Unilever.jpg” vspace=3>Since mid-October, one case has dominated the proceedings of London’s High Court – and despite an out-of-court settlement last Thursday, it is likely to commandeer corporate imaginations and influence workplace practices for some time. just-food.com’s Clare Harman charts the course of one of the most celebrated cases in the history of pension fund management.

London’s High Court offers a theatrical platform for many a showdown, but since the 15 October, one case has dominated proceedings. Despite its resolution out-of-court last Thursday it is likely to commandeer imaginations and workplace practices within the rather arcane world of pension fund management for some time to come.

On one side was Unilever, aggrieved Anglo-Dutch consumer products manufacturer, and on the other, Merrill Lynch Investment Managers (MLIM), aggravated British investment unit of Wall Street giant Merrill Lynch. The air was thick with allegations of negligence and incompetence, and a large sum of money hung in the balance. Sector players held their breath.

This case could prompt a rash of equally expensive litigations

The case was billed by some media bodies as a head-to-head between the city’s most powerful businesswomen, reported with as much of an eye for fashion as for the technicalities of their testimony. Others saw it as a public dressing-down of the young, and rather cocky, whiz-kid by the global grand-daddy. Either way, it is credited with such importance that many believe that it could well change the future of global pension fund management. It could certainly prompt a rash of equally expensive litigations, and instigate new controls on the investment sector, until now notorious for its myriad independent approaches to fund management.

Mandate debate

The Unilever Superannuation Fund (USF) brought its case against MLIM (formerly Mercury Asset Management) claiming £130m (US$185m) in damages to its potential earnings caused by improper risk controls, inadequate diversification and failure to provide downside protection. The two companies had worked together for eleven years before their acrimonious split in 1998 over the pension fund’s performance during the particular period of January 1997 to March 1998.

During this time the USF alleged that MLIM took on excessive risk that prevented it from benefiting from the stock market rise. Mismanagement, said USF, saw the fund become over-weighted on industrial companies and under-weighted on the banking and technological firms that were powering the market.
At the heart of the case, however, an important distinction must be noted: this was not a case of a pension fund management losing money – this was an issue about a pension fund not performing sufficiently well to sustain a benchmark of market indexes. During the period in question, the £1bn USF pension fund returned a total of 20.6%, lagging an agreed benchmark by 10.5%.

The USF says that the firms had a contractual agreement to the effect that the portfolio should have aimed to outperform the benchmark by 1%, but be no more than 3% below the benchmark for any four consecutive quarters. But MLIM argued that the contract was not a guarantee of the fund’s performance, and counter-sued for unpaid fees.

Public face for a private case

The presiding judge, Justice Anthony Coleman, heard from eight witnesses involved with the fund. Of these, the media soon discovered that the most compelling pair to juxtapose were Wendy Mayall, chief investment officer of the USF, and Carol Galley, co-head of Mercury Asset Management when Merrill bought it for US$5.3bn in November 1997.

Mayall, the 44-year-old mother-of-two, proved an apposite adversary for the ice maiden Galley.

Mayall, the 44-year-old mother-of-two, proved an apposite adversary for Galley, who is known in city circles as the “ice maiden”. The court heard how a series of “acrimonious clashes” and “disagreeable conversations” had beset relations between the women. It was revealed that Mayall once jibbed MLIM executives for “all sitting around discussing our bonuses and our luxury yachts”. The media revelled in its presentation of a courtroom drama that grabbed attention in the manner of a celebrity divorce.

Mayall ranks as the 70th most influential woman in Britain in a Good Housekeeping magazine league table. Galley, whose choice of clothes and designer handbag was commented on almost as much as her testimony, was the MLIM star whose fearsome influence was well known; her power was such that in 1996 her vote was enough to topple Sir Rocco Forte from the head of his hotel group during Granada’s hostile £3.7m bid for the chain.

On the stand

Ostensibly, Galley was criticized for turning over the management of the USF to her protégé Alistair Lennard. The ambitious, inexperienced 27-year-old started taking over management of the pension fund from the second half of 1993. By 1994, he had full responsibility for stock selection for the fund, something Unilever did not hear about until April 1995. Lennard told the court that he took control because Galley was busy with the running of the company. The fund was not performing as well as it should and, “she was getting, I understand, a bit of a hard time from the client,” he explained.

Mayall admitted that she was aware of MLIM’s investment style at the time, with its concentrated portfolios. The approach had worked well when MAM had powerful market intelligence. She maintained, however, that the fund managers should have adjusted that to fit with USF’s mandate, and criticised MAM for offering to rebate some management fees in January 1998 after it received complaints about the portfolio’s performance. Mayall said she made it clear at that time that a rebate was unsatisfactory: she wanted compensation to the tune of £60m.

Lennard, operating under what Unilever argued was an irresponsible lack of supervision, ran significantly higher risk levels than his peers. Galley defended his management of the fund, insisting that the investment-management sector had become increasingly competitive during that period, and that Lennard had to act more aggressively if it was to meet Unilever’s benchmark. She expressed regret for leaving a gap of nearly two years before she told USF that Lennard had taken over the portfolio, but insisted that in the company’s open-plan office his actions could be constantly monitored by senior staff members.

Privately, however, MLIM lawyers have acknowledged that Galley’s testimony did little to help their cause. Galley, who plans to retire at the end of this year, left the stand having exposed the fact that, by 1997, risk controls within MLIM had broken down and funds were individually, and eclectically managed by fund managers without proper checks. She confirmed her own reputation for severe action when she revealed that Unilever knew about the imminent removal of Lennard from the pension fund, 24 hours before he himself knew.

MLIM’s risk analysis was “to a degree, built on sand”

When Peter Stanyer, head of MLIM’s risk-management operations, took the stand, the firm’s lawyers relaxed. He coolly defended his company’s handling of the fund. However after two extra days on the stand he was forced to admit that he had in the past told colleagues that the statistical tool he used to measure risk taken by fund managers was “to a degree, built on sand”. A frustrated Justice Coleman compared fund managers at MAM to speeding motorists.

Out of court settlement

The out-of-court settlement, which came a day after the case was abruptly suspended, saw MLIM agree to pay “a sum to the Unilever fund without admission of liability”. That sum was put at £70m by industry sources. In a joint statement, the two sides revealed that the “dispute arose in the context of a new mandate given by the Unilever Fund to Mercury in January 1997, and involved a customized set of investment objectives unique to the Unilever Fund.”
Now, however, “they have resolved all issues between them concerning the management of the Unilever Superannuation Fund during a 15-month period in the 1990s.” Moreover, they said that they are both pleased with the terms of the settlement and that they will resume normal business relations.
Needless costs

With more determination and willingness to compromise, the case need never have come to court

Before reaching the High Court, Unilever and MLIM had spent over two years attempting to negotiate a settlement, but remained tens of millions of pounds apart. According to the rather frustrated response of Justice Coleman to the settlement news, however, perhaps both companies should have tried a little harder. Coleman commented that the time in court had seen both sides invest “immense amounts of extremely expensive executive time”, which saw costs rise needlessly to “hundreds of thousands of pounds”.

Showing obvious displeasure at the decision to bring the case to trial, Coleman added: “It is worth reflecting on the consequences of that failure [to reach agreement by mediation]. We have spent 28 days in court pursuing issues which were for the most part well defined when the mediation took place.

“While it is true that, at the end of it all, a more detailed view of the facts could be delineated […] it seems extremely questionable whether, with more determination, and willingness to adopt a more flexible approach at the time of mediation, a mutually acceptable compromise could not then have been achieved.”

Investment industry response

In the investment industry meanwhile, companies moved quickly to prevent a reoccurrence of the trial or the need for a bureaucratic sector reform. The global fund industry is already facing a slump with poor performance, falling profits and widespread layoffs. If fund managers are to retain their much-valued independence; precision will have to be greater and their mandates will have to be more client-specific.

To instil an air of caution, Standard Life Investments has created a new position – the director of investment process – whose job will be to act as an intermediary between the risk-management department and fund managers. The European unit of Goldman Sachs Group Inc has put its internally used “risk monitoring tools” into its marketing pitch. Still, however, the fund manager is caught in a difficult bind with regard to taking risks; miss the chance to outperform and lose the reputation and the clients, but make a mistake and face being sued. 

Meanwhile, other disgruntled MLIM clients tempted by the scale of the settlement may be eyeing up the possibility of similar retrospective claims. The £3bn pension fund of J. Sainsbury was managed by MLIM during the same period covered by Unilever’s lawsuit, and last week the supermarket giant said it was evaluating its own options in light of the deal. As far as MLIM is concerned, the £70m fig leaf many believe was positioned to cover its embarrassment is unlikely to stay in place for long.

By Clare Harman