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home » case studies » case 4 Case 4
The Case
This case concerns socially responsible investment by the City of Edinburgh District Council. The plaintiff - the director of finance on the council - accused a number of trustees of breaching their fiduciary responsibilities in withdrawing investments from all South African companies without first considering the interests of the beneficiaries and acquiring professional advice. The defendants claim that advice was sought and the interests of the beneficiaries were paramount in their decision. Facilitator’s Notes
The Players
The trustees of the City of Edinburgh District Council were responsible for the disbursement and investment of 58 trust funds that had a total market value of 2,252,999 pounds. In May 1984 the Labour Party won a majority of the council seats and immediately took steps to have the policies on which they were elected adopted and implemented by the trustees. One such policy that was broadly supported by the public was withdrawing all investments from South African companies to reflect their disapproval of apartheid. The trustees met numerous times in the following months and passed recommendations calling for a report on how best to withdraw council investments from South Africa. In response, the director of finance reminded the trustees of their duties, including the need for diversification and the need to obtain and consider proper advice. The trustees called upon the expertise of their stockbrokers to report on their investments in South Africa and propose alternative investments opportunities. Based on this advice, the trustees withdrew their investments from South African companies and reinvested, resulting in the fund’s assets actually increasing in value. As the plaintiff in this case, you are arguing that the trustees have breached their fiduciary responsibilities to the beneficiaries of the funds. Specifically, you are making three claims: First, the trustees failed to consider whether it would be in the best interests of the beneficiaries of the fund to withdraw investments from South Africa. Second, the trustees did not seek out or obtain proper professional advice as to the best interests of the beneficiaries. When advice was sought out, it was to inform how to implement the investment policy instead of whether dis-investing was in the best interests of the beneficiaries. Third, you claim that the trustees had permitted the social and moral views of their members to influence their decision-making. Based on previous case law (e.g. Cowan v Scargill) trustees are not permitted to invest for reasons of a political or moral nature. Questions for the Plaintiffs
The trustees of the City of Edinburgh District Council were responsible for the disbursement and investment of 58 trust funds that had a total market value of 2,252,999 pounds. In May 1984 the Labour Party won a majority of the council seats and immediately took steps to have the policies on which they were elected adopted and implemented by the trustees. One such policy that was broadly supported by the public was withdrawing all investments from South African countries to reflect their disapproval of apartheid. The trustees carefully contemplated this recommendation and felt that investments in South Africa were undesirable, not only for moral reasons, but also because the probability of civil disorder and insurrection in South Africa made investment there increasingly risky. The trustees met numerous times with various governmental groups and no one objected to the proposal to withdraw investment from South African companies on any grounds. However, the director of finance on the council reminded the trustees of their duties to maintain a diversified portfolio and acquire the proper advice in all stages of decision-making. The trustees called upon the expertise of their stockbrokers to report on their investments in South Africa and propose alternative investments opportunities. Based on this advice, the trustees withdrew their investments from South African companies and reinvested, resulting in the fund’s assets actually increasing in value. As a member on the board of trustees, you are aware of the potential criticism that you are making investment decisions based on moral or ethical grounds. However, you feel that if you have taken all of the necessary professional advice and diversification requirements into account, it shouldn’t make a difference if the funds were invested in alignment with the moral or political views of the council. The trustees claimed that withdrawing investments from South Africa is in the best interests of both the beneficiaries of the fund and the Labour Party. Questions for the Defendants
The trustees of the City of Edinburgh District Council were responsible for the disbursement and investment of 58 trust funds that had a total market value of 2,252,999 pounds. In May 1984 the Labour Party won a majority of the council seats and immediately took steps to have the policies on which they were elected adopted and implemented by the trustees. One such policy that was broadly supported by the public was withdrawing all investments from South African countries to reflect their disapproval of apartheid. The trustees met numerous times in the following months and passed recommendations calling for a report on how best to withdraw council investments from South Africa. In response, the director of finance reminded the trustees of their duties, including the need for diversification and the need to obtain and consider proper advice. The trustees called upon the expertise of their stockbrokers to report on their investments in South Africa and propose alternative investments opportunities. Based on this advice, the trustees withdrew their investments from South African companies and reinvested, resulting in the fund’s assets actually increasing in value. The plaintiffs pose three questions for you to rule on: First, did the trustees ensure the withdrawal of investment was in the best interests of the beneficiaries? Second, was there sufficient expert advice sought to justify the dis-investment strategy used by the trustees? Third, did the trustees breach their fiduciary duties by allowing the social and political views of the plan members to influence their investment decisions? Questions for the Court
The courts found that the trustees were in breach of trust in failing to first consider whether the withdrawal of investment was in the best interests of the beneficiaries and without obtaining professional advice on the matter. When expert advice was sought from the stockbrokers, it was not on the basis of whether dis-investing would benefit the beneficiaries, but only as to how the policy should be implemented. The court’s judgement also clarified a particular proposition from case law concerning social investment (e.g. Cowan v Scargill): that a trustee has a duty not to be guided by matters of political or moral judgement as opposed to financial criteria. Specifically, Judge Murray stated: "But if it means that each individual trustee is genuinely applying his mind and judgement to a trust decision, must divest himself of all personal preferences, of all political beliefs and of all moral, religious or other conscientiously held principles, then I do not think that this proposition is reasonable or practicable. What he must do, I think, is to recognize that he has those preferences, commitments, or principles but nonetheless do his best to exercise fair and impartial judgement on the merits of the issues before him. If he realizes that he cannot do that, then he should abstain from participating in deciding the issue or, in the extreme case, resign as a trustee." In other words, trustees are not required to rid themselves of all personal preferences, but rather should recognize those preferences and direct all efforts towards making a fair and impartial decision for investment. |
