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The Case
The British case of Cowan v Scargill concerned a divided board of pension trustees. The pension board, composed of five management-appointed trustees and five union-appointed trustees, was charged with the responsibility of managing and controlling the pension funds of British mineworkers. Management-appointed trustees alleged that the trustees appointed by the union had breached their fiduciary responsibility in refusing to approve an investment plan unless it was amended so that it prohibited any investment overseas, and in any industry that was in direct competition with the coal industry. The union-appointed trustees ardently claimed that they were acting in the best interests of the beneficiaries of the fund and the people of England, whereas the management appointed trustees felt that the restrictions on the fund would limit the its ability to yield the best return on the fund’s investments. Facilitator’s Notes Select three groups and assign each group a role. Each of the three groups has their own fact sheet (below). Give each group 45 minutes to discuss the issues facing them and to prepare their presentation. Each group’s presentation must include the most compelling arguments for their case; each group will also have time to rebut arguments put forward by the other two groups. Allow 20 minutes for each presentation and a further 20 minutes for rebuttal. Finally, allow 30 minutes for plenary discussion including the discussion of what really happened. Players
A formal pension plan was set up in 1980 for workers in the coal mining industry in the UK. The fund was controlled and administered by 10 trustees, five of whom were appointed by the National Coal Board (employer trustees) and five by the National Union of Mineworkers (union trustees). The board was charged with distributing pensions and lump sums to all industrial employees of the National Coal Board on retirement, injury or illness, and also to widows and children of deceased mineworkers. Since its inception, the pension board has maintained a history of amicable relations. The pension fund totalled approximately £3,000 million with £200 million for investment each year. Funds were provided by members’ contributions to the scheme and by contributions from the board of approximately the same amount, with additional contributions by the board to allow for inflation. Approximately two-thirds of the payments to the fund came from the board, and one-third came from the fund participants. In the past, the board had invested the fund’s monies into three main areas: marketable securities, land, and industrial finance. All three areas included overseas investment and the first two investment areas included investments in oil and gas. In 1982, the board held a meeting to discuss a new investment plan. Although initially it appeared that all of the trustees would agree to the new plan, the union trustees objected to the revised plan as it was in direct conflict with the policy decision at the National Union of Mineworkers Conference. Specifically, the union trustees refused to agree to the new investment plan unless it was amended so that it would prohibit any increase in overseas investment, to provide for the withdrawal of existing overseas investment at the most opportune time, and to bar investment in energies that are in direct competition with coal. The union trustees justify this decision on two grounds: first, it is moral; and second, because the fund is partly financed by the workers, the union trustees have the unilateral right to determine where the monies should be invested. You are claiming that the actions of the union trustees constitute a breach of their fiduciary responsibility. Specifically, you are making three claims: First, you claim that the defendants were not using the power to invest for the purpose of producing income and profits for the fund, but to advance the policy and principles of the National Union of Mineworkers without any regard to the financial consequences for the fund. Instead of investing for the sole benefit of the beneficiaries, the union trustees wish to invest with the objective of a social aim. As a result of the desired restrictions on the fund’s investments, the fund will be limited in its ability to obtain a profit in lucrative areas as well as limit the fund’s diversification requirements. Second, you charge that the union trustees are incorrect in arguing that the contributions of the working miners to the fund give them the right to decide where the pension funds should be invested. The fact that part of the fund comes from employees’ contributions does not give those contributing to it greater rights than those of other beneficiaries. Instead, all the contributions are made with the intention that the fund is to be administered for the benefit of the beneficiaries as a whole and not a particular class of them. Third, the union trustees disregarded the duty to obtain and consider professional advice and not reject it without good cause. This, you argue, is imprudent. Questions for the Plaintiffs
A formal pension plan was set up in 1980 for workers in the coal mining industry in the UK. The fund was controlled and administered by 10 trustees, five of whom were appointed by the National Coal Board (employer trustees) and five by the National Union of Mineworkers (union trustees). The board was charged with distributing pensions and lump sums to all industrial employees of the National Coal Board on retirement, injury or illness, and also to widows and children of deceased mineworkers. Since its inception, the pension board has maintained a history of amicable relations. The pension fund totalled approximately £3,000 million with £200 million for investment each year. Funds were provided by members’ contributions to the scheme and by contributions from the board of approximately the same amount, with additional contributions by the board to allow for inflation. Approximately two-thirds of the payments to the fund came from the board, and one-third came from the fund participants. In the past, the board had invested the fund’s monies into three main areas: marketable securities, land, and industrial finance. All three areas included overseas investment and the first two investment areas included investments in oil and gas. In 1982, the board held a meeting to discuss a new investment plan. Although initially it appeared that all of the trustees would agree to the new plan, the union trustees objected to the revised plan as it was in direct conflict with the policy decision at the National Union of Mineworkers Conference. Specifically, the union trustees refused to agree to the new investment plan unless it was amended so that it would prohibit any increase in overseas investment, to provide for the withdrawal of existing overseas investment at the most opportune time, and to bar investment in energies that are in direct competition with coal. The union-appointed trustees felt that continued investment abroad and in oil would be to the detriment to the coal industry and would be against the interests of the scheme’s beneficiaries. The union trustees opined that it is their duty to avoid investments that are likely to be hazardous and against the well-being of the members of the fund and the industry as a whole. The union trustees were aware of some of the misgivings of the management trustees, such as the ability of the fund to maintain a diversified portfolio with such restrictions. However, the union trustees contend that disinvesting in these areas will not greatly impact the fund’s portfolio as there are many other investment opportunities in Britain to maintain sufficient diversity in the fund. Further, the management trustees claim that the union trustees had not taken appropriate steps to advise their decision. Although in agreement that it is a trustees’ responsibility to obtain advice, the union trustees claim that they are not obliged to act on it. A trustee’s duty is to act on reasonable grounds in the best interests of the beneficiaries and the disinvestment from these areas justify ignoring expert opinion. And finally, the union trustees claim that their decision is based on moral, as opposed to commercial grounds and that this position was non-negotiable. Since the fund is financed in part by unionized workers, the union trustees claim unilateral rights to use the funds in whatever way they felt would be most profitable for the workers. Questions for the Defendants
A formal pension plan was set up in 1980 for workers in the coal mining industry in the UK. The fund was controlled and administered by 10 trustees, five of whom were appointed by the National Coal Board (employer trustees) and five by the National Union of Mineworkers (union trustees). The board was charged with distributing pensions and lump sums to all industrial employees of the National Coal Board on retirement, injury or illness, and also to widows and children of deceased mineworkers. Since its inception, the pension board has maintained a history of amicable relations. The pension fund totalled approximately £3,000 million with £200 million for investment each year. Funds were provided by members’ contributions to the scheme and by contributions from the board of approximately the same amount, with additional contributions by the board to allow for inflation. Approximately two-thirds of the payments to the fund came from the board, and one-third came from the fund participants. In the past, the board had invested the fund’s monies into three main areas: marketable securities, land, and industrial finance. All three areas included overseas investment and the first two investment areas included investments in oil and gas. In 1982, the board held a meeting to discuss a new investment plan. Although initially it appeared that all of the trustees would agree to the new plan, the union trustees objected to the revised plan as it was in direct conflict with the policy decision at the National Union of Mineworkers Conference. Specifically, the union trustees refused to agree to the new investment plan unless it was amended so that it would prohibit any increase in overseas investment, to provide for the withdrawal of existing overseas investment at the most opportune time, and to bar investment in energies that are in direct competition with coal. The plaintiffs sought the court’s direction on five grounds. First, were the union trustees in breach of their fiduciary responsibility as trustees of the scheme’s money and investment in refusing to concur with the adoption of the new investment plan? Second, was this at the expense of the beneficiaries’ interest? Whose interests should the trustees protect? Third, do the union trustees have a special right to direct funds into particular investments considering that without their members, there would be nothing to invest? Fourth, can pension trustees invest for moral or ethical reasons, with the real potential that it could harm the fund? And finally, do pension trustees have a duty to obtain expert opinion? Are they obliged to act on it? Questions for the Court
The courts held that the trustees had an overriding duty to invest with the primary objective of increasing the fund’s value for the beneficiaries, despite their personal views or moral reservations on the choice of the most suitable investments. Specifically, the court stated: "Trustees may have strongly held political or social views... they may object to any form of investment in companies concerned with alcohol, tobacco, armaments, or many other things. In the conduct of their own affairs, of course, they are free to abstain from making any such investments. Yet under a trust, if investments in this type would be more beneficial to the beneficiaries than other investments, the trustees must not refrain from making the investments by reason of the views that they hold" (p.288). The courts also found that the proposed amendments to the investment policy were designed to further the union’s policy of ensuring the general prosperity of the coal industry, regardless of the financial outcomes for the beneficiaries. Specifically, the amendments could not be considered a policy that was intended to obtain the best possible results for the beneficiaries as many of them are retired from the coal industry, or have never worked directly for the coal industry, such as widows and children of deceased miners. The trustees have the ultimate duty to protect the interests of all of the beneficiaries, not a subset of them. Any possible economic benefit that the beneficiaries could accrue due to the proposed amendments to the plan was viewed as a remote possibility. Furthermore, the courts declared that pension trustees have a duty not only to obtain advice on the choice of investments and diversification of investments, but also have a duty to act with prudence after listening to the advice. Specifically, the courts concluded that a trustee is entrusted with the “duty to seek advice on matters which the trustee does not understand, such as the making of investments, and on receiving that advice to act with the same degree of prudence. This requirement is not discharged merely by showing that the trustee has acted in good faith and with sincerity. Honesty and sincerity are not the same as prudence and reasonableness” (p. 761). Thus, the union trustees had breached their fiduciary duties to the beneficiaries by failing to act on sound expert advice. Accordingly, their refusal to approve the investment plan was in violation of their fiduciary responsibility to do the best that they can for the beneficiaries. Trustees have an overriding duty to the beneficiaries to take advantage of a full range of investments. |
