Academic Paper: Fiduciary Duty Is a Fantasy

(November 9, 2011) — Fiduciary duty is somewhat of a fantasy, claims Oxford University Gordon Clark, author of a new academic paper titled “Fiduciary Duty, Statute, and Pension Fund Governance: the Search for a Shared Conception of Sustainable Investment.” 

“Fiduciary duty is the golden rule ‘regulating’ the relationship between trustees and beneficiaries. In principle, it regulates behavior 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,” Clark asserts in his paper, noting that fiduciary duty is a chimera, looking 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 his paper, Clark argues that the design and governance of investment management institutions is actually more important than honoring the principle fiduciary duty. He writes: “Just as Alan Greenspan’s idealism about the social value of rational self-interest was brought asunder by the global financial crisis…it would seem that the moral imperatives of individual reputation and community standing are not effective in sustaining the authority of fiduciary duty…These norms have wilted in the face of contests for control over the investment management process.”

Last month, another academic paper questioned the assumptions of fiduciary principles. The paper asserted that reclaiming fiduciary balance between prudence, loyalty, and impartiality is critical to sustaining pension promises.

According to the article titled “Reclaiming Fiduciary Duty Balance” — written by James P. Hawley, Keith L. Johnson, and Edward J. Waitzer — better alignment is needed among pension service providers’ interests, governance practices, and risk management policies.

The paper stated: “Fiduciary duty is grounded on a relatively stable set of legal principles that have survived for centuries. However, interpretation of fiduciary principles can be quite dynamic. We are again at an inflection point, where our understanding and appreciation of fiduciary duty is evolving rapidly. In response to recent changes in financial markets, economic changes, and changes in the asset management industry, fiduciaries are examining the continued appropriateness of norms and beliefs carried over from the twentieth century.”

The most significant transformations for pension fiduciaries in recent years include the following, the paper asserted:

1) Growth of pension funds

2) Expansion of service provider influence

3) Exposure to systemic and extra-financial risk

4) Focus on short-term returns