Thursday, October 27, 2005

Fiduciary Responsibility

Mark Kleiman has a post up on the fiduciary responsibilities of corporate managers. There are those, such as Milton Friedman, who argue that the only duty of a corporate manager is to maximize the return to the investor. Any action which does so, as long as it is not illegal, should be taken by the manager, no matter how immoral. As Mark points out this leads to absurd results, Polish corporate managers in the 1930s would have a duty to supply arms to the Nazi's, if that would maximize profits at the time, and so forth. Indeed, Mark says that this leads to Lenin's observation that "When the time comes to hang all the capitalists, the capitalists will compete to sell us the rope."

The escape from this dilemma, it seems to me, comes from understanding the nature of moral guidance. In my view, the nature of moral guidance is to help understand the correct actions to take today, that will maximize one's well being over the long term. I can fairly well determine what I need to do to make things go well tomorrow, or through next week or next year, but what acts today will make for a good future 20-years down the road and what will lead to a bad one. In saying that, note that I've made no distinction between my personal well being and any general social well being. However, that comes from the fact that I'm dealing with long term concerns decades, or even longer, for I am concerned not just with how well I will be doing, but how well children and grandchildren will be doing. In making long term plans for success, the best I can do is strive for general success of my family, community, country and world rather than try and plan on specific well being for myself. Moral guidance then is aimed at indicating those things we need to do now to maximize our well being far into the future.

Apply that then to the fiduciary responsibility of the corporate manager. Even if his obligation is only to maximize corporate profits, that obligation is not only for the next year or two, but for the, potentially infinite, life of the company. While he is obligated to the investor who hopes to return a profit next year, he is equally obligated to the investor who has set up a trust the college education, or perhaps retirement, of a child born this past month. The point then is that the corporate manager is certainly obligated to follow moral guidance in running the company as this is directed to his fiduciary responsibility to longer term investors. And realize that the moral guidance I'm speaking of here is the same as would apply to all people, corporate manager or no. The same principals or right action apply because the objective is the same in all cases, to have as peaceful and stable a world as possible far into the future.

The error of people like Friedman, and I believe the current conservative movement generally, is that their focus is only on the short term. Even if I start from conservative principals of self interest, if I include in my thinking plans for long term success, I find that I consistently return to liberalism. I get the current conservative views only if I restrict my self interest to the very short term.

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