It is well established under the law that ERISA fiduciaries can wear two hats and serve in a corporate capacity at the same time they are serving in a fiduciary capacity for an ERISA-covered plan. However, when they are acting as fiduciaries of the plan, they must act solely in the interests of participants and beneficiaries.
A recent Ninth Circuit case highlights the conflicts that can occur where an ESOP is involved. For instance, are decisions relating to corporate salaries, when made by directors and officers who are also fiduciaries of the company's ESOP, subject to ERISA fiduciary law such that the decisions must be made in the best interest of participants and beneficiaries? The Ninth Circuit in Johnson v. Couturier held that such decisions should be subject to ERISA fiduciary law where the fiduciaries stand to "directly profit" from such decisions:
Decisions relating to corporate salaries generally do not fall within ERISA’s purview. But where plan assets include the employer’s stock, the value of those assets depends on the employer’s equity. Employee compensation levels are, of course, one of the many business expenditures reducing the value of the overall equity of any company. On the other hand, “[v]irtually all of an employer’s significant business decisions affect the value of its stock, and therefore the benefits that ESOP plan participants will ultimately receive.” Martin v. Feilen, 965 F.2d 660, 666 (8th Cir. 1992). Taken to its logical conclusion, therefore, this line of thinking would, in the case of an ESOP, extend the application of ERISA to a corporation’s annual expenditures on office supplies—clearly an absurd result. The Eighth Circuit has on this basis limited an ERISA fiduciary’s duties “to transactions that involve investing the ESOP’s assets or administering the plan.” Id. Setting executive compensation levels does not obviously fall into either category. See Eckelkamp v. Beste, 201 F. Supp. 2d 1012, 1023 (E.D. Mo. 2002) (holding that a corporate director is not acting as an ESOP fiduciary in setting compensation levels).
Nonetheless, we conclude that applying ERISA to the instant case does not risk encompassing within its confines any and all day-to-day corporate decisions shielded by the business judgment rule. Where, as here, an ESOP fiduciary also serves as a corporate director or officer, imposing ERISA duties on business decisions from which that individual could directly profit does not to us seem an unworkable rule. To the contrary, our holding merely comports with congressional intent in establishing ERISA fiduciary duties as “the highest known to the law.” Howard v. Shay, 100 F.3d 1484, 1488 (9th Cir. 1996) (quotation omitted). To hold otherwise would protect from ERISA liability obvious self-dealing, as Plaintiffs allege occurred here, to the detriment of the plan beneficiaries.
See also the Ninth Circuit's very interesting discussion in the case regarding indemnification agreements. The court held that the agreements at issue, indemnifying the directors and officers and requiring advancement of the defendants' legal defense costs, were void and unenforceable.
UPDATE: See also this article--Case Imperils Rights of ERISA Fiduciaries--which provides some of the history behind this case.
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