Institutional Investors and Responsible Investment: A Case Study of USS - a UK Pension Fund TAIEX workshop on Responsible Investment Tel Aviv, 7th September 2009

Dr Daniel Summerfield Co-Head of Responsible Investment

Who are we?

Occupational pension fund of UK universities ~ $40 billion in assets 200,000+ individual members ~300 institutional members Second largest UK private pension fund Active and responsible long-term owners of companies in which we invest = active ownership/Responsible Investment (RI)

How we invest?

In-house fund manager & external fund manager/passive fund Approx 90% of USS’s assets managed in–house Shares in companies in most markets Properties Fixed income Alternative assets (private equity, infrastructure, hedge funds) Active owners of companies in which we invest RI policy applies to all our holdings in all markets

Underlying principles USS Statement of Investment Principles

“to maximise the long-term investment return on the assets having regard to the liabilities of the scheme” “an active and responsible long-term shareholder of companies and markets ……to protect and enhance the value of the fund's investments by encouraging responsible corporate behaviour.”

Why is USS doing RI?

Status: Non-commercial in-house fund manager – one client Long-term liabilities Assumptions: Identify good corporate management Prevent or avoid value destruction Make better valuations and stock selection decisions Protects and enhances value of fund’s investments Fiduciary obligations to ultimate beneficiaries

USS’s Approach to RI

Integrated approach To ensure material extra-financial factors are incorporated into investment decision making processes across all asset classes and in all markets Holistic, in-depth and integrated company engagements Joint meetings with portfolio managers Operational, strategic and governance issues addressed Potential escalation of engagement strategy Very challenging approach but potentially the most rewarding Approaches to market regulators

Key objectives of integrated approach

Risk management Value creation Corporate Governance etc on par with other investment considerations Generating alpha from engagement Make better valuations and stock selection decisions “When an investor systematically integrates all relevant variables into their decision-making there is no such as an extra-financial factor: just enhanced analytics” Henrik du Toit, CEO, Investec

Changing Perceptions

• Stock prices often fail to reflect true corporate performance • • “For everyone except the investor who plans to sell today, a higher share price is only a means to an end-not an end in itself. The ultimate end is a better corporation, whatever criteria we may use to judge ‘better’” UCLA School of Law report –2005 • • • “Potential financial materiality of extra financial issues is rapidly becoming a mainstream, rather than a peripheral, quixotic concept in the pension investments world” “RI is only a way-station to its eventual convergence with LHI (long horizon investment)” Ambachtsheer Letter, March 2007

Overcoming challenges

“Over time, analysts have become obsessed with the question of whether a company meets its quarterly EPS numbers, and not with whether a company is built to last…The focus on short-term results has, I believe, had a counter-productive influence on companies, on investors and on analysts themselves.” William H. Donaldson 2005 CFA Institute Annual Conference “Practically everybody overweighs the stuff that can be numbered because it yields the statistical techniques they’ve been taught in academia and doesn’t mix the hard to-measure stuff that may be important” Charlie Munger, Vice Chairman, Berkshire Hathaway, 2005

Barriers to overcome

No two people see the same data the same way The rock upon which analyst/fund manager communication can founder

Engagement issues

Holistic and integrated: The company’s strategy The company’s operational performance The company’s acquisition/disposal strategy Independent directors failing to hold executive management to account Internal controls failing Inadequate succession planning An unjustifiable failure to comply with best practice Inappropriate remuneration strategy The company’s approach to corporate responsibility

Key market issues for overseas investors

Macro economic & market stability Alignment of interests & accountability Minority investor protection Transparent & credible accounting & reporting system Assessment of potential political interference

Investments in Israeli companies

$256m invested in 11 companies listed in Israel, US and UK Potential further investment with move to developed market status at MSCI Challenge for market –regulator and investors – to raise corporate governance standards to meet higher expectations of overseas investors.

Key governance challenges in Israel

Low market score for CG - 33rd position out of 49 countries –GMI country rankings Key challenges: Market for control – ownership – market structure Board accountability – non-independent chairmen Remuneration issues – insufficient disclosure

The case for collaboration

Active shareowners cannot achieve significant progress alone – task is too big Diversified and global portfolios Companies face competing and contradictory priorities Unified voice – stronger signal sent Asset owner collaboration - more proactive strategic role Strong business case – pooling of resources Common view on key issues – powerful catalyst for change

Contact details

Dr Daniel Summerfield Co-Head of Responsible Investment Universities Superannuation Scheme (USS) 99 Bishopsgate London EC2M 3XD UK Tel: +44 (0)207 972 6398 Cell: +44 (0)7950 320660 Email: [email protected]