Nobel Prize-winning Economist Calls for Shareholder Welfare Over Value

Harvard professor argues that sole focus on maximising returns can violate fiduciary duty if at odds with beneficiary priorities.

Economist Oliver Hart has proposed that the concept of shareholder value be replaced by one of shareholder welfare to provide better outcomes for people and planet.  

Speaking at a lecture hosted in London by NGO ShareAction, the Nobel prize winner said: The conventional wisdom is that pension and other asset managers should act on behalf of their beneficiaries by maximising risk-adjusted financial return, or shareholder value; this view is flawed.” 

Hart noted that while beneficiaries care about financial returns, they also want to live in a “safe and decent world”. 

“Shareholder value maximisation (SVM) should be replaced by shareholder welfare maximisation (SWM),” he said, adding that to make it practical for pension managers to support SWM, changes in the legal interpretation of fiduciary duty “may be required”. 

According to Hart, fiduciary duty for both company boards and asset managers has been interpreted to mean a strict focus on financial returns.  

“Anything else, and people would have said that you’re violating your fiduciary duty, which I think makes no sense,” he said, adding that it should instead be interpreted as acting on behalf of beneficiaries.  

“If your beneficiaries don’t just want to maximise financial return, but care about other things, then, if you don’t put any emphasis on these other things, then you’re violating your fiduciary duty,” he said.  

“And yet, that’s just the norm now, and in some cases, the law. It’s certainly the law in the US with respect to pension plans […] The norms and the law need to change so that we can free pension from this strict constraint.”  

Published in March, the UK’s Green Finance Strategy committed to a review of pension trustees’ fiduciary duties and stewardship activities by the Financial Markets Law Committee, which also reviewed the issue in 2014 and 2017. 

The UN-convened Principles for Responsible Investment has commissioned a series of reports on the legal barriers to posed by existing laws in major jurisdictions to investing for sustainable impact, in some cases calling on policymakers to “better align” sustainability-driven goals with fiduciary duty,  

Hart is the the Lewis P. and Linda L. Geyser University Professor at Harvard University, where he has taught since 1993. He is the 2016 co-recipient of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Hart’s research largely focuses on the roles that ownership structure and contractual arrangements play in the governance and boundaries of corporations. 

Broken system 

Earlier this year ShareAction commissioned a YouGov poll that found that close to three-quarters of the public would like social and environmental factors considered alongside financial returns.  

Further, 71% of respondents said they would view their financial services supplier negatively if they were invested in companies engaged in human and labour rights abuses.  

For suppliers invested in companies involved in either deforestation and environmental damage, or high use of fossil fuels, the percentage of the public with a negative impression was 68% and 53% respectively.   

“Our pension and investment systems are broken,” said Catherine Howarth, CEO of ShareAction, also speaking at the lecture, on 25 October. “It doesn’t deliver decent incomes in old age and it fails to reign in investee companies that operate in socially destructive ways.  

“Our pension funds urgently need a new mandate in law to serve working people’s interests, properly balancing financial and impact considerations.” 

According to Howarth, working people who pay in “good faith” into pension schemes are not served as well as they might be by an institutional investment system “hobbled by legal and economic orthodoxies” that inhibit fiduciaries from investing in the best long-term interests of pensions.    

In our view, failing to recognise the effects on people of the investments made on their behalf and act, accordingly, prevents institutional investors from securing the best outcomes over the long term for the people they’re duty-bound to serve,” she said.  

Howarth said many companies make more money for their investors by operating in ways that “consciously externalise costs” onto people and the environment.  

“The current definition of fiduciary duty is not fit for purpose within the circumstances of such profitable exploitation,” she added.  

“In our view, open and public policy and legislative reform to free up pension trustees to adopt a broad outlook on their members’ best interests can address this significant problem.”

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