The
“prudent man,” who has long been the standard for fiduciary responsibility, was
born near Harvard Square in the 1830s. While playing a useful role for many of
the years since, his surroundings have changed significantly, and so must he.
It
is useful, however, to look farther back into history – the 14th
century-- for the original and, for today, more appropriate definition of
“prudent”: farsighted and wise. Thus the prudent person of the 21st
century must be farseeing, and in particular must look at all facets of the
investment process, and use all analytical tools that foresight demands
Institutional
investors need to recapture that far-sightedness when it comes to fulfilling
their fiduciary responsibilities. It will help to focus on the meaning and
implementation of the concept of fiduciary responsibility and the duties of
fiduciaries. The integration of prudent financial management practices
with environmental stewardship, concern for community, labor and human rights,
and corporate accountability to shareholders and stakeholders, will minimize
short- and long-term financial risk and identify investment opportunities that
will lead to increased shareholder value.
The
focus on institutional investors derives from the fact that they, by virtue of
the scale of their collective investments, have enormous influence over
financial markets and the global economy as a whole. In 1999 United States
public pension funds had assets representing 46 percent of the gross domestic
product and 33 percent of the capitalization of the New York Stock Exchange’s
capitalization. Additional holdings by religious, educational and public
institutions, unions and foundations further increase these numbers. As a
result these institution’s financial decisions have a huge impact on society
The collective power of these institutions could reorient companies and
economies around the world to secure the short- and long-term interests of
beneficiaries, and other shareholders and stakeholders alike.
What, then, is a new
approach to fiduciary responsibility for the 21st century?
·
Fiduciary
responsibility requires consideration of the social, environmental, political
and cultural effects of investments, both positive and negative, over the
short- and long-term as a fundamental part of the investment process. This is
not screening, nor is it a moral or ethical issue, per se. It is a financial
issue, one that identifies risks and opportunities not captured by conventional
financial analysis. Anything less than this comprehensive view does not meet
the needs of beneficiaries, or the demands of fiduciary responsibility. This approach is about protecting
shareholder value.
·
Fiduciary
responsibility acknowledges that economic reality must incorporate the social,
environmental and financial if it is to be sustainable. Anything less will be
short-term benefit at best. The idea of a ‘triple bottom line’ does not reflect
the reality of a single earth and its inhabitants. Programs seeking a double- or triple-bottom line are in the last
analysis working toward a single bottom line because there is a synergy rather
than a conflict among these issues and financial performance.
·
Fiduciary
responsibility requires pension fund trustees to secure their beneficiaries’
future. This has long been recognized.
However, as investor and corporate governance activist Robert Monks states
“…the primary thing that workers need for their retirement [is] money, but
don’t [workers] also need a safe, clean, decent world in which to spend it.
These ends are not economically exclusive, institutional shareholders hold not
only the proxy power but also the legal obligation to help deliver both.”[3]
There is sufficient evidence that this analytic approach can enhance portfolio
performance by recognizing risks and opportunities not reflected in traditional
financial analysis.[4]
· Fiduciary responsibility requires the voting of proxies on shareholder resolutions relating to issues of corporate governance and social concerns. Proxies are assets to be exercised in beneficiaries’ interest. This is not an argument that there is a “right’ way to vote on corporate governance and social issues, where differences can legitimately exist. Many shareholder resolutions can be correlated with increased shareholder value, especially with consumer-oriented companies. What is obvious, however, is the obvious point that not voting proxies is to squander asserts.
·
Fiduciary
responsibility requires that trustees
analyze apparent out-performers as well as underperformers. Had this been done
more systematically the bubble created by Enron, WorldCom and others might well
have been identified as the bubbles they were, and the exuberance they fed
might have been avoided at great savings to portfolios.
·
Fiduciary
responsibility necessitates looking closely at the webs of conflicting
interests among accountants, auditors, money managers and investment bankers,
and institutional finance committees and boards. These webs will grow more
impenetrable unless fiduciaries exercise their prerogatives as owners.
·
Fiduciary
responsibility acknowledges the reality of ‘universal ownership’ especially for
large institutional investors. As a result portfolios must be monitored in
order to maximize portfolio-wide, long-term returns.[5]
This
vision of fiduciary responsibility carries new and redefined obligations for
fiduciaries.
·
Fiduciaries
should be knowledgeable about the social, environmental, political and cultural
issues that affect their portfolios and which are analytic tools integrated
with more conventional financial analysis. These issues include among others
climate change, labor conditions and human rights worldwide, diversity on
boards and in the workforce, and product safety.
·
Fiduciaries
should use investment managers who have the skills and resources to implement
an investment program that incorporates the interrelationships between
financial decision-making and social and environmental issues, and who are also
knowledgeable about these issues. This is not portfolio screening.
·
Fiduciaries
should review their entire portfolios, not individual assets or even individual
asset classes. Single decisions affect total portfolios that in turn have
societal effects. For large institutional investors the bottom line is
portfolio-wide. This requires awareness that negative economic externalities
(e.g. pollution) and positive returns in a single company (e.g.
pharmaceuticals) may benefit a particular firm they own, but will likely damage
the asset value of other firms they own.[6]
·
Fiduciaries
should develop proxy-voting guidelines, make them available to their
beneficiaries, and disclose their actual votes on proxy resolutions.
Fiduciaries are the stewards of capital entrusted to them to look out for all
their beneficiary interests.
·
Fiduciaries
should demand greater transparency and disclosure from the companies in their
portfolios on social and environmental issues as well as issues of corporate
governance. They will also need to encourage best practice, and better
practice.
·
Fiduciaries
should practice the same levels of transparency and disclosure they demand of
companies on all aspects of their activities.
·
Fiduciaries
should explore the potential of alternative investments and alternative
investment strategies to channel funds into new areas that are socially just
and environmentally sound, as well as financially viable.
·
Fiduciaries
should ask their lawyers how to accommodate these new responsibilities and
obligations, rather than ask if they can. Even in situations where a
legislature has directed that the highest financial rate of return is the sole
purpose of a pension fund, such as the case of New York, this new analytical
approach to financial decision-making need not be an obstacle. Substantial
research shows that consideration of the risks and opportunities that social,
environmental, political and cultural issues raise can improve financial
performance, or at least have no negative effect.[7]
This
view of fiduciary responsibility and the obligations of fiduciaries is not a
radical approach to institutional investing. In fact it is very conservative
because it makes best use of all available information that can positively and
negatively affect financial returns. The transparency of analysis and action
that results should help address not only long-term societal impacts of
investment decisions, but also immediate needs for greater disclosure from
companies.
The
transition from the present view of fiduciary responsibility to a new view may
take sometime. As Schopenhauer observed, the difficult takes a while to
achieve, the obvious a little longer. But the debate on these issues must begin
now to the benefit all beneficiaries, shareholders and stakeholders alike.
FR 11 02
[1] Expanded version of remarks made at the meeting of the International Interfaith Investment Group, sponsored by the Alliance of Religions and Conservation (UK), New York, June 20, 2002; and at the Green Mountain SRI Summit: A Forum on Environmental, Social, Faith-Based & Sustainable Investing, Stowe, Vermont, September 9, 2002.
[2] Co-Founder and Co-Director of the Initiative for Fiduciary Responsibility (IFR) and former President of the Jessie Smith Noyes Foundation, a leader in mission-related investing. These remarks represent my views and do not necessarily reflect the views of the IFR. Reactions are welcome to stevev@igc.org. For information about the IFR see www.theglobalacademy.org/ifr.asp.
[3] Robert A.G. Monks, The Right Response to Seattle’s Warning, The Corporate Library, April 10, 2000. www.ragm.com
[4] See Peter Camejo. The SRI Advantage: Why Socially Responsible Investing Has Outperformed Financially. Gabriola Island, B.C., Vancouver, Canada: New Society Publishers, 2002. And Innovest Strategic Value Advisers, www.innovestgroup.com.
[5] James P. Hawley and Andrew T. Williams, The Rise of Fiduciary Capitalism: How Institutional Investors Can Make Corporate America More Democratic. Philadelphia, PA: University of Pennsylvania Press, 2000.
[6] Hawley and Williams, op.cit.
[7] Peter Camejo, op.cit. and www.innovestgroup.com