Analysis: Clarity on fiduciary duty a possible outcome of the Kay Review

It is looking increasingly likely that a high-level review of the concept of fiduciary duty could be a tangible outcome of the UK government-backed review of short-termism and equity markets conducted by Professor John Kay.

As Business Secretary Vince Cable told a fringe meeting at the annual conference of governing coalition partner the Liberal Democrats last month, while the Review was “almost totally devoid” of new regulatory proposals one area that could be clarified is fiduciary duty. This is the somewhat nebulous concept that has been blamed for preventing pension funds fully engaging with investee companies.

Indeed, Kay told Responsible Investor in an interview in August that he was surprised that people hadn’t made more of his proposal. He argues that clarity on fiduciary duty could help to remove obstacles, perceived or otherwise, to more engaged investment.

Sources close to the LibDems say the party, the government’s junior partner, are pushing to get a review under way. However, it’s believed that the body which looks at legislation, the Law Commission, could take up to five years to conduct a review. Professor Kay’s suggestion to review the fiduciary concept followed a campaign by pressure group Fair Pensions.
In March this year it organised a letter in The Times newspaperfrom a group of leading investors, campaigners and academics calling for legal clarity.
They argued that a misguided interpretation is forcing institutional investors to focus solely on maximising short-term returns and ignore “anything that cannot immediately be monetized”.
Trustees have been influenced by the 1985 Cowan v Scargill legal case and others, which turned on trustees’ discretion to make investments for the benefit of their members.

Another topic raised by the Kay Review is the issue of multiple share classes. This, as the economist acknowledges, is opposed by the institutional establishment, though he suggests it should be under “continued review and discussion”. Indeed, some major investors reckon it might be time to re-visit the issue, given the success of dual-class shares in Sweden, for example.

Cable told the meeting, which was organised by the Social Market Foundation think tank, that he hasn’t “closed that question” yet in his own mind.

Although some observers reckon the focus on fiduciary duty is a red herring – and the ‘shareholder spring’ this year showed that investors are increasingly willing to show their hand – any and every development which removes barriers to responsible investment must surely by welcomed.