Why should pension funds which are suffering shrinking equity investments allow the chief executives of the companies they invest in to get richer and richer? This is an easy question to answer for most trustees, who this year have been given the chance to check the top executive pay following the passing of a law requiring all publicly quoted companies to make their director's remuneration package subject to shareholder approval. Jason Hollands, the director of group communications and strategy at Isis Asset Management, one of the UK's biggest advocates of corporate governance, sees the law as a chance for trustees to pass on some of the misery they are experiencing. "When markets are climbing and investors are being adequately rewarded for their equity exposure, shareholder 'uprisings' are reasonably uncommon, but when markets fall, pressure inevitably mounts on company directors to justify every penny they receive." Hollands notes that even before the law came into force a rising tide of shareholder activism had already had some success in checking chief executive pay. He identifies one of the biggest scalps taken by shareholders active in corporate governance over the last year as that of Prudential chief executive officer Jonathan Bloomer, who had his high pay package withdrawn after shareholder unrest on the issue. Corporate governance though is more than just about reining in directors' pay; it is also about rooting out the type of corruption that led to the downfall of Enron and WorldCom. To ensure that happens, more pension funds will have to get involved in shareholder activism believes Sarah Wilson, managing director of proxy voting agency and corporate governance research provider Manifest. She says: "It is not feasible now to take a 'if we don't like it we will sell it' attitude to share ownership, it is much too expensive. Activism is a low cost way of improving company performance. It cannot just be left to a few people to do otherwise it is bit like elections; you cannot complain about what you get in terms of government if you did not get involved." Wilson notes that while most trustees will delegate corporate governance on a day-to-day basis to their fund manager, they should still be actively monitoring their fund manager. And she urges trustees to put a governance policy in their statement of investment principles. Trustees' checklist • Incentive pay should be linked to company performance and should only be approved where it reflects above average performance. • Directors' service contracts should be restricted to one year to avoid large compensation cases in the event of dismissal. • Company board effectiveness needs to be re-assessed regularly. • To avoid too much concentration of power and responsibility, the roles of chairman and chief executive should not be combined. • In order that directors are not in a position to decide their own pay, remuneration committees should only comprise of independent non-executive directors. Source: Morley Fund management