"Where were the shareholders?" has not been far from the lips of global regulators, media and the general public over the past two years. While some funds have jibbed at the idea of become more closely involved in the stewardship of their equity assets, two of the UK's largest pension funds are taking matters into their own hands.

RailPen and USS, which collectively manage £46 billion, have decided to pool their resources to maximise their governance and engagement activities. As from the 2010 proxy season, the two teams will be working together on the basis of a jointly agreed policy covering a range of strategic and structural governance issues. Initial coverage will be the constituents of the FTSE All Share, the UK's leading benchmark for the main market.

At the core of the collaboration is a commitment to engage with companies and move away from any suggestion of "box ticking". Although the funds' policy contains considerable detail on both provisions and principles, it is clear that either party is able to submit individual votes and is under no obligation to vote in lockstep. In what will be a new departure for most investors, the funds will be backing up their proxy ballots with a letter to each issuer explaining the rationale behind the vote and will invite issuers to pick up on the concerns with the team directly.

For the time being each partner will pursue its international voting and engagement strategies individually and is using the UK initiative as a test-bed for its radical new approach to investor governance. Other issues are not covered by the partnership, notably no advice will be given on corporate actions and matters relating to change of control or sensitive shareholder proposals will be handled on a case by case basis.

In a prepared statement the funds said: "It is hoped the alliance will provide an infrastructure for engaged voting for other pension funds – domestic and overseas – in due course. The alliance may also work together to influence the governance agenda of UK plc by providing a pension fund perspective as an alternative to the messages conveyed by large money managers and investor representative bodies."

In November 2009, Lord Myners, the UK's City Minister said: "Without significant steps forward, the ownerless corporation will sleep-walk into another financial crisis. The time for better stewardship is now.”

RailPen and USS seem to have taken that message on board and it's particularly interesting to note that they've not waited for an other "industry initiative" but taken market-based steps to take governance out of the ghetto and into the mainstream with a credible commitment to make a difference.

Links

USS/RailPen Joint Voting Policy >>