Why shareholder litigation is not just about restitution of losses

While many institutions may associate shareholder class actions with the US and perceive this system to be rather over litigious on the part of investors – or, perhaps, rather the law firms that represent them – the collective investor redress process has already extended to more than 30 countries, with more jurisdictions being added each year.  

A surge in UK investor actions

The UK, in particular, has seen a significant increase in investor actions in the past five years. While it has taken some time for cases to come through, a handful have already been resolved – largely through settlement – with others under way.   

Fiduciary duty on its own misses a bigger issue: the key and fundamental governance aspect to investor litigation

This uptick has partly been driven by a growing number of law firms and litigation funders coming into the space, but also a cultural shift in how shareholder actions are perceived by the UK investment industry. 

Reputationally, both asset owners and managers now recognise a need to understand where they are impacted by investor actions and have an appropriate response – be that participation or not.

It is also now broadly accepted that pension funds and other institutions have a duty to respond and recover lost funds for beneficiaries where appropriate, understanding that this can directly translate to increasing the future retirement pots of their members. 

More than fiduciary duty

American law firms and corporate action processors continue to remind investors of their fiduciary duty to participate in litigation and warn against “leaving money on the table”.  Although it is a rather well-worn and US-centric message, they have a valid point.  

However, fiduciary duty on its own misses a bigger issue: the key and fundamental governance aspect to investor litigation.

While the focus of attention for shareholder litigation has long been financial recovery, in our view a core objective should also be addressing corporate misconduct, with the aim of improving the long-term prospects of investments. 

Many cases will inherently be linked with environmental, social and governance factors, and governance change can usefully be driven alongside litigation.  

This non-financial recovery can be just as important, if not more so, for investors. Within the UK in particular, this has become a major motivation for participation among pension funds and other institutions, a trend we expect to continue with a number of significant “ESG-focused” cases close to launching.

Catalyst for new standards

As deployers of capital, institutional investors have a duty to use their ownership powers to protect the long-term financial interests of their investments.  

A key part of this ownership duty is engaging with companies to encourage good corporate behaviour and strong governance practices. Helping to build stronger, more resilient businesses in such a way should translate to more success and the delivery of stronger investment returns. 

A successful litigation – whereby a legal judgment confirms specific wrongdoing, enabling the partial recovery of related investment losses – sets a strong example for the company and wider market. 

Such a case can be a catalyst for new standards being set by regulators, which improve practices for all and should trigger concentrated efforts by the company concerned to develop and demonstrate robust practices.  

These outcomes are good for pension funds as collective bodies representing minority shareholders in listed companies globally, and for institutional investors more broadly too.

The tide is turning

The good news is that the tide is turning. Pension funds are increasingly using investor actions within their stewardship framework and overall governance toolkit to challenge corporate behaviour, while we have more recently also seen asset managers play a key role.  

But there are challenges to navigate, not least the fact that a growing number of litigation cases across the UK – and the wider world – are making the universe increasingly complex for investors to monitor and understand. This means institutions having the right tools and expertise in place is key.

At the same time, there is still some way to go to entirely change the mindset and for asset owners broadly to see shareholder actions as part of being a responsible, long-term investor, as well as about the restitution of losses. 

A deeper shift in mindset will bring benefits to broader society, investee companies and their employees and, of course, benefits to pension scheme members. 

Caroline Goodman is the founder and chief executive of Institutional Protection