Rose: Reframing Fiduciary Duties in Public Funds

Abstract: This article challenges the commonly evoked fiduciary obligation to strictly maximize fund value by asking a foundational question: who are the proper beneficiaries of public fund trustees’ fiduciary duties? The article makes a pivotal claim: public funds, including public pension funds and sovereign wealth funds, owe their duties to the government and current and future citizens collectively, and not to individual benefits claimants. This analysis is driven by the fact that in practice individual claimants function more like senior creditors than the residual claimants that are the typical recipients of fiduciary duties. This reframing of fiduciary duties in public funds has dramatic consequences for the investment policies of the funds. Most importantly, a shift in the locus of fiduciary duties to the government and current and future generations requires fund managers to more fully consider the externalities accompanying their investments, which should serve to help them fully and accurately price their investments. Private investors might ignore certain effects, such as uncompensated harms from pollution or depleted natural resources, because the government absorbs the costs of such externalities. A strict fiduciary duty to act in the interests of the fund would obligate a private investor to ignore such externalities, so long as they do not negatively affect the returns of the fund’s investments. The government that absorbs the cost of these externalities, however, should view investments differently, with a view to minimizing negative externalities, particularly those that are significantly more expensive to remediate than to prevent. As a result of this analysis, it follows that public funds should benefit from less constrained fiduciary standards that would encourage more investment in sustainable enterprises and long-term projects.

Full paper available for download here.