Colin Melvin asks whether one of the consequences of the credit crunch will be greater accountability of companies to their investors

American history began a new chapter in January, with the inauguration of Barack Obama as president. However, it won’t just be millions of Americans who will be hoping for the change he promised in his election campaign.

British pension funds and investors have had millions of pounds wiped off their value virtually overnight, due to the credit crunch that began life in the US. There will be huge pressure on Barack Obama to restore confidence in the banking system and stabilise the American economy.

Despite the fact that governments have stepped in around the world to help ease the situation, there is still concern about the safety of our savings, with trust in the accountability of the entire financial system continuing to suffer severe erosion.

First among crises America is at the forefront of those worries. Many of us are owners, by default, of large swathes of corporate America through our pension funds. The effects are being keenly felt in Britain, with pension funds being one of the biggest casualties of the credit crunch.

Most of us are still oblivious to the fact that our pension schemes are invested in companies that are taking unacceptable risks on our behalf and paying executives excessive and unjustifiable bonuses – all things we can do very little about because of our limited rights as shareholders in US companies.

However, there may be hope in sight as Washington will be powerfully motivated to protect hard-hit pension funds.

In Barack Obama’s first 100 days of office we can expect to see the rights of shareholders strengthened. He understands the need for change to the economic landscape to prevent a recurrence of the greed and overtrading that have driven the current crisis.

Obama needs owners to shoulder their responsibilities so that the regulators can focus on where they can best add value. This will include a ‘say on pay’, and access to the proxy (i.e. the ability to propose directors to the board). There may also be legislation that will give new life to defined benefit retirement plans over defined contribution schemes.

Improved oversight
This will spur institutional investors, such as pension fund trustees – who are, after all, the guardians of our retirement income – to take up their responsibilities as owners and will give them important new tools to do the job.

Given the already more open view of the Obama administration, I expect this to become a two-way exchange internationally, with the US providing important leadership in addition to borrowing practices from abroad. These initiatives will lead to more meaningful director elections and more accountable boards, which will be to the long-term benefit of us all as corporate owners through our pensions and investments.

If pension fund trustees had obtained the right advice to question the dubious business practices that started the credit crunch, the worst excesses of the crisis might have been avoided. But instead, investment banks and other players in the financial markets were left largely unchallenged by their shareholders.

Even today, millions of people who pay into pension schemes are completely unaware of the fact that their pension savings are still being invested in shares with no real discussion with those companies about how they do business.

Taking the longer view
Pension funds are long-term savings vehicles, but they support the short-term dance of the City, which is entirely concentrated on the next quarter’s earnings and other short-term financial measures.

If this myopic approach continues, we will fuel further extraordinary profits for the financial services industry and ultimately create another credit crunch in the not-too-distant future, seeded by public money.

To make matters worse, we are not just picking up the bill for the credit crisis through our pensions once but several times – in what could be described as the ‘triple whammy’effect of the crisis.

As taxpayers, we are providing the funding for bank bail-out packages; as pensioners we are watching the value of our pension funds diminishing as the stock markets tank; and as employees we are suffering as companies shed jobs and freeze salaries. I believe the time is right for the short-term dance to end and a real conversation to begin with the large companies we collectively own.

Hermes has been working alongside many of the largest pension funds in Britain and around the world to help them understand and engage with the companies they invest in and begin a dialogue on issues such as transparency, accountability and long-term strategy.

The role of the investor So what can ordinary people do to promote the long-term value of their pension funds? Well, they too need to start a dialogue with their pension fund trustees and encourage them to take action.

The first question they should ask is: ‘Do our trustees have the expertise and support to promote our interests as long-term investors in companies’ shares?’

I firmly believe that if millions of people like you and I actively get involved in protecting and promoting the value of our hard-earned pensions, we will make a significant change in the performance of our largest companies.

Those trustees who have become more empowered through the help that Hermes has given them to start this dialogue are beginning to have a positive impact. Institutional investors are starting to see the value of adopting longterm investment strategies and holding the companies they are investing in to account.

Boards of directors are benefiting from being challenged by long-term shareholders on a range of issues.And pension fund beneficiaries and savers are starting to realise the benefits of exercising their power as owners.

As we look ahead to a new president in America, I believe the time is right for the short-term dance of the City to end and a good conversation to begin with the many large companies that we collectively own.

In any case, we are at the beginning of an exciting moment in the quest for an accountable capitalism.

It is not only in America’s interest that Obama is successful but it is also in the interests of all British people that he succeeds so that a better future can be created for us.

Colin Melvin is CEO of Hermes Equity Ownership Services, one of the world’s largest stewards of pension fund assets, representing shareholdings worth over £50 billion