What is fiduciary duty?

"The actual owners of the world's corporations are no longer a few wealthy families. They are the huge majority of working people who rely on today's largest companies to safeguard their pensions and life savings."
- ‘The New Capitalists: How Citizen Investors are Reshaping the Corporate Agenda'

Millions of ordinary savers depend heavily for their future wellbeing on the small number of people who look after their money. The behaviour of these intermediaries is crucial to our ability as a society to respond to today's key policy challenges:

• The ageing society. With the decline of final salary pension schemes, people's standard of living in retirement increasingly depends on the performance of their pension investments.
• Climate change. The behaviour of institutional investors will have an enormous impact on our chances of making the transition to a low-carbon economy.
• A strong economy. If we are to return the economy to stable and sustainable growth and prevent another financial crisis, it is vital that our money contributes to good corporate governance rather than fuelling bubbles and irresponsible practices.

Fiduciary duties are the strict legal obligations that apply when one person is entrusted to act on behalf of another. In an investment context, fiduciaries include the trustees of pension funds and charitable trusts. Other examples of fiduciaries are lawyers and the legal guardians of children.

What is the project about?

The project set out to ask whether the legal framework governing investor behaviour is fit for purpose in the 21st century, particularly in the aftermath of the financial crisis. The second phase of work will focus on two key themes which emerged in the March 2011 report:

• The enlightened fiduciary. Fiduciary duties are often interpreted as a straitjacket which prevents investors from taking a long-term, responsible approach which, for example, takes full account of sustainability issues. We believe this perception is legally flawed, but is unlikely to be shifted without explicit statutory clarification. Moreover, this interpretation of fiduciary duty directly undermines the UK company law framework: company directors have a duty to promote the success of the company, having regard to the long-term consequences of their decisions and to wider factors such as social and environmental impacts. This is based on the principle of 'enlightened shareholder value', yet many shareholders continue to believe that the law actively prohibits them from taking a similarly enlightened approach. We therefore propose clarification of the legal position to free trustees from restrictive interpretations of fiduciary duty and allow them the discretion to take a broad approach to fulfilling their beneficiaries' interests.

• The new fiduciaries. Fiduciary duties presume a simple relationship between a trustee and their beneficiary. This may have reflected reality two hundred years ago, but it could be inadequate for today's highly complex capital markets, where key decisions are delegated to asset managers on advice from investment consultants. Moreover, an increasing proportion of pension savings are being invested in products purchased from insurance firms, where the fiduciary framework does not apply at all. We suggest a need for clarification of the legal status of all professional agents who manage people's pensions and other savings.