When Fiduciaries Collide: Foreshadowing a Looming Conflict in Corporate Governance

When Fiduciaries Collide: Foreshadowing a Looming Conflict in Corporate Governance

Envision a situation with two sets of fiduciaries, one a Delaware corporate board, the other a shareholder of the corporation who is also the trustee of a diversified retirement fund. The corporation in question generates negative externalities in the form of sub-living wages and carbon pollution, contributing to systemic macroeconomic risk[1] that reduces income growth and aggregate demand, damages productivity, and increases the likelihood of financial crises. The retirement trustee has determined that in aggregate, the economic toll of these externalities constitutes an unacceptable risk to beneficiaries’ future financial health. The trustee, in observing its duty of prudence, therefore believes these externalities should be reduced by the firms in the retirement portfolio responsible for them. The trustee additionally believes that our corporate board will not voluntarily undertake steps to reduce the externalities, as this will entail substantial cost in the form of higher labor expense and increased expenditure on pollution control equipment, or even an undesired change in the business model. Our well-diversified trustee, invested in thousands of assets, assesses that its portfolio weighting in the corporation is minuscule, so that any financial damage to the corporation itself, as a result of these increased costs, will be nothing more than a rounding error to the trustee’s portfolio as a whole. On the other hand, the trustee estimates that the pecuniary long-term damage to the overall portfolio, in the absence of systemic risk mitigation, will be significant. The trustee, cognizant of the fiduciary duty to investigate and monitor portfolio risk, engages with the corporation’s board to encourage it to reduce the firm’s externalities. As affirmed in McRitchie v. Zuckerberg, however, the corporate director’s fiduciary duty is not to any particular shareholder, but to the long-term value of the company’s shares. The board has judged that reducing the firm’s externalities would harm the long-term value of the shares, so the board refuses the demand. The trustee escalates by initiating a “vote no” campaign against the board, hoping to remove the incumbent directors and thereby shift the corporation’s behavior.

The corporate directors, in rejecting any reduction in externalities based on the projected damage to the shares, are merely fulfilling their fiduciary duties. The trustee, in pressing for the reduction, is merely fulfilling its fiduciary duty as well. Attention is rising to the portfolio damage incurred from the systemic risks of climate change, biodiversity loss, wealth and income inequality, erosion of the rule of law and the rise of corruption, increasing authoritarianism, and their interactions, incentivizing diversified asset owners to exercise duties of care and loyalty to their beneficiaries by pressing for the reduction of negative corporate externalities. As they do, their duties come into direct conflict with the duties of corporate directors. This conflict bears upon central questions of corporate governance, such as who ultimately decides how corporations behave. The flashpoint is not imminent, but there are signs that it is approaching. The clash, which exposes a fault line between corporate and trust law, is underexplored. It may not be for long.

The Damages from Systemic Risks and Increasing Asset Owner Attention to Them

Various systemic risks contribute to macroeconomic damage, with the physical effects of climate change (excessive heat, sea level rise, increased fire risk, drought, agricultural harms, greater weather extremes, etc.) receiving the most focus. For example, the insurance company Swiss Re expects global GDP to be 18% lower by 2050 in the absence of mitigating action, the asset manager BlackRock calculates a cumulative loss in global output of nearly 25% in the next two decades under a “do nothing more” scenario, and the consultant Boston Consulting Group (BCG) joined with the University of Cambridge to warn that cumulative economic output could be reduced by 15% to 34% if the global average temperature is allowed to rise by 3°C by 2100 (the current forecast is 2.8°C), surmising that damage will be at the upper end of the range, or even higher, due to the limitations of current models.

Regarding the systemic risk of income inequality, World Bank economists determined that for the median country in the world, a 1 percentage point increase in the Gini coefficient decreases GDP per capita growth over a 5-year period by over 1 percentage point. Racial and gender inequality have also been connected to severe macroeconomic impacts.

Estimates of the macroeconomic damage of other systemic risks include the threat of biodiversity loss, as the World Bank estimates that an aggregation of ecosystem collapses could cost more than 2% of global real GDP annually by 2030, and authoritarianism, with a Nobel Prize-winning economist finding that democratizations increase GDP per capita by about 20 percent in the long run. Furthermore, the macroeconomic damages of these systemic risks in isolation are magnified by their interactions.

Macroeconomic risks and opportunities affect the value of financial assets in retirement funds through their impacts on corporate profits, which flow through earnings per share (EPS) into stock prices, and through credit quality into bond prices. Several entities have estimated the implied damage. The EDHEC-Risk Climate Impact Institute at EDHEC Business School assesses that “more than 40% of global equity value is at risk unless decarbonization efforts accelerate and losses could exceed 50% with near climate tipping points.” The consultancy Ortec Finance, in analyzing the portfolio holdings of the 30 largest U.S. pension funds, cautions that investment returns could drop by up to 50% by 2050. The world’s largest sovereign wealth fund, Norway’s Government Pension Fund Global, conducted its own assessment and reports that “the present value of average expected losses from physical climate risk on our US equity investments under a Current Policy scenario is 19 percent (and 27 percent at the 95th percentile) when using the top-down approach…” and notes that these figures are underestimates, as “the damage functions fail to capture the losses associated with the systemic impacts of climate change…”

While certain sectors of the economy will be harmed more than others, there are few safe investments. The concept of market contagion suggests that returns and volatility become correlated across assets or across countries in response to systemic events. Transmission channels can arise from trade linkages or financial or political relationships. Contagion can also result from investor behavior, such as when panicky investors sell safe assets to raise a cash cushion. While the linkages are complex and difficult to generalize, even a well-diversified portfolio will suffer from systemic risk.

Asset owners such as defined-benefit pension funds, who must account for long-term liabilities to their beneficiaries, have begun to recognize that systemic risks necessitate remedial action. The impetus for asset owner-driven systemic risk management derives from a number of sources. One is from global corporate governance and investor organizations: the International Corporate Governance Network’s Global Stewardship Principles include language that “systemic risks, including those relating to climate change, wealth inequality and anti-corruption, can affect the sustainable value creation of individual companies as well as the health of economies and financial markets.” The UN Principles for Responsible Investment and the UN-convened Net Zero Asset Owners Alliance, comprising 86 asset owners controlling more than $9 trillion in assets, also note the dangers to portfolios from systemic risks.

Moreover, regulators and legislators have taken note of the fiduciary duty to manage systemic risk, most prominently in the United Kingdom, which shares its common law fiduciary roots with the U.S. The U.K. Pensions Regulator has stated that managing systemic risk is core to trusteeship. Parliament is currently considering amendments to the Pension Schemes Bill that would stipulate guidance for trustees to take into account climate risk when investing in the best interests of members and beneficiaries. Major pension funds in the U.K. and Europe are amplifying these ideas and putting them into action. For example, the U.K.’s National Employment Savings Trust, a public corporation of the Government’s Department for Work and Pensions and the U.K.’s largest pension fund by number of members, announced that it may vote against the board chairs of companies that have materially scaled back their climate commitments without adequate explanation. In the U.S., public pension fiduciaries in Maryland, Vermont and Connecticut have incorporated systemic risk concerns into their proxy voting guidelines, with Vermont explicitly threatening to disapprove corporate directors on that basis. Pension funds that are alleged to insufficiently consider systemic risk may be pressured to act through litigation, exemplified by current lawsuits against the Canada Pension Plan Investment Board and the Cushman and Wakefield 401(k) Plan. As emissions rise, biodiversity declines, extreme wealth inequality increases, rule of law erodes, and global freedom and corruption worsen, the trend of growing interest in, and action for, systemic risk reduction on the part of retirement trustees should continue to strengthen.

What Might This Mean for Corporate Directors?

An emerging systemic risk activism will have different implications for different companies. Firms that innovate in climate change mitigation and adaptation, for example, may find it easier to raise capital from retirement pools. Several pension plans have committed to funding climate solutions but have been careful to restrict investment to projects that meet internal hurdle rates. Since risk-adjusted expected returns for early-stage technologies are often speculative, pension funds may avoid projects with the greatest potential for impact. But a project with great potential to reduce systemic risk, even if its near-term risk-adjusted returns are sub-par, could still be investable for a pension fiduciary who believes that the reduction in long-term harm to the portfolio overwhelms the diminished near-term returns of the impact investment.

Directors of corporations that produce negative externalities may feel increasing threats from systemic-risk activism, however. Investor-owned corporations are a significant source of systemic risk. Public companies account for almost one quarter of all emissions from fossil fuel and cement producers. Approximately one-third of the world’s workers, many in the direct workforces or global supply chains of investor-owned brands, earn below a living wage. Public companies have been deeply implicated in the opioid crisis, a systemic risk that costs the U.S economy over a trillion dollars per year, and generate other systemic externalities ranging from antimicrobial resistance to erosion of the freedom of expression. The systemic risk profile of artificial intelligence is also a new but rapidly growing concern for pension fiduciaries.

In issuing his opinion dismissing McRitchie v. Zuckerberg, Vice Chancellor Laster noted that a corporate board could voluntarily address the needs of diversified investors by amending the corporate charter to become a public benefit corporation (PBC). But this has not been a palatable alternative for Delaware corporations. The author is aware of only two public companies that have converted to PBC status, Veeva Systems and United Therapeutics, and none since 2021. Fifteen shareholder resolutions filed by the Shareholder Commons for the 2021 proxy season requesting conversion to a PBC received votes of generally 2-3% (a resolution at Yelp was supported by 12% of shareholders).

If corporations will not address their negative externalities voluntarily, then retirement fiduciaries may be forced to resort to pressure tactics. For equity holders, these span the spectrum of escalation from friendly persuasion, to supporting non-binding shareholder resolutions, to rejecting Say-on-Pay proposals, to “vote no” campaigns aimed at directors, to outright proxy battles for board seats. While poor management of externalities is not currently a topic of board proxy battles, in the heyday of ESG ascendance Exxon lost three directors to a challenge, supported by several pension funds, based partly on inattention to climate risk. Activist investor attention to externalities extended to JANA Partners’ and the California State Teachers Retirement System’s joint letter to Apple, Inc. requesting greater parental controls over children’s screen time, and Kimmeridge Energy Management’s board challenge at Ovintiv Inc. linked to deficiencies of environmental stewardship. As the irresistible force of $70 trillion backing global retirement funds meets the immovable object of share maximization, directors may expect a return to board activism regarding externalities.

Managers in the Middle

Caught amidst this clash of titans, asset managers will understandably try to appease both sides or risk losing business. Indeed, managers have already faced termination both from retirement fiduciaries who have accused them of neglecting externalities as well as those who have accused them of the opposite. These same managers may also feel the wrath of corporate clients who have placed them in 401(k)s.

Currently managers are testing two different strategies in order to please everyone: pass-through voting and opt-in stewardship. The ability of clients to take over proxy voting responsibilities themselves has always been an option for those with separately managed accounts, and managers are busily extending these options to clients in pooled accounts where technology previously prevented it. While voting choice elegantly allows managers to wash their hands of stewardship controversies, there are also competitive drawbacks. In outsourcing their capacity to vote, asset managers have removed their incentive to engage, steward and monitor, and have reduced their value proposition to little more than price, especially in the passive management realm. Clients also complain that they cannot fulfill their stewardship responsibilities, required by law in certain jurisdictions, with vastly fewer resources than are available to asset managers, who have large teams of stewardship professionals and much greater access to corporate executives.

To attract clients concerned with systemic risk mitigation in a way that overcomes the drawbacks of pass-through voting, some of the largest asset managers have begun to experiment with opt-in stewardship. Both BlackRock and State Street offer to select clients stewardship options that are designed to reduce externalities. BlackRock advertises a dedicated stewardship team that “may vote against the election of one or more directors” if it finds that a company is not executing on its commitment to “align with the transition to a low-carbon economy.” State Street’s dedicated stewardship team, on behalf of opt-in clients, may support shareholder proposals that request the publication of a climate transition plan, a deforestation policy, enhanced disclosure on human rights risks, and even enhanced disclosure of race, ethnicity and gender composition of the board.

Neither BlackRock nor State Street engage forcefully with U.S. companies as a result of the SEC staff’s February 11, 2025 guidance for shareholders to maintain their eligibility to report their beneficial ownership under Schedule 13G of the Exchange Act. Smaller asset managers that do not face this constraint are free to set up their own opt-in stewardship platforms, however, and at any rate all asset managers can apply these rules to any non-U.S. company where their jurisdiction permits it. For a fascinating (to corporate governance professionals) look at this evolving trend, the reader is directed to former New York City Comptroller Brad Lander’s 2025 memo recommending that $43 billion managed by BlackRock be put out to bid, and BlackRock’s response. If opt-in stewardship manages to take hold, corporate directors can expect increased pressure to reduce their externalities from certain asset managers as well as asset owners.

The Backlash Against Systemic Risk Mitigation

Conservative think tanks, state finance officials and Congressional representatives have launched attacks on the legality of systemic risk mitigation by pension fiduciaries, and these are accelerating as trustees more forcefully flex their influence. The American Legislative Exchange Council has drafted model legislation, the State Government Employee Retirement Protection Act, that includes language stating that, “[w]hen used to qualify a risk or return, the term ‘material’ does not include…any portion of a risk or return that primarily relates to events that…are systemic, general, or not investment-specific in nature.” In July, 2025, financial officials of 21 states wrote to the leaders of large asset managers criticizing the assessment of future outcomes as long-term risks, citing climate change as an example of a potential risk that is “framed as certain and catastrophic to justify forcing companies to take immediate actions that may not align with their long-term business interests.” In February, 2026, the Chair of the House Committee on Education and Workforce wrote to the President of the California Public Employees Retirement System, stating that the fund’s commitment to strong labor standards and its climate investing program were examples of prohibited activities designed to advance a social agenda rather than provide for the exclusive benefit of its employees. The letter included veiled threats to amend ERISA to cover state pension plans or refer the matter to the IRS. U.S. corporations bent on preserving their ability to externalize harms onto society have friends in high places.

How will the Impending Conflict Play Out?

One can only speculate as to when the asset owner fiduciary imperative for systemic risk reduction will collide with corporate directors’ fiduciary duty to the value of the entity’s shares, the form it will take, and the legal ramifications. One potential scenario involves asset owners allying with activists to replace directors, exemplified by the Exxon proxy fight. This scenario seems unlikely, however, since activists earn returns on an improvement in the target’s share price, not on reduction of systemic risk to diversified portfolios. More likely is a proliferation of “vote no” campaigns. The efficacy of these campaigns is questionable. Directors may not receive majority support and be forced to tender their resignation to the board, but the board may simply refuse the tender. Lawsuits may be the end result. Another route to systemic risk reduction may be through government. But lobbyists cost money, and pension fiduciaries may be reluctant to expend scarce resources on issues where there is no guarantee of success.

Amidst the uncertainty of what the future will bring, one likelihood is that relations between the boards of externality-generating companies and their diversified asset owners will become increasingly contentious, and in this contest the interests of the company’s largest shareholders may become increasingly irrelevant. It is a paradox when the fiduciary duty of corporate directors foils the fiduciary duty of retirement trustees. One can only hope that the paradox is solved before unabated systemic risk generated by corporate externalities causes severe damage to our economy as well as to retirement beneficiaries’ nest eggs.

1This is a more general definition of systemic risk, as opposed to the narrower definition used by bank regulators. Systemic risk in this sense is allied with, but different from systematic risk, which refers to the sensitivity of an asset or portfolio to various factors that affect all assets. Systemic risk reduction diminishes the risk to the market, while systematic risk reduction diminishes risks related to market factors, with the risk to the market as a whole taken as a given.(go back)