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Long-Term Investing and Fiduciary Duty

There are a lot of people and organizations thinking about ways to extend the time-horizon of institutional investors these days. For example, there’s this World Economic Forum project on long-term investing. There’s also a new ‘long-term investors club’ in France. And there are a variety of smaller initiatives and projects, like the work we’re doing at Stanford and Oxford on the design, governance and management of pensions and sovereigns. As such, I expect over the next few months and years we’ll be seeing a stream of interesting research on this topic.

On cue: My Oxford colleague Gordon Clark has just published a paper that really adds to our understanding of the institutional constraints to long-term investment strategies within pension funds. The paper is entitled “ Fiduciary Duty, Statute, and Pension Fund Governance: The Search for a Shared Conception of Sustainable Investment.” Here are some blurbs to whet your appetite:

“Fiduciary duty is the golden rule ‘regulating’ the relationship between trustees and beneficiaries. In principle, it regulates behaviour by pre-empting those actions that would harm the interests of beneficiaries while promoting duties of care consistent with the interests of those that stand to gain from well-intentioned and responsible decision-making. But, in many respects, fiduciary duty is a chimera: it looks to convention rather than forward to innovation in investment management. As such, governance policies and practice must provide the instruments that simple recipes of fiduciary duty are ill-equipped to provide. In this paper, I argue that the design and governance of investment management institutions is, actually, more important than honouring the principle fiduciary duty which, in the context of Anglo-American statute, is increasingly empty.”

And if that didn’t raise your eyebrows, try this:

“In so many ways, fiduciary duty has been so denuded by government regulation that what is left is a rhetorical gesture on behalf of those that stand to benefit by the status quo. At best, fiduciary duty remains as a case specific mechanism for restitution in circumstances where government policy, regulation, and its guarantee institutions are either not relevant or unable to deal with the issue. At worst, fiduciary duty remains as a trump card for those that would wish to protect their own interests in the face of obvious demands for profound change in the nature of investment practice.”

Note to the Long Term Investor Council of the World Economic Forum: Gordon can be found here.