Class Action Participation Bound Up in Fiduciary Duty
Australia is the second most active jurisdiction in the world for securities class actions, but millions of dollars are being left unclaimed by asset owners. Leaving money on the table shouldn’t be the outcome for investors.
For an asset owner, knowing if there are funds available to be returned from a class action can be almost impossible without dedicated resources. Cross-referencing share ownership history against ongoing shareholder class actions – that may have commenced years ago – requires operational bandwidth, and unlike corporate actions, the information required to research class action activity is splintered across many jurisdictions, organisations, and entities. In addition, firms are also challenged with being aware of potential actions. Often, the communication to notify investors of a potential shareholder action is addressed to someone who left the firm many years before.
However, that doesn’t mean that opportunities to recover funds that are available should be ignored just because the process is perceived to be complex. Ensuring all eligible funds are returned to an asset owner is part of the fiduciary duty of those entrusted with managing other people’s money.
Fiduciary duty is invoked in many ways, whether in arguments around fossil fuel investment, climate action, or whether capital should be deployed on social projects that may have a great social outcome but ultimately return a lower investment than other options. Many of those leads to complex and multi-faceted discussions around the purpose of capital, and whether investing for performance outcomes means excluding lower returning options in favour of higher-yielding investments that may be more likely to cause frustration with investors.
I think everyone would agree that availing of a mechanism to return money to investors – that they are entitled to because of corporate failure – falls easily into the expectations around fiduciary duty.
Why fiduciaries should care about class action participation
One super fund that clearly views the class action mechanism as important to their business and to member outcomes is HESTA. In 2020 alone, HESTA was involved in 21 class actions, including against Westpac, CBA, and an alleged foreign exchange cartel including UBS, Royal Bank of Scotland, JP Morgan, Citibank and Barclays and earned an average of $32 million from successful actions. (1)
Evidence at a parliamentary hearing into litigation funding showed that funds participate in class actions with two objectives in mind: to recover losses, and to increase accountability of companies which it views as a fundamental part of its role as an active investor.
Class actions are a process that enables shareholders to recoup their losses and to also spur increased governance in the company, leading to enhanced director independence, audit firm rotation, and insider trading controls.
This is key – superannuation funds and fund managers, by holding businesses to account through shareholder litigation, contribute to a more transparent financial system where the businesses themselves are less able to make vast profits whilst investors are left carrying the risk and losses.
As HESTA noted in their submission to the Parliamentary Litigation Funding and the Regulation of the Class Action Industry Inquiry; they participate in class actions “to recover losses but also as a means of encouraging better standards of corporate governance and improved accountability by companies, directors and corporate advisors to their shareholders.”
(1) R. Myer, ‘HESTA chases class action dollars, joining 21 shareholder cases’, The Daily News, https://thenewdaily.com.au/finance/superannuation/2020/08/30/class-action-hesta-westpac/, (Aug 30, 2020)
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