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.

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