(March 12, 2014) — Daniel Summerfield, co-head of responsible investment at the Universities Superannuation Scheme, told aiCIO about how the £40 billion fund approaches its investment portfolio.
aiCIO: How do you anticipate governance to evolve over the next three to five years and do you predict any new issues arising?
Summerfield: A key area of focus will undoubtedly be the integration of environmental, social, and governance issues into the investment process, which presents a great challenge but also an opportunity for long-term investors. This for many responsible investment professionals remains the “holy-grail” in terms of our key underlying objective in ensuring that all material, extra-financial factors are considered on par with other criteria when making investment decisions across all asset classes.
aiCIO: What are the expectations for hedge fund governance; will it comply with the standards of other asset owners?
Summerfield: Until relatively recently, the quality of hedge fund governance had been notable in its absence from investors’ due diligence processes of potential investments. USS Investment Management, along with some other investors, incorporates a governance assessment into its due diligence process to ensure our interests will be effectively addressed and protected by the board and its directors. A key part of our due diligence process focuses on the background, role, contribution, and oversight functions of the independent directors as well as the board’s overall governance structure.
Although we are supportive of best practice guidelines enshrined in a “comply or explain” regime, we would expect, at a minimum, that boards of funds in which we invest to be composed of a majority of experienced independent directors who are able to devote sufficient time to the funds to which they are appointed. We will also want to ensure that, individually and collectively, the board members have the requisite and complementary skillsets to oversee hedge funds and the specific strategy employed by the fund.
Where we feel governance is substandard, we will offer proposals for improvement but USS is prepared to walk away from a potential investment, if the governance is deemed inappropriate and there is no commitment to make the necessary improvements.
aiCIO: What strategies can be deployed to ensure that long-term investments accommodate variations in cross-border and regional governance?
Summerfield: USS recognises the power of investor collaboration to add weight to individual company engagements and to address market-wide systemic failures. This is particularly important in overseas markets in which we invest where there will be important variations from the UK in terms of engagement and governance practices.
As we started to roll out our voting and engagement programme across all our markets, we encountered the same challenges as many other global investors due to a) resource constraints b) limitation in making our voices as overseas investors heard, and c) the need to take into account the cultural sensitivities and different market practices.
The approach we have therefore adopted in different markets is to forge alliances with domestic investors and other partners who will be in a better position to act on our behalf when necessary and to guide us appropriately. Far Eastern markets, such as Japan, are particularly sensitive in terms of engagements by overseas investors. We are cognisant of the cultural sensitivities and lessons learnt from previous activist investors’ experiences in Japan on whom serious doubts were cast regarding the identification of some companies, issues, and engagement approaches.
For these reasons, we have developed a formalised co-sourcing arrangement with Governance for Owners Japan with whom we work closely on our Japanese engagements.
aiCIO: Reputational risk is at the forefront of investors’ minds. What governance issues should they focus on to strengthen their current position?
Summerfield: The debate on executive remuneration is not going to go away anytime soon. The UK government’s introduction of a binding vote does not address the core issue. We believe that a “back to basics” approach is needed to ensure that the remuneration structures and metrics are fit for purpose and can be tailored for each individual company. USS is working alongside the National Association of Pension Funds, Hermes, RPMI Railpen Investments, and the BT pension scheme to encourage companies to adopt a more principled and company-specific approach towards remuneration which aligns pay more closely with the interests of their long-term owners.
The interview was conducted for a report on corporate governance by Clearpath Analysis. To view the full interview, click here.
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