A New Era of Fiduciary Capitalism?

capitalismAn Encouraging View

John Rogers, CFA, President and Chief Executive Officer of the Chartered Financial Analyst Institute weighed in at the Society’s Journal in June with a guest editorial about the state of finance as an industry in today’s economy. Rogers observed that the proportion of GDP attributable to this industry has almost doubled since 1980 and wants to know what the benefit was to the larger society.

He describes the history of interest rate suppression and its effect on the financialization of the economy. The rapid growth of this industry absorbed tens of thousands of bright young people at its height. He laments that the sole objective of this engorged industry was “rent seeking”; the search for greater “alpha” or the margin between principal and current value. Rogers observes that with the advent of institutional investors who control enormous market share, the relentless drive for alpha to the exclusion of all other considerations might be ending.

He asserts that these institutions understand that their role as perpetual entities have, at the core, a fiduciary obligation to their beneficiaries that extends beyond the lives of those who are currently recipients. Because they have this realization, they must take a strategic orientation to the companies in whom they invest. Rogers observes that they are concerned with governance in those corporations because the way a corporation is governed has a tremendous impact upon its future viability. This creates a phenomenon he calls “patient capitalism”. Such a pervading atmosphere in the financial markets would change the objective of capital investment from the search for greater alpha today towards a questioning how the long term interests of the shareholder (for the institutional investors this means the interests of their beneficiaries for generations to come) are being met by this corporation, its products and/or services. Rogers observes that more and more frequently, large institutions are investing directly between each other on private trading platforms, bypassing the exchanges,  their high speed trading programs and excessive fees.

Rogers does not express it directly but in governance, executive compensation is a massive proportion of total costs and easily reduced as a cost of doing business. He does not explicitly address future costs that have enormous social impacts such as developing alternative energy resources and reducing fossil fuel consumption to fight global climate change, but when the outlook is strategic, the beneficiaries numerous and intergenerational these considerations must be included. The aggregate of 1,000 of the largest (fiduciary) institutions accountst for more than half of the world’s capital. This gives them tremendous clout in the global markets. They can bring about enormous social benefit if they were to demand and assert their fiduciary orientation on global corporations.

John Rogers, in conclusion hopes for the supplanting of 30 years of finance capitalism with a new era of fiduciary capitalism and warns the financial sector that if it causes another meltdown then it should expect more regulation even to the point of making them into public utilities. He decries the era of stratospheric managerial bonuses and is fervently wistful and optimistic for “…efficiently and cleanly connecting capital with ideas, long term investing for the good of society, and delivering on promises to future generations”. We should insist upon, be on the lookout for and prepared to spotlight the coming fiduciary capitalism.