Some Introductory Thoughts - Robert A.G. Monks - 15/3/97

The United States Department of Labor ("DOL") has responsibility for defining the scope of appropriate concern for the trustees of the country’s private pension systems. DOL policy is also thought to be binding on the various state and local pensions. While the DOL definition of fiduciary responsibility has no legal implication for mutual fund or private trustees, its seasoned statements cannot lightly be ignored by any trustee. In the aggregate, the pension systems hold in excess of 30% of the entire equity holdings of the country; institutional investors hold more than 50% and average 65% of the top 1000 companies.

DOL has developed four main policies since 1984:

First - ownership rights and responsibilities (including the right to vote shares) are "plan assets" and, therefore, must be prudently managed in the same way as more familiar trust holdings;

Second - this responsibility extends to pension fund holdings of securities in companies chartered outside the United States;

Third - in exercising ownership responsibilities, trustees must take into account all factors that appertain to long term value maximization; and

Fourth - the trustees are encouraged to consider the whole range of impacts that corporations have on society - particularly their policies with respect to employees - but only so far as such is in aid of long term profit maximization - exclusively for the benefit of plan participants. The trustees owe fiduciary responsibility solely for the beneficiaries of pension plans.

Because of the size of the American system, the increasing predisposition of trustees to invest in equity securities outside the country and the rather indifferent exercise of franchise by foreign shareholders, DOL policies are of extreme importance to all publicly held companies world wide. It is well to reflect that until the most recent times no more than a quarter of the shareholders of UK companies would vote at AGMs. American holdings, therefore, could well constitute an effective majority of those participating.

Government involvement has been most important in requiring a standard for fiduciary ownership. What this standard is to be and how it is to be implemented remains entirely a matter for the private fiduciary. It is noteworthy that alongside the much discussed proliferation of trans national corporations there is occurring a somewhat belated - and far less well noted - emergence of multi national fiduciaries who hold stocks and have ownership rights / responsibilities in companies all over the world. Perhaps the best known is the Public Employees’ Retirement System of the State of California (CalPERS). As the pattern of funded pension systems spreads across the OECD world, we can contemplate institutional investors in each country having the characteristic of being universal owners of the largest public companies for an indefinite period of time. One can begin to think in a precise way about the long term interests of shareholders when we realize that such a large proportion of the whole is held for the account of hundreds of millions of pensioners having a need to retire in a clean, civil, well-policed world.

There were proposals in the 1996 Congress, notably by Senators Bingaman and Kennedy, to involve the government more directly in corporate functioning. Each proposed a set of governmentally defined standards (and presumably the new agencies and adjudicators to define and administer them) in areas of employment, job creation, research expenditures, export efforts and the like with tax incentives for those companies that comply. Last November’s election results have been interpreted as being hostile to larger government, so there is little chance of these Congressional initiatives being enacted. However, a downturn in business and stock market levels coupled with such causus belli as the highest executive pay levels recorded at any time in man’s history on the planet could stimulate a renewed call for government action.

The American lesson has been consistently one of benefiting from market forces with the government’s role limited to setting standards. Even the most convinced Friedmanite is content with government involvement that encourages desired conduct by removing disincentives. This is the situation with pension fund activism. The celebrated consulting firm McKinsey in its 1996-4 Quarterly announced the results of a survey of institutions and corporate CEOs that indicated agreement as to the value of owner involvement and an estimate that such was worth an 11% premium to market value. With the carrot of increased value and the stick of government attention, we can expect that institutional investors will become more involved in the functioning of portfolio companies in the future.