Doing the right thing

Brian Holden should be congratulated for his comprehensive review of trustees and trusteeship (published exclusively in Professional Pensions on November 9).

One question which he did not explore is the comparison between trust and contract-based pensions and their regulation, which I do here, but from a strictly legal point of view.

The legal obligations of trustees on the one hand and the directors of corporate pension providers services on the other are fundamentally different from each other.

The only trust law duty of trustees is to look after the interests of their beneficiaries: they must, over the life of the trust, dispose of the whole of the trust fund for the sole benefit of its beneficiaries.

Trustees who apply it for any other purpose are in breach of trust. The company law duty of a company’s directors is to look after the interests of the shareholders, i.e. the maximisation of profits. Directors who pursue any other aim, with a minor exception for employees in section 309 of the Companies Act 1985, are in breach of their company law duties.

Two of the classic authorities are the English case of Hutton vs West Corp Railway (1983) 23ChD 654, CA and the US case Dodge vs Ford Motor Company, 204Mich 459, 17 ONW, 668 (1990).

As a matter of law, the directors of a company must not “do the right thing” or act in any other person’s interest, unless doing the right thing or acting at some other person’s interest coincides with the interests of the shareholders.

When companies obey the law, they do so, not on moral grounds or because it is the right thing to do, but because somebody has worked out that it is more profitable to obey the law than to flout it and pay the fine or other penalty (eg effect on public reputation). When penalties are not serious, they are simply factored into the company’s costings.

Of course there are incompetent and dishonest trustees who will put themselves first and their beneficiaries last, and of course there are decent humans as company directors, who will ignore company law and do what is right, even though it is not in the company’s best interest, but these, in both cases, are exceptions.

A regulator of trustees is already half-way there, because all trustees want, more or less, to do the right thing but need guidance, while a few need to be stopped in their tracks.

Regulating companies is totally different. No matter how “good” an individual working for a company might be, the company itself knows nothing of good or bad, of public interest or of doing what is right for its sake. Its directors’ duties are not to do what is right, unless it happens to coincide with the company’s (i.e. its shareholders’) interests.

A regulator of trustees, as individuals, has only to deal with the bad apples (hopefully few) and give guidance to the rest, but a regulator of companies must deal with bodies, which, in the final analysis, are driven solely by their shareholder’s demands to maximise profits, and so must set procedures on the assumption that there is no intrinsic willingness to follow guidelines.

The Companies Act 2006 does offer the possibility of a solution which could bring the legal trustworthiness corporate providers of pensions services more into line with that of trustees. Section 173(1) provides that: “A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of the shareholders as a whole” and have regard to other matters including the interests of employees and the impact on the community and the environment.

Where promoting the success of the company ends and the interest of the community etc start is moot, but there can be little doubt that the company’s interests are still paramount. What could however change the standing of companies is subsection (2) which says: “Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.”

If, when this comes into force, companies providing pensions adopt the purpose of acting in the interests of pension scheme members, I would, on the basis of legal duties, be prepared to trust company pension providers to the same extent that trustees can already be trusted.

If providers are unwilling to adopt such provisions, the conclusion to be drawn is that, in a conflict between the interests of the shareholders and those of the pension beneficiaries, the former will continue to prevail.

Roderick Ramage is a solicitor regulated by the Law Society