A PROXY FOR THE NEXT GENERATION
We spoke to Michael Judin about the nature of
fiduciary duties in the 21st century. What became
clear is that ESG issues and fiduciary duties are not
Robert: In their published report Fiduciary Duty in the 21st
Century, the UN Principles of Responsible Investment (UNPRI),
United Nations Environment Programme (UNEP) Finance
Initiative, UN Global Compact, and UNEP Inquiry investigated
the South African legal landscape to determine whether
fiduciary duty is a legitimate barrier to investors integrating
environmental, social and governance (ESG) issues into their
The report recommends that “the Financial Services Board
should clarify that compliance with the requirements of
Regulation 28, in particular those relating to ESG issues, should
be seen as an integral part of the fiduciary duties imposed by
the Pension Funds Act”. In your view, does current South African
law on fiduciary duty support or prohibit investors integrating
ESG issues into their investment processes? Furthermore, would
the report’s recommendation, if implemented, develop South
African law such that fiduciaries other than pension fund
trustees would need to consider integrating ESG issues into
their investment processes?
Michael: The “new” South African Companies Act, which
became effective in 2011, has indirectly dealt with the matter.
Section 7 of the Act states that one of the objectives of the Act
is to promote compliance with the Bill of Rights.
The Act still requires directors to act in the best interests of the
company, but this section implies that, in making decisions in
the best interests of the company, directors should consider the
rights of others. Therefore the legitimate needs of the community,
the environment and other stakeholders cannot be ignored in
board decision-making. The application of the section has not
yet been tested in court, but some are of the view that this section creates a strong “hook” to keep directors accountable
for the impact of their decisions beyond the company. In South
Africa, we also have an extended suite of legislation that deals
with environmental protection and community responsibility –
for example, our mining companies’ legal duty to execute
a pre-approved social and labour plan, labour practices,
broad-based black economic empowerment etc. It is obviously
part of a director’s fiduciary duty to ensure that the company
complies with legislation.
We also have a corporate governance code, currently King
III. The King Code strongly addresses the board’s duties insofar as matters such as the environment, the community and
its broader stakeholders are concerned. While there is no
requirement in law that directors should comply with the King
Code, it should be borne in mind that as a result of at least 14
decisions of the High Court of South Africa, the King Code is
now part of South Africa’s common law and as a result thereof
falls to be followed in the same way as one is required to
comply with a statute.
However, our stock exchange rules require listed companies to
apply the King III principles or explain why and to which extent
they did not comply with every one of the individual principles.
We have also seen numerous instances where our courts use
the King Code to measure directors’ action and decisionmaking.
So it has become a yardstick for “the reasonable
director” and has become part of our common law.
In as far as trustees of pension funds are concerned, ESG
matters are included in their fiduciary duty. However, similar to
the King Code, we have the Code for Responsible Investment
in South Africa (CRISA), which deals with the application of
such broader good governance from an investor perspective.
Unfortunately, the take-up of this is not at as a high level as the
King Code. It would be useful for the pension fund regulator
to have a requirement similar to our stock exchange rules in
Robert: Given the current legal landscape in terms of
opportunities and obstacles, what guidance from a responsible
investment (RI) perspective could you offer to those whose
duties as trustees or agents include a fiduciary duty of care
over their clients’/beneficiaries’ assets?
Michael: In short, RI hinges on a single measurement –
sustainability. What does this mean? The trustee of a pension
fund, or the institutional investor more generally, has a duty
towards the pension fund beneficiaries or the investment fund
investors. If they want to best serve these beneficiaries, they
need to have a long-term perspective on investment and thus
on the companies they choose to invest in.
A long-term investment view has a very different perspective
on risk, quality of earnings, skills and ethics of the board and
management team in the underlying investment, and other
matters. Unfortunately, there is still a lot of “short-termism” when
it comes to investment, even at an institutional investment level.
This is often evident in the fact that short-term performance,
profits, cash flow and dividends are still the key criteria on
which many investment decisions are based. If sustainability
becomes the measure, the investor will ask whether this
company has built a strategy and business model that will
sustain value creation for investors in the long term.
If this is the criterion, the company’s interaction with its
community and its labour force becomes relevant, as it can
result in future risks or benefits, Marikana being an example.
Also, the company’s view on environmental matters becomes
relevant, as a high level of risk taking, albeit at a business
or an operational level, can have negative consequences, as
illustrated by the oil spill in the Mexican Gulf or, more recently,
the VW debacle.
The institutional investor should also bear these principles in
mind when setting performance targets and incentive schemes.
Often, the right things are said when it comes to investment
policy, but these are not adequately supported by structures
and actions that drive the appropriate behaviour.
Robert: In your opinion, in which areas can the legal
community support the ongoing development and training of
fiduciaries to ensure they are properly apprised of the scope of
their fiduciary duties?
Michael: There is a huge need for ongoing training for
directors of companies and public entities, as well as for trustees
of pension funds and other structures. To use pension funds
as an example, 50% of the trustees are employee selected
and often employee representatives. People selected often
come from their own specialist areas, but they are unaware
of their fiduciary duties and may believe that they have a duty
as a “representative”. So I like your suggestion that the legal
community should support such training and development
The legal fraternity is in a privileged position where they are
not only close to the theory of the law, but also familiar with
the application thereof. The application side is not just the
challenges and realities of the practical implementation of law.
It also includes knowledge obtained through court judgments
as well as arbitration rulings etc.
There are lots of lessons to be learnt from the application side
and it brings the letter of the law to life. It is often very difficult for
non-legal people to really get to grips with legal requirements
in the absence of such practical examples and experiences.
If the legal fraternity starts sharing this technical and practical
knowledge we will have stronger directors, which will result in
better and stronger companies, to the benefit of the community
Not only in South Africa, but across the globe, regulators are
looking carefully at what steps entities have taken in regard to
compliance and training when disciplining, levying fines or
prosecuting entities and individuals.
One of the best mitigating factors is to be able to show that the
offending entity has in place strict compliance and adequate
training (including policies) and that despite these, the offence
was committed. Fiduciaries are in the firing line of activism,
which will become all-pervasive, and being able to show the
adequacy of training, compliance and policies will become
of critical importance in helping to avoid severe criminal and
Who has fiduciary duties? What UNPRI says
In investment, the most common fiduciaries are the
trustees of trusts or pension funds. Beyond trustees,
different jurisdictions have different interpretations of
who exactly holds fiduciary obligations and who simply
has duties of care.
This question of who holds fiduciary duties is likely to
change. The shift in many countries to contract-based
defined contribution (DC) pensions raises the question
of who is responsible for protecting the interests of
these savers. The specific question that policy makers
will need to address is what duties are owed by
insurance companies, asset managers and sponsoring
organisations (i.e. employers) in contract-based schemes
(i.e. where the pension provider does not have fiduciary
or equivalent obligations to the beneficiary in the way
that a trustee would in a trust-based scheme).
For example, the board members of a pension fund
can have a statutory duty to – in the performance of
their duties – follow the interests of the scheme members,
deferred members, the pension beneficiaries and the
employer, and the board would then ensure that these
parties can feel that the consideration of their interests
Source: United Nations Principles of Responsible Investment (UNPRI)