Moving Beyond Modern Portfolio Theory

The TakeAway: Harvard’s Initiative for Responsible Investment works to build a “master narrative” for responsible investing, along with educational tools for improving trustee performance.

Massive changes in financial regulations and ramped up activism – aided in part by interactive technology – make the spotlight on fiduciary boards burn brighter than ever.  For institutional investors of all stripes, this involves revisiting core assumptions that drive their decision making.  It also means rethinking the purpose and benefits of Modern Portfolio Theory (MPT), which once served a positive purpose but now overlooks important strengths and weaknesses in the real economy.  Finally, it involves restoring power and authority to beneficial owners (what prominent UK governance advocate Lord Paul Myners calls “true owners”, not all-powerful consultants and money managers), and reviving opportunities for professional education—the kind that changes behavior, not just a pleasant retreat at a fancy resort.

These topics were discussed by more than 30 key thinkers and doers at yesterday’s daylong convening, the first of a Quarterly Convening Series, hosted by the Initiative for Responsible Investment (IRI) at Harvard Kennedy School’s Hauser Center for Nonprofit Organizations.

According to Steve Lydenberg, IRI Founding Director, over the next two years the Quarterly Convening Series (QCS) will concentrate on two workstreams:

  • The Theory of Responsible Investment Series focuses on “big picture issues that define the direction and parameters of the discipline of responsible investment” within the context of “leading-edge thinking in related disciplines such as finance, economics, law, and justice”;
  • The Asset Class Risks and Rewards Series focuses on the societal and market-level risks “incurred by abusive practices in specific asset classes”, as well as rewards generated by “appropriately conceived investment practices within these asset classes”.

Thursday’s launch event helped establish a baseline understanding of fiduciary duty: how to advance a theory of long-term wealth creation that also “extends investment time horizons, promotes intergenerational equity”, accommodates the range of beneficiary needs, promotes sustainability, and incorporates ethical first principles.  A major part of the discussion also concentrated on curricular implications – for both content and process – directed to fund trustees that support these policies and practices.

The day then turned to specifics: What’s the best way to disseminate a curriculum bound to value-based claims beyond financial return on investment?  How can we communicate responsible investment topics with institutional investors?  What additional tools are needed?  Finally, two case studies – one about risks, the other about rewards – served as brainstorm catalysts, as participants described their own experience.

Most people agreed that these ambitious goals won’t be accomplished easily, given the deeply entrenched status-quo power wielded by fund managers and consultants, and the powerful influence of groups such as the International Foundation on trustee training, which ignore a responsible investment paradigm.  One person pointed out that,  in a networked world, one needs to think beyond one-off workshops or events and consider longer term engagement strategies.  Several acknowledged that an effective educational approach is pluralist and collaborative, not unilateral, and relies upon “knowledge mobilizers”, not single sources.  And, networked technology and social media can help create these “communities of practice”.

At a broader level, participants considered the moral obligations and interdisciplinary nature of the fiduciary paradigm, and how it rests within a broken political system that favors the powerful few over the many.  Thus the larger question: In an interdependent world, how can we create a new and vibrant economy that cherishes liberty and justice, while advancing sustainable prosperity?

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