News

MEDIA RELEASE

Two of Australia's largest superannuation funds, Public Sector Superannuation Scheme and Commonwealth Superannuation Scheme (PSS/CSS) today appointed Westpac Investment Management to the role of primary governance adviser for its $AU 3 billion in Australian share investments.

Westpac Investment Management will provide ongoing advice to the scheme trustees in relation to environmental, social and corporate governance.

PSS/CSS Chief Executive Officer Steve Gibbs said, "As one of Australia's leading superannuation and pension funds schemes we are pleased to be able to broaden our risk management to the increasingly important area of governance."

PSS/CSS will look at the way the companies in their investment portfolio manage environmental and social risks, as well as the effectiveness of corporate governance practices.

"It is well known that poor environmental practices, disconnection with community views and poor corporate governance practices can all lead to a decline in shareholder value." said Mr Gibbs.

"PSS/CSS's governance initiative will mean that we will systematically monitor these risks. Where appropriate we will be facilitating dialogue with the managers of the companies in which we are owners."

While governance is not a new concept, it is the level of available research and methodological understanding that now permits the implementation of disciplined monitoring and dialogue.

"To appoint a governance adviser is hardly a radical step, it's simply best practice risk management." said Mr Gibbs.

PSS/CSS has been monitoring international governance developments in order to ensure their governance initiative has all the discipline and rigour of other risk management practices.

"It has not been an overnight development," said Mr Gibbs. "Since we already monitor risks relating to economic, political and investment levels, this is simply a refinement of how we best safeguard the long term interests of our members."

Westpac Investment Management together with Monash University Sustainability Enterprises have expertise in researching governance risks and the relationship between these risks and shareholder value.
Westpac Financial Services Managing Director, Mr Shaun Mays said, "Westpac is pleased to be appointed to advise the PSS/CSS schemes in relation to governance risks.

"The funds management industry is in the early stages of recognising that risks come in many forms - governance is the next frontier in risk management.

"This is clearly the future of investment management and we are honoured to be able to work with PSS/CSS and Monash University at the leading edge of fund stewardship."

An increasing number of large Australian companies are becoming more transparent in their reporting.

Mr Glen Cunningham, Executive General Manager, Corporate Affairs, Southcorp, said: "We acknowledge and welcome the increased scrutiny of progressive institutional investors regarding the sustainability of company performance. Southcorp is committed to being a sustainably managed company and the PSS/CSS initiative will provide us with a further means by which we will communicate with our investors."

The PSS/CSS governance initiative, believed to be a first for Australia, reflects a new era for investment management and fund stewardship. Westpac takes up the role immediately.

For further details:
Mr Steve Gibbs
Chief Executive Officer
Public Sector Superannuation Scheme and Commonwealth Superannuation Scheme
Ph. 0418 102 310

Facts on PSS/CSS:

PSS and CSS membership comprise Commonwealth public servants. The PSS is the successor fund to the CSS, which was closed to new members in 1990. The two funds have a combined membership of about 328,000 members; and they have combined investment assets of about $10 billion.

Facts on Westpac Investment Management

Westpac Investment Management is one of the largest fund managers in Australia with over 30 years experience and more than $22 billion in funds under management. Westpac Investment Management services a range of institutional investors and is also a leading provider of socially responsible investments.

Governance: Questions & Answers

What is Governance?

Governance refers to the accountability between a company's management and its owners. Shareowners such as PSS/CSS rely on directors and executives to perform the detailed management of the company. Governance therefore describes the manner in which shareowners, such as PSS/CSS are vigilant in relation to their investments.

Vigilance is relevant in monitoring policies and practices that might lead to failure to identify and manage risk, which in turn has the potential to erode shareholder value and impact negatively on member returns. By monitoring investments in this way the schemes can be more alert and thereby responsive to risks in the portfolio.

What Governance is Not

Governance is not about micro-management. It is not about morals and ethics, nor is it about the day to day operations of a corporation. Governance is not Ethical or Socially Responsible Investment in the form frequently reported in media of recent times, although there are number of common areas.

In the case of PSS/CSS the preferred approach is constructively to discuss identified governance risks via the service provider. The desired outcome is to effect positive change, to the benefit of shareholder value, and not one of "AGM activism", "promotion of protest" or any other activity that might detract from shareholder value.

Why is governance relevant?

It is increasingly recognised that governance can have a relationship with shareholder value. As one of Australia's largest investors, simply selling out of companies that do not reflect sound governance practices is a highly limited option for PSS/CSS. A more viable response to governance risk is therefore to monitor and enter dialogue with management, when appropriate.

In the US the giant CalPERS (US $144 bn) has recognised the value of governance. A study showed that 62 companies with whom CalPERS entered dialogue over a five year period were found to outperform the S&P500 index by 23% in the following 5 years. This compared with an 89% underperformance of this group of companies relative to the same index prior to such vigilance by CalPERS.

What is the benefit to fund members ?

The benefit to members is the potential to improve long term investment returns. In particular, by actively managing risks in the portfolio of investments, the schemes have the potential to better manage their exposure to investments that might otherwise act as a drag on performance.

Governance in an International context

Governance is rapidly increasing around the world. It is an integral part of the US$ 144 bn CalPERS pension fund's management, following its demonstrated commitment to Corporate Governance. The British Telecom owned Hermes Funds Management also integrates governance practices covering its STG 50bn, with positive impacts on shareholder value.

More broadly, the monitoring of environmental, social and corporate governance risks continues to increase around the globe - with related significant incorporation into investment funds management.
Examples of environmental, social and corporate governance risks increasingly considered in investment include the fact that US funds managed for these types of risks account for more than 10% of the US$19.9 trillion funds market. Moreover these types of funds grew at an average 1.5 times market average during the two years to November 2001. This rate of above average growth has been consistently demonstrated in the US since 1995.

Further, the globally recognised Dow Jones Sustainability Index (DJSI) now monitors governance risks for more than 2500 global corporations - including Australia. Funds managed against this index have grown rapidly in only a few years to exceed more than 1.5 billion euro. Perhaps more significantly, the DJSI and the governance risk evaluation it signals has well and truly entered the lexicon of company management and financial services.

In the UK, the Pensions Act was amended in July 2000 to require Occupational Pension Trustees to disclose to fund members the extent to which social, environmental and ethical considerations are reflected in the buying, selling and holding of investments. This further entrenches the role of governance risk management. Going forward, the debate may well become one as to the risk arising from not adequately managing governance risks.

Governance in an Australian Context

There have been a number of comments in relation to the (in) action of institutional investors in relation to the governance of funds under their management. These have ranged from government ministers through to fund members and media commentators. The governance management being initiated by PSS/CSS ensures that governance risks are constantly monitored with a framework for constructive dialogue when appropriate. Rather than being ad hoc, it is the permanency of the PSS/CSS approach that will facilitate proactive rather than reactive governance of funds under stewardship.

In addition to being a leading response to concerns regarding how institutions fulfil their governance duties, the PSS/CSS governance initiative will ensure the trustees are prepared for the government's Financial Services Reforms that require communication to investors in relation to the extent to which environmental, social, labour standards and ethical considerations are taken into account in the acquisition, realisation or retention of assets. This reform is to take effect from March 2002.

Who is doing this?

Following an exhaustive review and lengthy consideration, PSS/CSS have appointed Westpac Investment Management as the primary governance adviser to the schemes. Westpac will expand its relationship with Monash University as part of this appointment.
Working with Monash, Westpac has performed a leading role in the evaluation of governance risks in the development of structured investment strategies. This work has been recognised by both the Banksia Foundation and the Business and Higher Education Roundtable (BHERT).

Importantly, PSS/CSS sought a service provider who had a sound understanding of governance risks, could effectively communicate with companies, and who would be likely to be listened to by companies. Effective communication of governance risks is integral of PSS/CSS's objective, that being the improved risk management of its investments.

What might be some examples of Governance risks?

Environment - a company seeking to operate and potentially grow its business needs to be able to demonstrate development/expansion processes that are sympathetic to sustainable development. This includes potential risks from inadequate disclosure of environmental management policies and practices as well as the manner in which an organisation manages its consumption of resources. Failure to manage environmental risks may result in community alienation and increased regulatory costs.

Social - companies seeking to grow their franchise while being seen as out of touch with community sentiment face risks in relation to consumer support as well as potential regulation and or legislation regarding their franchise. Examples of this might include management of Human Rights where failure to adequately manage this risk could result in consumer boycotts or additional regulation that could fetter expansion of the business enterprise. Workplace safety is another area where expectations of businesses are growing and where the risks from poor workplace safety management may arise from not only the implications for the workers and other users of the workplace, but also the reputation of the business.

Corporate Governance - companies that do not align the interests of owners and managers have been associated with the destruction of shareholder value. Risks to be managed include reward for results as well as ensuring effective management of conflicts of interest, Board and Management experience and diversity.

What if companies decline to enter dialogue?

Corporations are increasingly embracing the concept of governance risk management. Also increasing is company recognition that constructive dialogue is an opportunity for mutuality of exchange with shareowners and other stakeholders. As with any relationship, the appropriate governance response to constructive dialogue will depend upon the circumstances.

Is there a conflict of interest in relation to Westpac's role?

Westpac Investment Management (WIM) has been providing investment and risk management services to its clients for more than 35 years. WIM's charter is dedicated to the fulfilment of the client mandate. In fact WIM has one Australia's most established longevity records in meeting client mandates. This has been achieved across a variety of asset classes, including the buying and selling of company shares. Ethical walls exist between the parent bank and its funds management subsidiary. WIM staff performance is evaluated solely in relation to fulfilment of the client mandate.

What about the additional cost?

The governance advisory service represents a minimal additional expense across the PSS and CSS funds. More importantly this initiative is all about the benefit of risk management, outweighing the relatively low costs involved. The real cost is the cost of being exposed to declining shareholder value cross the investment portfolio.
PSS and CSS expect that over time, the costs of governance will further reduce as more funds inevitably go down this path.

18 December 2001