Fiduciary Capitalism, Long-Term Thinking and the Future of Finance

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John Rogers, CFA, penned a thoughtful article in a recent issue of the Financial Analysts Journal regarding the future of finance – and how pension funds and other institutional investors could usher in a new era of capitalism.

From the article, titled “A New Era of Fiduciary Capitalism? Let’s Hope So”:

From my perspective, a new era of capitalism is emerging out of the fog. What I define as fiduciary capitalism is gathering strength and needs to become the future of finance. An era of fiduciary capitalism would be one in which long-term-oriented institutional investors shape behavior in the financial markets and the broader economy. In fiduciary capitalism, the dominant players in capital formation are institutional asset owners; these investors are legally bound to a duty of care and loyalty and must place the needs of their beneficiaries above all other considerations. The main players in this group are pension funds, endowments, foundations, and sovereign wealth funds.

Fiduciary capitalism has several attractive traits. It encourages long-term thinking. As “universal owners,” fiduciaries foster a deeper engagement with companies’ management teams and public policymakers on governance and strategy. In textbook terms, they seek to minimize negative externalities and reward positive ones. Because reducing costs is easier than generating alpha, we can expect continued pressure on financial intermediaries to reduce costs. To be sure, there are considerable gaps to bridge between today’s landscape and fiduciary capitalism. Transparency and disclosure, governance of fiduciaries, agency issues, and accountability are all areas that need more work.

On barrier in the way of fiduciary capitalism: lack of transparency. From the article:

Too many institutional investors are secretive and do not disclose enough about their activities. Their beneficial owners (including voters, in the case of sovereign funds) need more information to make reasonable judgments about their operations. Similarly, far more transparency is needed in the true costs of running these pools of assets. Investment management fees and other expenses often go unreported. Too much time and energy is spent comparing returns with market benchmarks, and not enough is spent defining and comparing the organizations’ performances against their liabilities—or against adequacy ratios.

Pension governance itself needs to be improved. As Ranji Nagaswami, former chief investment adviser to New York City’s $140 billion employee pension funds, has observed, public pension trustees are often ill equipped to govern platforms that are effectively complex asset management organizations. Compensation remains a complicated issue. In the public sector, paying for great pension staffers ought to be at least as important as a winning record on the playing field, yet in 27 of the 50 US states, the highest-paid public employee is the head coach of a college football team.

Rogers concludes:

The future of finance needs to be less about leverage, financial engineering, and stratospheric bonuses and more about efficiently and cleanly connecting capital with ideas, long-term investing for the good of society, and delivering on promises to future generations. In the public policy arena, governments that promote long-term savings, reduce taxes on long-term ownership, and require transparency and good fiduciary governance can help hasten this welcome change in our financial markets.

The era of finance capitalism wasn’t all bad, and an era of fiduciary capitalism wouldn’t be all good. In a time when leadership in finance is desperately lacking, fiduciaries have the potential to reconnect financial services with the society they serve. Let’s hope it’s not too late.

Read the entire article, which is free to view, here.

The Case For Long-Termism in Pension Investments


Pension funds, more so than other investors, operate on a particularly long time horizon.

But that doesn’t mean funds can’t succumb to short-term thinking.

Keith Ambachtsheer, Director Emeritus of the International Centre for Pension Management at the University of Toronto, makes the case for more long-term thinking at pension funds in a recent paper published in the Rotman International Journal of Pension Management.

He lays the groundwork of short-term thinking at pension funds by presenting this statistic:

My 2011 survey of 37 major pension funds found that only 8 (22%) based performance-related compensation on measures over four years or more.

In other words, pension funds aren’t rewarding long-term thinking. But how can that be changed? From the paper:

A good start is to insist that the representatives of asset owners become true fiduciaries, legally required to act in the sole best interest of the people (e.g., shareholders, pension beneficiaries) to whom they owe a fiduciary duty….the resulting message for the governing boards of pension and other long-horizon investment organizations (e.g., endowments) is that they must stretch out the time horizon in which they frame their duties, as well as recognizing the interconnected impact of their decisions on multiple constituents to whom they owe loyalty (e.g., not just current pension beneficiaries but also future ones).

Increasingly, fiduciary behavior and decisions will be judged not by a cookie-cutter off-the-shelf “prudent person” standard by a much broader “reasonable expectations” standard.

A logical implication of these developments is that the individual and collective actions of the world’s leading pension funds are our best hope to transform investing into more functional, wealth-creating processes.

It will take work, but a shift to long-termism will be worth it, according to the paper:

Institutional investors around the globe, led by the pension fund sector, are well placed to play a “lead wagon” fiduciary role as we set out to address these challenges. Indeed, the emerging view is that pension sector leaders have a legal obligation to look beyond tomorrow, and to focus the capital at their disposal on the long term.

Will the effort be worth it? Logic and history tell us that the answer is “yes.” Qualitatively, long-termism naturally fosters good citizenship; quantitatively, a 2011 study that calculates the combined impact of plugging the upstream and downstream “leakages” in conventional investment decision making with a short-term focus found that the resulting shift to long-termism could be worth as much as 150 basis points (1.5%) per annum in increased investment returns (Ambachtsheer, Fuller, and Hindocha 2013).

Read the entire paper, titled The Case for Long-Termism, here [subscription required].