain, AGMs, press- Public domain, AGMs, press

• Collaboration with Other GroupsCollaboration with Other Groups

• Persistence Pays Off Persistence Pays Off

DOES LAPFF ACHIEVE?DOES LAPFF ACHIEVE?

OVER 15 YEARS LAPFF HAS:-OVER 15 YEARS LAPFF HAS:-

1.1. Improved company reporting facilitating improvements.Improved company reporting facilitating improvements.

2.2. Contributed to improved governance/part of making Contributed to improved governance/part of making changes happen.changes happen.

3.3. Assisted in raising issues/awareness contributing to the Assisted in raising issues/awareness contributing to the pressures for change eg., environmental work.pressures for change eg., environmental work.

AREAS OF CONCERNAREAS OF CONCERN

• Directors’ payDirectors’ pay

• Boardroom structuresBoardroom structures

• Environmental issuesEnvironmental issues

• Labour standardsLabour standards

• Appointment of and role of auditorsAppointment of and role of auditors

DIRECTORS’ PAYDIRECTORS’ PAY

• Supportive of high rewards for success.Supportive of high rewards for success.

• Opposed to ‘Fat Cat’ pay deals rewarding poor performance Opposed to ‘Fat Cat’ pay deals rewarding poor performance

(LAPFF alerts).(LAPFF alerts).

• Opposed to excessive rewards which are disproportionate Opposed to excessive rewards which are disproportionate to performance.to performance.

• Will not tolerate any lack of transparency.Will not tolerate any lack of transparency.

BOARDROOM STRUCTURESBOARDROOM STRUCTURES

• Separation of Chair of Board from Chief Executive.Separation of Chair of Board from Chief Executive.

• Independence of non- executive directors.Independence of non- executive directors.

• Senior independent director.Senior independent director.

• Recruitment and appointment of directors.Recruitment and appointment of directors.

• Induction and professional development.Induction and professional development.

• Institute of Directors – Institute of Directors –

LAPFF support for IoD Chartered Director qualificationLAPFF support for IoD Chartered Director qualification

ENVIRONMENTAL ISSUESENVIRONMENTAL ISSUES

• Greenhouse gas emissions (Kyoto protocol)Greenhouse gas emissions (Kyoto protocol)

• Mineral explorationMineral exploration

• Waste dumpingWaste dumping

EMPLOYMENT STANDARDSEMPLOYMENT STANDARDS

• Overseas labour standards Overseas labour standards

• FTSE companies in ChinaFTSE companies in China

• Survey of company workforce practicesSurvey of company workforce practices

e.g. attitudes of companies to supply chain labour e.g. attitudes of companies to supply chain labour standards and reputational risksstandards and reputational risks

The aim is to support shareholder valueThe aim is to support shareholder value

LAPFF ACTIVITIES: MAKING A DIFFERENCELAPFF ACTIVITIES: MAKING A DIFFERENCE

DIRECTORS’ PAYDIRECTORS’ PAY

• Reduction in the number of LAPFF Pay Alerts over time. Reduction in the number of LAPFF Pay Alerts over time.

• There is a continuing positive trend with executives and There is a continuing positive trend with executives and new executives being appointed on one-year terms. new executives being appointed on one-year terms.


OVERSEAS EMPLOYMENT STANDARDSOVERSEAS EMPLOYMENT STANDARDS

• The Forum has had a long-term commitment to improving The Forum has had a long-term commitment to improving overseas employment standards. LAPFF first expressed overseas employment standards. LAPFF first expressed investor concerns on the indirect use of child labour by retail investor concerns on the indirect use of child labour by retail companies in 1998, following a series of high profile media and companies in 1998, following a series of high profile media and non-governmental organisation revelations on this issue. non-governmental organisation revelations on this issue.

• In January 1999, LAPFF initiated a campaign to persuade In January 1999, LAPFF initiated a campaign to persuade companies to adopt codes of conduct, backed up by the companies to adopt codes of conduct, backed up by the development of monitoring and verification mechanisms. At development of monitoring and verification mechanisms. At that time there was little investor involvement on this issue in that time there was little investor involvement on this issue in the UK. Since LAPFF’s work began, supply chain labour the UK. Since LAPFF’s work began, supply chain labour standards have become a key CSR concern and there is now a standards have become a key CSR concern and there is now a greater recognition of this issue amongst other investors. greater recognition of this issue amongst other investors.

LAPFF ACTIVITIES: MAKING A LAPFF ACTIVITIES: MAKING A DIFFERENCEDIFFERENCE

• In particular, the Forum was instrumental in persuading Dixons In particular, the Forum was instrumental in persuading Dixons to disclose their code of conduct.to disclose their code of conduct. In view of this progressIn view of this progress, , in in 2003 it was decided that a second, more in-depth, study should 2003 it was decided that a second, more in-depth, study should be conducted to investigate the extent to which FTSE 100 retail be conducted to investigate the extent to which FTSE 100 retail companies were making genuine efforts to implement and companies were making genuine efforts to implement and monitor their codes. The resulting report published in monitor their codes. The resulting report published in December 2003 showed the progress that all the retailers December 2003 showed the progress that all the retailers covered had made and the Forum publicly thanked the covered had made and the Forum publicly thanked the companies concerned. companies concerned.

• A detailed study with 6 companies operating in China during A detailed study with 6 companies operating in China during 2005, has enabled LAPFF to identify good practice as a basis 2005, has enabled LAPFF to identify good practice as a basis for developing an engagement approach for poor performing for developing an engagement approach for poor performing companies.companies.

• LAPFF identified minimum reporting standards on employment LAPFF identified minimum reporting standards on employment practices during 2005 and is engaging on getting companies to practices during 2005 and is engaging on getting companies to meet these requirements.meet these requirements.


REPORTING OF GREENHOUSE GAS EMISSIONSREPORTING OF GREENHOUSE GAS EMISSIONS

• Another long-term commitment of the Forum is to improve reporting Another long-term commitment of the Forum is to improve reporting on greenhouse gas emissions by all FTSE 100 companies, on greenhouse gas emissions by all FTSE 100 companies, particularly those which do not currently make any disclosures. particularly those which do not currently make any disclosures. During the 2004 proxy season the Forum has attended a number of During the 2004 proxy season the Forum has attended a number of AGMs to ask companies about their disclosure of greenhouse gas AGMs to ask companies about their disclosure of greenhouse gas emissions according to the guidelines of the Department for emissions according to the guidelines of the Department for Environment, Food & Rural Affairs (DEFRA). A positive response was Environment, Food & Rural Affairs (DEFRA). A positive response was received in all instances with the companies committing to look at received in all instances with the companies committing to look at the issue of reporting. The AGMs attended included Amvescap, the issue of reporting. The AGMs attended included Amvescap, Smith & Nephew, LogicaCMG and Shire Pharmaceuticals. Wolseley, Smith & Nephew, LogicaCMG and Shire Pharmaceuticals. Wolseley, in the construction and building material sector, has said it will in the construction and building material sector, has said it will ‘consider’ using the guidelines. ‘consider’ using the guidelines.

• The campaign, conducted in collaboration with the Environment The campaign, conducted in collaboration with the Environment Agency Pension Fund, has attracted much press interest, with Agency Pension Fund, has attracted much press interest, with references in a wide range of general and specialist media. A further references in a wide range of general and specialist media. A further boost to the campaign came from theboost to the campaign came from the decision of the Minister of decision of the Minister of State at DEFRA, Rt Hon Elliot Morley MP, to meet members of the State at DEFRA, Rt Hon Elliot Morley MP, to meet members of the Forum Executive and Forum officers on 23 September 2004 to Forum Executive and Forum officers on 23 September 2004 to discuss the Forum’s concerns about FTSE 100 companies that still do discuss the Forum’s concerns about FTSE 100 companies that still do not publish quantified data on their greenhouse gas emissions.not publish quantified data on their greenhouse gas emissions.

A MINISTERIAL QUOTEA MINISTERIAL QUOTE

"I congratulate LAPFF for playing an important role in "I congratulate LAPFF for playing an important role in furthering these aims. Recently I met with representatives furthering these aims. Recently I met with representatives from the Forum and was pleased to hear the positive from the Forum and was pleased to hear the positive responses they received in assessing the FTSE 100's level responses they received in assessing the FTSE 100's level of greenhouse gas emissions reporting.of greenhouse gas emissions reporting.

"I therefore look forward to seeing the LAPFF continuing to "I therefore look forward to seeing the LAPFF continuing to increase company awareness on the importance of increase company awareness on the importance of reporting their greenhouse gas emissions.”reporting their greenhouse gas emissions.”

• LAPPF funded an independent study into issues common LAPPF funded an independent study into issues common between companies in various sectors with a view to between companies in various sectors with a view to engaging with companies to improve disclosure and engaging with companies to improve disclosure and improve accountability for their actions. The forum is now improve accountability for their actions. The forum is now on the oil and gas sector.on the oil and gas sector.

LAPFF ACTIVITIES: MAKING A LAPFF ACTIVITIES: MAKING A DIFFERENCEDIFFERENCE

EMERGING AREAS OF ACTIVITYEMERGING AREAS OF ACTIVITY

• 2005 saw the start of a pilot study into the impact of 2005 saw the start of a pilot study into the impact of mergers and acquisitions.mergers and acquisitions.

• About to explore disclosure of information around a About to explore disclosure of information around a company’s equal pay performance – equal pay audits and company’s equal pay performance – equal pay audits and annual reporting.annual reporting.

WHERE ARE WE NOW?WHERE ARE WE NOW?

• Beginning to make a differenceBeginning to make a difference

• Public support is growing Public support is growing

• Governmental support/interest (preferred to regulation)Governmental support/interest (preferred to regulation)

• Constant media interestConstant media interest

• Much more to do – only beginning to scratch the surfaceMuch more to do – only beginning to scratch the surface

OUR ANNUAL CONFERENCE – SOME QUOTESOUR ANNUAL CONFERENCE – SOME QUOTES

• ““An in-depth, thought-provoking and top quality conference that An in-depth, thought-provoking and top quality conference that only gets better every year" only gets better every year" Jonathan Stapleton, Journalist, Jonathan Stapleton, Journalist, Professional Pensions.Professional Pensions.

• ‘ ‘An unmissable event on the LGPS calendar’ An unmissable event on the LGPS calendar’ Martin Campbell, Martin Campbell, Vice President, Public Sector Business Development Mellon Vice President, Public Sector Business Development Mellon Global InvestmentsGlobal Investments

• ““The conference provided a good insight into an increasingly The conference provided a good insight into an increasingly important area for Local Govt Pension Funds. I recommend it." important area for Local Govt Pension Funds. I recommend it." John Jones, Consultant, Henderson Global InvestorsJohn Jones, Consultant, Henderson Global Investors

• “ “As a first time attendee, I was very impressed with both the As a first time attendee, I was very impressed with both the quality of the agenda and the input from your speakers. I think quality of the agenda and the input from your speakers. I think ……..your membership will continue to grow over 2005 and ……..your membership will continue to grow over 2005 and beyond.” beyond.” Spencer Ahluwalia, Director, Legg Mason Spencer Ahluwalia, Director, Legg Mason InvestmentsInvestments

• "Very well organised, informative and definitely worth attending" "Very well organised, informative and definitely worth attending" Michael Hart, Director – Business Development bfinance.Michael Hart, Director – Business Development bfinance.

THANK YOU FOR LISTENINGTHANK YOU FOR LISTENING

ANY QUESTIONS?ANY QUESTIONS?