|Steering Business Toward Sustainability (UNU, 1995, 191 pages)|
|Part two: Incentives|
|9. New concepts of fiduciary responsibility|
So long as assets are viewed as passive pools of income-generating securities, fiduciary responsibility ends with a diversified asset allocation plan and the selection and monitoring of money managers. Yet some institutional investors have taken in recent years a first step towards a more proactive definition of fiduciary responsibility, one which recognizes that their investment expectations can and do impact corporate behavior.
The Council of Institutional Investors, whose membership includes roughly eighty of the nation's largest public employee and union pension funds, focuses attention on corporate governance and the problem of boards of directors failing to adequately represent the financial interests of shareholders. In particular, the Council has vigorously attacked distorted compensation packages for senior management of many corporations: "High pay is not the same as pay for performance and may not, in fact, improve performance," noted the Council's April, 1994 newsletter. "Compensation can be tied to performance without giving away the store. And giving away the store pursuant to a formula still leaves one without a store."
The California Public Employees Retirement System (CALPERS), one of the nation's largest institutional investors and an active Council member, has been a leader on issues of corporate governance. Most recently CALPERS has included issues of workplace conditions and employment practices in their annual governance reviews as "one of many other considerations ... in our investment decisions."
Such initiatives mark the beginning of a process of integrating into investment decision-making factors that have previously been considered beyond the purview of financial analysis. How does a $10 million CEO compensation package affect employee morale? How does a CEO's "independent wealth" affect his/her attitude toward and loyalty to the corporation? Will directors who are paid $40,000 per annum in fees act with sufficient independence to effectively oversee senior management? Will corporations with broader employee participation in ownership or decision-making enjoy a competitive advantage? These are questions about compensation and governance, specifically, and, more generally, about corporate culture.
Assistant Secretary of Labor Olena Berg, the former Chief Deputy Treasurer of California who currently oversees the regulation of the U.S. pension industry, believes that a broader view of investor responsibility is inevitable for pension funds. "We will be asking pension funds to change their thinking," Berg says. "Instead of thinking only about beating the market by another increment, we want them to think about how their investments are contributing to the long-run health of the economy ... Given the size of the funds, it doesn't make sense to try to beat the market for a quarter. When you are the market, as the funds are, you can't beat it. The goal should be an overall lifting of the economic boats by investing in ways that are economically productive and create more and better jobs." (New York Times, August 10, 1993.)
The role of financial institutions in steering business toward sustainability begins with such steps. Concerns about corporate governance and the creations of long-term benefits to the economy as a whole mark evolving concepts of "prudence" towards broader investor responsibility and the inclusion in investment decision-making of factors previously beyond the purview of financial analysis.
Nevertheless, the connection between the long-term health of the economy and the social and environmental costs of economic growth remains problematic for fiduciaries. Institutional investors have been very slow to embrace "social investing," or strategies which explicitly seek to address this connection.