Agenda item
PRESENTATION FROM LAPFF-LATEST DEVELOPMENTS AND ACTIVITIES UPDATE
Minutes:
The Board received a presentation from the Local Authority Pension Fund Forum
Board Members received the following information noted in summary below:
- There are 80 LGPS fund members, six pools, combined assets of approximately £230 Billion.
- LAPFF has an unparalleled resource of funds dedicated to develop responsible investment and to maximise shareholders influence.
- The forum engages on topics ranging from environmental and carbon risk, social and governance risk and reliable accounts.
- LAPFF working plan for 2019 priorities include: plastics, board employee representation, lobbying, sectoral aspects of disruptive technology and diversity, sustainable development goals with a continued focus on executive pay, governance, corporate tax disclosure, bribery and corruption, employment practices, reliable accounts etc.
- As per the January meeting input, climate change is a priority. Presenter also requested input and feedback from Pensions board members. UN climate change report that says we have 12 years to address the issue if we do not wish to experience significant consequences of global warming being at more than 1.5 degrees.
- LAPFF also invited board members to the next meeting which is to take place in Leeds on 17th of April. Details to be circulated via email.
- Priorities for this year include worker representation on board, looking at the impact on different sectors of high disruptive technology; certain sectors have poor gender make up of their board. LAPFF will be pursuing these and also looking at how companies are tackling sustainable development goals. Other themes that remain in focus include: pressing for meaningful corporate tax disclosures, engagement on bribery and corruption (currently Glencoe) and the ever present issue of executive pay.
- Long-term focus is to essential need for reliable accounts and how these are policed. Will be following up on recommendations by the Competition Markets Authority (CMA) which have come out and supported a LAPFF position from 2010 that a separate independent company should be undertaking the audit function and not the FRC.
- Climate change is a major priority and it was also highlighted at the January meeting. To remain within the 1.5 degrees target, we need far-reaching decarbonisation demand reduction.
- One way member funds are consistently able to raise concerns to companies is by voting at the AGM. LAPFF consistently issues voting alerts on companies where they see there are egregious corporate governance or other concerns.
- LAPFF presentation also highlighted the importance of voting alerts.
- 14 voting alerts were issued in 2018, allowing members to vote at the AGM. In particular in US companies votes can be focused on specific shareholders’ resolutions.
- The actual voting act can act as a huge catalyst for companies to respond to stakeholders.
- A question was asked what prompts a voting alert as 14 does not sound to be many alerts.
- In response: LAPFF explained that the voting alerts are a result of the engagement exercises surrounding the themes within the LAPFF work plan. Sometimes, the alerts are a result of engagement that LAPFF has been undertaking with companies for some time. The number of alerts is indicative of the resource issues. If members wish to see more voting alerts, then LAPFF could dedicate more resources to it.
- It is also important to note that the votes do have legal force leading to for example removal of a director or voting against a resolution.
- Another point to note was that often through engagement LAPFF has noted that many fund managers do agree to the issues in principal, however are afraid to rock the boat. So, often it takes time to get to the end result of issuing a voting alert.
- Actual change is a result of long-term engagement. Presenters quoted examples of Shell, National Grid, Ryan air and TESLA. For example LAPFF started engagement with Shell in late 90s and finally by 2015, Shell made an announcement that they would half their net carbon foot print by 2050-which essentially helped set the tone for the rest of the oil and gas companies as well. Now the challenge for LAPFF is to check how to keep companies to commit to targets and how to measure what the companies are doing in the interim to reach the end goal. Another example was the engagement with National Grid-which was another long-term engagement. LAPFF started engagement in 2002 and were finally able to meet the chair in 2013, have been to 4-5 AGMs, pushing the company to focus on their scope 3 emissions. Recent meeting with the chair and senior executives in recent in 2018 and pushing the companies for the 1.5 degrees scenario. They will put electric charge stations around motorways all over the UK and LAPFF have been pushing on time scales for that.
- Different market forces work in the UK versus the US.
- Two examples of LAPFF engagement that relate to employment standards and overlap in corporate governance. Two of these are TESLA and Ryanair.
- Ryanair had been controversial amongst investors for a couple of issues. If you look at the board of the company, the chairman has been on there for 22 years, when the best practices in the UK for best governance are 9 years. The other non-executive members are ex-board members or business interests of Ryanair. It is a non-independent board.
- On the employment side, the large majority of the cabin crew are indirectly employed through agencies and it is also the case with the pilots too. This allows Ryanair to keep its benefits cost low. The large number of cabin crew and pilots are employed under Irish Law. Irish labour law is less beneficial than European labour law, thereby providing less protection to these employees than through other European labour laws. Ryanair insisted that there is nothing wrong with their model and in 2017 everything started to go wrong. There was a pilot rostering problem that Ryanair faced and they cancelled several hundred flights and said that they did that to improve punctuality, which was not the case. It became clear that Ryanair had problems retaining pilots as it is a great place to start your career as a pilot, but most pilots do not stay with Ryanair, they get their hours up and become captain elsewhere, so Ryanair suffers a shortage of senior pilots.
- Ryanair had also been extremely anti-union and had in its contract that you could be fired for taking industrial action that can cause disruption to the service-this is against the law. When the scheduling issues happened, that is when Ryanair was forced to deal with these issues.
- LAPFF has been engaged with Ryanair when this crisis in 2017 began over different issues including employment issues, governance standards and even climate change. LAPFF held an open forum with some investors where some cabin crew members came and spoke about their experience working with Ryanair. Ahead of the annual meeting, LAPFF decided to challenge Ryanair and should get rid of the chair and build the process of a new independent board. This is when LAPFF issued a voting alert ahead of the last year’s AGM in September. Paul Dounty, who is the Chair of the fund, attended the AGM and spoke about reformed governance and highlighted some of the issues that he had spoken to workers about.
- The 2017 AGM against the chairman was 10% but this time around it was up to 30-35%. This is an example of the difference engagement makes and the impact of voting alerts. This vote was fatal for the chairman. We informed the company that we need to see some changes from the company and if Ryanair doesn’t comply, then LAPFF would issue a shareholders resolution. This happened October 2018 and there was still no movement from Ryanair, LAPFF wrote to the company earlier this year asking what the succession plan was for the chairman, and are you going to change the structure of the board or we will file a resolution and we will remove the chairman. Upon the circulation of that notice, Ryanair when it issued its earnings, it announced that the chairman was going to step down.
- The other example is of TESLA which is also very strong founder based organisation where Elon Musk is the central figure. TESLA is a similar model where the board is built of people that are close to the founder and it isn’t very independent appearing. There is not a lot of experience from the automotive industry on the board as it sees itself as a tech company. TESLA is a company that people want to see do well however there has been activities of anti-union activities, poor health and safety practices so LAPFF hosted an investor briefing in 2018 where production line workers spoke about their experience working for TESLA including the health and safety issues.
- Two issues that caught a lot of attention which was the introduction of the new incentive scheme for Elon Musk which was somewhere along 2.5 billion dollars. LAPFF issued a voting alert on that. Another standard UK practice is to split Founder and chief executive which was not the case at TESLA, so at the annual meeting in June, there was a resolution seeking the appointment of an independent chair. LAPFF recommended a voting issue asking to vote in favour of that proposal. The incentive scheme did pass even though it did get a large vote against and some of the asset managers were putting pressure on pension fund clients who direct their voting to vote in favour of that resolution. The independent chair vote got a large vote for, but did not pass as major shareholders opposed it. However, subsequently, the company has been forced to split the chair and chief executive role but that was the result of the SC regulator stepping in asking Elon Musk to step down as chair or be fined for his tweet on taking the company private.