Tuesday, April 19, 2011
The Appearance of Reality: Trustees
This is the fourth post in my effort to clarify corporate governance terms that now seem misleading to me. We all know what these words mean in a literal sense but in the context of governance, of business and of our post-crash world do they still mean the same thing?
I look forward to your comments.
Trustees
It’s likely that a majority of the voting shares of all publicly traded companies are held by “trustees” – legal creatures with the obligation to responsibly manage trust property for “the exclusive benefit [ERISA terminology]” of “plan participants”. The ancient, unchanging and inveterate requirement of trust law and practice is that the trustee is not permitted to serve its own objectives when they are in conflict with those of trust beneficiaries.
With a few rare and honorable exceptions, trustees – including universities, foundations and even the most enlightened corporations’ pension funds – deliberately decline to take steps as activist shareholders. There is no recorded judicial effort to enforce trust principles; there has been no action by regulators; there has not been any derivative litigation on behalf of the beneficiaries.
What this means is that mutual funds, employee benefit plans and other relationships styled as trusts are trusts in name only, and not in substance. A trustee who actively pursues the interests of their beneficiaries is in a precarious position. Good guys can’t be good because they’re at a competitive disadvantage. So we’re left with layers of conflicts. Among them:
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When the trustee is a member of a conglomerate group, pursuing beneficiary interest could put them into conflict with their parent company. If the fiduciary portfolios include tradable shares from other parts of the conglomerate, how do you proceed? On behalf of the beneficiary or the parent company?
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When university or foundation trustees also represent companies in the trust portfolio, which interest takes priority? Engaging such a company raises questions of comity and collegiality within the board and can make for difficult relationships.
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There has long been a rumored “Golden Rule” for ERISA plans: “You leave my company alone and our pension plan will leave your company alone.” Whether or not this is hyperbole, there has never been a recorded case of activism by an ERISA plan. When a trustee is serving as fiduciary for a company employee benefit plan, he might well be acting contrary to the commercial interest of the sponsor company (company whose employees join the plan) by raising questions about the management of companies in the pension portfolio.
So long as these important institutional investors can ignore legal fiduciary obligation with respect to portfolio companies, this significant block of shares is effectively sterilized. And, because entire categories of investors decide not to participate, they succeed in trivializing those who do. As a result, critics of shareholder involvement can claim that only a limited group of shareholders are active and that their perspective is skewed.
Here are my questions:
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Is the involvement of informed, motivated and empowered owners essential for the protection of the ultimate beneficiaries?
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Should trustees be permitted – because of lack of enforcement – to ignore their legal duties of management and acquiesce in management conduct?
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Should the obligation of trustees to act be enforced? And, if so, how should they be enforced?
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By the judicial system
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By regulatory authorities – the FSA in the UK, the SEC, DOL in the US
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By private litigation.
April 19, 2011 in accountability
, fiduciary duty
, institutional investors
, Pension
, trustees
, Disinformation
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6 comments |
The outrage is that Foundation trustees, along with university fiduciaries, charged solemnly with fiduciary obligations, should feel free not to act as stewards of portfolio companies. Alan Greenspan represented the conventional wisdom: The extent of the problem was glaringly evident in a 2002 speech Alan Greenspan delivered at NYU's Stern School of Business. "After considerable soul-searching and many congressional hearings, the current CEO-dominant paradigm, with all its
faults, will likely continue to be viewed as the most viable form of corporate governance for today's world. The only credible alternative is for large - primarily institutional - shareholders to exert far more control over corporate affairs than they appear to be willing to exercise."28 The emphasis is mine, added to demonstrate Greenspan's
confusion of a legal obligation with something a trustee can freely choose not to do. That one of the nation's most respected and powerful economists is seemingly content to allow fiduciaries to shirk their inveterate obligations clearly states the current level of neglect. In the absence of shame, a judicial or agency enforcement action will be
necessary to require fiduciary involvement in corporate governance.