Time to Talk About the Public Interest

The TakeAway: Current global activity about “materiality” and “multiple capitals” seek to embed environmental, social, and governance considerations within corporate and investor commitments to accountability and sustainability. But they’re the latest iteration of an ancient ethic waiting to be reborn. In addition to embracing these efforts, and addressing seriously the wider sustainability context in which they exist, our current challenge is to take the next leap: Engage in a serious and sustained conversation about “the public interest” capital markets profess to support, and unveil the civic moral ethic at the heart of the fiduciary ethic.

It’s been awhile since I’ve posted anything, but I’ve been busy, writing up a storm for different clients. One piece, called Redefining Materiality II: Why It Matters, Who’s Involved, and What it Means for Corporate Leaders and Boards, finally was released last week by AccountAbility. It provides an overview of several current and overlapping global conversations about “materiality” and “multiple capitals”, and the ways in which environmental, social, and governance (ESG) issues need to be part of the risk/reward equation for investors and corporate leaders.

On that front, there are at least 4 major activities underway, exhibited by (in no particular order) the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC), the Sustainability Accounting Standards Board (SASB), and the Global Initiative for Sustainability Ratings (GISR). The first 3—GRI, IIRC, and SASB—are about improving corporate disclosure; the GISR is ratings, not disclosure, and about discerning corporate leaders from laggards. I’ve had direct involvement with all of these initiatives in one way or another, have many friends and colleagues working there, and find it a lovely challenge to keep up with them. If you read my AccountAbility report, you’ll learn about others, too. They’re all superb, and worth engaging and following.

That’s because they’re contributing to a 21st century definition of capitalism, and providing frameworks that incorporate nonfinancial considerations into the valuation process.  In doing so, they’re making important contributions. (Although I think we’ve enough new “frameworks” to last awhile. What we really need is more  “execution”, “education”, “empowerment”, “experimentation”, and “engagement”. But I digress…)

However…  with the exception of GISR, in addition to falling short on situating corporate and market behavior within a sustainability context of thresholds and baselines (see Allen White’s superb piece in last week’s Guardian), they’re also relying on intellectual frameworks that, in my mind, are too narrow and tilted too far towards quantitative reasoning and market-based outcomes.

That’s understandable, as you can’t change the world by being too weird. To paraphrase Harvard’s Ron Heifetz and Marty Linsky in Leadership on the Line (thanks to my old pal Joan Gallos for referencing this, and go read her blog, The Leadership Professor!), better to make change and speak the language that people can absorb, prodding them to take up important issues rather than ignoring them—or killing the messenger.

So what’s missing?

It’s very simple. What’s missing is the connective tissue that holds all these metrics and “capitals” together, the normative context in which we humans live our lives. Ethics. Values. Civic virtue. Public decorum. Kindness, compassion, and respect for each other, for our communities and future generations, and the earth. Fairness. All those “intangibles” that are deeply felt and pack a punch, the product of centuries of human wisdom and truth claims, be they religiously or philosophically rooted.

What’s missing—except for dispatches from my idol Michael Sandel and a number of others who continue to write about the commodification of public life and the erosion of civic virtue—is a sense of “the common good” and “the public interest” as defined in muscular moral terms, not reduced to stakeholder claims or calls for “fair, orderly, and efficient markets”.

I know, I know—this is a slippery slope, and who’s to say which definition of “the public interest” or ethical values should reign? On person’s truth claims are another’s oppression.

But I say, Let’s talk about this, because for the better part of the past 60+ years we’ve been operating on the basis of a picture that’s incomplete, one that’s been torn in two, the other half missing, the part about “the public interest” and “the common good”. It’s right there in the language of the enabling legislation that established the Securities and Exchange Commission’s core mission and three main pieces, affecting corporate disclosure, market regulation, and investment management. As amended in 2012, they include the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940.

The term “public interest” appears 34 times in the ’33 Act, 223 times in the ’34 Act, and 59 times in the ’40 Act.

Many have argued that the “public interest” standard has fallen victim to “regulatory capture” over time, elevating the primacy of “protecting investors” and assuring “fair and honest markets”.[i] Others—most notably my old friend and colleague Steve Lydenberg—have offered up the concept of “Reasonable Investor” as a way of restoring consideration of the “common good”, an antidote to the impact of decades of dominance of Modern Portfolio Theory and the financialization of the economy.[ii]

But I’m not seeing much more than that.

So, in the interests of contributing to your summer reading pleasure, I thought I’d publish here my essay entitled “Loose Canons and Apocalypse Now: Unveiling the Ethics in the Fiduciary Ethic”, submitted last November to the Investor Responsibility Research Center Institute’s Research Award competition on Post Modern Portfolio Theory. In “Loose Canons”, I argue for just such a conversation because the “canons” we’re used to are, well, a con.

I didn’t win, but IRRC Institute executive director (and friend and colleague) Jon Lukomnik told me that the judges thought it “fascinating”, yet probably were looking for “harder research”.  (The winners were awesome: a group of law and business professors from the U.S., led by the formidable Lucian Bebchuk, and a law professor/lawyer and student from Canada, described here.) That’s okay—my friends who read the draft told me they loved it. Maybe that’s what friends are for.

It’s long—more than 15,000 words—but I wanted to release it and perhaps spark some thinking and discussion about how we might begin to “take back” the whole idea of economic activity, civic virtue, and the public interest, in ways that include a broader public, not abuse it.

Over the next couple of weeks I’ll be publishing installments of the entire paper, complete with endnotes and citations. It’s not exactly Danielle Steele or Robert Ludlum beach reading, but it does draw a line in the sand.

Let me know what you think.

For openers, here’s the Abstract:


On matters of governance, the people’s good is the highest law, as Cicero said two millennia ago. How “the good” gets defined shapes our legal and political systems, which inform interpretations of fiduciary duty. For centuries, the civic moral side of economic and political enterprise was characterized by self-evident truths, grounded in ethics and values about human community, peace, and prosperity. These “truth claims” were situated in religious, theological, and political philosophies and constructs about “the good life”, about civitas—and what it takes to sustain it. Over the past century, this moral dimension to the fiduciary ethic became eclipsed for a host of reasons, including the rise of financial capitalism and the bureaucratic corporate form; the ascension of scientific management and social control, which viewed human capital as economic units; mid-20th century self-segregation of the economics profession from the behavioral sciences; subsequent dominance of Cold War models of economic analysis that rejected interdisciplinary collaboration or multiple interpretations of “capital” and relied on deductivist, utility-maximizing assumptions; and the elevation of market values over human values. These “loose canons” fostered a framework of fiduciary duty ripped from its ethical roots, thus legitmating behavior emphasizing financial performance despite the cost to human and ecologic well-being and the “real” economy. As current efforts mount to connect the real economy to portfolio and investment theory, so, too, must attention be paid to the normative roots, the civic moral foundation, of fiduciary duty. Doing this involves revealing and restoring the ethics of the fiduciary ethic, an “apocalypse now” in keeping with ancient truths about stewardship ideals, beliefs, principles, and practice. Coupled with the collaborative education, opportunities for reflective practice, and a “values vocabulary” emerging from it, trustees will be better equipped to fulfill their fiduciary role and manage risk. They will be able to do so in a manner that serves institutional and individual beneficiaries by balancing long-term prosperity with planetary well-being and the public interest. Rightly understood, this occurs in the name of the good—however that “good” or those “goods” get defined in a pluralist, interconnected world.

[i] See Susan E. Woodward, “Regulatory Capture at the U.S. Securities and Exchange Commission,” Prepared for the Milken Institute Conference on Capital Markets, (Santa Monica, CA: 16 March 1998) at http://www.sandhillecon.com/pdf/RegulatoryCapture.pdf and Lawrence G. Baxter, “’Capture’ in Financial Regulation: Can We Channel It Toward the Common Good?” Cornell Journal of Law and Public Policy 21, no. 1 at http://www.lawschool.cornell.edu/research/JLPP/upload/Baxter-final-2.pdf.

[ii] Steve Lydenberg, “Reason, Rationality, and Fiduciary Duty,” (Cambridge, MA: Initiative for Responsible Investments, Hauser Center for Nonprofit Organizations at Harvard University, 2012) at http://irrcinstitute.org/pdf/FINAL-Lydenberg-Reason-Rationality-2012-Winner.pdf. Lydenberg’s essay won the first IRRC Institute Award, presented in March 2012. Barry Burr, “Research papers get top honors at IRRC Institute,” Pensions & Investments, 12 March 2012 at http://www.pionline.com/article/20120305/PRINTSUB/303059984. See also Lydenberg, On Materiality and Sustainability: The Value of Disclosure in the Capital Markets (Cambridge, MA: Initiative for Responsible Investments, Hauser Center for Nonprofit Organizations at Harvard University, September 2012) at http://hausercenter.org/iri/wp-content/uploads/2010/05/OnMateriality_Final.pdf



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