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Page 16, line 10, at end insert:
("( ) the exercise of voting rights and other powers granted by virtue of the management of investments on behalf of the beneficiaries;").

The noble Lord said: In moving this amendment I also wish to speak to Amendments Nos. 131 and 141. The purpose of the amendments is to oblige pension fund managers and trustees to vote their shares at company meetings, to announce beforehand how they intend to vote and to keep a record of how they voted.

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This is a topical matter because it deals with the excessive payment packages and share options paid to directors of recently privatised industries. That is because over one-third of all the shares on the London Stock Exchange are held by pension funds. Support for the amendment is based on the recommendations of the Cadbury Committee, on experience in the USA and on research which shows that companies with more shareholder involvement perform better.

First, Cadbury: the recommendations are clearly stated in the report and paragraph 6.11.2 says:


    "Institutional investors should make positive use of their voting rights".

That is covered by my Amendment No. 126. Paragraph 6.12 says:


    "We recommend that institutional investors should disclose their policies on the use of voting rights".

That is covered by my Amendments Nos. 131 and 141.

The recommendations by Cadbury have been readily accepted by most businesses because they promote the community of interest between shareholders, directors and all employees and improve the company's performance; and this community of interest will be needed on matters other than pay. Shareholders, employees and pensioners will not determine details of corporate strategy, but they will make their voice heard on matters of principle as laid down by the Cadbury code, probably on such matters as environmental issues, ethical issues and policies towards employment.

Turning to experience in the United States, this is based on the fact that voting has been a duty for pension funds since 1988. That has been a potent force. In harnessing the good sense of individual people interested in the success of their companies, they have found a variety of ways of dealing with pay and other matters and helping their companies to perform better. For instance, in some companies shareholders have insisted that the directors use a proportion of their pay to become significant shareholders themselves. The Committee will not be surprised to learn that research at the Harvard Business School comparing 70 companies concluded that companies where the directors had been obliged to hold stock by their fellow pension fund stockholders did indeed perform better.

Other shareholders have insisted on wage compression. That means that they have set the difference between the highest and the lowest paid employees. If senior executives earn more, they have to carry the rest of the team with them. Research into this has not been carried out, but my instinct tells me that there will be an improved company performance.

Let us compare that position with the awful mess that the Government have got into over the pay and share options of senior executives in the recently privatised utilities, with the Government vainly calling for shareholders to vote while the public get more and more angry. I am sure that the Minister and his friends would have much preferred to have a duty to vote in the privatisation prospectus than put up with all of that. The omission will be highlighted even more: activity by American pension fund managers in the UK is about to increase dramatically.

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Since 1994 American pension fund managers have had their duty to vote extended to shares that are held outside the United States in order to reflect the globalisation of capital markets. This became apparent a few weeks ago with the removal of Maurice Saatchi, chairman of the advertising agency. It was fund managers in Chicago who threatened to vote him off the board; they were acting under United States law. Is it not sensible to bring British law into line with American law, so that we, too, reflect the globalisation of capital markets?

Since raising this matter at Second Reading, I have received a lot of correspondence. Some of the more progressive pension fund managers, such as Mr. Alastair Ross-Gooby, have been strongly supportive. The Pensions and Investment Research Corporation has suggested that for some time and in recent years has provided a service to its members advising them on which way to vote at company meetings. The National Association of Pension Funds and others raised two problems: the question of cost and offending other clients by voting against them. Those objections were remarkably easy to deal with. We dealt with cost by agreeing that abstaining was a voting option. That could very well be the decision in a large number of cases and would have to be recorded as such. Pension fund managers giving offence to their customers is easily dealt with by anonymous voting. Many companies in the United States, in order to encourage voting at their meetings, have instituted a system of anonymous voting so that fund managers can vote without offending their other clients.

I have also been asked why voting should be a duty. My response is that these amendments do not tell people how they should vote; they provide a framework to encourage them to vote. Government and business obviously want people to vote. Surely it is then a duty to provide that framework and not just stand back. Without it, all that we have is vested interests shouting at each other, as they are doing over directors' pay in the privatised utilities. Provide the structures and you will get a result.

Then there is the position of trustees and pension fund managers under trust law. The position is not clear and it is not my intention to try to clear up the whole area of trust law. But it is possible, and timely, to clear up this one area.

There is no doubt then about the benefits of voting. Why should it be in this Bill? My main reason is that improving the performance of British industry is too important to let this opportunity pass us by. It will be many years before there is another pensions Bill. We must take the opportunity that presents itself. We are dealing here with the single largest group of shareholders in UK companies.

This provision will not bring a major improvement in the performance of British industry. Life is not as simple as that. Our performance will be improved by a whole series of small increments, and this is but one of them. I beg to move.

Lord Mackay of Ardbrecknish: This amendment has been well trailed by the noble Lord, Lord Haskel.

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We are in no doubt that institutional investors, as owners of shares, have a responsibility to the companies in which they invest. As part of that responsibility, it is extremely important that shareholders should subject the performance of their companies to critical scrutiny. If shareholders see that their companies are not competitive, they must point out to management the improvements that they want to see. If those improvements are not forthcoming, they must demand changes in the management and impose them if they must. It is not an exaggeration to say, as the noble Lord did, that that function is crucial to our economic prosperity.

The Government strongly believe that institutions should develop constructive, long-term relationships with the companies in which they invest. Regularly voting their shares can be an important part of that relationship. It demonstrates to management that the owners are interested in the company and committed to its future. It is also consistent with the trustees' duties to act in the interests of the beneficiaries.

But there is a significant difference between encouraging best practice, which the Government do encourage, and imposing specific or detailed obligations on pension funds, which risk being regulatory and burdensome. As an example of best practice I commend to the Committee the lead taken by the National Association of Pension Funds. It recommends that trustees should decide on their voting policy and that voting policy should be made public. Thereafter the trustees should exercise that vote prudently in the interest of the scheme beneficiaries.

The Committee will no doubt be aware also of the pressure that Postel, which manages the Post Office and British Telecom pension funds, has brought to bear in encouraging better corporate governance and, for example, seeking to reduce the length of rolling contracts. Those are positive and welcome examples of a trend which I hope will continue.

However, the legislative approach suggested by the noble Lord seems to me to be fraught with difficulties and inconsistencies. On the face of it, the phrase "duty to exercise voting rights" means the creation of a binding statutory requirement on trustees or fund managers to vote or exercise their proxies on any resolution on which they are entitled to vote by virtue of their investments.

I have some difficulties with that particular requirement. Mandatory voting is not even something that we impose on the electorate at large when it comes to elections. I also argue, as I would in a discussion about mandatory voting in elections, that there is a right to abstain. That is a very reasonable and important freedom which the electorate ought to have and which should be paralleled in any duty of trustees to vote.

I would also question the logic of a duty being imposed only on pension funds, which is the primary object of the Bill. It would argue for a similar duty to be placed on individuals who hold shares, other collective investment vehicles and insurance companies. It will not surprise the Committee to know that we are not attracted to going down the road of intrusive legislation of that kind.

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On the practical side, it is perhaps unfortunately the case that forcing people to vote provides no guarantee that they will exercise that vote in a prudent manner. I could talk for a long time about that and give instances of it having happened. But I shall leave that aside. If we go further down that road, the amendment imposes a legislative duty to vote in the interests of the beneficiaries. Taken to its logical conclusion, mere evidence of voting by the trustee on a resolution would not necessarily discharge the duty. To discharge the duty properly, a vote would have had to be made in the best interests of the beneficiaries.

How does one enforce such a duty and how many resolutions would the trustees of an average pension fund have to vote on? I suspect that the number would be high. I do not know how any administrative system could cope with the paperwork and the delving required to check on the trustees' voting records. I understand that the United States Government randomly inspect pension funds to check their practices in relation to corporate governance. To most UK eyes, that would appear to be unnecessarily intrusive and contrary to the Government's general deregulation approach.

In conclusion, the Government believe that the right way ahead in this important area is to encourage higher standards of corporate governance and encourage institutional investors to play their part in that. I do not believe that anything divides the noble Lord, Lord Haskel, and myself in that regard.

We accept that the role of institutional investors and the relationship with the companies in which they invest is an important aspect of corporate governance. But I urge the Committee to be wary of using the Pensions Bill to try to address that wider debate. Any provision introduced into this Bill would, by its very nature, be a partial response. It would risk cutting across initiatives designed specifically to address issues such as those put forward by the Cadbury Committee and its successor body, mentioned by the noble Lord, and the work of the Greenbury Committee on directors' remuneration. The Government will consider any recommendations by those bodies on the need for further action. But this is not the right vehicle to ride that particular horse.

I have clearly explained the Government's position, which I am sure will be read tomorrow, not only by Members of the Committee but also by the outside interests to which some of the remarks are directed. With those assurances and underlining the position of the Government, I hope the noble Lord, Lord Haskel, will feel able to withdraw the amendment.


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