Further to the launch of the UK Stewardship Code in July 2010, USS offers the following response to describe the fund’s adherence to the Code’s seven principles and approach to engagement with investee companies.
USS has long practised the principles of stewardship espoused by the Code. The fund first articulated its engagement approach to responsible investment (RI) in 1999 and has employed an in-house responsible investment team to engage with companies on environmental, social and governance (ESG) matters for over a decade. The RI team works closely with portfolio managers to monitor investee companies on an on-going basis and the fund seeks to integrate RI considerations into investment processes across all assets under management.
USS actively participated in the development of the Stewardship Code through written submissions and meetings with the Financial Reporting Council, Financial Services Authority, Lord Myners and Sir David Walker. USS provides a distinct perspective on stewardship as an active, long-term and ‘universal’ investor that is not conflicted by links to commercial financial institutions. The fund takes its role as a long term beneficial owner of companies very seriously and devotes substantial resources to monitoring and engaging with company management and boards.
In line with best practice, the fund regularly posts information on RI activities on its website, through periodic RI activity reports, voting disclosures and the fund’s annual reports. The website discloses USS’s RI objectives and strategy, rationale and resourcing, voting policies and outlines the fund’s approach to investee company engagement and broader market wide collaborations. Representatives of the fund (including its trustee directors, portfolio managers, heads of RI and CIO) regularly present, write and comment publicly on the fund’s stewardship activities and approach to RI. The fund was also commended for transparency by the RI campaign group, Fair Pensions, in 2009.
Principle 1: Publicly disclose their policy on how they will discharge their stewardship responsibilities.
The fund’s website includes a section devoted to responsible investment policy and activities. The fund explains how it will discharge its stewardship responsibilities and work with companies to address poor corporate management of extra-financial factors through active engagement. The pages include links to the key policy and strategy documents governing RI and explain how the fund resources its work in this area, including sections on RI research providers, voting and engagement.
Principle 2: Have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed.
As a beneficial owner with in-house fund management and RI capabilities serving only one client, USS does not face the potential conflicts of interest that commercial fund managers may need to address. However, we will continue to monitor for potential conflicts of interest going forwards.
Principle 3: Monitor their investee companies.
USS’s Statement of Investment Principles (principle 6.5) includes a commitment to monitoring investee companies, stating:
“The aim of such monitoring should be to identify problems at an early stage, and enable engagement with management to seek appropriate resolution of such problems. The trustee company [USS] uses voting rights as part of its engagement work to ensure that voting is undertaken in a prioritised, value-adding and informed manner.”
Monitoring is implemented by the fund’s external and internal portfolio managers in conjunction with the RI team.
Principle 4: Establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value.
The fund’s escalation strategy is disclosed under the Engagement section of the website. If boards do not respond constructively to USS’s engagement, then the fund will consider whether to escalate its action, for example, by:
• Writing to the company to highlight our concerns
• Meeting with management specifically to discuss concerns
• Meeting with the Chairman, senior independent director, or independent directors
• Expressing concern through the company’s advisers
• Collaborating with other investors regarding our concerns, subject to applicable regulations
• Speaking to the market regulators regarding our concerns
• Making a public statement at the company’s meeting
• Releasing a press statement, either singly or jointly with other investors relating to the issue
• Submitting resolutions at a shareholder meetings
• Requisitioning an EGM
• In extremis, selling our shares in the company
Principle 5: Be willing to act collectively with other investors where appropriate.
USS recognises the power of investor collaboration to add weight to individual company engagements and to address market wide systemic failures. This is acknowledged within the fund’s Statement of Investment Principles (6.5) and the RI Strategy (principle 3), and expanded under our Approach to Engagement.
USS is an active and lead participant in many market wide investor collaborations, networks and alliances in line with the active share-ownership principles outlined in the code. For example, USS has pooled governance expertise and resources with another UK pension fund to establish a voting and engagement alliance to enable more effective stewardship of our FTSE All-Share investee companies.
On occasion, USS may invite other investors to support the fund’s engagement with investee companies, or lend its support to concerns raised by other investors. Where necessary, the fund seeks legal advice regarding collaboration. In conjunction with our submissions to the Stewardship Code consultation, the fund called for clarification on the UK’s acting in concert regulation.
The fund’s collaborative engagement activities are reported within RI Activity Reports and the market wide initiatives sections on our website.
Principle 6: Have a clear policy on voting and disclosure of voting activity.
USS’s approach and policies on voting and voting records are clearly disclosed on the fund’s website. The fund votes at the meetings of all its UK investee companies (including in-house and externally managed stocks in passive and active portfolios) and the majority of its foreign listed equities. Decisions are taken by the RI team in conjunction with the portfolio manager, informed by proxy governance research and other research providers. The fund advises companies where we have not supported management recommendations in advance of the meeting where practicable.
Principle 7: Report periodically on their stewardship and voting activities.
USS publishes its full voting record and half yearly RI activity reports detail the fund’s stewardship and broader RI activities. Shorter updates are provided in the fund’s Annual Report and Members' Annual Report. Disclosure is balanced with the need to build confidence with the companies we are engaging with. Thus, the fund will rarely publicise current engagements, except where it forms part of an engagement strategy.
RI activities are subject to scrutiny by the fund’s internal auditors and progress updates are regularly provided to the Board of Directors.
For further information, please contact a member of the RI team.