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For The Association of American Law Schools Annual Meeting January 2010. Speech
not given and Bob did not attend.
New Orleans Speech
January 7, 2010
Corporate Governance, Fiduciary Duties and Social Responsibility
“[S]ocio-economics does not entail a commitment to any one paradigm or ideological
position, but it is open to a range of thinking that treats economic behavior as involving
the whole person and all facets of society within a community evolving natural context.”
In the 2003 film The Corporation by Mark Achbar, corporations are described as having
may of the traits found in people clinically defined as psychopaths.
Callous unconcern for the feelings for others
Incapacity to maintain enduring relationships
Reckless disregard for the safety of others
Deceitfulness: repeated lying and conning of others for profit
Incapacity to experience guilt
Failure to conform to social norms with respect to lawful behavior.
The corporation is designed to make money without regard to human life, the social
good, or the impact of the corporation’s activities on the environment. Corporation by
laws impose a legal duty on corporate executives to make the largest profits possible for
shareholders. Law and economics and cost benefit ratios provide the operational
This paper will suggest that a more spacious view of inveterate and unchanging legal
concepts – such as the law of trusts – provide a framework for the construction of ethical
corporations. We will suggest that ethical corporate behavior is characterized by three
principal norms.
Health – concern for the well being and biological survival of human
Care of Infants – Concern with the long term - of sustainability
Fairness – inter generational, inter national, and between the various
components of the corporate constellation. Sharing of risks and benefits.
We will sketch the outlines of a possible path to ethical corporations in today’s United
#1 – One of the major challenges of our time is to assure to all the benefits of the wealth
creating corporate system while at the same time protecting society from its adverse
#2 – The prevailing legal system in America describing the governance of corporations is
largely a matter of state law. Its driving dynamic empowers and requires management to
maximize shareholder values, as defined by the cost/benefit analyses so beloved by the
For The Association of American Law Schools Annual Meeting January 2010. Speech
not given and Bob did not attend.
law and economics community. This dynamic places incentive for corporations to
“externalize liabilities” - to place as many of the costs of corporate functioning as
possible on to others. In the film, The Corporation, I summarize: “The corporation is an
externalizing machine, in the same way that a shark is a killing machine. There aren’t any
questions of malevolence or of will. The enterprise has within, and the shark had within
it, those characteristics that enable it to do that for which it is was designed.” The
unhappy face of “federalism” seemingly condemns us to a “race to the bottom” in the
effort to improve corporate standards – that has certainly been the fate of corporate
governance attempted reforms over the last half century.
#3 – Management controls both the board of directors and the corporations’ lobbying and
political contribution policies. This confers on management vast leverage in dealing with
the state, its own creator and supervisor. The Supreme Court has removed all restraint on
direct corporate involvement in politics. This has made “reform” of the prevailing
corporate system most problematic. Indeed, years into the Crisis of 2009-2010 we are
still experiencing endless equivocations and delays from the SEC, the Federal Reserve
and other government agencies whose enforcement failures were such an important cause
of the disasters. Reality is that we suffer from ownerless corporations – the single
element in the corporate constellation adequately independent, motivated and skilled to
require accountability from management has been muted. This phenomena has occurred
partly as crime and partly as tragedy.
#4 – By sheer hazard, the preponderance of the outstanding voting stock of publicly
traded companies in America is held by trustees - fiduciaries the extent of whose
responsibilities and prerogatives are defined under existing federal laws – principally,
The Employees’ Retirement Income Security Act of 1974 (ERISA) and The Investment
Company Act of 1940 (Investment Company Act).
#5 - I asked Senator Jack Javitts, one of the “Fathers of ERISA” how they had managed
to combine a rationalized retirement system with a legitimizing ownership base for
portfolio companies. Never accused of modesty, Jack nonetheless was prompt to say:
“Bob, we never thought of it.” Today, institutions own 76% of the total equity and yet
J.W. Hurst’s forty year old description rings true. “As the number of institutional
investors increased, some prophets said that these investors, moved by their stakes and
informed by their expertise, would begin to play in earnest the supervisory roles of the
legendary stockholder…Already under responsibility to those for whose benefit they held
shares, professional fund managers did not seem anxious to incur further responsibilities
to their fellow shareholder in the companies in which they invested. At bottom, the
position seemed unstable…. Meanwhile the relative passivity of these big investors
underlined the general failure of shareholding to supply the steady surveillance by which
stockholders were supposed to legitimate the power wielded in business corporations.”
Reality is that these big investors are not the flesh and blood individuals whom the
theorists look to for legitimating private power. They are trustees, usually institutions, the
scope of whose responsibility is set forth in enabling federal statutes which plainly were
not at all focused on the implications on the governance of corporations. Most of these
For The Association of American Law Schools Annual Meeting January 2010. Speech
not given and Bob did not attend.
institutions are parts of financial conglomerates. Often, the relative financial importance
of the fiduciary component in the conglomerate is less significant than other functions
with the result that the inevitable conflicts of interest are resolved to the detriment of the
beneficiaries of the employee benefit plans and mutual funds.
#6 - In the early 1970s, famous 2nd federal circuit court judge Henry J. Friendly ruled that
institutional trusts were personal and could not be transferred. He was overruled in an
amendment to the Securities Act in 1975. In 1985 UK Judge Robert Megarry ruled in
Cowan v. Scargill that trustees must administer property exclusively for the benefit of
participants. These two judicial recognitions of the association of ancient trust law and
the newly emergent institutional investors are like road signs to a way long deserted.
Money management became the most lucrative and important industry in the US and UK.
Legal niceties defining trustee duties as expressed in ERISA – administer “for the
exclusive purpose” and “for the sole benefit” of plan participants – were shunted aside
into insignificance in the chase to maximize assets under management. The underlying
notions of “fiduciary” which underlay the money management industry were
unmistakably superseded by the appetite of the trustees to maximize the assets that they
managed. Trustee has become an historical noun rather than a current mode of conduct.
#7 – The opportunity exists even today to recognize a federal law of trusts comprising the
rights and obligations of fiduciaries under existing statutes – preeminently, those creating
employee benefit plans, mutual funds and bank trusts. The President could convene the
Chair of the SEC, the Secretary of Labor, the Chairman of the Federal Reserve and the
Attorney General and announce simply: “It is in the public interest that the trustee owners
of companies act like stewards for the welfare of their beneficial owners. This requires
that all fiduciaries, the scope of whose responsibilities are defined by existing federal
law, should require that the companies in their portfolios conduct their business so to
optimize the long term value of the owners’ holdings. The Attorney General is here to
evidence that this government intends to enforce the fiduciary responsibilities of the
owners of America’s publicly traded companies.” It is within the current competency of
those in office to manifest a new federal law of ownership that will have the effect of
providing normative standards in the direction and management of companies that
supersede the frail standards imposed by current state law and through vigorous and
intelligent use of the power of ownership to create a new form of corporate governance.
#8 - Ownership rights and responsibilities are part of the “plan assets” which trustees are
obligated to administer in the exclusive interest of beneficiaries. The US agencies
responsible for enforcing beneficiaries’ rights have conspicuously been co-opted by the
financial conglomerates they are supposed to regulate. The Investment Company Institute
has notoriously dominated the SEC for decades and in recent times the Chamber of
Commerce has elicited shameful fiduciary retreat from the Department of Labor. The
emergence of fiduciaries as the “legendary shareholder” has been further inhibited by the
reality that trustees are risk averse, trustees cannot be compensated for successfully
taking risks and, in recent times, trustee organizations have largely been acquired by
financial conglomerates with attending conflicts of interest. That said, a healthy wealth
producing corporate system needs the involvement of informed owners.
For The Association of American Law Schools Annual Meeting January 2010. Speech
not given and Bob did not attend.
#9 - Our chronicle of shareholder activism has brought us to the point where clearly the
power exists in ownership to inform the process of managing the enterprise. What does
not exist is a language of accountability. Managers are not bad people. They can manage
what they can measure. It is up to the rest of us to reform the system of measurement
from the manifest inadequacies of the present system of accounting. The primary
obligation trustees, operating pursuant to the newly declared Federal Fiduciary Law, is to
generate an holistic accounting system so that all corporations can have the confidence of
functioning in a way compatible with society’s needs. Today’s managers could ethically
manage tomorrow’s enterprises if we can internalize externalize costs and account
appropriately for assets like intellectual property.
There has been encouraging progress in the field of environmental costs.
#10 - The United Nations Environment Program sponsored a report Fiduciary
Responsibility – July 2009 – that directly confronts the obligation of trustees to consider
what have traditionally been “external costs” ( at page 11). The law firm Freshfields
expands the traditional scope of definition of fiduciary responsibility to include a
spacious concept of operating rules. It concludes not only that this concept is within the
competence of traditional trustees, it states clearly that it is their obligation - an
obligation that is legally enforceable by beneficiaries.
1. Fiduciaries have a duty to consider more actively the adoption of
responsible investment strategies
2. Fiduciaries must recognize that integrating ESG issues into investment
and ownership processes is part of responsible investment, and is
necessary to managing risk and evaluating opportunities for long-term
3. Fiduciaries will increasingly come to understand the materiality of ESG
issues and the systemic risk it poses, and the profound long-term costs of
unsustainable development and its consequent impact on the long-term
value of their investment portfolios.
4. Fiduciaries will increasingly apply pressure to their asset managers to
develop robust investment strategies that integrate ESG issues into
financial analysis, and to engage with companies in order to encourage
more responsible and sustainable business practices.
The whole question of specifying the precise interests of shareholders is complicated by
the diversity of the shareholder population, ranging from holders for a nano second
pursuant to a computer algorithm to those permanent holders in index funds. A certain
arbitrariness is necessary – many reasons, not the least of which is relative size, suggest
that the typical beneficiary of a defined benefit plan with eighteen years before retirement
and a desire not only to have the funds for a comfortable life, but also the desire to live in
a clear, civil and conscious society. Designating such an individual beneficiary class will
enable courts and enforcement agencies to put content into the new holistic accounting
For The Association of American Law Schools Annual Meeting January 2010. Speech
not given and Bob did not attend.
#11 – J. D. Suss1 argues for the transformation of existing human systems: “From my
perspective, a new, reinvigorated consciousness is the ideal fountainhead out of which
truly citizen-centered global public policy, institutions, and institution-building can be
born, nurtured, and maintained. From the stance of a world view that embraces a more
relational/participatory consciousness the avaricious consumerist/ materialist, Cartesian
frame-of-reference, e.g. the status quo values and agenda of a growing, global corpocracy
would no longer be viable.”
#12 - By defining the scope of fiduciary responsibilities in increasingly holistic terms,
which can be expressed in ethical terms - concern for health, a long term perspective, and
fairness - the driving dynamic of corporations can be changed through the effective
involvement of shareholders, acting in their legendary function as “stewards”.
September 11, 2007, J.D. Suss –