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E M P L O Y E E B E N E F I T S , C O M P E N S A T I O N
& P E N S I O N L A W
Vol. 6, No. 17: September 9, 2005
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Publisher: Employment, Labor, Compensation & Pension Law Journals
a division of
Social Science Electronic Publishing, Inc. (SSEP)
and Social Science Research Network (SSRN)
Editor: PAMELA PERUN
Urban Institute
Mailto:pamela@planetnow.com
Copyright: SSEP, Inc. 2005. All rights reserved.
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Topic of This Issue:
Fiduciary Issues
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T A B L E of C O N T E N T S
_________________________________________________________________
NEW and FORTHCOMING ARTICLES
"The Economic Inefficiency of Secrecy: Pension Fund Investors'
Corporate Transparency Concerns"
Journal of Business Ethics, Forthcoming
TESSA M. HEBB
University of Oxford
School of Geography and the Environment
"Pension Funding Reform: It's Time to Get the Rules Right (Part
2)"
Tax Notes, Vol. 108, No. 10, August 29, 2005
KATHRYN J. KENNEDY
John Marshall Law School
"New Standards of Director Loyalty and Care in the Post-Enron
Era: Are some Shareholders more Equal than Others?"
New York University Journal of Legislation and Public
Policy, Forthcoming
DANA M. MUIR
University of Michigan
CINDY A. SCHIPANI
University of Michigan Business School
"Pension Fund Corporate Engagement: The Fifth Stage of
Capitalism"
Industrial Relations, Forthcoming
GORDON L. CLARK
University of Oxford
TESSA M. HEBB
University of Oxford
School of Geography and the Environment
"Questioning the Trust Law Duty of Loyalty: Sole Interest or Best
Interest?"
Yale Law Journal, Vol. 114, p. 929, 2005
JOHN H. LANGBEIN
Yale Law School
WORKING PAPERS
"Fiduciary Standards and Institutions' Preference for
Dividend-Paying Stocks"
KRISTINE WATSON HANKINS
University of Florida
Warrington College of Business Administration
MARK JEFFREY FLANNERY
University of Florida
Department of Finance, Insurance and Real Estate
MAHENDRARAJAH NIMALENDRAN
University of Florida
Department of Finance, Insurance and Real Estate
"Acting Like Owners: Proxy Voting, Corporate Engagement and the
Fiduciary Responsibilities of Pension Trustees"
GIL YARON
University of British Columbia
Faculty of Law
S S R N I N F O R M A T I O N
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EDITORIAL POLICIES
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Benefits, Compensation & Pension Law we do not referee working
papers. We accept abstracts of working papers in Employee
Benefits, Compensation & Pension Law whose topics suit the
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scholarly discourse.
N E W and F O R T H C O M I N G Articles
_________________________________________________________________
"The Economic Inefficiency of Secrecy: Pension Fund Investors'
Corporate Transparency Concerns"
Journal of Business Ethics, Forthcoming
BY: TESSA M. HEBB
University of Oxford
School of Geography and the Environment
Contact: TESSA M. HEBB
Email: Mailto:thebb@ouce.ox.ac.uk
Postal: University of Oxford
School of Geography and the Environment
Mansfield Road
Oxford OX1 3TB, UNITED KINGDOM
ABSTRACT:
In the wake of recent corporate scandals, this paper traces the
growing power of pension funds to provide managerial oversight
of the firms they hold in their investment portfolios.
Increasingly pension funds are exercising their legitimate
rights as owners to raise the corporate governance standards of
the firms they invest in.
Within corporate governance generally, pension funds are
shifting their attention away from managerial accountability and
toward measures that increase transparency in firm-level
decision-making. Pension funds use transparency to ensure that
shareholders are the primary interest being served by the firm.
Transparency not only aligns managers and owners, it also raises
issues of firm behaviour that allow other stakeholders to engage
the corporation more broadly. I contend that secrecy is
economically inefficient. When organisations are opaque and
interests are secret, decision-making can and does distort
efficiency.
I examine recent pension fund corporate governance campaigns
with particular reference to the California Public Employees
Retirement System.
______________________________
"Pension Funding Reform: It's Time to Get the Rules Right (Part
2)"
Tax Notes, Vol. 108, No. 10, August 29, 2005
BY: KATHRYN J. KENNEDY
John Marshall Law School
Contact: KATHRYN J. KENNEDY
Email: Mailto:7kennedy@jmls.edu
Postal: John Marshall Law School
315 South Plymouth Court
Chicago, IL 60604 UNITED STATES
Phone: 312-427-2737 ext. 515
ABSTRACT:
The author addresses the issue of pension funding reforms in two
separate articles. Part one previously explained ERISA's
historical funding and plan termination rules in order to show
why plan sponsors, such as United Airlines' parent UAL
Corporation, were permitted to create and maintain unfunded
pension plans and why the Pension Benefit Guaranty Corporation
assumed some of those unfunded liabilities.
Part two discusses the need for reform in ERISA's funding and
plan termination rules. This article will examine various
legislative and industry proposals and the policy considerations
relevant to such proposals, in light of historical mistakes that
should be avoided with subsequent legislation. The article's
conclusion makes recommendations in support of preserving the
defined benefit system.
______________________________
"New Standards of Director Loyalty and Care in the Post-Enron
Era: Are some Shareholders more Equal than Others?"
New York University Journal of Legislation and Public
Policy, Forthcoming
BY: DANA M. MUIR
University of Michigan
CINDY A. SCHIPANI
University of Michigan Business School
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=721045
Contact: DANA M. MUIR
Email: Mailto:DMUIR@UMICH.EDU
Postal: University of Michigan
701 Tappan Street
Ann Arbor, MI 48109 UNITED STATES
Phone: 313-763-3091
Fax: 313-936-8715
Co-Auth: CINDY A. SCHIPANI
Email: Mailto:schipani@umich.edu
Postal: University of Michigan Business School
Hutchins Hall
701 Tappan Street
Ann Arbor, MI 48109 UNITED STATES
ABSTRACT:
This Article examines how the legal frameworks that protect
shareholders and employees interact in light of the corporate
wrongdoing that has come to light over the past few years. Our
research finds that legal rights vary significantly depending on
whether claims are founded in federal securities law, state
corporate law, or ERISA. This Article discusses the resulting
anomalies that occur depending on whether the plaintiff is an
employee or nonemployee. Even among employees, legal rights and
obligations differ depending on whether the employee purchased
company securities through a company-sponsored plan versus
through a standard brokerage account. This Article addresses
these issues and proposes an analytical approach consistent with
underlying policy implications.
JEL Classification: K20, K22, K10
______________________________
"Pension Fund Corporate Engagement: The Fifth Stage of
Capitalism"
Industrial Relations, Forthcoming
BY: GORDON L. CLARK
University of Oxford
TESSA M. HEBB
University of Oxford
School of Geography and the Environment
Contact: TESSA M. HEBB
Email: Mailto:thebb@ouce.ox.ac.uk
Postal: University of Oxford
School of Geography and the Environment
Mansfield Road
Oxford OX1 3TB, UNITED KINGDOM
Co-Auth: GORDON L. CLARK
Email: Mailto:gordon.clark@geog.ox.ac.uk
Postal: University of Oxford
Mansfield Road
Oxford OX1 3TB, UNITED KINGDOM
ABSTRACT:
Pension fund capitalism is a new, albeit evolving, stage of
Anglo-American capital market development. It is marked by the
ability of pension funds to aggregate the widely disbursed
ownership of beneficiaries and therefore act as single entities
with a unified voice. Pension funds within their investment
portfolios are increasingly using this voice to engage
companies. Such corporate engagement in its broadest definition
is the use of one's ownership position to influence company
management's decision-making. Corporate engagement brings
together four distinct underlying currents: first, the increased
use of passive index funds; second, the corporate governance
movement; third; the growing impact of socially responsible
investing; and finally, the impact of new global standards. At
its best corporate engagement offers a long-term view of that
promotes higher corporate, social and environmental standards
and adds share value, thus providing long-term benefits to
future pension beneficiaries.
______________________________
"Questioning the Trust Law Duty of Loyalty: Sole Interest or Best
Interest?"
Yale Law Journal, Vol. 114, p. 929, 2005
BY: JOHN H. LANGBEIN
Yale Law School
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=696801
Paper ID: Yale Law & Economics Research Paper No. 303
Contact: JOHN H. LANGBEIN
Email: Mailto:john.langbein@yale.edu
Postal: Yale Law School
P.O. Box 208215
New Haven, CT 06520-8215 UNITED STATES
Phone: (202) 432-7299
ABSTRACT:
The duty of loyalty requires a trustee to administer the trust
solely in the interest of the beneficiaries. Any transaction in
which the trustee has an actual or potential interest violates
the sole interest rule, no matter how beneficial the transaction
to the beneficiaries. This Article develops the view that a
transaction should not give rise to liability merely because the
trustee also benefits. Sometimes beneficiaries are better off
when a transaction also benefits the trustee. Corporation law
has wholly abandoned the sole interest rule, preferring a rule
that permits a conflicted transaction that satisfies disclosure
and fairness standards.
Important changes have been undermining the trust law sole
interest rule. The grievous procedural inadequacies of the
equity courts that gave rise to the rule have now been overcome.
The rise of professional trusteeship has required that the sole
interest rule be abridged to permit trustee compensation. As
trusteeship has increasingly become a branch of the financial
services industry, major exceptions to the sole interest rule
have been recognized to facilitate trustee-provided financial
services. The rationale for these exceptions is that they
benefit trust beneficiaries by promoting integration of
functions and economies of scale.
This Article contends that the exceptions are wiser than the
rule they modify. The duty of loyalty should be reformulated to
prefer the best interest rather than the sole interest of the
beneficiary. A conflicted transaction should continue to be
presumed to violate the duty of loyalty, but rebuttably, not
conclusively. The trustee should be allowed the defense that the
transaction was in the best interest of the beneficiaries.
______________________________
W O R K I N G P A P E R Abstracts
_________________________________________________________________
"Fiduciary Standards and Institutions' Preference for
Dividend-Paying Stocks"
BY: KRISTINE WATSON HANKINS
University of Florida
Warrington College of Business Administration
MARK JEFFREY FLANNERY
University of Florida
Department of Finance, Insurance and Real Estate
MAHENDRARAJAH NIMALENDRAN
University of Florida
Department of Finance, Insurance and Real Estate
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=686966
Date: August, 2005
Contact: KRISTINE WATSON HANKINS
Email: Mailto:kristine_hankins@yahoo.com
Postal: University of Florida
Warrington College of Business Administration
Gainesville, FL 32611 UNITED STATES
Co-Auth: MARK JEFFREY FLANNERY
Email: Mailto:flannery@ufl.edu
Postal: University of Florida
Department of Finance, Insurance and Real Estate
Warrington College of Business
P.O. Box 117168
Gainesville, FL 32611 UNITED STATES
Co-Auth: MAHENDRARAJAH NIMALENDRAN
Email: Mailto:NIMAL@DALE.CBA.UFL.EDU
Postal: University of Florida
Department of Finance, Insurance and Real Estate
Warrington College of Business
P.O. Box 117168
Gainesville, FL 32611 UNITED STATES
ABSTRACT:
Many researchers perceive that the “Prudent Man” standard for
fiduciary responsibility causes institutional investors to
prefer dividend-paying stocks. However, most states revised
their fiduciary standards during the 1990s, replacing Prudent
Man constraints with the less-stringent Prudent Investor rules
for many institutional investors. We find that the introduction
of the Prudent Investor standard is followed by an economically
and statistically significant reduction in institutional
holdings of dividend-paying stocks. If institutional investors
should no longer be assumed to have an exogenous preference for
dividend-paying stocks, some conclusions about security returns
and corporate behavior from the 1990s may need to be
re-considered.
______________________________
"Acting Like Owners: Proxy Voting, Corporate Engagement and the
Fiduciary Responsibilities of Pension Trustees"
BY: GIL YARON
University of British Columbia
Faculty of Law
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=772184
Date: June 28, 2005
Contact: GIL YARON
Email: Mailto:gyaron@share.ca
Postal: University of British Columbia
Faculty of Law
1322 East Mall
Vancouver V6T 1Z1, British Columbia V6T 1Z1 CANADA
ABSTRACT:
Pension trustees have a fiduciary obligation to act in the best
interests of plan members. The impact of recent corporate
scandals on capital markets has highlighted the fact that
protecting the interests of plan members and beneficiaries
extends to pension plans exercising their shareholder rights as
a means of fostering good corporate governance and long-term
stability and accountability within capital markets. Some
jurisdictions have affirmed the role of the pension plan as
shareholder through rules governing shareholder participation in
corporate governance and statements interpreting the
long-standing duties of pension trustees in the context of
voting proxies and other shareholder activist practices. This
review of the law in Canada, United States and the UK suggests
that Canadian pension trustees have an fiduciary obligation as
part of prudent and loyal stewardship to oversee the voting of
proxies, including establishing policy and monitoring voting in
the best interests of plan members. There is also authority to
support a similar obligation with respect to corporate
engagement with the companies that a pension plan owns, although
the law is less precise in articulating the scope of this
obligation. The paper reviews the legal and practical barriers
in these areas, and provides a fiduciary framework for pension
trustees to use as a guide.