Emerging Themes in Canadian Fiduciary Law for Pension Trustees

The following post comes to us from Edward J. Waitzer, partner at Stikeman Elliott LLP in Toronto and director of the Hennick Centre for Business and Law at York University. The post is based on a research by Mr. Waitzer and Douglas Sarro that received the 2013 IRRC Research Award.

As society increasingly faces governance challenges at all levels, there is a growing recognition of the need to take a longer term and more systemic view. Given the overwhelming incentives for myopic leadership (and action), our common law system—where courts respond to specific fact situations—may play a critical role. One avenue is likely through the concept of fiduciary duty—the legal obligation to act in the best interests of others.

The Supreme Court of Canada has been at the leading edge in developing a coherent view of the nature of fiduciary relationships and their consequences (largely through its recognition of a new class of fiduciary relationship between the Crown and Aboriginal peoples). The logic has permeated more broadly, with the Court focusing on the high degree of specialization and interdependence in society—where we increasingly rely on the services and expertise of strangers. This rise of “fiduciary society” is a classic non-zero-sum game, where we can all benefit but, if trust is eroded, the game fails (and everyone loses). Hence it is that values of trust and loyalty, shaped by “reasonable expectations”, have come to form the basis for the court’s broad standards.

For example, in BCE, the Court reviewed a claim by bondholders who alleged their interests had not been adequately considered by the directors of BCE in the context of a change-of-control transaction. While upholding the Board’s decision, the Court noted that there is no “principle that one set of interests… should prevail over another set of interests. Everything depends on the particular situation…” and whether the Board treated stakeholders “equitably and fairly”, in accordance with their “reasonable expectations”. By focusing on societal expectations, the Court sought to impose public responsibilities on directors.

This article extends that logic to trustees of public pension plans, arguing that evolving trends in fiduciary responsibility will impose public and inter-generational obligations on them and require that they consult with beneficiaries (or their proxies), be strategic and collaborate with other like-situated fiduciaries. Pension fiduciaries should be focussing on ways in which their investment decisions can benefit the whole and, in so doing, mitigate risk and increase return. This requires a shift in focus beyond portfolio-level benefits to a consideration of systemic effects—considering how investment can be used to create better markets (and society) tomorrow, rather than simply “beating” the market today. Such actions should serve the interests of beneficiaries over time better than focusing on maximizing short-term relative returns.

The full article is available for download here.

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