The Elfenworks Center for the Study of Fiduciary Capitalism
Overview
Corporate Governance, Fiduciary Capitalism and Universal Owners
Economic Externalities
Norm Shifts
Sustainable Economic and Social Development
Fiduciary Responsibility and Sustainability
Norm Shifts
A ’norm’ is a society’s attitude toward a particular activity or practice and a ’norm shift’ is a change in a society’s attitude. For a large part of our country’s history, for example, employing children in factories was considered an acceptable labor practice. It was an accepted norm. But the norm changed (albeit with significant conflict) and today child labor is neither acceptable nor legal. While norms are not externalities, some norm shifts, like the shift to the prohibition against child labor, can have extremely important economic consequences and are often justified to some degree by their economic impact. In this case, the enhanced long-term productivity that would come from a more highly educated labor force. This development was made possible by the universal public schooling that accompanied the movement away from child labor and which was used as a partial justification for the change in norms about employing young children.
Recent examples of the interaction between norm shifts and scientific and technologically based externality issues can be seen in areas as diverse as tobacco and smoking, environment, labor practices, animal testing standards, health and safety issues, human rights and various types of gender, racial and other forms of discrimination which are closely related to human rights. In the U.S. many if not all of these may also become significant forms of contingent legal tort liability which may well have major financial impact on firms.
Contingent legal liability (and the often closely related regulatory actions by Congress and the courts) come to define markets boundaries -- what is legally, ethically and prudentially possible - in business practices. Norm shifts usually present themselves to a firm in the form of legal (tort), market, good will and/or other forms of firm specific liabilities. Because of potential adverse consequences, fiduciary duty compels institutional owners to have in place a process for tracking and analyzing these developments, that is, some form of risk analysis. They should be obligated to monitor and analyze their portfolios for interactive externality effects, as well as for ’risk’ factors based on norm shifts. We call this type of extended monitoring ’universal monitoring’.
Since universal owners internalize positive and negative externalities of the firms in their portfolios and since they bear the consequences of firms’ norm based liabilities, their fiduciary duty requires universal monitoring of their portfolio. It is in their long-term interest and the interest (by definition) of their investors and beneficiaries to maximize the positive externalities of their holdings and minimize the negative externalities. This may create direct costs (e.g. pollution abatement, product and process redesign) for some firms and sectors of the economy, but will generate gains to other sectors and firms. However, as a general proposition, negative externalities impose costs on affected firms that outweigh - sometimes greatly outweigh - the benefit to polluting firms. Thus it is in the long-term interest of a universal owner, one that owns all firms, to pursue externality monitoring in an attempt to reduce negative externalities and to encourage positive externalities among portfolio firms. This should be combined with portfolio wide norm shift linked risk monitoring resulting in universal portfolio analysis and universal monitoring.
