CORPORATE GOVERNANCE AND CORPORATE SOCIAL RESPONSIBILITY

1. CORPORATE GOVERNANCE AND CORPORATE SOCIAL RESPONSIBILITY THE ROLE OF LAPFF A PRESENTATION TO THE TUC TRUSTEE NETWORK CONFERENCE B BAILEY HONORARY TREASURER – LAPFF DIRECTOR TO WEST MIDLANDS PENSION FUND 5 June 2006

2. LOCAL AUTHORITY PENSION FUNDS FORUMWHAT WE ARE ABOUT THE FORUM • Maximises pension funds’ influence as shareholders to promote Corporate Social Responsibility and high standards of Corporate Governance. • Facilitates commissioning of research and policy analysis of issues more effectively than individual members. • Provides a forum for consultation on shareholder initiatives. • Provides a forum for information exchange and discussion about investment issues. • Provides a forum to consider issues of common interest to all local government pension fund administrators and trustees.

3. LOCAL AUTHORITY PENSION FUNDS FORUMOUR STRUCTURE MEETINGS • Four Business Meetings a year, four Executive Meetings. • Annual General Meeting. • Decisions at meetings reached by consensus. • Each member Fund has one vote at meetings. • Annual Conference. • Forum Executive CONTRACTS • PIRC contracted as research and engagement partner, supplying research, advice and assistance to LAPFF. • Forum Officer – marketing, publicity, development.

4. LOCAL AUTHORITY PENSION FUNDS FORUMMEMBERSHIP • Currently 39 Local Authority Pension Funds. • £60 billion in value. • Membership open to all LGPS pension funds. • Representation at Forum Meetings by Councillors and Officers. • www.lapfforum.org.

5. LAPFF APPROACH OBJECTIVE OF THE LAPFF APPROACH:- • To be proactive – not reactive. • Recognise change takes time. • Drive performance up to match the best. • To facilitate active engagement with companies.

6. ACTIVE ENGAGEMENT CAN BE CONSIDERED AS MANAGING INVESTMENT RISK BY IDENTIFYING THESE RISKS IN COMPANIES, A FUND AIMS, THROUGH ITS ENGAGEMENT STRATEGY, TO IMPROVE THE GOVERNANCE WEAKNESSES AND PROTECT ITS LONG TERM SHARE VALUES • Reputation • Falling short of its peers on social, environmental or ethical trends. • Slow in responding to social changes and trends. • Falling short of its peers on meeting new OFR and other reporting standards. • Comparatively weak broad structure in terms of make-up, expertise, independence.

7. ACTIVE ENGAGEMENT IS PART OF INVESTMENT MANAGEMENT Investment Strategy Active Engagement SIP/FSS Myners’ Compliance

8. MYNERS’ PRINCIPLES The Myner’s principles indicate funds should follow an active shareholder engagement approach using its position to influence the corporate practices of companies in which it invests.

9. SHAREHOLDER ACTIVISM • Myners - Principle 6 Trustees should ensure they have an explicit strategy on Activism elucidating the circumstances in which they will intervene in a company; the approach they will use in doing so; and how they measure the effectiveness of this strategy. • CIPFA Guidance states: Authorities may wish to seek alliances with a group of local authority pension funds, to utilise the benefits of collective size where there is common interest to influence a company/companies. • LAPFF enables LGPS Funds to meet their Myners requirements.

10. ENGAGEMENTTHE LAPFF APPROACH • Establishing Best Practice - policy research, stakeholder views, international norms • Benchmarking Company Practices - PIRC database, surveys, bespoke research • Engagement with Companies - Correspondence, discussions, private meetings • Escalation as Necessary - Public domain, AGMs, press • Collaboration with Other Groups • Persistence Pays Off

11. DOES LAPFF ACHIEVE? OVER 15 YEARS LAPFF HAS:- 1. Improved company reporting facilitating improvements. 2. Contributed to improved governance/part of making changes happen. • Assisted in raising issues/awareness contributing to the pressures for change eg., environmental work.

12. AREAS OF CONCERN • Directors’ pay • Boardroom structures • Environmental issues • Labour standards • Appointment of and role of auditors

13. DIRECTORS’ PAY • Supportive of high rewards for success. • Opposed to ‘Fat Cat’ pay deals rewarding poor performance (LAPFF alerts). • Opposed to excessive rewards which are disproportionate to performance. • Will not tolerate any lack of transparency.

14. BOARDROOM STRUCTURES • Separation of Chair of Board from Chief Executive. • Independence of non- executive directors. • Senior independent director. • Recruitment and appointment of directors. • Induction and professional development. • Institute of Directors – LAPFF support for IoD Chartered Director qualification

15. ENVIRONMENTAL ISSUES • Greenhouse gas emissions (Kyoto protocol) • Mineral exploration • Waste dumping

16. EMPLOYMENT STANDARDS • Overseas labour standards • FTSE companies in China • Survey of company workforce practices e.g. attitudes of companies to supply chain labour standards and reputational risks The aim is to support shareholder value

17. LAPFF ACTIVITIES: MAKING A DIFFERENCE DIRECTORS’ PAY • Reduction in the number of LAPFF Pay Alerts over time. • There is a continuing positive trend with executives and new executives being appointed on one-year terms.

18. LAPFF ACTIVITIES: MAKING A DIFFERENCE OVERSEAS EMPLOYMENT STANDARDS • The Forum has had a long-term commitment to improving overseas employment standards. LAPFF first expressed investor concerns on the indirect use of child labour by retail companies in 1998, following a series of high profile media and non-governmental organisation revelations on this issue. • In January 1999, LAPFF initiated a campaign to persuade companies to adopt codes of conduct, backed up by the development of monitoring and verification mechanisms. At that time there was little investor involvement on this issue in the UK. Since LAPFF’s work began, supply chain labour standards have become a key CSR concern and there is now a greater recognition of this issue amongst other investors.

19. LAPFF ACTIVITIES: MAKING A DIFFERENCE • In particular, the Forum was instrumental in persuading Dixons to disclose their code of conduct.In view of this progress, in 2003 it was decided that a second, more in-depth, study should be conducted to investigate the extent to which FTSE 100 retail companies were making genuine efforts to implement and monitor their codes. The resulting report published in December 2003 showed the progress that all the retailers covered had made and the Forum publicly thanked the companies concerned. • A detailed study with 6 companies operating in China during 2005, has enabled LAPFF to identify good practice as a basis for developing an engagement approach for poor performing companies. • LAPFF identified minimum reporting standards on employment practices during 2005 and is engaging on getting companies to meet these requirements.

20. LAPFF ACTIVITIES: MAKING A DIFFERENCE REPORTING OF GREENHOUSE GAS EMISSIONS • Another long-term commitment of the Forum is to improve reporting on greenhouse gas emissions by all FTSE 100 companies, particularly those which do not currently make any disclosures. During the 2004 proxy season the Forum has attended a number of AGMs to ask companies about their disclosure of greenhouse gas emissions according to the guidelines of the Department for Environment, Food & Rural Affairs (DEFRA). A positive response was received in all instances with the companies committing to look at the issue of reporting. The AGMs attended included Amvescap, Smith & Nephew, LogicaCMG and Shire Pharmaceuticals. Wolseley, in the construction and building material sector, has said it will ‘consider’ using the guidelines. • The campaign, conducted in collaboration with the Environment Agency Pension Fund, has attracted much press interest, with references in a wide range of general and specialist media. A further boost to the campaign came from thedecision of the Minister of State at DEFRA, Rt Hon Elliot Morley MP, to meet members of the Forum Executive and Forum officers on 23 September 2004 to discuss the Forum’s concerns about FTSE 100 companies that still do not publish quantified data on their greenhouse gas emissions.

21. A MINISTERIAL QUOTE "I congratulate LAPFF for playing an important role in furthering these aims. Recently I met with representatives from the Forum and was pleased to hear the positive responses they received in assessing the FTSE 100's level of greenhouse gas emissions reporting. "I therefore look forward to seeing the LAPFF continuing to increase company awareness on the importance of reporting their greenhouse gas emissions.” • LAPPF funded an independent study into issues common between companies in various sectors with a view to engaging with companies to improve disclosure and improve accountability for their actions. The forum is now on the oil and gas sector.

22. LAPFF ACTIVITIES: MAKING A DIFFERENCE EMERGING AREAS OF ACTIVITY • 2005 saw the start of a pilot study into the impact of mergers and acquisitions. • About to explore disclosure of information around a company’s equal pay performance – equal pay audits and annual reporting.

23. WHERE ARE WE NOW? • Beginning to make a difference • Public support is growing • Governmental support/interest (preferred to regulation) • Constant media interest • Much more to do – only beginning to scratch the surface

24. OUR ANNUAL CONFERENCE – SOME QUOTES • “An in-depth, thought-provoking and top quality conference that only gets better every year" Jonathan Stapleton, Journalist, Professional Pensions. • ‘An unmissable event on the LGPS calendar’ Martin Campbell, Vice President, Public Sector Business Development Mellon Global Investments • “The conference provided a good insight into an increasingly important area for Local Govt Pension Funds. I recommend it." John Jones, Consultant, Henderson Global Investors • “As a first time attendee, I was very impressed with both the quality of the agenda and the input from your speakers. I think ……..your membership will continue to grow over 2005 and beyond.” Spencer Ahluwalia, Director, Legg Mason Investments • "Very well organised, informative and definitely worth attending" Michael Hart, Director – Business Development bfinance.

25. THANK YOU FOR LISTENING ANY QUESTIONS?