Extract from Remarks by Paul Appleby, Director of Corporate Enforcement, at the IAPF Evening Seminar on Corporate Governance, 17 September 2002.
“As Director of Corporate Enforcement, I am of the view that pension fund trustees should adopt, promote and communicate widely clearly stated policies whereby companies with good corporate governance records will be rewarded through being considered for investment. As the value of Irish listed companies is a direct function of the demand for, and confidence in, their shares, a commitment to good corporate governance by IAPF members would very quickly make clear listed companies that there are very real and tangible benefits to be derived from positively embracing best practice.
The effect of adopting such policies should be to reduce funds’ risk of exposure to losses in portfolio values due to corporate malpractice. In order to exert positive influence in this direction, pension fund trustees should keep their relationship with their investment manager under regular review, so as to ensure that their concerns about the quality of investments made on their behalf is properly taken into account.
Ideally, trustees should require that only companies with sound governance structures and processes will be considered for investment purposes. On an ongoing basis, pension fund trustees should challenge investment managers on the extent to which this criterion is being adhered to in practice. They should find out what efforts have been made by the manager to influence senior management (and if necessary the directors) of investee companies to improve governance standards.
Where pension fund trustees are dissatisfied with the manner in which a particular company is being run, they should mandate their investment manager to use their voting power in an appropriate way. A considered use of their votes can be used to effect change by, for example, choosing not to support the re-election of certain Board members, choosing not to approve directors’ remuneration packages, choosing not to vote in favour of approving the financial statements, etc.
While I appreciate that adverse public comment by an individual investment manager or trustee(s) could have an adverse effect on share price and would be seen as a last resort, it may be necessary in certain isolated cases to take this stand, even if it has an adverse impact in the short-term. Where private discussions fail, militant action should occasionally be invoked to impress the investee companies that corporate governance is a significant issue.
Recent events, both domestically and abroad, have highlighted a number of instances of corporate governance failures which have had very serious results for some affected companies and their employees. A knock on effect has been a collapse in the share price of these companies, with a corresponding fall in portfolio values. The risk of corporate governance failure is now more immediate than it seemed to be a number of years ago, and in consequence, inaction on governance issues is no longer a tenable position for investors.”