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May 30, 2001
Book Review: The Rise of Fiduciary Capitalism
by Doug Wheat
The fiduciaries of large institutional investors are finding it is in their interest, as
shareowners, to urge corporate social responsibility.
SocialFunds.com --
In The Rise of Fiduciary Capitalism - How Institutional Investors Can Make Corporate America More
Democratic," authors James Hawley and Andrew Williams focus on the growing role of
institutional investors in overseeing the managers of public companies. The authors, both
professors at the School of Economics and Business Administration at Saint Mary's College of
California, make an important case of why of super-large institutional investors have a vested
interest the broader health of the economy and society. They have coined a new term for these
investors: "universal owners."
 Large institutional investors, such as the
California Public Employee Retirement System (CalPERS), have become so large that they must employ
index investing strategies. Smaller investors can choose to sell an under-performing company
anytime they like. Organizations like CalPERS, however, may not be able sell their position in a
company's stock without causing a disruption in the share price. "And if they cannot sell, then
they must 'care,'" according to the authors.
In most cases, these large institutions are
professionally managing the pooled assets of individuals. For instance, CalPERS manages pension
and health benefits for more than 1.2 million California public employees, retirees, and their
families. Hawley and Williams say there are two implications of the concentration of capital in
the hands of institutional investors. First, since they cannot sell their position in a company,
institutional investors may feel they need to exert control over the operation of the company in
order to gain the maximum return on their investment.
The authors note this is an
evolutionary step in the development of the modern capitalist economy. At one time, owners of
companies were also the managers. During the rise of the modern corporation in the early 1900's,
owners began to hire professional managers to run the companies. The owners thereby became divorced
from company management. In this new realm of capitalism, financial professionals, or fiduciaries,
represent the owners of the company and look over the shoulders of hired managers.
The
second implication detailed by Hawley and Williams is that large institutional investors, through
index investing strategies, have a stake in the economy in general rather than the health of a
handful of companies. Long-term economic expansion matters. CalPERS has a fiduciary obligation to
provide retirement benefits to its current plan participants as well as its current retirees. That
means it has a vested interest in society 20, 30, or more years from now.
The need to
think about the long term forms the basis for the authors' term "universal owner." According to
the authors, universal owners occupy a quasi-public policy position as having an economic interest
in the long-term health and well-being of the whole society. This position suggests that they
need to consider the health of the environment, quality of life, education of children, and the
safety of workers as part of the investing process.
Hawley and Williams provide some
modest suggestions on how institutional investors might act with their still largely unrecognized
role as universal owners. These suggestions focus on setting guidelines, monitoring, grading, and
taking action to instill change in a company.
The authors conclude with what is a
daunting question for the individuals whose money is being managed by institutional investors -
"Who will watch the watchers?" As we have seen in our political system, when power is taken from
individuals and placed in the hands of representatives, complacency and apathy often result.
Indeed, "The Rise of Fiduciary Capitalism" has recognized an important trend whose development still
can be shaped.
Buy this book at Amazon.com
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SRI World Group, Inc. All Rights Reserved.
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