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Reason, Rationality, and Fiduciary Duty

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Abstract

This paper argues that since the last decades of the twentieth century the discipline of modern finance has directed fiduciaries to act "rationally"—that is, in the sole financial interest of their funds--downplaying the effects of their investments on others. This approach has deemphasized a previous, more "reasonable" interpretation of fiduciary duty that drew on a conception of prudence characterized by wisdom, discretion and intelligence—one that accounts to a greater degree for the relationship between one's investments and their effects on others in the world. The reasonable approach allows fiduciaries to a greater degree to assess the objective well-being of beneficiaries, to recognize fundamental sources of investment reward in the economy, and to fulfill their obligations to allocate benefits impartially between current and future generations. Reason and rationality can work in a complementary fashion to make investment long-term in its perspective and beneficial to society and the economy as well as to specific funds or portfolios. Determining how to accomplish this challenging task is part of the obligation of fiduciaries as they seek to realize the full potential of the investment assets entrusted to their care.

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Notes

  1. Rawls (1991, p. 48). See also Scanlon (1998, p. 192) on the common sense distinction between reasonable and rational behavior.

  2. Ibid. p. 49.

  3. Ibid. p. 51.

  4. Black’s Dictionary of Law.

  5. See White (2003, pp. 14–19).

  6. 9 Pick. (26 Mass.) 446 (1830).

  7. “Securities and Exchange Commission Staff Accounting Bulletin 99—Materiality” 17 CFR Part 212. August 13, 1999. Available at http://www.sec.gov/interps/account/sab99.htm. Last visited November 8, 2011.

  8. Commission Guidance Regarding Disclosure Related to Climate Change, Release Nos. 33-9106; 34-61469; FR-82 (Feb. 8, 2010), available at http://www.sec.gov/rules/interp/2010/33-9106.pdf, citing TSC Industries v. Northway, Inc., 426 U.S. 438 (1976).

  9. Restatement, Second, Trusts, Section 227, Comment f. (1959) as cited in Youngdahl (2010).

  10. See Bernstein (2005, 2007) for extended discussions of the origins and evolutions of Modern Portfolio Theory.

  11. Halbach Jr. (1991–1992, pp. 1154, 1155, 1184).

  12. Clark and Urwin (2010, p. 63).

  13. Waitzer (2009, p. 5).

  14. Keith Ambachtsheer, Forward to Koedijk and Slager (2011).

  15. See Walsh (2004).

  16. See for example, Romano (1993).

  17. Department of Labor, Interpretive Bulletin §2509.94-1 (29 CFR 2509.94-1).

  18. Advisory Opinion No. 2007-07A (December 21, 2007) and Advisory Opinion No. 2008-05A (June 27, 2008).

  19. Hawley and Williams (2000).

  20. Rawls. Op. cit. p. 50.

  21. CalPERS Press Release, “CalPERS Targets $800 Million for Investment in California Infrastructure” September 11, 2011. Available at http://www.calpers.ca.gov/index.jsp?bc=/about/press/pr-2011/sept/ca-infrastructure.xml. Last visited, September 30, 2011.

  22. TIAA-CREF Press Release, November 3, 2010. Available at: http://www.tiaa-cref.org/public/about/press/about_us/releases/pressrelease363.html. Last visited September 30, 2011.

  23. Social Enterprise, “Impact investors unite to create $25m fund for African agriculture” September 29, 2011, Available at http://www.socialenterpriselive.com/section/social-investment/money/20110929/impact-investors-unite-create-25m-fund-african-agriculture. Last visited September 30, 2011.

  24. Rawls. Op. cit. p. 49.

  25. Wesley (1872).

  26. Simon et al. (1972, pp. 18, 21).

  27. Louche and Lydenberg (2010, p. 398).

  28. Thornley et al. (2010, p. 7).

  29. Kurtz and diBartolomeo (2011). Available at http://www.iijournals.com/doi/abs/10.3905/joi.2011.20.3.095 See also the website at http://www.sritudies.org for a comprehensive listing of academic studies on the relationship between socially responsible investment and financial performance.

  30. Sen (2009, p. 207).

  31. See the website of the Norway Government Pension Fund for a complete list of excluded companies at http://www.regjeringen.no/en/dep/fin/Selected-topics/the-government-pension-fund/responsible-investments/companies-excluded-from-the-investment-u.html?id=447122. Last visited September 30, 2011.

  32. See the Access to Medicines Index website for a complete list of investors at http://www.accesstomedicineindex.org/content/investors-0. Last visited September 30, 2011.

  33. Sen. Op. cit. p. 194.

  34. SNS Asset Management website, available at: http://www.snsam.nl/index.asp?NID=7622. Last visited November 7, 2011.

  35. See http://www.regjeringen.no/en/sub/styrer-rad-utvalg/ethics_council/Recommendations/Recommendations/recommendations-on-cluster-weapons/Recommendation-of-June-16-2005-on-the-ex.html?id=424150. “Recommendation of June 16, 2005 on the exclusion of companies that are involved in production of cluster munitions” http://www.regjeringen.no/en/sub/styrer-rad-utvalg/ethics_council/Recommendations/Recommendations/recommendations-on-companies-supplying-a.html?id=614301. “Companies supplying arms or military equipment to Burma “http://www.regjeringen.no/en/sub/styrer-rad-utvalg/ethics_council/Recommendations/Recommendations/recommendations-on-companies-supplying-a.html?id=614301. “Companies supplying arms or military equipment to Burma”. Accessed September 1, 2011.

  36. Elster (2009, p. 28).

  37. As cited in Bernstein (2007). Op. cit. p. 40.

  38. Bernstein (2005). Op. cit. p. 120-121.

  39. See, for example, Lowenstein (2000, pp. 26–27) on the use of leverage by the hedge fund Long-Term Capital Management.

  40. See, for example, Bullock and van Duyn (2011, p. 21) (U.S. Edition).

  41. See, for example, Scannell (2011, p. 1) (U.S. edition).

  42. Simon Zadek, Presentation at World Economic Forum, 2005.

  43. Bhidé (2010, p. 44).

  44. Rawls. Op. cit. p. 50.

  45. Shukla (2011).

  46. See, for example, Bärnghausen et al. (2009).

  47. On SIVs, see for example, Kerber (2007). On auction rate securities, see for example, Anderson and Bajaj (2008).

  48. Halbach. Op. cit. p. 1171.

  49. Hawley et al. (2011).

  50. Ibid. p. 8.

  51. See Development and International Co-operation (1987).

  52. Milton and Friedman (1980, p. 14). As cited in Bhidé. Op. cit. p. 56.

  53. Bernstein (2005) Op. cit. p. 119.

  54. Bhidé. Op. cit. p. 7.

  55. Ibid. p. 60.

  56. See Sy Harding “Investors Will Have to Learn to Trade” StreetSmart blog post, January 21, 2001. Available at http://www.streetsmartreport.com/print/school/Commentaries/Investors%20Will%20Have%20to%20Learn%20To%20Trade Last visited, October 21, 2011.

  57. Story and Bowley (2011, p. A1).

  58. Skidelsky (2009, p. 149).

  59. Elster. Op. cit. p. 8.

  60. Davidson (2009, p. 77).

  61. See Taleb (2007).

  62. Skidelsky. Op. cit. p. 188.

  63. Ibid. p. 87.

  64. Ibid. p. 174.

  65. Ibid. p. 158.

  66. Rawls. Op. cit. p. 52.

  67. Gudeman (2008, p. 14).

  68. Sen. Op. cit. p. 194.

  69. Waitzer (2009).

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  1. Initiative for Responsible Investment, Hauser Center for Nonprofit Organizations, 79 JFK Street, Cambridge, MA, 02138, USA

    Steve Lydenberg

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Lydenberg, S. Reason, Rationality, and Fiduciary Duty. J Bus Ethics 119, 365–380 (2014). https://doi.org/10.1007/s10551-013-1632-3

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