Does a pension fund manager have an ethical responsibility to actively campaign for corporate governance reforms at the firms that the fund invests in?

Answer 1

All pension fund managers have a fiduciary responsibility to manage all the assets under their administration in a prudent manner, including those assets that relate to ownership as well as those relating to cash flow. However, pension funds also face the ‘rational ignorance’ dilemma. If a pension fund exercises its power to influence a firm’s behavior, then the pension fund incurs all the costs of monitoring management, but the fund only receives its pro-rata share of the benefits. Rational ignorance means that a shareholder, including a pension fund, may consider it uneconomical to become involved in corporate governance. It is not cost-effective. So, the shareholder rationally accepts that by doing nothing it may be exploited by the majority controlling shareholder. The ethical aspect of this situation is that because of their often large ownership interest in portfolio firms, the pension funds have the ability to ensure that the firm act in a cost-efficient manner for the benefit of all shareholders. (See Monks and Minnow (2008), chapter 2 for a further discussion of the rational ignorance dilemma faced by institutional investors.)