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Universities Superannuation Scheme - USS

PRI reporting framework 2018

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(Proxy) voting and shareholder resolutions

Overview

LEA 15. Voting policy & approach

New selection options have been added to this indicator. Please review your prefilled responses carefully.

15.1. Indicate whether your organisation has a formal voting policy.

15.2. Indicate what your voting policy covers:

15.3. Attach or provide a URL to your voting policy. [Optional]

15.4. Provide a brief overview of your organization’s approach to (proxy) voting.

USS is committed to voting its proxies in an informed manner. Votes are confirmed in house by the RI team in association with the portfolio manager. Where possible, the scheme will write to the company to outline our concerns ahead of the vote.  If this is not possible,  we send the letter as soon as possible after the vote is cast.  Further details regarding our approach can be found on our website at: https://www.uss.co.uk/how-uss-invests/responsible-investment/voting.

See answers to LEA 18.2 for a detailed descripted of how USS is integrating environmental and social considerations into its proxy voting process.

We carefully review and consider shareholder resolutions where they have been submitted.

It is unusual to see shareholder resolutions in our home market (the UK), as shareholders have good access to management and boards. However, USS remains open to this potential route for escalation and co-filed shareholder proposals in 2015, 2016 and 2017.

In 2017 we pre-declared our support for several shareholder proposals on the PRI pre declaration platform including;  Charles Schwab, Exxon,  Pioneer and Occidental.


Process

LEA 16. Typical approach to (proxy) voting decisions

16.1. Indicate how you typically make your (proxy) voting decisions.

Approach

Based on

16.2. Provide an overview of how you ensure your voting policy is adhered to, giving details of your approach when exceptions to the policy are made (if applicable).

The USS Voting Policy is shared with proxy voting providers and companies and published on the scheme's website. USS actively considers all voting decisions in-house prior to confirming the vote and receives recommendations and proxy research from multiple providers to gain greater insights into the issues under consideration. Portfolio manager views are sought on votes and engagement letter texts. Recommendations are often made by the service providers that are inconsistent with USS voting policy or perspective. On such occasions the RI team ignore the recommendation and vote in accordance with the in-house decision. Records regarding the analysis and decision are retained.

The RI team regularly liaise with proxy voting service providers to feedback on the metrics, data points and analysis undertaken to facilitate implementation of USS’s voting and engagement policy.

16.3. Additional information.[Optional]

Further details on voting

For more information on the scheme's approach to voting see:

  • https://www.uss.co.uk/how-uss-invests/responsible-investment/voting

Voting engagement letter

An example letter sent to a company to outline the rationale behind USS's vote at the AGM is provided below.

The letters are sent to the company's chairman, detailing the scheme's vote, departures from corporate governance best practice and USS's expectations from company's - as outlined in USS's UK Voting Policy and Global Stewardship Principles (both available on the web page above). Less detailed rationales and votes are also published on the USS website.

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Example letter from May 2017

Dear Chair

VOTING AT ANNUAL GENERAL MEETING OF XXX INC,  MAY 2017

Universities Superannuation Scheme is the principal occupational pension scheme for universities and other higher education institutions in the UK. The fund is one of the largest pension schemes in the UK, with total fund assets of approximately £57 billion.

The majority of assets are managed in-house by USS Investment Management, a wholly owned subsidiary of USS, authorised and regulated by the FCA.

USS takes seriously its fiduciary obligations to beneficial and institutional members. We aim to be engaged and responsible long-term shareholders of the companies in which we invest and to foster constructive dialogue. Our policies on corporate governance, voting and engagement are available at www.uss.co.uk.

As investors in XXX Inc we have voted at the company's Annual General Meeting on XXX 2017. After careful consideration of the issues and facts available to us at the time of voting, we are writing to explain where we did not support management's recommendations and/or highlight material environmental, social or governance (ESG) issues.

Resolution 1a To re-elect as a director, 1: Against

As noted previously, USS would welcome the appointment of an independent chairman to the board.

Resolution 1b To re-elect as a director 2: Against

We also have concerns regarding the extended tenures of directors 1-6, who have all served on the board for 13 years or longer. We would  welcome refreshment and succession planning to better ensure independent oversight.

Resolution 1c To re-elect as a director 3, : Against

Please see our comment under item 1b above.

Resolution 1e To re-elect as a director, 4: Abstain

We note the cross directorships between director 4 and 7. We have concerns regarding the potential for conflicts of interest to arise and challenges to independence. We would also welcome greater transparency regarding the nominations and appointments process to understand how the board ensures a diversity of skill sets represented on the board.

Resolution 1h To re-elect as a director, 5: Against

Please see our comment under item 1b above.

Resolution 1i To re-elect as a director, 6: Against

Please see our comment under item 1b above.

Resolution 1j To re-elect as a director, 7: Against

We have concerns regarding the director’s aggregate time commitments, given his executive role and additional directorships. We also note the cross directorships highlighted above.

Resolution 2 To ratify the appointment of Ernst & Young LLP as auditors: Against

USS encourages the audit committee consider undertaking a tender process to rotate the company's external auditor. We have concerns that the extended, 20 year relationship with Ernst & Young may negatively impact independence and professional scepticism. We would welcome auditor rotation, in line with international best practice.

Resolution 3 To approve an advisory vote on the remuneration of the Company's named executive

officers: Against

USS is concerned about the relationship between the company's payment practices and the creation of durable shareholder value. We would welcome the introduction of a long-term incentive plan that rewards executives for the achievement of corporate strategy and clawback provisions under all variable pay awards. We are also concerned about the large one-time RSU awards issued during the year which vest without reference to performance.

Resolution 4.03 To set the frequency at which the advisory vote on executive compensation shall

be held to triennially: Abstain

We consider an annual say-on-pay vote encourage better communication between shareholders and directors on compensation issues and strengthens the alignment between pay and performance.

Resolution 5 To adopt the 1997 Stock Incentive Plan: Against

We do not support long-term incentive schemes offered to non-employee directors and consultants and would welcome the introduction of performance conditions for all executive awards.

Resolution 7 To request that the board use sustainability as a compensation performance measure: Shareholder Proposal: For

As outlined above, we expect the inclusion of performance conditions for all variable pay awards. We would welcome the inclusion of sustainability key performance indicators as part of the company's performance measurement used in the determination of executive pay.

Resolution 8 To amend the vote counting practices: Shareholder Proposal: For

USS believes that abstentions should not be counted as votes "against" a proposal as we are concerned that reduced transparency regarding abstentions may misrepresent the results for shareholder proposals. USS would welcome a straightforward vote counting formula that aligns with shareholder expectations.

Whilst we acknowledge an improvement in the company's sustainability reporting, we would welcome greater disclosure around performance against key indicators such as health & safety and emissions. We would also welcome the publication of policy statements relating to the company’s position on material environmental & social issues.

We expect timely reporting of material environmental, social and governance (ESG) data from companies to demonstrate how ESG risks and opportunities are being managed within the business. We also request that this information is refreshed at least on an annual basis and made available to investors ahead of the AGM, so that it can be considered within our review of the proxy materials and integrated into our voting decisions.

 

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LEA 17. Percentage of voting recommendations reviewed (Not Applicable)


LEA 18. Confirmation of votes

New selection options have been added to this indicator. Please review your prefilled responses carefully.

18.1. Describe your involvement in any projects to improve the voting trail and/or to obtain vote confirmation .

          Shareholders use their votes at corporate events as an expression of their support or otherwise for management and business strategy, major transactions, capital raisings and share issuances, as well as governance related matters. It is important that the votes we cast are accurately and efficiently transmitted to issuers.  USS continue to work with our custodians and intermediaries in the voting chain, to ensure the system works as effectively as possible and identify areas for improvement.   For example, we encouraged JP Morgan to develop KPIs with their service provider (Broadridge) earlier this year to monitor vote execution performance.
        

18.2. Additional information. [OPTIONAL]

          In 2016 the scheme implemented a new process for integrating environmental and social issues into its voting decisions.  The scheme’s approach is focussed on company disclosure, with the following key E&S indicators identified: 

• Quality and Timeliness of reporting on corporate social responsibility (CSR) issues 
• Carbon Emissions 
• Fatalities 
• Ethical Business Practices: human rights, child labour and modern slavery
 
This approach is intended to proactively encourage better company disclosure on key E&S indicators ahead of the company AGM.  Without this information investors will not be able to take a holistic approach to assessing company performance.   Integrated reporting cannot be widely adopted without timely reporting of performance against material E&S KPI’S.  Furthermore E&S considerations cannot be integrated into remuneration frameworks to the satisfaction of investors without this disclosure.  

In addition to the original Australian and UK markets, the process was extended to three new markets over the course of 2017:  the US, Canada and Ireland.   In 2018,  we also intend to extend this process to our quantitative funds and companies in Japan, Singapore and Hong Kong.   We will take an automated approach using the service of external research providers. We are also voting companies from outside these markets that have high environmental / social footprints. 

We have analysed the adequacy of the environmental and social disclosure made by 135 companies in 2017 and have included comments (both positive and negative) in letters to 52 companies. In 2018 we expect to vote against the report and accounts of companies where we continue to identify material gaps in their disclosure on environmental and social factors.
        

LEA 19. Securities lending programme

New selection options have been added to this indicator. Please review your prefilled responses carefully.

19.1. Indicate if your organisation has a securities lending programme.

19.3. Indicate how voting is addressed in your securities lending programme.

          USS has adopted an approach where we systematically recall some securities to vote on their ballot items for certain holdings; and we recall some securities to vote on their ballot items on an ad hoc basis for other holdings. However, we are unable to tick both boxes above.

Our policy is outlined below:

To ensure that the scheme is able to vote all its shares at important meetings or where USS is a significant shareholder, USS has worked with service providers to establish procedures to restrict lending for certain stocks and recall shares in advance of shareholder votes. 
- Where we hold 3% or more of the issued share capital of a company, stock is recalled systematically. 
- In other circumstances we monitor the meetings and proportion of stock on loan, and will restrict and/or recall lent stock on a case by case basis, e.g. in the event of a contentious vote or in relation to engagement activities, further to discussion with the portfolio manager. 


This is publicly disclosed within the Scheme's Stewardship Code Statement. See https://www.uss.co.uk/~/media/document-libraries/uss/investments/riactivities/statementonukstewardshipcode.pdf.
        

LEA 20. Informing companies of the rationale of abstaining/voting against management

New selection options have been added to this indicator. Please review your prefilled responses carefully.

20.1. Indicate whether you or the service providers acting on your behalf raise any concerns with companies ahead of voting

          Engagement letters are sent ahead of the vote where possible. We send a letter explaining the rationale behind our votes to all our actively held companies, regardless of their size, index or country of incorporation. An example of the type of letter we send is provided in LEA 16.3. In Japan, we send the letters translated into Japanese.
        

20.2. Indicate whether you and/or the service provider(s) acting on your behalf, communicate the rationale to companies, when , you abstain or vote against management recommendations.

20.3. Additional information. [Optional]

We have analysed the adequacy of the environmental and social disclosure made by 135 companies in 2017 and have included comments (both positive and negative) in letters to 52 companies.  These issues are also followed up in e-mails, calls and meetings.

During the course of the year 255 engagement letters (communicating our voting decision and rationale) were sent to 239 companies.  This was fewer than previous years owing to a greater concentration of the portfolio and consequential decrease in the number of equity holdings in developed markets over recent years.

As a long term shareholder, the voting letters that are sent to USS’s companies are generally a continuation of the engagement from previous years reflecting house views, vote history and engagement meetings.

We meet companies throughout the year and raise concerns about corporate governance issues during these meetings, this often naturally leads to a discussion regarding our voting decision.


Outputs and outcomes

LEA 21. Percentage of (proxy) votes cast

21.1. For listed equities where you and/or your service provider have the mandate to issue (proxy) voting instructions, indicate the percentage of votes cast during the reporting year.

Votes cast (to the nearest 1%)

98 %

Specify the basis on which this percentage is calculated

21.2. Explain your reason(s) for not voting certain holdings

          USS does not vote holdings sold between the record date and the date of the shareholder meeting (i.e. we avoid empty voting).
        

21.3. Additional information. [Optional]


LEA 22. Proportion of ballot items that were for/against/abstentions

22.1. Indicate if you track the voting instructions that you and/or your service provider on your behalf have issued.

22.2. Of the voting instructions that you and/or third parties on your behalf issued, indicate the proportion of ballot items that were:

Voting instructions Breakdown as percentage of votes cast
For (supporting) management recommendations
Against (opposing) management recommendations
Abstentions
100%

22.3. Describe the actions you take in relation to voting against management recommendations.

          Please see our response under LEA 15.4 and 20.3
        

22.4. Additional information. [Optional]

In the twelve months ending December 2017, USS voted on 6,909 resolutions at 545 events at 472 companies (2016: 7,580 resolutions at 623 events at 521 companies).  

USS supported:

  • 38% of remuneration resolutions (44% in 2016)
  • 61% of auditor appointments (69% in 2016)
  • 52% of sustainability focussed resolutions (59% in 2016)
  • 40% of shareholder resolutions (45% in 2016)

USS voted “against” management’s recommendation on at least one resolution at 425 (90%) of companies (87% 2016).  Dissenting votes and comments for the engagement letters are discussed in advance with the relevant portfolio manager(s).

A letter outlining changes to USS’s UK voting policy was also sent to over 50 UK portfolio companies ahead of the proxy season (see SG 06.1)

With regard to the guidance note on abstentions, we are unable to identify where an abstention vote should be counted as a vote against.

Engagement letters are sent to companies ahead of the meetings in most instances, and translated into Japanese for our Japanese holdings. The letters detail the rationale behind our voting decisions, encourage improvements, and provide introductory information on USS’s approach to stewardship. Over the year, 255 engagement letters were sent to 239 companies (347 letters to 339 companies in 2016).


LEA 23. Shareholder resolutions

New selection options have been added to this indicator. Please review your prefilled responses carefully.

23.1. Indicate if your organisation directly or via a service provider filed or co-filed any ESG shareholder resolutions during the reporting year.

23.2. Indicate the number of ESG shareholder resolutions you filed or co-filed.

1 Total number

23.3. Indicate what percentage of these ESG shareholder resolutions resulted in the following.

Went to vote
Were withdrawn due to changes at the company and/or negotiations with the company
Were withdrawn for other reasons
Were rejected/not acknowledged by the company
Total 100%

23.4. Of the ESG shareholder resolutions that you filed or co-filed and that were put to vote (i.e. not withdrawn) how many received:

>50%
50-20%
<20%

23.5. Describe the ESG shareholder resolutions that you filed or co-filed and the outcomes achieved.

USS nominated its own candidate for supervisory board membership.  This resolution was ultimately withdrawn when the firm put forward their own candidate who was acceptable.

23.6. Describe whether your organisation reviews ESG shareholder resolutions filed by other investors.

We give careful consideration to all shareholder resolutions including those related to environmental and social issues.  USS supported 40% of shareholder resolutions in 2017.

We pre-disclosed voting intentions for Charles Schwab, Exxon, Pioneer and Occidental.

23.7. Additional information. [Optional]


LEA 24. Examples of (proxy) voting activities

New selection options have been added to this indicator. Please review your prefilled responses carefully.

24.1. Provide examples of the (proxy) voting activities that your organisation and/or service provider carried out during the reporting year.

ESG Factors
ESG issue
Conducted by
Objectives
Scope and Process
Outcomes
ESG Factors
ESG issue
Conducted by
Objectives
Scope and Process
Outcomes
ESG Factors
ESG issue
Conducted by
Objectives
Scope and Process
Outcomes
ESG Factors
ESG issue
Conducted by
Objectives
Scope and Process
Outcomes
ESG Factors
ESG issue
Conducted by
Objectives
Scope and Process
Outcomes
ESG Factors
ESG issue
Conducted by
Objectives
Scope and Process
Outcomes
ESG Factors
ESG issue
Conducted by
Objectives
Scope and Process
Outcomes
ESG Factors
ESG issue
Conducted by
Objectives
Scope and Process
Outcomes

24.2. Additional information. [Optional]

See answer to LEA 18.2 for an explanation as to how USS has integrated environmental and social decisions into voting.


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