What has fiduciary duty got to do with social justice? In fact, what on earth is fiduciary duty?
It turns out that this question is rather important. Fiduciary duty, taken from ‘fides’ (meaning faith) and ‘fiducia’ (meaning trust) are the duties of those who operate capital on behalf of someone else.
This means charitable trustees (with around £90bn), but more significantly it means the trustees of pension funds – around £1.5trn, or as much as the value of the UKs GDP.
So what we understand by fiduciary duty directs gargantuan volumes of money.
Trouble is, the twentieth century saw the gradual emergence of Milton Friedman’s mantra, “the social responsibility of business is to maximse profits” into an unchallenged orthodoxy.
The voice of Adam Smith, speaking from the past in the pages of The Theory of Moral Sentiments, was lost in the rush for profit. Markets, as Smith wrote, lose legitimacy when they do not serve the broader interests of communities.
So fiduciary duty came to be understood by trustees as the obligation to maximise the financial interests of beneficiaries. This is crazy when beneficiaries are human beings, not merely material beings.
The distortions caused by this mistaken orthodoxy were then compounded by errors in implementation, where conflicted finanical services professionals ended up enabling short term returns to be valued more highly than extreme long term returns – breaching even this profit-maximising orthodoxy.
It is time to reclaim the true and original notion of fiduciary duty – the duty of pension fund and charitable trustees to align interests. Rather than seeking ‘maximum’ returns, it is time that fiduciaries were charged with achieving ‘optimal’ returns – optimal for all stakeholders.
By turning this key, the biggest weapons in our society might be retargetted. Instead of zoning in on extraction of financial return, they might aim at the target of reasonable returns in a society optimised for their beneficiaries.
Just to note that Fair Pensions have been providing outstanding leadership in this discussion for a few years now. The recently announced review to be conducted by Professor John Kay into associated questions represents a real opportunity for change. I hope that Fair Pensions are able to get their point across.