Super funds' fiduciary duty to participate in class actions

Superannuation funds have a fiduciary duty to invest in class action lawsuits that fit with member’s best interests and there are many opportunities for a return on investment.

Speaking with Super Review, Financial Recovery Technologies, vice president and managing director, Asia Pacific, Sean Cookson, said funds like HESTA had shown the benefits of becoming involved in class actions, such as when it announced it would be party to a class action against AMP Limited, the Commonwealth Bank and against Westpac.

“Some super funds really do see it as their role as active investors to leverage class actions to drive better behaviour within corporates, and HESTA is a good example of that where they've been quite public about that,” he said.

“And we've met with HESTA a number of times and they've said that that's always been their approach and they see it as a really good lever and one of their governance tools.”

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The primary benefit to funds from participating in securities class actions was compensation for their investment losses resulting from corporate wrongdoing.

On average in Australian cases, it was estimated funds recovered 25% to 35% of their compensable losses, with about 25% going to case cost reimbursement and litigation funder fees. Recovery rates were at least three times greater than those typical of US securities class actions.

Financial Recovery Technologies was a technology-based services firm that helped institutional investors identify, file claims, and collect funds made available in securities class action settlements, often working with super fund clients.

Former head of impact at HESTA, Mary Delahunty, has had years of experience with driving super fund class action involvement. The founder of Seven Advisory, an environmental, social and governance consulting firm, said class actions should be an obligatory duty for super funds.

“Undertaking a class action is not a trivial matter, a securities class action will be considered where shareholders have suffered loss as a result of poor corporate behaviour, for fiduciaries it’s beyond important to try and recover this loss – I think it’s obligatory,” she said.

“Super funds invest member’s hard-earned deferred wages for the benefit of their retirement, these are the shareholders in the class action – ordinary hard-working Australians who do not deserve to have their savings squandered by poor corporate behaviour.

“It is a crucial form of shareholder democracy to allow the recovery of funds replacing losses and serving as a deterrent for others.  Where individual legal action is costly and out of reach of most Australians, class actions allow losses to be recovered collectively, further democratising the process for shareholders.”

According to Cookson, Australia was one of the lowest risk jurisdictions in terms of joining a class action, behind the United States.

“This relates to class actions in what we define as ‘high-risk’, essentially jurisdictions where funds would have to opt-in and actively participate directly in the litigation process. Examples of these jurisdictions are Germany and the UK. We measure risk on three metrics, cost (any costs associated with participation or adverse risk costs), anonymity and discovery.

“Many funds set loss thresholds and have low risk tolerances. If their losses do not meet pre-set thresholds for say a case in Germany such as the Volkswagen case, then they will not participate.”

He pointed to the change in Federal Government and a hesitance by super funds towards becoming involved in anti-trust class actions as future triggers or areas of class action activity.

“The prior government - particularly Treasurer and the Attorney General - were openly hostile to securities class actions,” he said.

“They threw up barriers including requiring litigation funders to get licenses and approval for their funding arrangements.  They cut back shareholder rights including adding a scienter (state of mind) requirement to the continuous disclosure obligations on publicly traded companies. They threatened additional burdens including caps on funder fees and federalisation of cases, which would have required them to be litigated in Federal rather than State courts.

“The latter effort also sought to remove cases from Victoria, where lawyers were recently permitted to work on a contingency fee basis.”

He said there would hopefully by fewer assaults on shareholder rights with the change of Government, permitting lawyers and funds to focus on investor rights, compensation, and protection of market integrity.

Echoing Cookson’s sentiment, Delahunty said the investment community should advocate strongly for a return of authentic disclosure requirements that were weakened significantly under the Coalition Government.

“The former Treasurer saw a rise in class actions as a reason to dilute disclosure obligations instead of a reason to improve corporate behaviour, these changes damage our nation’s strong focus on corporate governance and are exactly the wrong tool to deal with dodgy directors and executives.”