Corporate governance guidelines aim to improve decision-making processes by listening to stakeholders better. James Phillips explores how pension funds will benefit
Corporate governance concerns are increasingly on pension funds' radars as they seek to improve practice at some of the world's largest firms.
Yet, sometimes their voices can be drowned out at company board meetings by larger stakeholders who are sometimes majority shareholders.
To try and help these small fish, the Investment Association (IA) and ICSA: The Governance Institute, last month launched joint guidelines to improve companies' engagement with their stakeholders.
The voluntary principles promote practices including identifying key stakeholders regularly, determining which should be engaged with directly, what expertise is needed in the boardroom, and that such engagement is appropriate.
At the heart of the guidance is a view that the relationship between companies and their stakeholders needs strengthening, especially in terms of value.
Particularly, it suggests an increased importance in making sure that stakeholder interests are borne in mind throughout the decision-making process.
Pensions and Lifetime Savings Association (PLSA) policy lead for stewardship and corporate governance Luke Hildyard says:
"It's important that companies develop strong and functional relationships with all their key stakeholders and incorporate stakeholder perspectives into their strategic decision-making," he states.
"Firstly, because it's only fair that the people who rely on the company and on whom the company relies have a proper say in the way it's run, and secondly because different stakeholders can bring particular insights to the decision-making process, leading to better decisions."
Overall, the new guidelines could improve decision-making generally by providing a full picture to the process.
NN Investment Partners head of responsible investment Adrie Heinsbroek says even if the principles only act as a steer, they will strengthen evidence-based decisions.
"Understanding the aspiration and motivations of different stakeholders including shareholders in the boardroom is important," he says. "It means that management can take the full picture into consideration when discussing and deciding on both business strategy and its execution, as well as the broader socio-economic implications.
"Guiding principles strengthen that message, so it's a helpful step in the further strengthening of incorporating societal views in business decision-making."
So should institutional investors, including pension funds, feel more empowered to take their issues to the directors of a company?
Hildyard is pleased there is recognition of the role of pension funds in the guidance, arguing this explicitly brings them into the decision-making progress.
"In comparison to employees, suppliers and customers, pension fund can often be neglected as an example of a critical stakeholder constituency," he states.
"Pension funds could use this guidance, together with existing rules requiring company directors to have regard for stakeholder interests, to encourage the board to take pensions issues seriously.
"Clearly, stakeholders seeking greater say in corporate decision-making can now point to the principles issued on behalf of the investment community (the IA) and corporate governance professionals working within companies themselves (ICSA) as grounds for better say in decision-making."
The unified approach by the two bodies, as well as further forthcoming guidance, will boost the code's practicality.
MSCI head of corporate governance business development Howard Sherman says:
"I was particularly struck by the attention paid to how boards really operate, including the importance of the induction programme, agenda management, the critical role of board committees, and more," he states. "The guidance here is both considered and practical.
"The asset owners, asset managers, banks and insurers we work with at MSCI environmental, social and governance (ESG) research would welcome more reporting on how ESG considerations factor into corporate strategic plans.
Meanwhile, Heinsbroek believes the guidance will build on the existing empowerment of pension funds, and improve corporate responsiveness to their concerns.
Yet he argues: "To be seen and respected as conversation partners, solid understanding of the issues at hand as well as relevance is needed from stakeholders. This will need to go beyond mere short-term interests as it will not be perceived as constructive."
Sherman adds additional guidance on reporting, specifically under Section 172 of the Companies Act, will boost this further. The government has proposed companies with at least 2,000 employees will be required to explain how they have met their duty, under the act, to have regard to the interests of employees, suppliers and other non-shareholders in decision-making.
Yet, the PLSA's Hildyard believes that those who could benefit from this are not aware, and this is hampering results.
"The Companies Act 2006 requires directors to have regard for the interests of stakeholders when exercising their responsibilities as directors," he states. "Clearly, there are directors who think solely in terms of short-term profit maximisation, but aren't held to account for their failure to have a balanced regard for their stakeholders.
"Similarly, employees have the right to be consulted over important decisions at the companies but many are not aware of this right or lack the capacity to organise in order to establish one."
The IA's and ICSA's code is only voluntary, which begs the question, ‘will this actually be adopted and therefore lead to much change?'
Hildyard says sometimes more blunt action has been proven necessary to enforce change; for example, he notes that despite the increased introduction of bags for life and advertising campaigns, only introducing a 5p charge on plastic bags led to reduced usage.
"While worker directors and stakeholder forums are instigated at the board's discretion, some cynicism about how much independent challenge they'll offer is understandable," he continues.
"The plastic bags case offers a useful example. After years of campaigns and encouragement to reduce usage with limited success, it took a blunt ban to do so properly."
For this reason, it could make sense to make these guidelines, or something similar, mandatory.
Heinsbroek adds it is right the guidance is not mandatory at such an initial stage, allowing all participating parties to mould it to a way that is beneficial for all.
"Voluntary is the right first step to make the topic perceived as a positive contributor to increase and expand the licence to operate a company," he states. "It also allows pension funds to choose how they want to make use of this opportunity and make it fit to their wage of engaging."
The guidelines' over-arching aim is to ensure investors' voices are heard in company boardrooms. Although voluntary, a drive to be better than their competitors could lead to greater engagement.
However, for best practice it may be necessary to introduce some stricter and compulsory rules.
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