Mercer has developed a suite of services to help our clients respond to their new responsibilities under the UK Stewardship Code, as well as the EFAMA Code and the Eumedion Best Practices for Engaged Share Ownership.

The value of stewardship

Pension scheme trustees have a duty to act in the best long-term interests of their beneficiaries. There is a growing view among academics and investment professionals that environmental, social and corporate governance issues can affect the short- and long-term performance of institutional investment portfolios. Pension scheme trustees, in complying with their fiduciary (or equivalent) responsibilities, therefore, need to give appropriate and due consideration to these issues as a core part of their deliberations.

Stewardship exercised through voting and engagement activities helps the realisation of long-term shareholder value. Where companies have inactive or disengaged shareowners, the chances that company management will act in ways that are detrimental to shareholders’ interests are greater. Stewardship also provides investors with an opportunity to enhance value as diversified investors of companies across the global economy.

Introduction of industry codes and requirements

The UK’s Financial Reporting Council (FRC) published the UK Stewardship Code (the “UK Code”) in July 2010 to “enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and promote the efficient exercise of governance responsibilities”. An article in our November 2010 newsletter outlined some background to the Code and implications for scheme trustees.

Following this initiative and its uptake, additional and complementary principles-based codes have been introduced by the European Fund Asset Management Association (EFAMA) and the Dutch Corporate Governance Forum, Eumedion.

The codes and their audience

• UK Stewardship Code
  The UK Code is primarily addressed to Financial Services Authority-regulated asset managers for whom it is mandatory to publicly disclose a statement detailing the extent to which they comply with the UK Code. However, the FRC strongly encourages all institutional shareholders to issue a compliance (or non-compliance) statement. The FRC states that “the responsibility for monitoring company performance does not rest with fund managers alone. Pension fund trustees and other owners can do so either directly or indirectly through the mandates given to fund managers”.
  
  The UK code is a “comply” or “explain” code based on seven key principles.
  

   

• EFAMA Code for External Governance
  The EFAMA Code for External Governance (the “EFAMA Code”) is directed at European asset managers and provides a best practice framework for asset managers to engage with investee companies. The EFAMA Code is based on six key principles.
  

   

• Eumedion Best Practices for Engaged Share-Ownership
  Best Practices for Engaged Share-Ownership Eumedion (the “Dutch Code”) was introduced to the Dutch market this year by the Eumedion. The Dutch code applies to Eumedion participants and comprises 10 principles, with a focus on stewardship activities with Dutch companies on an “apply or explain” basis.  With effect from January 2012, Eumedion members will be required to disclose their practices against the Dutch Code.
  

Table 1: Comparing the UK and European Codes

How can Mercer help?

Mercer was the first investment consultancy to sign on to the UK Stewardship Code and actively promotes the adoption of UK, the EFAMA and Dutch Codes. We advise clients in the UK, Europe and around the world to design and implement investment policy decisions regarding proxy voting, engagement and collaborative approaches that are wholly in line with the objectives of the outlined codes. We have now launched a suite of stewardship services that specifically address the requirements of the new code requirements:

Manager Stewardship Assessments

• Assessment of the fund’s current equity managers regarding their compliance to the code relevant to their region
  

   

• An assessment stating whether the manager is “compliant”, “partially compliant” or “non-compliant” on each key principle and overall
  

   

• Identification of key areas of strengths and weaknesses of each manager’s approach and recommendations of actions for asset owners

Stewardship Code Audit

• Review and analysis of the fund’s current investment policies against each of the principles of the relevant code
  

   

• Key recommendations to align investment policies with “best practice”, including compliance to the codes

Compliance Disclosure

• Preparation of compliance disclosure statement for publication on website and external stakeholder communications

Mercer can help investors to develop and implement approaches to active ownership that fit the unique needs of their organisation, including advice on the growing number of collaborative engagement initiatives which now exist.

For further information and to discuss how Mercer can help you with the UK Stewardship Code, the EFAMA Code and the Dutch Code, please contact: Will Oulton, Head of Responsible Investment for EMEA, via email or telephone on +44 (0)207 178 3406.

In addition, please visit: www.mercer.com/services/responsible-investment