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UNDERSTANDING PENSION FUND CORPORATE
ENGAGEMENT IN A GLOBAL ARENA
Oxford
– November 2002
Session
Four
How
do national laws shape the kinds of engagement that can occur? Can corporate
engagement using internal levers of power accomplish broad socially optimal
outcomes more effectively than outside pressure groups and state-level
regulation? The failure of the
United States and United Kingdom governments to enforce the law of trusts
respecting the conflicting interests of institutional investors has effectively
warped the scope of corporate engagement. The pension funds of private
companies, the largest and most experienced component of the category, do not
participate in corporate activism. Perhaps the most experienced observer of the
sub industry in the United States, James E. Heard, now CEO of Institutional
Shareholder Services (“ISS”), “is not aware of a single corporate pension
fund that has become a governance activist.” [Fortune, Marc Gunther, 22 June 2002]. This severe skewing of the
pension fund universe has several consequences. Because only a fraction of the
total institutional investor universe actually practices “engagement”, their
activity inevitably is trivialized. Because the private company pension funds
are allowed not to participate, the existing activity can be dismissed as the
concern of theoreticians and of those without enough experience of real business
to be worth listening to. While the participants are respected institutions,
they are not The President and Fellows of Harvard College, the Ford Foundation,
The Trustees of the Wellcome Trust or of Cambridge University. The “great and
the good” are not players in either country. There are several
explanations for their inactivity. Certainly the most persuasive explanation is
that they face a huge conflict of interest. They are hired by corporate
executives to manage the pension assets. If they take an aggressive approach
with any portfolio company’s management, then they probably won’t be
retained to manage their assets for very long. Indeed, it is unlikely that they
would be hired to manage any firm’s assets. I have attached a chart entitled
“The Golden Rule” which shows the pervasive circular logic through which
private pension assets are in effect removed from engagement participation. A
fiduciary wishing to “engage” runs the risk of virtually certain competitive
reprisal. Until and unless such a fiduciary can explain to his superiors and his
customers that he is only doing what is plainly required by law and that all
other companies similarly situated (his competitors and potential competitors)
have no choice but to do the same thing, such action will not be rational. By and large, the
fiduciaries of private company pension plans are conglomerate financial
organizations which have (or want to have) multiple relationships with the
companies showing shares they hold in pension portfolio. With respect to U.S.
pension funds, ERISA requires as plainly as the language permits that plan
assets be administered exclusively for
the benefit of plan participants. (Emphasis added). Enforcement of this precept
of law clearly would require rearrangement of existing and hugely profitable
commercial alignments. The U.S. Department of Labor declines to enforce this law
and the United Kingdom has recently deferred full implementation of the Myners
Report, which plainly required institutional activism. What has resulted is that
only those institutions without conflict of interest can participate in the
engagement process in both countries. Many choose not to do so. This is, in fact,
a very short list. The Public Employees’ Retirement System of California, the
pension funds for the City of New York and the College Retirement Equity Fund in
the United States and Hermes and the Universities Superannuation Scheme in the
United Kingdom have provided the preponderance of activity. There are many
ways in which the law could be enforced with respect to conflicting interests
without requiring massive institutional rearrangement. Special purposes entities
could be created or responsibility could be selectively delegated. An example is
the delegation by Hewlett Packard board member Patricia Dunn of the voting
responsibility of Barclay’s Global Asset Management, of which she is Chief
Executive officer, to an independent fiduciary in the recent contested merger
vote with Compaq. The portion of law
in each country conferring power on shareholders importantly informs the scope
of engagement policy and practice. Some overgeneralization may be helpful. Only
in the United Kingdom do shareholders enjoy real power to influence management.
Under The Companies Act, ten percent of the shareholders of a UK company may
call an Extraordinary General Meeting (“EGM”) at which any or all of the
directors may be removed with or without cause. Because of the homogeneity of UK
financial institutions, this means that any one of perhaps forty institutions
has it within their power actually to change the management of companies of all
sizes. Shareholders are not conferred this power under the laws of any of the
United States. Ownership power is limited to exhortation and “name and
shame”. Because of the actual ability of shareholders of UK companies to
require “engagement”, it is possible that corporations chartered there will
assume a different – and possibly more competitive character – than those
chartered elsewhere. The ethical
responsibility of corporations is spacious compliance with law and the adoption
of practices to insure its integrity. This includes full public disclosure of
the impact of corporate functioning on society and the avoidance of corrupting
the law making and enforcement processes. That corporations’ ethical concerns
should be fully circumscribed by compliance with law is a compelling proposition
first articulated by David Engel in 32 Stanford Law Review 1 (1979). Democratic
societies very carefully limit how and to whom they confer power to impact the
lives of citizens. One certainly needs to question what authority corporations
have to make judgments affecting the circumstances – environmental, for
example – under which we live. I, for one, have not consented to Exxon
determining the quality of the air I breathe. Robert A.G. Monks |