Fiduciary Duty under the Microscope: Stewardship and the Spectrum of Pension Fund Engagement
| Date | 01 May 2019 |
| Author | Anna Tilba,Arad Reisberg |
| Published date | 01 May 2019 |
| DOI | http://doi.org/10.1111/1468-2230.12413 |
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Modern Law Review
DOI: 10.1111/1468-2230.12413
Fiduciary Duty under the Microscope: Stewardship and
the Spectrum of Pension Fund Engagement
Anna Tilba∗and Arad Reisberg
UK pension fund trustees’ interpretations of their fiduciary duties may shape pension fund
approaches to corporate stewardship and engagement envisioned bythe UK Stewardship Code.
Data from interviews with pension fund trustees, executives, investment intermediaries and
pensions experts reveals interpretive pluralism of the concept of fiduciary duty in the area
of pension funds. This article develops a model identifying the spectrum of pension fund
engagement, linking interpretations of fiduciary duty to intensity and methods of engagement
in practice. The findings help disambiguate the concept of ‘Fiduciary Duty’, highlighting the
practical challenges of Stewardship Code application. These insights are relevant to the ongoing
revisions of the Stewardship Code and policy clarifications of the nature of fiduciary duty by
the UK Financial Conduct Authority. The paper encourages trustees, regulators and others to
consider what role pension fund trustees should have in stewardship, which may not be directly
relevant to their fiduciary duties as trustees.
INTRODUCTION
Institutional investors1are said to be pivotal to two vital dimensions of mod-
ern capital markets, firstly for the value of public corporations they own, and
secondly, for the financial security of savers who invest through them. Reg-
ulators count on institutional investors to help police the market against the
risk of either repeat systemic crimes and fraud or CEO pay rising. Yet, in
the wake of the Financial Crisis of 2007–2008 institutional investors were
∗Associate Professor in Strategy and Governance, Durham University Business School, Durham.
The authors wish to thank the reviewers for their helpful comments and feedback. We also wish
to thank the following colleagues for their comments on earlier drafts of this paper: Luca Enriques,
Dionysia Katelouzou, Jonathan Rushworth, EdwardWalker-Arnott and Con Keating. Special thanks
go to Deborah Sabalot for her legal expertise in financial services, regulatory and compliance issues,
particularly in relation to trustee fiduciary duties and for her in-depth and constructive comments
and feedback on the crucial final revision of this article.
1 The UK Stewardship Code defines ‘institutional investors’ as asset owners and asset man-
agers with equity holdings in UK listed companies. Asset owners are defined in the Code
to include pension funds, insurance companies, investment trusts and other collective invest-
ment vehicles. As the providers of capital, asset owners set the tone for stewardship and may
influence behavioural changes that lead to better stewardship by asset managers and compa-
nies. Asset managers as defined as those with day-to-day responsibility for managing invest-
ments on behalf of the asset owners and are in a position to influence companies’ long-term
performance through stewardship, Financial Reporting Council, The UK Stewardship Code,
September 2012 2, para 2 and 1, para 6 at https://www.frc.org.uk/getattachment/d67933f9-
ca38-4233-b603-3d24b2f62c5f/UK-Stewardship-Code-(September-2012).pdf (last accessed 14
January 2019) (Stewardship Code).
C2019 The Authors. The Modern Law Review C2019 The Moder n LawReview Limited. (2019) 82(3) MLR 456–487
Published by JohnWiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 101 Station Landing, Medford, MA 02155, USA
Anna Tilba and Arad Reisberg
repeatedly blamed for being part of the problem that lead to the market crash.
In particular, their passivity, lax engagement and disinterest in exercising proper
oversight of their investee companies were heavily criticised.2In the aftermath
of the crisis and the governance reviews that followed,3the concept of a ‘Fidu-
ciary Duty’ was hastily (and perhaps inappropriately) put forward as a legal
and practical platform that could guide the development of institutional in-
vestor practices, particularly those relating to extending the stewardship role
vis-a-vis investee firms.4The success of this approach was dependent to a
great extent on the many investors such as asset managers, insurance compa-
nies and pension funds to be actively engaged with the companies. From this
perspective, the diligent exercise of shareholder stewardship5became essential
to reinforce the ‘comply or explain’ effects of the UK Corporate Governance
Code.6
Although no longer the largest group of investors in the UK market, pen-
sion funds7are considered both by scholars and policymakers to be partic-
ularly significant for stewardship because of their ‘patient capital’, which is
designed (in theory) to generate returns for their beneficiaries over the longer
term.8However, a host of barriers seem to prevent all but a handful of funds9
from meeting the expectations placed on them as ‘owners’ of public corpora-
tions. Alongside the more obvious barriers such as dispersed share ownership
and the associated problems of co-ordination, management and control, free-
rider problems10 and other problems of diversification, rational apathy and
2 A. Reisberg, ‘The UK stewardship code: On the road to nowhere?’ (2015) 2 Journal of Corporate
Law Studies 217.
3 For the overviewof the development of the Stewardship Code,see B. Cheffins, ‘The Stewardship
Code’s Achilles’ Heel’ (2010) 73 Modern Law Review 1004, and Reisberg, ibid.
4 J. Hawley, A. Hoepner, K. Johnson, J. Sandberg, and E. Waitzer ‘Cambridge Handbook of
Institutional Investment and Fiduciary Duty’ (Cambridge: Cambridge University Press, 2014);
Stewardship Code n 1 above; J. Kay, The Kay Review of UK Equity Markets and Long-Term
Decision Making (London: Department for Business, Innovation and Skills, July 2012) (The Kay
Review) at http://www.bis.gov.uk/assets/biscore/business-law/docs/k/12-631-kay-review-of-
equity-markets-interim-report.pdf (last accessed 14 January 2019).
5 The Code defines ‘stewardship’ as follows: ‘For the investor, stewardship aims to promote the
long-term success of companies in such a way that the ultimate providers of capital also prosper.
For investors, stewardship is more than just voting. Activities may include monitoring and
engaging with companies on matters such as strategy, performance, risk, capital structure, and
corporate governance, including culture and remuneration. Engagement is purposeful dialogue
with companies on these matters as well as on issues that are the immediate subject of votes at
general meetings.’ Stewardship Code ibid,1,para4.
6 Reisberg, n 2 above.
7 Davies indicates that the beneficial share ownership of UK equities by pension funds hassteadily
been decreasing from the peak of 31.7% in 1993 to only 4.7% in 2012. P. Davies, ‘Shareholders
in the United Kingdom’ (2015) ECGI Working Paper Series in Law 27.
8 L. Ryan and M. Schneider, ‘The Antecedents of Institutional Investor Activism’ (2002) 27
Academy of Management 554; S. Davis, J. Lukomnik and D. Pitt-Watson, ‘The New Capitalists:
How Citizen Investors are Reshaping the Corporate Agenda’ (Boston, Mass: Harvard Busi-
ness School Press, 2006); R. Martin, P. Casson and T. Nisar, Investor Engagement: Investors and
Management Practice Under Shareholder Value (Oxford: OUP, 2007); The Kay Review n 4 above.
9 It should be noted here that, if constituted as a tr ust the pension fund is not a separate legal
person but only acts through its trustees.
10 Martin, Casson and Nisar, n 8 above; A. Sch¨
afer and U. von Arx, ‘The Influence of Pension
Funds on Corporate Governance’ (2014) 46 Applied Economics 2316.
C2019 The Authors. The Modern Law Review C2019 The Moder n LawReview Limited.
(2019) 82(3) MLR 456–487 457
Fiduciary Duty under the Microscope
informational deficit11 have also been pointed out. The long chain of interme-
diaries from ultimate beneficial interests through to the investee company also
represent a significant barrier to engagement.12
In the context of the FRC’s ongoing review of the UK Corporate Gov-
ernance Code13 and the Stewardship Code,14 it seems that the commitment
to these general principles may be easier to achieve at a theoretical level than
in practice. Various commentators and regulators have asked why sharehold-
ers have not exercised more control over investee companies. Lord Myners
(then the Financial Services Secretary to the Treasury) described institutional
investors as ‘absentee landlords’ and stated that institutional investor inactivity
had contributed to what he termed the ‘ownerless corporation’.15 An OECD
Report in February 2011 on the contributing causes of the global financial cr isis
concluded that institutional investors were generally not effective in monitoring
investee companies.16 At present, companies like BHS, Carillion, which has
13 pension schemes, GKN (with the hostile takeover bid by Melrose) British
Steel/Tata, and Toys R Us, lead to questions being asked about the moni-
toring role of the pension trustees and the Pensions Regulator, particularly in
light of increasing pension deficits and yet continuous dividend payments to
shareholders.
A number of scholars have begun to question the effectiveness of the UK
Stewardship Code itself arguing that it lacks the capacity to achieve its goals.17
Active pension fund trustees’ involvement in corporate governance thus
appears more assumed than demonstrated, while the motivations behind these
contrasting approaches to equity ownership necessitate further investigation.
Despite reforms and continuous development of best practices in corporate
governance, little attention has been placed specifically on the governance
of pension schemes. While good pension scheme governance is, indeed,
11 Reisberg, n 2 above.
12 J. Rhee,‘Shor t-Termism of Institutional Investors and the DoubleAgency Problem’ HLS Forum
on Corporate Governance and Financial Regulation 9 May 2013 at https://corpgov.law.harvard.
edu/2013/05/09/short-termism-of-institutional-investors-and-the-double-agency-problem/
(last accessed 17 January 2019), A. Tilba and T. McNulty, ‘Engaged versus Disengaged
Ownership: The Case of Pension Funds in the UK’ (2013) 21 Corporate Governance: An
International Review 165; A. Tilba and J. Wilson, ‘Vocabularies of Motive and Temporal
Perspectives: Examples of PensionFund Engagement and Disengagement’ (2017) Br itish Journal
of Management 11.
13 FRC, Proposed Revisions to the UK Corporate Governance Code, December 2017
at https://frc.org.uk/getattachment/f7366d6f-aa57-4134-a409-1362d220445b/;.aspx (last ac-
cessed 12 March 2018).
14 FRC, The Annual Reviewof Cor porate Governanceand Repor ting 2017/2018, October 2018
at https://www.frc.org.uk/getattachment/f70e56b9-7daf-4248-a1ae-a46bad67c85e/Annual-
Review-of-CG-R-241018.pdf (last accessed 14 January 2019). Stewardship Code n 1
above.
15 Lord Myners, ‘Association of Investment Companies’ April 2009 at http://webarchive.
nationalarchives.gov.uk/20091207163737/http://hmtreasury.gov.uk/speech_fsst_210409.htm
(last accessed 7 April 2018).
16 OECD,The Role of Institutional Investors in Promoting Good Corporate Governance (OECD
Publishing, 2011) 9.
17 Cheffins, n 3 above; D. Arsalidou, ‘Institutional Investors, Behavioural Economics and the
Concept of Stewardship’ (2012) 6 Law and Financial Market Review 410; Reisberg, n 2 above;
Tilba and Wilson, n 13 above, 13.
458 C2019 The Authors. The Modern Law Review C2019 The Moder n LawReview Limited.
(2019) 82(3) MLR 456–487
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