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Civilising Capital

Interview with Peter Lewis

Peter Butler is a global investor with a difference. He believes that environment, shareholder democracy and workers rights make good business sense.

What are the principles that guide Hermes?

Hermes Pensions Management is one of the largest pension fund managers in Europe. It is unique in two ways, because it is a fund manager - an asset manager - that is wholly owned by a pension fund. That pension fund is BT (British Telecom) Pension Scheme, which is the largest pension scheme in the United Kingdom. And that has about �30 billion (about $85 billion) of assets which we manage, and we also manage other third party pension funds, so that in total we have $Aust. 140 billion (near enough) of funds under management.

Because we are owned by a pension fund, we have an independence other fund managers probably don't have. Other fund managers tend to be owned by banks or insurance companies and that can lead to conflicts of interest which we don't have. So the combination of that independence, lack of conflicts of interest, and the size, creates an institution that is certainly unique in Europe and is pretty unusual even on a world standard.

Hermes has a lot of money and in terms of the equity investments, most of it is invested in the indices around the world. We invest a lot of money in the UK, we invest in the European Indices; the Asia Pacific Index; Japan Index; and the US Index. On behalf of our clients we have investments in 3,000 public companies worldwide.

The basic stance is that we always support local management, provided they are creating long term shareholder value. What that means is not just maximizing short term profits, it is about long term, and that means that you must look after your stakeholders, because unless you look after your stakeholders you can't create long term value.

You can't create long term value if you kill your employees because of a bad safety record, or you pollute the environment. So it is very much a recognition that you have got to get those short term issues right if you are going to create the long term value, and stakeholders very much come into that equation.

We believe that good corporate governance does create long term shareholder value, so we have developed an international code of practice which we ask all international companies to support. It is identical to the one that has been approved by the International Corporate Governance Network, which is a network representing some $10 trillion of investment worldwide and is based on the principles agreed by the OECD and the World Bank a couple of years ago.

It is only when companies contravene those basic principles and stop doing the right things for shareholders in the long term that we will withhold our support from management in terms of annual votes or special resolutions.

So you are basically using your purchasing power to shift the focus from making a short-term percentage profit in a year to actually having long-term strategies?

When you are an index tracker, and when it is pension fund money you are investing, it is the return over 30, 40, 50, 60 years that matters and so our first requirement is that each of the companies in which we invest has good corporate governance. But about five years ago we recognized that that was not enough on its own, because you have got a lot of poor performers - of under performers.

Somebody has to do something about that. Warren Buffet used to say that acting fund managers have this gin rummy approach. They just throw away the worst card.

If an acting manager doesn't like a company and he just sells it, then he just passes the problem on to somebody else - and that somebody else are the index trackers, so we as index trackers must do more about the under-performers.

My job was created in 1996 to do something about under-performing companies. My background is not fund management, it is corporate. I spent 20 to 25 years being involved in running businesses, and I became an executive director of large PLCs in the UK and became a non-executive director as well, and the idea was that somebody that knows how companies run should be representing shareholders, talking to chairmen and chief executives of companies that are in difficulties.

So, in terms of the under-performing companies - and we have been having a lot of corporate collapses in Australia in recent times - is it actually taking a more interventionist stance there to protect workers jobs?

Yes, it is about making sure that managers are doing their job properly. That they are accountable for what they do. I think that there are all sorts of indications - when you talk about factories closing, people losing their jobs - very often the problems are made worse by bad management.

You have a world that is globalising and jobs do shift around. You do get the most labour intensive jobs shifting in different parts of the world, and that is an inevitable consequence of what happens, but if companies are managed well in that period you don't need to have a wholesale collapse - the destruction of industries that goes on.

It is about good management, and when managements go to sleep and their board of directors go to sleep and shareholders do nothing, it can often lead to mass redundancies.

What about issues like environmental standards and core labour standards? Do you have a philosophy regarding relations with unions in the companies that you work with?

Part of our core beliefs is that it is not right for shareholders to micro-manage companies. It is not for us to tell companies what their annual payroll should be. That is a director's job. But if directors fail in their basic job, so that if a company has appalling labour relations or has an appalling environmental record with oil tankers that keep polluting beaches, or any other major environment, then somebody in that company is not doing the right thing and we will want to hold the directors to account for that. We believe that the directors must take responsibility for these environmental, ethical, labour issues, and if they get it wrong they should expect to be removed by the shareholders.

What indicators do you use for that? Is it only after there has been damage that you would move in or is it ongoing monitoring of the performance of your companies?

Very much it is about transparency and reporting. We were one of the first fund managers on behalf of British Telecom Pension Scheme to come up with a policy on SEE issues - social, ethical and environmental. The concept is that the companies must be transparent in what they are doing. They must report in meaningful terms on these issues to shareholders, so that shareholders can hold the directors to account. That is the approach. It is not for us to tell them what to do, but we trust them to tell the shareholders what standards they keep. Do they follow particular standards that may be followed by world agencies? If not, why not? That is the approach.

Have you worked with the trade union movement, for instance in Britain?

Interestingly, one of our investors in our Focus Funds is the GMB, which is the GMB Pension Fund, and GMB is the third largest pension fund in the United Kingdom, and they took the view that it was good news to have shareholders doing something about management that were failing. So that is a very direct example of what we do.

My fellow director of Hermes Focus Asset Management, which is the company that does this, David Fitzwatson, he is actually on the taskforce of promoting trade unionism in the United Kingdom, alongside John Monks who is the General Secretary of the TUC and Brenda Barber, who is Deputy General Secretary of the ICFTU. So we have these close union links from that point of view. We also have been working with the AFLCIO in the USA on Premier Oil.

What sort of input have they had into your work?

It has been a two way thing. They have been very concerned about some of the issues in Burma. They have been able to pursue some angles in the United States because it is a British based company - Premier Oil. We as a shareholder in the United Kingdom have got good access to the Board there. I think considerable progress has been made and it has been very interesting taking a different approach.

The thing that people forget is that when you are a pension fund manager the beneficiaries - the millions of pensioners and future pensioners - are the beneficiaries of what we do. They are the capitalists that benefit from this, and they are also the workers - the trade unionists. When people say well it is about profit maximization for some remote capitalist, it is just not what it is all about. What we are doing is maximizing the long-term value of the companies for the benefit of the people. And those people - the pensioners - are also the workers and the trade unionists.

When you look at things in that sort of linked up way, then the interests of the shareholder; the interests of the fund manager; the interests of the unionists and the employees are all the same in the long-term. Short term situations might be different, but long-term they are all the same.

What is your evaluation of the quality of management in companies around the world? We hear a lot about the huge salaries that executive directors and board members get. Are they worth the money we pay?

Some are, some aren't. I think what is appalling is the payments that are made to executives of companies which either fail (and people get paid for failure), or large amounts that are paid with no regard for the performance of the company. That is what is so unacceptable.

I don't think that people object to skilful people at the top of their profession, whether they be professional rugby players; professional footballers; top film stars, earning a lot of money. And I don't think people really object to really good professional directors earning a lot of money, provided the shareholders are doing well.

What people object to is paying executives for failure, and that is largely the fault of shareholders around the world ignoring this issue. It is an important issue and one that we have been trying to raise in profile in the UK.

But the biggest problem is in the United States because shareholders in the United States have been impotent on this issue and it has meant that this disease that excessive executive remuneration has been exported by the United States to the rest of the world, and it is very difficult for us to fight against it.

What sort of leadership role can the union superannuation funds in Australia take in this broader project of thinking more long-term?

The first thing they should do on a global scale is the extent to which union pension funds invest internationally, then they should use the vote. They should tie in with international shareholders and the international union movement and use the vote - register their protest where it is appropriate and put pressure on boards of directors around the world who are failing their shareholders.

Finally, how confident are you that we can civilise global capital?

I think we can civilise global capital, provided we realize who the beneficiaries are, and as I say, they are the trade union members, the pensioners, the workers. What global capital is about is the long-term interests of those people - their long-term savings and having something to retire to. That is why we have to do this in a civilized way; we have to recognize that long-term shareholder value is needed to pay people's pensions. But the only way that you get it is dealing with the short term issues of pollution; of other environmental issues; ethical issues; and treating the employees in an appropriate way.

Peter Butler addressed Sydney and Melbounre forums organised by the Pluto Institute

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  Issue 120 contents

»	Calls for ALP Fundraising Code
»	Mad Monk Keeps IR
»	Ignored Warnings Bring Tragic Results
»	ACTU Executive To Mark Union Bounce Back
»	Workers Will Lose from Unfair Contract Changes
»	Tassie On Top, While NSW And WA Slip
»	Costa Gets First Union Call
»	Hamberger in Hot Water
»	Egan to Pay for Welfare Win
»	Sweet Victory for Sugar Workers
»	Selectron Demise Spells Death of Tech Inustry
»	Telco Industry Growth Hits The Wall
»	Shocking Conditions in Clothing Industry
»	Workers Force Council Backdown
»	New Dili Project Launched
»	Airport Guards Welcome Work Study Case
»	No News is Bad News for the Bush
»	Getonboard Closes Doors
»	Activists Notebook
»	Organiser of the Year Nominations Open

»	The Soapbox
»	The Soapbox
»	Trades Hall
»	Tool Shed

»	The Cost a Costa
»	Unionism and the ALP - a Workers View.
»	Is 60-40 Good Odds?
»	Ancient OHS - The Wergild Sysstem

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