The pundits are out in force. Europe is seeing unprecedented growth in pension funds to take care of its ageing populations. With pressure on them to increase profits, pension fund managers have moved away from fixed income investments and have began putting their money in equity. And, to ensure they have their say in company affairs, they have begun to recognize the importance of good corporate governance. So goes the hype. But what of the reality? Has a real pension fund industry developed in Europe yet? And if so, how active are its main players proving to be?
As usual, it’s difficult to talk about Europe in a generalized way – the situation is different from country to country. In the Netherlands, for example, pension funds have grown rapidly over the last decade or so. According to Pepijn Heins, manager of the Netherlands office of the WM Company, which monitors pension fund activity in Europe, when the Dutch office was first set up in 1984 it was measuring about 30 pension funds. Last year that figure stood at 230 funds. And, adds Heins, the value of Dutch funds is increasing all the time. ‘For the last few years we’ve seen investors move away from their traditional concentration on bonds. We’ve seen funds re-evaluating their whole strategy. It’s been coming for a number of years but last year was the first time that the equity make-up of the Dutch pension funds measured actually outweighed that of bonds.’
Heins puts the shift in emphasis down to financials. ‘Pension funds are having to do increasingly well to make the necessary contributions to retirees, so they’re having to change their asset mix.’
Nothing to declare
Other countries face similar financial hurdles but have nowhere near as highly developed a pension fund infrastructure. Take Italy, for instance, where the pension fund was only recently allowed as a legal entity. And the taxation system still strangles the growth of any private pension fund. As for the public pension funds, they do not invest in equities and certainly cannot be considered as activist investors. Comments Jean Nicolas Caprasse, a partner at Deminor, which advises institutional investors on corporate governance: ‘In terms of Italy and Spain there is nothing to declare on the corporate governance front at the moment.’ In Germany too, tax regulations are not very favorable for companies making contributions to their employees in the form of actively invested pension funds. ‘No pension funds are strong enough or developed enough to show an interest in this field,’ adds Caprasse. Instead, the issue of driving shareholder value and corporate governance has been left squarely on the shoulders of the mutual fund industry.
Even in countries where the pension fund industry is more firmly established, cultural barriers often stand in the way of investors involving themselves in the governance of the companies in which they invest. Take Switzerland, for instance, where, according to Philippe Spicher of Centre Info, which advises Swiss pension funds on corporate governance issues, most funds are very reluctant to speak out against companies. ‘We’re beginning to see some intervention at annual meetings but investors are not prepared to be very public about their opposition. They don’t want to be seen to be against management,’ comments Spicher.
Size matters
Deminor’s Caprasse says that usually two main factors distinguish whether or not a pension fund will be active on corporate governance issues. ‘The largest pension funds, and among those the public ones, tend to show the most interest in this area. Certainly in the UK, the Netherlands and Sweden we’ve found this. And even in Denmark and Belgium, where the funds tend to be much smaller, the trend holds,’ says Caprasse.
ABP, the largest pension fund in the Netherlands, and indeed in Europe as a whole, is no exception to that rule. According to chief counsel Rene Maatman, the fund’s interest in corporate governance stems from the mid-1990s. ‘The Peters Committee had a big impact on us. Our managing director was one of the members of the committee and its recommendations were on issues of real importance to us.’ ABP has since established two codes of conduct of its own, one about prudent investment policy, the other about corporate governance.
ABP was also one of eight founding members of a corporate governance research foundation for pension funds in the Netherlands. According to chairman Peter de Koning, the foundation was started to ‘support affiliated pension funds in formulating and implementing their corporate governance policy.’ It uses Deminor’s rating service – which monitors how companies stand on different corporate governance issues – to scrutinize how Dutch companies are faring. Maatman says the foundation plays an important role. ‘We’ve made alliances through the foundation with the largest Dutch pension funds. It makes combining actions much easier,’ he comments.
According to Maatman, until now ABP has concentrated less on strategy and financial results, more on formal governance. ‘Our priorities so far have been issues such as preference shares, non-voting shares and executive option schemes,’ he says. And the fund has had some success. At ABN-Amro’s annual meeting, for example, ABP opposed the company’s issuance of preference shares along with three other major pension funds. ‘Effectively it meant that the annual meetings could be dominated by shares worth only about one tenth of the capital. We opposed the policy and, as a result, the company changed its statutory document to say that holders of preference shares should only have voting rights in accordance with their capital contribution,’ he reports.
Another partial success was achieved at CSM, a company where shareholders had barely any voting rights at all. ‘The company’s policy was clearly in violation of the recommendations of the Peters Committee. After pressure from us and other investors they decided that those who contribute equity capital to the company should have a certain amount of voting rights,’ says Maatman. ‘The policy is still far from perfect but things have clearly changed for the better.’
The Netherlands is not the only place where investors are giving management a piece of their mind. In Sweden, for example, the interest shown in corporate governance by the pension fund industry is growing fast. Last year a number of pension funds got together to oppose a proposed executive incentive scheme at Skandia. The scheme was subsequently scrapped. And at telecom giant Ericcson’s annual meeting, four of the largest funds expressed their disapproval of the company’s voting policy and their wish for a one share, one vote policy to be put in place. The motion did not pass but the pension funds have now established a committee to investigate the legality of Ericcson’s policies.
More information
According to Ida Reijler of Caring Company, which provides research for Swedish pension funds on corporate governance as well as ethical and environmental issues, institutional activism in Sweden was awakened by the Volvo/Renault takeover discussions in the early 1990s. ‘The individual shareholder association in Sweden had been quite powerful for some time. It raised the opposition to the proposed takeover but it was the pension funds’ support that really put the boot in.’
Reijer notes that corporate governance changes in other countries have also been very influential on Swedish developments. ‘The actions of US pension funds like Calpers have set an example of what can be achieved.’ According to Reijer, the main governance issues in Sweden center around voting rights and disclosure. ‘Another problem is that although most boards have many non-executive directors, they often have strong links with company management,’ she adds.
Lack of disclosure is a particularly big stumbling block for pension funds in Switzerland. Centre Info’s Philippe Spicher explains: ‘It’s very difficult for pension funds to get involved in corporate governance because there is a real lack of information on issues like board structure, composition, independence and particularly remuneration. Companies really do not have to disclose anything in these areas.’ Spicher says that investors are just beginning to put pressure on companies but it will be a long process. ‘Swiss pension funds see what’s happening in the UK and US so they are trying to find out more on these issues. But they’ve still got a long way to go.’
One issue that has sparked real controversy this year has been the appointment of a combined CEO/chairman at two companies, Novartis and Credit Suisse. ‘The former case was not so bad because the company has a lead director who has the ability to hold meetings without the CEO and also the CEO does not sit on any of the key committees of the board. So some independent dialogue is guaranteed. But at Credit Suisse there is no lead director and the CEO sits on several of the board’s committees,’ comments Spicher.
Swiss banking law states that no one person can be CEO and chairman at the same time but Credit Suisse has got around the issue because it is not officially a bank but a holding company. According to Spicher, some pension funds have been outraged by the company’s actions and voted against the appointment at the AGM but only one – an investment foundation for pension funds called Ethos – was prepared to go public with its opposition. ‘It’s still difficult to come out and say what you really think in corporate Switzerland.’
In the public eye
Spurred on by the collapse of high-profile companies like Maxwell, BCCI and Polly Peck, shareholder activism came much earlier to the UK than it did to continental Europe. Only a handful of pension funds, however, have actually got involved. Chief among them is Hermes Investment Management, a fund manager wholly owned by the British Telecom pension scheme, the largest pension fund in the UK, which also manages a number of other funds such as the Post Office scheme.
‘We have quite an unusual structure which gives us more freedom than other pension funds,’ comments corporate governance executive Michelle Edkins. She explains: ‘We can make a public stance on governance issues because, unlike some other funds, we haven’t got any corporate finance business that will be exposed and we’re not trying to attract third party business.’
Edkins stresses that there is a lot more agreement among UK pension funds than you might think by looking at the few in the public eye. ‘Other institutional investors might not make a public stance on issues but they are certainly talking to companies behind the scenes, as well as talking with each other.’
Hermes is principally an index tracker, which means it has investments in just about every one of the largest companies in the world. In the UK, it is one of the top 20 shareholders in all of the largest companies. Obviously, explains Edkins, it’s not possible to know each company well, so Hermes has published a set of governance guidelines laying out the principles it believes in. But it does have regular contact with many companies.
‘We try and achieve as much as possible directly with companies but we are happy to go public about our efforts if dialogue with a company breaks down or we reach a stalemate,’ comments Edkins. Hermes was, for example, one of the pension funds that publicly opposed the one-off £10 mn bonus made to Vodafone CEO Chris Gent. The bonus was eventually approved at the company’s annual meeting but Vodafone’s chairman was sufficiently embarrassed by the 30 percent vote against to issue an apology to shareholders; and Chris Gent similarly announced that he would invest some of his cash bonus in Vodafone shares.
‘Our first and foremost concern is company performance. We’re interested primarily in the role the board plays in leading a company. We’re a long-term performance pension fund and we believe the quality of the board is fundamental to the long-term performance of the company,’ explains Edkins. She continues: ‘That includes the mix of non-executive and executive directors. We’re particularly interested in the caliber and independence of the non-executive directors.’
Hermes currently has an alliance with the US pension fund Calpers whereby each advises the other on how to vote on governance issues in their respective countries. In the future, Edkins says, Hermes would like to cultivate similar relationships in Europe. ‘It’s by far the best way to be effective abroad.’
