Doug McMurdo, chair of the Local Authority Pension Fund Forum (LAPFF), talks to Mona Dohle about bringing local concerns to corporate boards, improving accounting standards and holding multi-nationals to account.
You have recently become LAPFF’s chair. What are your priorities in the role?
I have represented Bedfordshire Pension Fund on LAPFF’s executive committee since 2016. Over the past two years, LAPFF has sadly experienced the deaths of two great figures, Councillor Kieran Quinn and Councillor Ian Greenwood, who were its chairs in 2017 and 2018. Councillor Paul Doughty took the reins as acting chair earlier this year before I was voted as the permanent chair by members at the AGM in July.
As chair, I look forward to ensuring that LAPFF continues to take a prominent role in strong and active stewardship across the companies where our members’ money is invested.I will also work closely with LAPFF’s vice chairs, Councillor Rob Chapman and Councillor John Gray, as well as the other executive members who are an invaluable part of this process.
Being a local councillor means that you deal with the down-to-earth issues affecting your community, which is a different world from shareholder meetings with big corporations. How will your work in the local community influence your role as LAPFF’s chair?
You would think so, but a lot of people who attend AGMs are typically the people I would find in my local community.
They too are concerned about returns, including how company performance affects their lives, and wish to know how behaviour in boardrooms impacts investment outcomes.
I have found that speaking to people at a local level gives me a good view of the impact our companies are making on their lives. This is an important perspective to bring to companies when LAPFF engages with them, especially as, you will have seen, the US Business Roundtable [an association of senior corporate executives] has said that companies have to respect local communities in how they operate.
It’s about thinking globally and acting locally, but also thinking about how local issues can inform global action.
LAPFF engages with companies on behalf of six local authority pools, who have their own ESG agenda and asset managers to help with shareholder engagement. How do you develop a common agenda?
LAPFF is a membership organisation consisting of 80 individual local government pension schemes (LGPS) and six pool companies, so it is inevitable that our members will sometimes have different perspectives on issues.
We are a member-led organisation, so we aim to form consensus on issues amongst our members. What this means in practice is that we usually engage with companies based on the number of members with shareholdings. So we focus on those companies that mean most to our members to protect their interests.
We engage on important responsible investment issues for our members. We try to build consensus around issues by listening and engaging with members regularly on major issues.
By working together we have a much stronger voice to ensure that directors are acting responsibly for the long-term benefit of the company and our beneficiaries.
To what extent has engagement changed as a result of LGPS pooling?
To be honest, there has not been any real change in the way LAPFF engages since the advent of pooling.
Our role remains the same – to engage with companies on responsible investment concerns to ensure long-term returns. That matters for our pool members just as it does for individual member funds.
In this sense, the forum exists to provide a collective voice, louder than it would have if we act as individual members or pools.
Over the past few years membership has grown considerably as have the assets under management of members to around £250bn. This makes the forum a powerful force to shift the agenda in the right direction, engaging companies and taking a lead on important responsible investment issues.
Is it fair to say that investors’ understanding of ESG has broadened, starting with factors which directly affect the financial industry, such as auditing standards and executive pay to broader issues like climate change and gender equality?
I am not sure; ‘ESG’ has always covered a broad range of issues. I would agree, however, that some people’s interpretation has been about narrower definitions of what might impact investment value.
For LAPFF, we have always taken a broad view of how such issues affect shareholder returns. For example, climate change is a massive issue for our members and has been for some time. We started engaging on corporate carbon disclosure back in 2002, published our first report on the investment implications of climate change in 2004 and have engaged with companies on carbon risk management for many years.
Our work on executive pay and auditing standards has been long standing, and the same goes for gender equality. We were engaging with UK-listed companies back in 2006 on equal pay audits. I would like to think that in many instances, where LAPFF leads, others follow.
Besides talking to companies, LAPFF also engages with the government through policy consultations. Which topics are currently high on the agenda?
One of the biggest victories for the forum has been the establishment of the new Audit, Reporting and Governance Authority (ARGA).
We have long called for a regulator with teeth. The previous set up was a classic example of regulatory capture. There were too many senior voices from the accountancy industry, which is never a good approach.
We hope to see some changes with ARGA scrutinising the quality of audits to raise standards and become a strong authoritative capital market regulator.
The work on this continues. At the moment there is a lack of competition in the auditing sector with the big four dominating. In many cases companies can only choose between one or two auditors, which is not the mark of a functioning market. We will continue to engage with policymakers to improve regulation in this regard.
The fallout of a potential no-deal Brexit could have significant consequences for LGPS funds, yet the topic is highly divisive. How do you handle that?
Views on Brexit are seriously diverse in the forum as they are in most walks of life.
Our approach has been to engage with company chairs on what it means for them and what planning they have in place.
It has been a topic in many engagements with discussions covering management of skills and immigration to the impact on trade and supply chains.
These discussions are likely to continue for the foreseeable future. If and when we leave the EU, the companies with whom we engage could face UK trade negotiations which will cover the same issues.
Of course, we don’t get to decide government policy but can engage with companies on the effectiveness of their preparations and securing the best outcomes for beneficiaries.
With yield curves reversing, there is again growing talk of another recession. Has the industry learned some lessons from the last crisis? Where do you see room for improvement?
One of the lessons of the 2008 crash was that the numbers some companies were presenting to shareholders were not accurate. This was particularly the case for banks.
There has been some progress and the creation of ARGA set on a statutory basis is what LAPFF had been calling for, for more than 10 years.
Although this is something to be welcomed, we still have concerns about the auditing industry. Similar concerns have been highlighted by the Competition and Markets Authority (CMA).
In relatively stable economic times, we have seen major failures – at Carillion, for example.
As Warren Buffet has said: “It is not until the tide goes out that we see who has been swimming naked.” Sadly, too often we have to wait until there is a recession before that emerges.
If audits were better performed on companies, we would identify failure much sooner. The auditing industry needs to up its game alongside broader reforms to ensure not just competition within the sector but also higher standards and quality audits overall. We will continue to push for prompt action before the next recession hits. Can you give us an example of successful engagement that you are particularly proud of?
LAPFF has had a lot of success in a range of areas, from climate change to executive pay to human rights. A recent example where we have had significant success is budget airline Ryanair.
There had been ongoing concern around how pilots and cabin crew were treated, and the board had not connected the dots in terms of how this was affecting financial performance. Part of the problem is that there is an outspoken chief executive and a relatively silent, long-standing chair. LAPFF recognised that the board composition at Ryanair was not creating the culture of accountability that we like to see.
We started talking to a range of stakeholders – the company, fund managers and other investors, unions – to see if we could get Ryanair to refresh its board. This included announcing an intention to file a shareholder resolution if matters did not improve.
It worked. The chair, David Bonderman, announced he is stepping down next year, along with the senior independent director. With union recognition agreements at the company, we are hoping the new developments on the human capital management front and a refreshed board will help set Ryanair on a more sustainable trajectory.
Are there any topics that LAPFF is not covering but where you would like to see further engagement?
LAPFF’s workplan is wide-ranging, but, of course, we do not have limitless resources. Truly effective engagement requires focus and persistence. There are issues continually emerging that can pose challenges to investors and we always have an open ear for these.