James P. Hawley

The Emergence of Fiduciary Capitalism

The twentieth century has seen a sea change in the concentration of ownership of U.S. corporations. Early in the century Berle and Means identified the divorce of ownership from control as the central corporate governance problem, but since the 1970s ownership has been re-concentrating into the hands of fiduciary institutions -- most notably pension funds and mutual funds. By the 1990s fiduciaries collectively owned over 50% of the outstanding equity of the 1,000 largest corporations. This new pattern of ownership, fiduciary capitalism, has begun to raise important policy questions including: How can agents (fiduciaries) effectively monitor other agents (boards of directors)? What are the social implications of universal ownership where fiduciaries own substantial stakes in virtually all of the corporations in a country, and, finally, What does it mean to maximize shareholder wealth when fiduciaries are universal owners?

POLITICAL VOICE, FIDUCIARY ACTIVISM, AND THE INSTITUTIONAL OWNERSHIP OF U.S. CORPORATIONS: The Role of Public and Noncorporate Pension Funds

This article examines the significance of the change from ownership of corporate equity (and debt) primarily by individuals to about half held by institutions. Most important among these are pension funds, of which public and noncorporate funds are the focus of the article. It is argued that public and noncorporate funds play an increasingly important role in corporate governance and policy. These “fiduciary activists” are central actors in the emergence of “relationship investing” resulting in the bypassing of market mechanisms in many important instances. The article examines a variety of recent examples of political voices of these institutions, concluding there is a partial, if messy, “remarriage” between the ownership and control of the modern corporation. This implies that U.S. corporations are in a significant sense neither merely “private” capitalist enterprises, nor public either, but an emerging entity containing public and private aspects along with an emerging “civil” ownership quality (i.e., by unions and other nonstate entities).

The Emergence of Universal Owners: Some Implications of Institutional Equity Ownership

THE United States the growth of institutional investors (public and cooperative pension funds, corporate and union pension funds, mutual funds and bank trusts) over the past twenty-five years has concentrated a substantial amount of corporate equity in the hands of a relatively small number of fiduciary institutions.1 This change in the ownership structure from individuals who held about 75 percent of stock in the early 1970s to institutional owners that currently own almost 60 percent of the largest 1,000 U.S. firms reflects the growth of various forms of indirect ownership (e.g., mutual funds) and beneficial claims

The Universal Owner's Role in Sustainable Economic Development

Abstract Toward the end of the twentieth century, ownership of corporate equity in the United States and Great Britain has once again become relatively concentrated, but this time in the hands of institutional owners such as pension funds and mutual funds. An important implication of this concentration is that ownership has become professional and, because these institutions are fiduciary institutions, subject to the fiduciary duties of loyalty and care. Furthermore, because of an institutions size or because of an explicitly policy of indexing, many institutions have become “universal owners”. A universal owner owns a small, but representative fraction of most of the companies in an economy. Thus, its ability to satisfy its fiduciary duties depends heavily on overall macroeconomic efficiency and performance rather than on the performance of any particular firm that it might own. Consequently, universal owners have a natural interest in issues of sustainable development because they receive the benefits from positive externalities generated by portfolio firms and are likewise harmed by their negative externalities.

Modern portfolio theory and risk management: assumptions and unintended consequences

The article presents an overview of the assumptions and unintended consequences of the widespread adoption of modern portfolio theory (MPT) in the context of the growth of large institutional investors. We examine the many so-called risk management practices and financial products that have been built on MPT since its inception in the 1950’s. We argue that the very success due to its initial insights had the unintended consequence, given its widespread adoption, of contributing to the undermining the foundation of the financial system in a variety of ways. This study has relevance for both the on-going analyses of the recent financial crisis, as well as for various existing and proposed financial reforms.

Tracking Companies’ Real Time Sustainability Trends: Cognitive Computing's Identification of Short-Term Materiality Indicators

The article argues that what as known as big data analytics using cognitive computing can be applied to sustainability (environmental, social and corporate governance) analysis. This can supplement what is now almost entirely done by human analysis, but this new technology is scalable and can create multiple real time data points (trends). Proprietary sustainability data analytics has been developed by a technology start up, TruValue Labs, Inc.. Using early data for a six month period, we have found statistically significant short term volatility variations correlated against what is called (and defined as) compounded TruValue (cTV), a sustainability indicator. This has been especially true in the E and S, and to a lesser degree, G areas. We argue that such short-term movement, previously undetected, and therefore not measured, has potential materiality (hence value) implications. The article sets the stage for these conclusions with a review of sustainability ratings and measurement systems currently in use, a brief review of cognitive computing, a discussion of materiality and sustainability as well as how TruValue data is generated.

Uncertain times, plural rationalities and the pension fiduciary

Modern portfolio theory is no longer quite the safe harbor for fiduciaries making investment decisions that it once was (Hawley et al. 2011). One reason for this is the prolonged uncertainty in the financial markets that was mentioned by chairman Bernanke in 2010 and which still seems to be with us two years (at the time of writing) down the line. In such an environment, the pension fiduciary faces both the external pressures stemming from a prolonged uncertain investment outlook, and the internal pressures stemming from employers and participants reacting to economic uncertainty and voicing their concerns related to the investment of pension assets. Fiduciaries have a duty to balance the interests of their different participant groups, and understanding the perspectives of those beneficiaries is critical to successful implementation of fiduciary obligations (Hawley et al. 2011; Berry and Scanlan 2014). From a practical perspective, unrecognized stakeholder expectations can pose risks to follow-through on implementation of investment strategies. How should the pension fiduciary act when the expected correlations among asset classes fail to materialize? How should the pension fiduciary interpret the apparently mixed signals from plan sponsors whose reactions to the sudden exposure to significant unfunded liabilities range all the way from derisking (by shifting more plan assets into fixed income investments) to seeking higher expected returns (by increasing the plans exposure to hedge funds and private equities)? What is the framework for making asset allocation decisions in such an environment?