Board members’ Duty of Loyalty to Shareholders (fiduciary duties): A built-in System failure

Although a shareholder may be part owner of a corporation, he generally has no control over the day-to-day management of the corporation. The board of the directors and the officers have direct control over the corporation, and therefore they owe fiduciary duties to the owners, who are the shareholders..”                                                                                                                                                                                                                                                                                                                                                                                                     [The Houston Chronicle]

Why is this important? An indication is given in the quotation below (relevant for listed enterprises, even though the first part refers to banks in particular)

«Fifty years ago in the US and Europe people who needed financial advice turned instinctively to their bank manager, who was a respected member of the community with good local knowledge. He – and it invariably was a he – would steer a client away from one product towards another even if doing so would lead to a lesser profit for the bank. The underlying assumption was that selling a product that was right for the client’s personal circumstances regardless of its profitability for the bank was in the long-run interests of the bank and its shareholders as well as those of the client..

Everything changed in the 1980s with the shareholder value revolution. People in quoted companies from the chief executive officer down came under much greater pressure to increase earnings on an annual, half yearly and quarterly basis. The result was that the bankers’ fiduciary obligation to look after the client’s interest came into potential conflict with the short-term interest of share-holders. The conflict was greatly exacerbated by the introduction of sales targets and incentive rewards for employees, together with stock option and other equity-related awards.

.. The requirement for quarterly reporting bred a “hitting the numbers” culture. Chief executives who failed to meet the market’s expectations could find themselves in the ejector seat as the share price collapsed. In the English-speaking countries the CEO’s average tenure came down to as little as three or four years.»

John Plender and Avinash D. Persaud (2007: 53-54,8-9): All you need to know about Ethics and Finance-Finding a moral compass in business today. [Emphasize added]

Kelly and Howard (2019)  refers to the consequences of ‘fiduciary duty’) as follows:

 

Today, 40 percent of jobs in the US are insecure, part-time, contract, gig-economy-type work, and even those jobs are disappearing in the face of offshoring and automa­tion. We’re getting these precarious jobs because of the systems natural functioning. The reality is that the pursuit of profits often means hold­ing down wages—and that’s a feature, not a bug.

In fact, we haven’t fully confronted the fact that corporations believe they have a fiduciary duty to systematically suppress labor and labor income—and weaken environ­mental regulation—in order to increase profit for wealthy shareholders.   

When the first moral duty is a fiduciary duty to maximize returns on investments, in effect it becomes the only duty, requiring all other concerns—the well-being of communi­ties, employees, and the environment—to be justified in terms of impact on capital.

(Marjorie Kelly and Ted Howard (2019:6,24-25): The Making Of a Democratic Economy.  Building Prosperity for the Many, Not Just the Few, emphasize added)

 

Another take on Fiduciary Duties: Fiduciary Responsibility to Future Generations

This Barnes (2015) presents, proposing what he terms ‘common wealth trusts’, introduced us to as follows:

«We all know what private wealth is: stocks, bonds, real estate, and so on (..) By con­trast, we barely notice our common wealth, which is a much richer trove. It in­cludes the vast gifts of nature, including sources and sinks, along with socially created institutions with­out which large-scale enterprise could not flourish.

Con­si­der what would happen, for instance, if the Internet stopped functioning: all of the businesses that depend on it would suddenly have little value on their own. The same is true for our energy, transportation, and financial systems. It is common wealth that creates most of the value of pri­vate wealth.

Common wealth, by right, belongs to everyone equally. However, markets currently do not acknowledge such wealth or recognize its value, much less its common ownership. Because of this enormous market failure, private businesses take, use, or pollute common wealth without limit, generally without paying its right­ful owners for the pri­vi­lege.

By so doing, private businesses and their narrow group of owners capture much of the value added by common wealth, exacerbating inequality. If businesses had to pay for the use of common wealth, these things would not happen, or at least would happen much less. What are now unpriced exter­nal­i­ties or straight-out thefts would become costs for businesses that could generate income for everyone.»

Peter Barnes (2015): “Common Wealth Trusts: Structures of Transition [emphasise added]

Barnes also gives his reason for why elected governments presently do not act as trustees for common wealth and what can be done to rectify this shortcoming:

«Our present form of elect­ed govern­ment is simply not de­signed to balance the rights of future genera­tions against those of the living. Since future gen­er­ations do not vote or do­­nate to candi­dates for public office, they have little to no clout in our electoral system. Historically, this was not a problem because when many of today’s democratic systems were established, nature was not imperiled as it is today. Now, however, the peril is great and cannot be ignored.

One way to work around this flaw in democracy is to give future generations repre­sen­tation in our economic system. Though difficult, this is easier to do—and once done, more durable—than representing them in our political system. We can assign property rights in critical ecosys­tems to trusts for which asset pre­servation, rather than winning elections or maximizing profit, is the paramount mis­sion. The National Trust in England, which owns more than 600,000 acres of countryside, including one-fifth of the coastline, shows how such institutions could look. Community land trusts provide a similar example, albeit on a smaller scale. »

Barnes 2015 ibid. [emphasise added]

See the paragraph ‘Property on the Outside, Commons on the inside ’ for an outline of how the proposed Commonwealth should be organized. Here, we will note that Barnes proposal is in line with our website’s emphasize on a real circular economy, including the stress on inequality:

«..organ­ized common wealth can

(1) slow the flow of energy and mater­ials through the economy and

(2) provide everyone a source of non-labor income.

..Assuring a decent living for all and reducing inequality will require some form of non-labor income. Organized common wealth can come to the rescue here as well. In the US, for example, organized common wealth could, over time, generate enough income to pay dividends of up to $5,000 per person per year. Initially, a sizable portion of the funds would come from selling a declining number of permits to park carbon dioxide in our shared air. Later, additional dividends could be generated by charging corporations that use our country’s finan­cial infrastructure, patent and copyright sys­tems, and electro­magnetic airwaves.»

Barnes 2015 ibid. [emphasise added]