Business, Innovation and Skills CommitteeSupplementary written evidence submitted by ShareAction (formerly FairPensions)

Thank you very much for the opportunity to give oral evidence to the Committee’s inquiry on the Kay Review of UK Equity Markets. I am writing to clarify some aspects of our oral evidence, and to let you know of a change to FairPensions’ operating name.

Firstly, as of Monday 18 March, FairPensions will become ShareAction. This reflects the broader scope and relevance of our work to promote responsible and engaged share-ownership. It is also intended to clarify that our focus is on invested pension savings (and the investment system more generally) rather than on the state pension or on unfunded public sector schemes, as is often assumed. We have been in touch with Committee officials regarding the implications of this change in the event that we should be cited by name in the Committee’s final report.

As you are aware from our written and oral evidence, our two key areas of expertise and interest are fiduciary duty and accountability to underlying savers. The below is intended to summarise and clarify our position on these two issues.

Fiduciary Duty

As you know, Professor Kay made two separate recommendations about fiduciary duty. The first concerned the question of who has fiduciary duties: Professor Kay recommended that these standards be extended to all those managing other people’s money. The second concerned the question of what these fiduciary duties mean, and in particular the need to clarify that they do not oblige institutional investors to focus solely on short-term share price movements: Professor Kay recommended that this be referred to the Law Commission.

The first of these two recommendations was well covered in the oral evidence session, but discussion of the second was somewhat truncated due to lack of time. We therefore thought it might be helpful to briefly restate our position, and in particular to clarify our perspective on the relationship between directors’ duties under the Companies Act and our proposed clarification of investors’ duties.

Section 172 of the Companies Act 2006 was designed to correct the widely held misconception that directors’ duty to act in shareholders’ interests prevented them from taking a long-term view and from considering their social and environmental impacts. It clarified that directors should “have regard” to these wider factors as part of their duty to promote the success of the company. This exactly mirrors the problem with interpretations of investors’ duties which we and Professor Kay have highlighted: there is a widely held view that institutional investors’ duty to act in the interests of underlying savers prevents them from taking a long-term, enlightened approach to the companies in which they invest.

Our argument is that these two problems are intrinsically connected. The Companies Act sought to achieve long-term, responsible corporate behaviour by promoting “enlightened shareholder value” (rather than by extending rights to other stakeholders in the company). But this job remains unfinished as long as major shareholders continue to believe that they themselves are legally obliged to be unenlightened.

This may help to explain the seemingly limited impact of the changes to directors’ duties under section 172.1 Surveys suggest that directors continue to feel they have limited room for manoeuvre, particularly in hostile takeover situations, where it is assumed that the directors’ duty to get the best price for shareholders “trumps” section 172.If major shareholders interpret their own duties in terms of the maximisation of short-term return, it is hardly surprising that this imperative will be transmitted up the chain to directors. This fits with the evidence (both anecdotal and empirical) from directors about why they make the decisions they do.2

It is for this reason that we believe explicit clarification of investors’ fiduciary duties, mirroring the clarification of directors’ duties offered by section 172 of the Companies Act, is an important part of the solution to short-term pressures on companies. We very much hope that this will be the outcome of the Law Commission’s review.

The above is elaborated in our 2012 report “The Enlightened Shareholder”, a copy of which is enclosed. We would be pleased to provide additional copies to the Committee if necessary.

Transparency and Accountability

As you know, we believe that in order to make Professor Kay’s vision for equity markets a reality, it will be necessary to strengthen the connection between savers and their money, by enhancing transparency and accountability of the investment industry to its customers. In our view, insufficient thought has been given to this by policymakers, who have tended to focus instead on the connection between companies and institutional investors. We have recently embarked on a research project aimed at rectifying this imbalance, which will be reporting with policy recommendations in the summer. Meanwhile, mindful of your request for specific proposals, we thought it might be helpful to summarise our key suggestions to date.

Pension funds should be obliged to report to their beneficiaries not just on their investment and voting policies (as now), but also on how those policies have been implemented on an annual basis. This could take the form of a “narrative report” along similar lines to the reports which companies are obliged to produce for their shareholders.

Government should exercise its reserve power to introduce mandatory voting disclosure for institutional investors. Please see below for more detail on the case for this measure.

Institutional investors could be obliged to hold annual meetings (in the same way that companies must hold annual meetings for their shareholders) offering savers the opportunity to hold their fiduciaries to account.

Government could explore ways to support and strengthen the role of member-nominated trustees, and to extend similar member representation to contract-based forms of pension provision. We could also learn from the approach taken in other jurisdictions, for example Denmark’s system of “member delegates”, which provides an additional level of scrutiny between the pension fund and the membership at large.

The case for mandatory voting disclosure

Disclosure of information about voting and engagement allows underlying savers to hold their agents to account for the exercise of shareholder rights on their behalf. ShareAction (FairPensions) works to build such a culture of accountability, and at present we find that lack of transparency is a fundamental barrier to its development. Individuals who contact their pension funds to ask how votes were cast at a particular company or on a particular issue are often given no information or simply told that the decision is delegated to asset managers.

We recently conducted an analysis of responses to saver emails about voting intentions on executive pay, sent via an email tool we built in April 2012. Less than half of responses stated that the fund disclosed their voting records, and only around one in five provided direct links to such disclosures.3 This is a disheartening experience for savers who are therefore less likely to continue attempting to engage with decisions about their money. Improved transparency has the potential to transform this “vicious circle” into a “virtuous circle” of greater engagement and accountability.

Our benchmarking surveys of institutional investors consistently find a link between transparency and substance: in other words, investors who disclose good information about their policies and practices tend to perform better in our analyses of the quality of their policies and their evidence of commitment to stewardship.

Voluntary mechanisms (such as the Stewardship Code) have generated improvements in voting disclosure, but evidence suggests that these improvements are beginning to plateau, at a level still far below universal disclosure. Although the IMA suggests that around three-quarters of Code signatories now disclose some voting information, this figure includes summary statistics (ie the total number of votes cast for and against management in a given year) which we would not regard as meaningful voting disclosure. Research by PIRC suggests that, even among Stewardship Code signatories, the proportion disclosing full information about individual votes cast is in fact just 21%.4 This reinforces the case for mandatory requirements which clearly set out the information to be provided in order to ensure that it is comprehensive and comparable.

Practical arguments sometimes made against mandatory public disclosure of voting include:

that it would impose an unreasonable cost on investors;

that it would breach commercial confidentiality; and

that it would be pointless as there is no demand for this information.

In our view these arguments have little merit:

The vast majority of UK investors already record data about their voting behaviour. The cost of disclosure is simply a matter of formatting this data and uploading it to a public website. Evidence from investors who already do this suggests that these costs are minimal.

We see no reason why voting information should be commercially sensitive. The fact that many investors disclose their voting records (usually quarterly in arrears) suggests that these concerns are unfounded.

As indicated above, the opacity of the investment system is itself a key barrier to the development of demand for this information. In any case, the information will be used by academics and civil society organisations (such as ourselves) to compare investors against each other in a more consumer-friendly format. Finally, the knowledge that voting decisions are subject to public scrutiny may in itself help to shift behaviour.

Catherine Howarth
Chief Executive, ShareAction (formerly FairPensions)

14 March 2013

1 See for example Collison et al, 2011, “Shareholder Primacy in UK Corporate Law: An Analysis of the Rationale and Evidence”, ACCA

2 See for example Graham et al, 2004, “The Economic Implications of Corporate Financial Reporting” (in a US context)

3 FairPensions, 2012, “The Missing Link”

4 See ttp://

Prepared 24th July 2013