By a rude bridge arching over the floodwaters,
Their flags fly in the April breezes,
Once upon a time, there were peasants here on the battlefield.
And then he fired a shot that was heard around the world.
From Ralph Waldo Emerson's “Concord Hymn”
Are you worried about climate change? What about social unrest arising from inequality and polarization? What about the rise of authoritarianism and the decline of the rule of law? What about the next pandemic, or microbial resistance to antibiotics? Using your economic rights to fight these harms may be more effective than voting.
Politically active citizens vote, organize, attend meetings, rallies and protests, and call and write letters to our elected representatives. As citizens, these are our political rights. The majority of Americans also have strong financial rights as participants in retirement and benefit plans, customers and shareholders in mutual funds and exchange-traded funds. Few are aware of these rights, and even fewer exercise them. We are missing out on important opportunities to influence policy, society, the economy, and our own lives.
Why do we care? First, corporations are powerful, and their decisions affect our lives just as much as policy decisions do. If we believe the premise of “corporate control,” that corporations have a strong influence on our political system through revolving door hiring, lobbying, and political contributions, then they may have even more of an impact. As investors and beneficiaries, we can change these decisions.
Second, while we can influence political decisions in our own country, it is much harder to influence deforestation policies in Brazil or forced labor laws in Asia. But corporations operate globally, and Americans can become global citizens by influencing corporate behavior.
Third, in a polarized society, it is becoming increasingly difficult to exercise one's political rights. Blue-state conservatives and red-state progressives may believe that their votes no longer matter. But shareholders and beneficiaries have economic power no matter where they live.
Your power is based on trust
If you've ever tried to directly influence a large corporation, you've probably been thwarted. Your personal power is tiny compared to the resources of the corporation. But if you're involved in a retirement plan, exchange-traded fund, or mutual fund, there's an important intermediary: a fiduciary. A fiduciary is a person or organization who has the power to make decisions about money that doesn't belong to them, such as a retirement fund trustee or an investment management company. This relationship can obviously be abused, which is why fiduciaries have special obligations to you. For example, a fiduciary cannot put their own financial interests above yours. You always come first. This is called the duty of loyalty. Another obligation is that a fiduciary must invest your money carefully. This is called the duty of care. Because fiduciary duties include both ethical and legal considerations, fiduciary duties are “the highest duty known to the law” (see Fiduciary Duties).Donovan vs. Beerworth680 F.2d 263, 272 n.8 (2d Cir. 1982).
Your trustees have influence that you don't have. Approximately 70% of the stock of publicly traded companies in the United States is controlled by fiduciary institutional investors. Trustees can change a company's behavior by owning stock, voting on corporate resolutions put forward by themselves or other shareholders, voting for or against resolutions proposed by a company's directors or other management, or simply expressing strong expectations. Trustees also own most corporate debt. Because companies raise the majority of their capital in the bond markets, trustees can change a company's behavior by refusing to lend or refinance a company's debt. Finally, trustees can lobby governments around the world on your behalf.
A trustee protects your investment from financial risks
A fiduciary fulfills his duty of care by investing your money wisely. We usually think of “wise investment” only in terms of expected return. But professional investors don't think of expected return in a vacuum. Investment is a balance between return and risk. Many investments with high expected return are reckless because they are too risky. Thus, the duty of care includes both investing to obtain acceptable future returns and investing to minimize unacceptable risks.
There are several types of risk. One is the risk that the price of an individual asset or group of related assets will fall. This is called “idiosyncratic” risk because it only affects a portion of the market. This risk can be carefully minimized by diversifying the portfolio. For example, when the price of oil falls, oil producers make less money but airlines can cut costs. A well-diversified portfolio with assets in different sectors usually allows investors to offset different idiosyncratic risks. That's why the U.S. Department of Labor requires fiduciaries to “diversify the plan's investments to minimize the risk of large losses.”
But there is another kind of risk that diversification cannot carefully minimize, and that is called “systemic” or “systematic” risk. Systemic risk causes a synchronized fall in asset values, and diversification does not help. The investment world was forced to recognize systemic risk during the 2007-2009 global financial crisis, in which broad markets fell simultaneously (for example, the S&P 500 fell 57% from peak to trough). While this particular systemic risk was unforeseen by most investors, there are now many systemic risks that can be identified and anticipated to have serious effects on retirement accounts and funds. One of them is climate change. The Singaporean government estimated that a diversified and balanced global pension fund could decline by up to 40% as the world economy's output decreases due to an increase in climate-related weather disasters, rising sea levels, and government crackdowns on polluting companies around the world. British defense company BAE Systems calculated a similar degree of risk for its defined contribution pensions. Long-term diversified investments face the prospect of a similar decline. Another systemic risk is economic inequality. Inequality makes financial crises more likely. The rise of authoritarianism and the associated breakdown of the rule of law slows economic growth, so your portfolio may not grow as much as you hoped. Health-related risks such as pandemics, the opioid crisis, and antimicrobial resistance also impose trillions of dollars of economic burden on the economy. These risks form an intertwined “polycrisis” that could wipe out retirement savings. Many of the companies in your portfolio contribute to these risks, and fiduciaries can play a powerful role in encouraging companies to mitigate them. Part of the duty of care is the duty to investigate material risks. If your asset manager, mutual fund, or retirement fund fiduciary has not investigated material risks to your investments and taken steps to prudently mitigate them, that could be a breach of fiduciary duty.
What actions did the trustees take?
Some trustees are using strong engagement with individual companies to mitigate systemic risk. As an example, the California State Teachers Retirement System (CalSTRS), the second largest public pension fund in the United States, has set methane reduction as one of its priorities for 2024. CalSTRS is urging its portfolio companies to join UN efforts to measure, disclose and mitigate methane emissions, and oil and gas giants Exxon and Chevron have already agreed to do so. CalSTRS backs up this engagement with strong sanctions. In 2023, it voted against the directors of more than 2,000 companies that it considers to be slow on climate action. Since methane is responsible for 30% of global warming since the Industrial Revolution, this trustee is mitigating the systemic risk of climate change for its beneficiaries.
Another example is the successful campaign to get Starbucks to recognize workers' collective bargaining rights. Initiated by a coalition of labor unions and supported by five New York City pension funds, the campaign nominated three pro-union opponents to the board of directors; the nominations were withdrawn after Starbucks agreed to work toward a collective bargaining framework with the unions. The board's reason for dissent was concern that the company's anti-union behavior “threatens the well-being of employees and, therefore, the company's ability to maximize shareholder value,” but trustees must recognize that union suppression is a driver of income inequality and a systemic risk to financial markets.
Trustees also mitigate systemic risk by funding projects that reduce risk and refraining from funding companies that increase risk. As an example, some Morgan Stanley Investment Management bond funds refuse to provide capital to thermal coal producers, but provide capital to projects that can credibly reduce carbon emissions.
Revitalizing trust relationships
You might think that because your portfolio is too small, your trustees won't look out for you. If so, think again. Another important aspect of the duty of care is the duty of impartiality. This means that trustees must consider the interests of all beneficiaries fairly and cannot put the interests of other beneficiaries above their own. If you're worried that your retirement savings will run out, you should be worried about systemic risks affecting the value of your portfolio. It is your trustee's duty to take reasonable steps to address these concerns.
You may not know what steps the fiduciaries are taking to investigate and mitigate systemic risk. You have a right to know. If you own mutual funds or ETFs directly, call the fund family's customer service line. Ask to speak on a recorded line (the fund company will allow this if you say you have a complaint). Tell the representative that you are concerned that the fiduciaries are not protecting your portfolio from systemic risk and that you would like to know what precautions are being taken. The representative will probably be at a loss for words, but if enough people do this, the fund company will find out about the situation. If you own mutual funds or ETFs in a 401(k) or are part of a pension plan, call your plan sponsor and make the same request.
If you want to escalate the issue, write a letter. It's always a good idea to have a written record. A group called Vanguard SOS organized 1,400 Vanguard fundholders to voice their dissatisfaction with the company's approach to climate change. Sending a similarly worded letter to your fund company or plan sponsor will get you noticed. Ignoring systemic risk can land trustees in hot water, as Australian pension funds, whose trustees received similar treatment, learned a few years ago. For citizen shareholders who want to learn more, there are useful resources here and here.
Call to action: Make a change!
You are a citizen of two worlds. One is the political world. You are a citizen. The other is the financial world. If you have a retirement account or own mutual funds or ETFs, you are a citizen. Each world gives you powerful rights. Most of us focus on the rights of one world and ignore the rights of the other. Join the citizen-shareholder movement. You and your portfolio will benefit as a result.
