Gone are the days when institutional investors like pension funds, insurance firms and other large asset managers kept a low profile and quietly, passively, bought and held their shares in organisations they expected to grow over time.
With analysis of environmental, social and governance practices becoming mainstream in investment management, professional investors have realised there is additional financial value in actively engaging with organisations to fix issues they feel will detract from their long-term success.
Executive pensions are the latest high-profile battleground with a number of FTSE 100 firms being put under pressure for paying their chief executives contributions up to four times those received by the average employee.
Fair pay policies are necessary to ensure good employee morale. Significant pay discrepancies between an employer’s senior executives and the rest of the workforce can be a signifier of wider problems with a workplace’s culture.
With £2.2 trillion of assets under management, pension scheme investors wield significant influence in encouraging corporate best practice and success. They demand best-practice corporate governance because organisations with strong governance cultures tend to outperform their competitors.
The Pensions and Lifetime Savings Association (PLSA) AGM voting review, published in January 2019, found the level of significant dissent on FTSE 100 remuneration-related votes in 2018 has risen by nearly 300% versus 2017. This indicates that investors remain frustrated at inaction on levels of executive pay at the very biggest employers.
But what is driving the new wave of shareholder activism that is having such a positive impact on corporate governance issues like executive pensions? The most likely answer is that action by leading UK pension schemes, such as Nest, Railpen, Universities Superannuation Scheme (USS) and the West Midlands Pension Fund, has tipped the scales. In part, this is driven by the PLSA’s Hidden Talent 2 report, published in April 2019, which measures the extent to which FTSE 100 employers are disclosing workforce issues such as staff turnover, the gender pay gap and sickness rates.
The pioneering schemes have provided the impetus, and won financial and reputational advantage by acting decisively. Thus, if there was proven benefit to members, it follows that shareholder activism should be part of good stewardship. Initiatives like the PLSA’s Corporate Governance Policy and Voting Guidelines have made engaging more accessible, providing a blueprint which smaller investors can follow.
Caroline Escott is policy lead: investment and stewardship, at the Pensions and Lifetime Savings Association (PLSA)