GOVERNANCE Market trust
Financial markets
For whose benefit? Amy Domini, Founder and CEO of Domini Social Investments
Banks and investment companies are more than mere financial firms. They hold and manage assets, such as retirement income, on behalf of others, whether individuals, companies or governments. In short, they have a fiduciary role to fulfill, based on trust. So why have the beneficiaries not really benefitted?
T
he moment has arrived for an honest conversation about the standards applied to fiduciaries. Fiduciary responsibility has, particularly in the United States though in other countries too, come to mean making money. But the best interest of the beneficiary may not rest on making money alone. If the money is made in a way that engenders a lower quality of life, or a shorter life, the beneficiary has in fact been ill-served. This past year the world has been thrust into an economic decline brought about by a sharp collapse of credit markets. The millions who have lost their jobs did so not simply because there were greedy investment bankers involved. They fell victim to a system that allows the fiduciary to invest for return, often short-term focused, without considering the overall risks or costs to the beneficiary. We will never know how many of the new unemployed are the direct result of their own pension plan investing in reverse default swaps, but certainly the numbers are high.
16
OECD Observer
No 273 June 2009
It has become vividly clear that the way one invests matters. The investments of the past decade were largely the cause of global economic collapse. It is time for government regulators globally to address the biggest enabler in all this, the standard of prudence. In the US, we have various standards that a fiduciary must look to but the most influential is the Employee Retirement Insurance Savings Act (ERISA), which Congress passed in 1974. This Act is looked to even by trustees of funds not governed under the Act for guidance. It established standards of conduct for fiduciaries and gives court redress when fiduciaries fail. ERISA section 404(a)(1)(A) provides, in part, that: “A fiduciary shall discharge his [or her] duties solely in the interest of the participants and their beneficiaries and (A) for the exclusive purpose of (i) providing benefits to participants and their
beneficiaries; and (ii) defraying reasonable expenses of administering the plan” (see reference below). While looking after the best interest of the beneficiaries and their dependants sounds like a noble goal, this section, which has come to be known as the “exclusive benefit” section, has created an understanding that nothing but making money can enter into the mind
It does not make sense that a fiduciary should invest in a polluting industry of the fiduciary. But the language of the law, and I would argue the intent of the law, is not stated that way. The language directs the fiduciary to think of nothing but “the benefits”. We need clarification as to the meaning of benefit. To interpret it as meaning “make money” is to accept bizarre consequences.
