Shareholder engagement:

the LAPFF Approach

Devon Pension Fund annual Staff and Retired Members

consultative meeting for pension fund members

26th February 2016

Presentation by

Tessa Younger, Engagement Services Manager

Alan MacDougall, Managing Director

PIRC Ltd, Research & Engagement Partner to LAPFF

Shareholder engagement:

what it is & why we do it

• Shareholders that engage with companies seek to exercise

‘voice’, rather than choosing to ‘exit’. In that sense, the opposite

of divestment

• Engagement with public companies typically seeks further

clarification of, or a change in, behaviour

• It involves meeting with companies on issues of interest or

concern that may affect value

• Engagement is more than voting, but voting remains a vitally

important element of engagement

LAPFF action on carbon

• LAPFF assesses company carbon reporting (2001) writes to

FTSE 100 with Environment Agency for better disclosure

(2002)

• Engagement with chosen sectors (2002 – 2010), BG group

sets an emission reduction target (2008)

• More recent focus on highest emitting UK companies

• Developing engagement strategy with Carbon Tracker

• Companies to identify and tackle carbon risks in business

models and press for alignment with 2°C scenario

3

Aiming for A

‘Who’s Who’ in ‘Aiming for A’

• LAPFF, Church Investor Group (Church Commissioners,

Church of England Pensions Board and CBF Church of

England Funds); Central Finance Board of the Methodist

Church and Rathbone Greenbank Investments

• Sarasin & Partners, Hermes Investment Management and the

Pensions Trust joined in 2015

4

Strategic Resilience

Resolutions

• ongoing operational emissions management

• asset portfolio resilience to International Energy Agency

scenarios

• low-carbon energy Research & Development and

investment strategies

• relevant strategic Key Performance Indicators and

executive incentives

• public policy positions relating to climate change

5

Annual reporting from 2016 to include information on:

Shell meeting

• Widely held by LAPFF members

• First meeting with chair, Jorma Ollila, in

October 2014

• Follow-up on meetings in two previous

years

• Discussed a range of issues

6

Shell

BP meeting

• Widely held by Forum members

• Met BP chair, Carl-Henric Svanberg, for

third time

• Discussed the resolution amongst a

range of issues

7

Shell resolution

• 13 LAPFF member funds co-filed in

December 2014

• UK: Aiming for A coalition joined by other

investors including Environment Agency,

Unison staff pension scheme

• Overseas investors included: institutional

investors from Finland; three Swedish

national pension funds; US and

Canadian funds

8

Shell

BP resolution

• January 2015, 11 LAPFF member

funds co-filed the resolution

• Same UK co-filers in the main, also

similarly strong representation of US,

Canadian and European funds

• Overseas filers also included Australian

Local Government Super

9

Strategic Resilience

Resolutions

• Resolutions on strategic resilience to

2035 and beyond

• Both boards advised shareholders to

vote in favour

• Unprecedented in UK, reflects positive

engagement with both company chairs

10

Voting declarations

• Voting declaration process for investors

to indicate support

• 31 LAPFF funds pre-declared

• UK institutions included Aviva,

Schroders, Royal London, Jupiter, F&C

• Overseas supporters: Calpers, Calsters,

Norges Bank, AXA as well as French,

Dutch and German managers

11

BP vote outcome

• Vote of over 98% in support

• Chair “emissions still rising

too fast to stay within 2°”

• Pushing for

a) Carbon price

b) Coal to gas transition

c) Energy efficiency focus

d) Subsidies for low carbon

technologies12

Shell vote outcome

• Shell AGM in Netherlands, got

99.8 % support

• LAPFF vice-chair attended UK

Shell shareholder meeting

• Precedent that now nearly every

significant institutional investor in

the world has voted for disclosure

of a low-carbon business strategy

13

Integrated Miners

• Continued engagement with BHP, Rio Tinto,

Glencore and Anglo American

• Met BHP representatives in March,

attended AGM in October

• BHP report issued setting out a two degree

planning scenario

14

• LAPFF is lead ‘Aiming for A’ investor

• Met chair, Jan du Plessis in December

• A ‘first’ in that more than 100 co-filers who

have shares as part of their main investment

portfolio have backed the resolution

15

• Significant number of members hold

• Only 50 co-filers needed

• LAPFF has engaged with board

members

16

• Substantial number of members hold

• Short of 100 co-filers, but first time in the UK

that investors backing an AGM resolution

make up 5% of a company’s voting shares.

17

Shareholder engagement:

what it is & why we do it

• Devon Pension Fund joined LAPFF in 2005 when there were

36 member funds, now the Forum has grown to 69 members

• The Forum has an annually agreed research and engagement

workplan, monitored quarterly by an elected Executive and

Business Meetings

• At Quarterly Business meetings, members discuss and approve

future company and policy engagement. Members also receive

detailed updates on current engagement initiatives

• LAPFF is supported in its work by PIRC, the Forum’s research

and engagement partner and by a part time Forum Officer.

LAPFF is a membership organisation with funds paying an

annual fee.

Shareholder engagement:

what it is & why we do it

• When concerns are raised by member funds, PIRC undertakes

an initial investigation of the issue or company

• A review is conducted by identifying the investment impact of the

issue; whether it is susceptible to shareholder engagement;

what comparative data may be available; and whether corporate

best practice can be identified. A report is produced for the

Executive

• Where the matter is primarily policy-related then PIRC will

provide a scoping report for the Executive to consider, including

possible responses, engagement objectives and outcomes.

• If the report is approved by the Executive committee, it is then

proposed to the next Quarterly Business meeting for adoption

Shareholder engagement:

what it is & why we do it

• LAPFF has benefitted from being free of conflicts of interest that

have undermined investor collaboration elsewhere. It represents

asset owners with only one purpose, unlike asset managers

which have a varied client base as well as their own financial and

operational interests, such as pay and performance

• LAPFF also benefits from another unique strength: engagement

is conducted face to face by trustees - the Councillors and

Officers of the fund’s themselves, supported by the research &

engagement partner. No other form of shareholder engagement

operates in this way

Shareholder engagement:

what it is & why we do it

• The ultimate aim is to ensure companies are well-run and

deliver shareholder returns that are sustainable

• Some investors also seek to encourage companies to adhere

to high standards of corporate behaviour

• Post-crisis there is greater government pressure for

shareholders to act as good stewards

• Public policy has given shareholders more ownership rights,

now there is more emphasis on responsibilities

• Collaborative engagement is seen as an important element of

improved stewardship

Shareholder engagement:

what it is & why we do it

A focus on effective outcomes, c.f. Lord Myners

“Shareholders cannot micromanage the companies in which they

have holdings� but � where they identify problems, they

should actively engage with the company to ensure that they are

tackled ”

“Intervention requires persistence and a thick skin, perhaps

raising issues repeatedly over a period of time with firmness until

concerns are addressed. Merely meeting senior management

and expressing polite reservations about strategy is not

sufficient, if it is not effective.”

Effectiveness of

LAPFF engagement

Outcomes

AwaitingResponse

SatisfactoryResponse

Dialogue

ModerateImprovement

SubstantialImprovement

Change inProcess

• 70% of meetings are with

board directors

• All engagements assessed on

outcomes

• Time is a factorN

• N as is persistence

Shareholder engagement:

what it is & why we do it

Reforms since the financial crisis:

• Policy reviews: Kay and Walker in the UK, plus Dodd-Frank,

EC Green Papers etc

• Stewardship Code for institutional shareholders, and survey

on adherence

• Annual election of directors

• Binding vote on remuneration policy

• Shareholder vote on audit committee reports (proposed by

Competition Commission) and ten year review (EC)

• Investor Forum – proposed by Kay, but skewed to asset

managers

News Corp/21st Century Fox

• Engaged on poor governance since 2010

• 2011 hacking scandal, further meetings

• Filed resolution for independent chair at News

Corp in 2012, 2/3 non-Murdoch shareholders

support.

• Co-filed resolution in 2013 for independent chair

at 21stC Fox (new co)

• 2014 support for two non-family directors at

21stC Fox

• Separation of roles, James appointed CEO at

21st Century Fox in June 2015

• Noted specific company accounts problems: RBS, HBOS, Co-op Bank

• Focus on auditors and accounting standards: Royal Sun Alliance, Tesco,

Betfair (defective accounts, KPMG missed illegal dividends), Wm Morrison

Supermarkets (KPMG missed illegal dividends, share buybacks)

• FTSE 100 observable failure rate at around 5 - 10% of audits

• Legal review, now two Bompas QC Opinions

• LAPFF wrote to FTSE 350 in November stating companies should follow

Bompas not the FRC

• Drawing attention to the issue has led to a large number of EGMs to rectify

unlawful distributions; Next, Wm Morrison Supermarkets, Ladbrokes, Al

Noor Hospitals, Foxtons, STV (Scottish TV), Betfair

IFRS: LAPFF’s approach

‘Reliable accounts’

Board Diversity:

FTSE 100 companies

• 30% Club Investor Group, focus on all

male boards

• A wide range of perspectives is critical

to effective corporate governance

• After engagement, London Stock

Exchange appointed two female

directors in early 2014, Antofagasta and

Glencore each also appointed a female

director in 2014

Labour standards at National

Express

• Cllrs Greening and Wilkinson attend the 2014

AGM to speak to a resolution co-filed by

LAPFF funds on workplace rights in the US

• In 2015 LAPFF funds file shareholder proposal

calling for independent review of labour issues

at US school bus subsidiary

• Almost a quarter of independent shareholders

fail to back the company; the highest level of

support for a shareholder resolution on

employee rights

Shareholder Engagement:

Accountability

Public reporting on engagement:

• Website updates

• Quarterly engagement report

• Member newsletter

• Annual report

Audit practices, Board

Composition, Carbon, Employment standards, finance

and accounting,

Governance, remuneration, reputational risk,

social risk

Questions, comments, feedback?

www.lapfforum.org

info@lapfforum.org

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