RI Engagement
USS engages with companies and other assets in which the fund invests when it thinks it is in the Fund’s long–term interests to do so.
Where we believe that an asset is underperforming or failing to meet best practice in relation to extra-financial issues or its conduct is impairing the scheme’s long-term prospects or reputation, the fund will seek to influence relevant parties to effect change. The kind of change that we seek may range from a change in governance structure, a shift in strategy or a new approach towards particular environmental or social challenges. USS endeavours to identify risks and opportunities at an early stage to minimise loss and maximise returns for the fund. Whilst USS is committed to transparency and disclosure, this is balanced with the need to build confidence with investee companies. USS will not generally seek publicity around company engagements. See below and the Communications & Media section for additional detail.
USS also engages with public policy makers, regulators and sector representative bodies where structural impediments exist – see the Market Wide Initiatives & Public Policy section for further detail.
Approach to Engagement
USS’ approach to engagement aims to be flexible, adaptable and responsive to events. The fund will consider engagement whether the company is held in an active or passive fund or whether or not the fund is underweight. The fund’s approach has evolved since the RI strategic review in 2006 and we believe it is now better aligned with our strategy.
The RI team works closely with portfolio managers where possible. Engagements are increasingly undertaken by combinations of internal portfolio managers and the RI team providing valuable investment information to the fund managers and sending companies strong signals on the extra financial issues under discussion.
Engagement Process
While the specifics of different engagements will vary, below we briefly describe a typical engagement process.
1. Issue alert
Company engagement typically arises from one of the following sources:
- routine RI research of extra-financial risks at companies;
- portfolio managers who raise concerns; and
- RI team’s networks built up through collaboration and market-wide and membership of organisations and trade bodies.
Example issues upon which USS has engaged:
- Access to medicines
- Allegations of human rights abuse
- Inadequate succession planning
- Independent directors failing to hold executive management to account
- Insufficient independent oversight on the board
- Landmines and cluster bombs
- Marketing and advertising
- Operations in oppressive and military regimes
- Poor consultation with local community/ indigenous/ first nations
- Poor disclosure, particularly of ESG information
- Poor environmental management, including pollution and climate change
- Poor human capital management
- Remuneration – strategy and link to performance, metrics, peer groups, incentive structure
- Strategy and operational performance
2. Analysis
RI’s analysis examines the materiality of the issue for the Fund, inter-linkages with broader strategy and performance, potential impacts for USS’s reputation, and the feasibility for change. Performance is evaluated relative to competitors and against credible benchmark standards.
3. Engagement plan
Further to analysis, RI will set objectives for change, and tactics for delivering these objectives. It should be stressed that not all issues we investigate will progress to a full engagement plan. The final action will depend on the conclusion of the analysis.
Escalation
USS seeks to engage with companies without publicity and without reducing complex issues to a simplistic campaign. We expect good management to be open to discussion and reassure shareholders when faced with investors’ concerns. However, USS reserves the right to make (and on occasion has made) public its concerns if the company fails to address adequately the issues which have been raised.
If boards do not respond constructively to USS’s intervention, then the Fund will consider whether to escalate its action, for example, by:
- Holding additional meetings with management specifically to discuss concerns
- Expressing concern through the company’s advisers
- Meeting with the Chairman, senior independent director, or with all independent directors;
- Intervening jointly with other institutions on particular issues;
- Making a public statement in advance of or at the AGM or an EGM
- Submitting resolutions at shareholders’ meetings
- Requisitioning an EGM
Where appropriate, the fund may engage with companies in collaboration with other pension funds and asset managers. These collaborative engagements add weight to USS’ engagement activities (as more funds = more assets = more impact), spread the costs of such action across the investors involved, and can help to increase the geographic reach of the fund.
Voting
RI believes that voting its shares is not only an important fiduciary duty, but a valuable tool in our engagement process. We therefore allocate considerable resources to ensuring we vote in line with the Fund’s long term interests. The fund undertakes engagement via the voting process through writing to companies where we do not vote in line with management recommendations. This may lead to further discussions or meetings. In the UK USS works with the Railways Pension Trustee Ltd to pool resources for voting and engagement with companies in the FTSE All-Share. See the Voting section for more detail.
Beyond Equities
Engagement is not restricted to publicly listed equities. Engagement is also undertaken with other asset classes such as private equity, hedge funds and property investments (see Integration section). The fund will also engage with policy makers where appropriate – see under Market Wide Activities and Public Policy.