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15 May 2018

What does it take to be an active shareholder?

We take our responsibilities as investors seriously at USS and have had a team dedicated to Responsible Investment for almost two decades. We’re investing over £60 billion in a variety of different asset classes, on behalf of thousands of pension scheme members.

One of our fundamental beliefs is that more value can be created – both financially as a return from the investment as well as socially and economically in the value an organisation is putting back into society – if a more active approach is adopted towards investing. We therefore engage with the companies and assets in which we invest in order to gather information from which we can make reasonable judgements about our ongoing ownership and the influence we may seek to exercise.

When investing in equity securities, in contrast to when we own debt in a company, USS becomes a part owner of the business. Day-to-day management of the company is outsourced to an executive management team whose performance, in turn, is overseen by a Board of Directors. As shareholders we are reliant on both parties to act in our best long term interests.

At least once a year we get to hold both the executive and board to account by exercising our ownership rights through voting at general meetings. Our vote allows us, among other things, to decide to whom we, as an owner of a company, want to delegate the oversight of management and implementation of the strategy to (i.e. who we would like to be on the board). The board candidates presented to shareholders for approval at general meetings are normally selected by a nomination committee. As the nomination committee is composed of representatives of the current board, we rely on them to identify the right individuals to act in the company’s and, by extension, the owners’ best interests. If we don’t believe the candidates are of sufficient calibre we will vote against them, and in extreme situations we may propose our own candidates for election.

This is why USS always actively votes on the resolutions put to shareholders by the companies in which we invest. But there is more to being an active shareholder than just voting and there is more to running a successful company than focusing on maximising short term profits. Long term shareholders like USS cannot afford to be myopic in their approach to the companies in which they invest, as a company without a licence to operate is not going to be a valuable going concern. And it is stakeholders – employees, customers, regulators, etc – rather than shareholders who determine whether that licence to operate is sustained.

In our due diligence prior to investing, and in our subsequent regular reviews, we ensure that all material financial factors – including environmental, social and governance (ESG) aspects are taken into consideration. If a company fails to meet the standards we expect, or demonstrates by its actions that it has lost focus on one or more of these criteria, then this would be a signal for us that we need to take action. (See ‘USS’s approach to Responsible Investment’ for more on how we take ESG factors into account in our investments.)

This doesn’t necessarily mean we will divest, though. Often the best way to secure ongoing value for our members is to engage with the management and work through our concerns with them. This is what happened, for example, with the Dutch chemicals and coatings company AkzoNobel (who own Dulux paint, among other products) last year when a number of shareholders including USS became concerned over the reluctance of the board and management to engage meaningfully with a third party who had put forward multiple offers to acquire the business. This subsequently led to a breakdown in the relationship between the board, the management and its investors – and in that instance we decided being vocal about our concerns and remaining involved as an active investor was the best way to ensure that constructive change happened.

It’s important to distinguish between active shareholders and activist investors. Active shareholders (like USS) are invested for the long-term in a company and have a role in supporting the company’s strategy so that it can be sustainably successful. This doesn’t mean we won’t criticise the management from time to time, and make suggestions for certain courses of action, but the basis for our interventions is that we support the company and want to see incremental improvement in pursuit of the agreed strategy. Activist investors, on the other hand, purchase a stake in a company often with the specific aim of changing the management, the strategy or the company itself – or all three – in order to pocket a financial gain over a relatively short term horizon. Having secured change, they typically divest and have no further interest in the long term prospects for the business.

Being an active shareholder also extends beyond the specific relationship between us and an individual company. The markets in which we invest, both in the UK and further afield, are subject to regulation and legislation, which determine how markets are run and, in turn, how companies are regulated. Over time these rules and regulations can change and we believe that part of being an active shareholder also involves having a voice in responding to proposals for change to ensure that standards are maintained or raised where needed. Most recently, we have responded to the Financial Conduct Authority’s (FCA) proposals to create a new premium listing category (which many think is intended primarily to attract the possible flotation of Saudi Aramco); the Business, Energy & Industrial Strategy (BEIS) Department’s consultation on the National Security and Infrastructure Investment Review; and the Financial Reporting Council’s (FRC) Proposed Revisions to the UK Corporate Code. We will continue to respond to consultations and engage in debate on policies and proposals which could change the market environment for our investments.

Choosing to be an active shareholder is not the easy option. It means we have to monitor the companies in which we invest and the market regimes where they operate. We have to remain constantly vigilant to changes in company management, and changes in government policy. It’s hard to draw a direct correlation between our active shareholder approach and the returns that the pension scheme makes overall; we believe at least some of the additional £1.2 billion added to the fund’s value1 through our outperformance of the benchmark over the past five years could be attributed to it. So we think the rewards are worth it, both in increased value for our members’ pensions and in positive change in our businesses and the wider economy.

1 The added value calculation is net of non-USS Investment Management costs, but gross of USS Investment Management costs.