Fiduciary duty and the impact of investment decisions

“Management”, according to Peter Drucker, “is a social function. It is, therefore, both socially accountable and culturally embedded.”

And as for the mission and purpose of a corporation, he continues, “Any institution exists for the sake of society and within a community. It, therefore, has to have impacts; and one is responsible for one’s impacts… This responsibility creates a major new challenge – and raises the most difficult problems, both of management and of political theory and practice. But it has become a fact.”[1]

It is forty-six years since those words were published, and they ring as true today as ever. The zeitgeist is very much that corporations are expected to act as responsible citizens. The claim that business has no social responsibility other than to increase its profits is increasingly falling on deaf ears. Business is expected not only to comply with the law, but also to acknowledge that it operates by a tacit license from society: legality is one thing, but social legitimacy implies a higher bar.

Institutional investment organisations also exist for the sake of society and within a community. Investment decisions have impacts.

This is why, in a recent Thinking Ahead Institute research paper, we argued that “while investment and fiduciary duty has been framed as a two-dimensional problem (risk and return), it has always been a three-dimensional problem of risk, return and impact.” But the recognition of responsibility for one’s impacts, as Drucker pointed out, raises difficult problems. These problems must be faced.

The situation is complicated by the fact that investment organisations generally act as an agent for somebody else. It’s not their money, so organisations are not free to define their social responsibility however they choose. Hence there needs to be alignment in the expectations of end savers, asset owners and asset managers about how the impacts of the investment process are to be taken into account. For this reason, we believe asset owners will increasingly prefer asset managers whose values and culture and beliefs align with their own. Mission clarity becomes even more critical on all sides.

Arguably the thorniest issue to address, though, is that of fiduciary duty. The fiduciary concept can be traced at least as far back as Roman times, and is a key element of consumer protection in much of the financial world. And if investment organisations are to consider the wider impacts of their decisions, they need a clear understanding of how this relates to their role as a fiduciary.

I’ve already observed that corporations are increasingly expected to maintain their social legitimacy. They cannot afford to ignore what Milton Friedman described as the “basic rules of society embodied in ethical custom”. And we are a point in time where society’s expectations are growing.

So what is the equivalent expectation that society has of the institutional investment community? Is it exclusively to maximise returns, even if that means setting aside social norms and good citizenship? And, if not, is the way in which fiduciary duty is currently defined consistent with that expectation?

Note that I am not beginning here with the question of how fiduciary duty is currently defined: what is demanded, what is permitted. Instead, I am asking the question of what fiduciary duty ought to be. There is no fundamental reason that fiduciary duty cannot incorporate the concepts of citizenship and of responsibility for one’s actions.

If we decide that it should acknowledge those concepts, then we can turn to the question of whether it currently does. Answering that question would require a much longer and more technical analysis than I am qualified to offer. The answer would vary between jurisdictions – and different experts may well reach different conclusions within the same jurisdiction.

So I’ve done the easy bit: I’ve asked the question.

And what if the conclusion is that the current interpretation of fiduciary duty does not adequately reflect the need to recognise responsibility for the impacts of investment decisions? That’s the difficult bit, and one blog post won’t get us far. It would include a look at the regulatory trend around the world (short version: largely moving in this direction, although the current US administration is an obvious counterexample). It would require identifying the practical barriers to change and working out the most effective way to confront them. It would require working toward a consensus between savers, society, regulators, corporations and the investment industry.

So nothing will change overnight. But investors, like corporations, need to maintain their social legitimacy even as society’s expectations evolve. And if fiduciary duty truly requires at present that the institutional investment community must set aside the concepts of citizenship and of responsibility for one’s actions in its pursuit of maximum returns – is everybody really OK with that?


[1] Peter F. Drucker (1973). “Management: Tasks, Responsibilities, Practices.” Harper & Row.