Johannesburg - In 1982, Arthur Scargill, who at the time was president of the National Union of Mineworkers in the UK, objected to certain aspects of the new investment plan introduced by the Mineworkers' Pension Scheme.
On behalf of the union's five trustees to the scheme, Scargill objected to the overseas investments and called for a prohibition on overseas investment in "energies, which are in direct competition with coal".
The five union trustees claimed that they were acting on behalf of the scheme's beneficiaries and that their position had received unanimous approval from the union membership.
The five trustees representing the National Coal Board (NCB), which was the employer in this instance, responded by alleging that the union trustees were in breach of their fiduciary duty because their objections to the new investment plan were not based on financial criteria.
The matter ended up in court, where the judge ruled in favour of the NCB. In his findings, the judge noted: "When the purpose of the trust is to provide financial benefits for the beneficiaries, as is usually the case, the best interests of the beneficiaries are normally their best financial interests."
The case, Cowan v Scargill, became one of the leading law cases dealing with the power of trustees to make socially responsible investments.
It is dealt with extensively in a report by the Canadian Shareholder Association for Research and Education, which tracks the development of the law on pension funds attempting to adopt more socially responsible investment profiles.
The report, written by Gil Yaron and titled The Responsible Pension Trustee, is essential reading for anyone looking into plans by our own union movement to become more active in the management of the hundreds of billions of rands of investments held by the various labour-related funds.
The National Labour and Economic Development Institute, the Cosatu think-tank, is believed to be looking at ways in which the asset managers who are responsible for investing union-related funds can introduce a new dimension to the investment process.
William Frater of Frater Asset Management says this initiative represents an opportunity to develop a more enlightened approach to shareholder value. "The unions represent long-term beneficiaries so their involvement could help to change the current obsession with the short term."
To this end, active shareholder involvement by the unions could help to promote the more enlightened version of capitalism that Jabu Moleketi, the deputy finance minister, seems keen to encourage.
But as Frater points out, it will not just be a matter of the unions pursuing a labour agenda in their investment strategy. The unions and any asset managers acting for them are required to be prudent and also to consider the interests not just of current employees but of all members of the funds.
Yaron's thought-provoking report highlights the many difficulties that face trustees who want to assume a more active shareholder role. These difficulties stem from two legal principles - prudence and loyalty.
The principle of prudence dates back to the 18th century investment scandal known as the South Sea Bubble, which resulted in investors losing fortunes. The principle includes "the duty to obtain a reasonable rate of return on investment; the duty to maintain an adequate diversity of investments; and the duty to obtain proper investment advice where necessary". Yaron notes that to date socially responsible institutional investment has been discouraged on the grounds that it violates these duties.
The principle of loyalty includes the "duty to act honestly and in good faith, and in the best interests of the beneficiaries, treating all beneficiaries with an even hand; and the duty not to allow one's personal interests to conflict with those of the beneficiaries". With regard to loyalty, Yaron argues that the "best interests of beneficiaries" has been interpreted as being their financial interests.
He notes that although most jurisdictions do not explicitly restrict consideration of non-financial investment criteria by pension trustees, the legal uncertainty surrounding this has resulted in trustees being reluctant to consider non-financial criteria.
Yaron does not say as much but it is possible that Scargill lost his case because it was ineptly argued and not because the judge necessarily felt Scargill's objections represented a breach of his fiduciary duty to the beneficiaries of the scheme.
The judge allowed that a trustee could consider non-financial interests where it was in the best interests of the beneficiaries. However, it seems that Scargill, who argued his own case, provided no explanation of why his prohibition would be for the benefit of the beneficiaries.
It is also significant that the beneficiaries in this case were all the members of the scheme, which includes current as well as retired mine workers.
Scargill had to demonstrate that the prohibition would benefit all of the scheme members and not just the current union members. Yaron expresses considerable disappointment with the judgment.
"Despite inconsistencies and weaknesses in the judgment, the decision has been adopted and reiterated in publications as the indisputable authority for the narrowest interpretation of the duties of prudence and loyalty ...
Taken as a whole, the decision appears to assert that a trustee may invest in alternative investments provided that they provide a commensurate rate of return and ensure adequate diversification."
Yaron also makes the point that Scargill's case was weakened by his focus on general ideology and his lack of balanced legal argument.
In the years since this judgment, Yaron's research shows that the courts have indicated that the duties of pension trustees are flexible and open to interpretation. However, due to the absence of clear legislative or judicial authority, trustees and the investment community have tended to apply a rigid interpretation of "the best interests of the beneficiaries" as being their financial interests.
Yaron advocates a broader interpretation. He notes that, in the years since that ruling, "the attitudes of beneficiaries have evolved and are far more sophisticated than they were previously.
It can no longer be said that the best interest of beneficiaries is to maximise the return on investments at any costs."
He cites the results of recent opinion polls that reveal that a significant number of beneficiaries do not view financial returns as their primary interest.
He also argues that there is "an increasingly evident interrelationship between corporate practices, and social and environmental issues in our shrinking global environment and that this is rapidly changing the scope of what is included in 'prudent' investment considerations".
One only has to consider executive remuneration to see that corporate practices do have a wider social impact.