Campaign group Fair Pensions has called for existing corporate legislation covering directors’ responsibilities to be the model for clarifying institutional investors’ fiduciary responsibility and free them up to take account of responsible investment.
“Is there a way to free trustees (and other fiduciary-like institutional investors) to consider the wider impacts of their actions whilst preserving the primacy of the beneficiaries’ interests?” a major new report from the group asks. “Section 172 of the Companies Act 2006 provides one possible model for such a move.” The Act requires company directors to ‘have regard’ to the longer-term and the wider consequences of their decisions. Fair Pensions wants the Department of Business to introduce a “parallel” provision for institutional investors, arguing a section 172-style wording could preserve the primacy of fiduciaries’ duty to their beneficiaries while recognising that beneficiaries’ long-term interests may often be best served by an “enlightened approach”.
The report – Protecting Our Best Interests; Rediscovering Fiduciary Obligation – even includes a draft of what the provision for fiduciary investors could look like as a basis for further discussion.
The changes would provide “a clear and substantive standard against which to hold decision-makers accountable”. Indeed, Fair Pensions, which campaigns for major institutional investors to adopt responsible investment, says it’s paradoxical that no provision like this been applied to institutional investors before, given that the Act is based on the idea of ‘enlightened shareholder value’.Many funds, it reckons, “wrongly invoke fiduciary duty to justify a refusal even to consider a non-financial issue”.
The group is to launch the 140-page report at an event in London this evening (March 30) – with Corporate Governance Minister Ed Davey as the keynote speaker.
The report takes a swipe at the voluntary Stewardship Code for institutional investors, saying its “focus is almost exclusively procedural, and avoids laying down any objective provisions as to how investors should exercise their ownership rights”.
The report also calls on the government to force investors to disclose their voting if voluntary initiatives fall short. “They should also explore other ways of improving transparency and accountability among institutional investors,” it says.
It wants a fundamental “cross-departmental” review of investors’ fiduciary obligations to make sure the concept is still relevant.
Among other points in the blockbuster study is a call for the government to “remind” asset managers of their fiduciary status. And it wants ministers to “confirm that investment consultants are fiduciaries in relation to their clients and work to ensure that these obligations are understood and applied in practice”.
It wants consideration of how to embed “appropriate incentives” in investment mandates, e.g. by incorporating longer-term performance measures apart from just performance relative to benchmark.
“Our overarching conclusion is that the government must conduct a review of investors’ fiduciary obligations.”