15th March 2012
The current legal framework underpins a short-termist, devil-take-the-hindmost, mindset, which worships rapid short-term profits growth but which can be detrimental to investors' long-term wealth. It encourages investors, and the corporations in which they invest, to pursue investment approaches that focus on short-term gains with little regard to longer-term performance or the sustainability of their strategies (the pre-crisis behavior of out-of-control and dysfunctional UK banks like HBOS and RBS were perhaps whether the disease became most pronounced).
Investors including Aviva Investors, Jupiter Asset Management, Hermes Fund Managers and other bodies inclluding UNEP, ACCA and FairPensions now believe it's time for a change and are calling on the government to tighten up the definition of "fiduciary duty" which is currently wide open to misinterpretation along Friedman-esque lines and hence abuse. They have written a letter to this effect to The Times (non-paywall version). The signatories, who also include David Pitt-Watson of the UNEP's Finance Initiative and Alan MacDougall of Pensions Investment Research Consultants, wrote:
[Investors'] duty to act in the best interests of savers is [currently] widely seen as a duty to focus solely on the maximisation of short-term returns, ignoring anything that cannot immediately be monetised. The folly of such an approach has been amply demonstrated by the banking crisis …. If politicians are serious about encouraging a more far-sighted and responsible capitalism, they must remove this perceived legal barrier. If the hopes being pinned on investors are to be fulfilled, attention must turn to an aspect of the law which is pushing in precisely the wrong direction."
The letter to the Murdoch-owned Thunderer coincides with a new report from FairPensions, which campaigns for transparency and accountability in finance. In its Enlightened Shareholder report, published on March 14, FairPensions suggests that efforts to use shareholder activism as a battering ram to introduce a more responsible form of capitalism in the UK are doomed to fail unless legal misunderstandings are corrected.
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