Deep underground, tectonic plates are continuously shifting, generally unnoted by all but the most dedicated geologists. That is, until those small, inexorable changes manifest into literally earth-shaking events: volcanoes, earthquakes, tsunamis, new land masses, and majestic mountains.

 In the world of corporate governance, fiduciary obligation underpins the legal responsibilities of everyone from corporate directors to institutional shareowners. Like tectonic changes, evolution in fiduciary duty is hard to spot. With the exception of the current debate over whether a fiduciary standard should replace suitability as the professional standard for brokers, the current interpretation and application of fiduciary duty has been relatively stable for a half a century. But beneath the surface there are increased rumblings of change. Whether, when, how, and where those rumblings will manifest themselves is uncertain. But certain fault lines are becoming evident already. Amazingly, observers from around the world are detecting the same tremors.

Why does this matter? Because these subtle shifts in fiduciary obligation can play a large role when it comes to changes in how institutions vote on issues like like say-on-pay and proxy access, not to mention how and what the Securities and Exchange Commission decides to regulate in terms of disclosure. Just as changes to the tectonic plates of society's ethical code influence the laws that govern it, small changes to the accepted view of fiduciary duty are writ large in changes to the rules of corporate governance set in places like the Delaware courts and the SEC. 

In the United States, Steve Lydenberg of the Hauser Center at Harvard recently won $10,000 for his paper, Reason, Rationality and Fiduciary Duty, which identifies the major fault line for fiduciaries as reasonableness vs. rationality. How that balance resolves affects the way investors behave in the market. Reasonableness, he argues, grows out of legal tradition and takes into account a number of factors such as how the actions of one group or individual affect others. By contrast, rationality seeks only the most efficient way to achieve internal goals, such as maximizing return at an acceptable risk level. While the two have always waxed and waned, Lydenberg argues that the dominance of modern portfolio theory, with its emphasis on financial markets rather than the real economy as a driver of investment returns, has caused rationality to dominate. But rationality fails in a number of areas, including the inability to: (a) “allocate benefits impartially between current and future generations,” (b) assess whether a fiduciary's actions actually benefit those for whom he or she acts since portfolio returns are only a portion of a beneficiary's life, and (c) understand what drives investment return in the real economy. Those are weaknesses that can harm portfolio companies and ultimately the investor, pensioner, or saver for whom the fiduciary acts.

[T]houghtful critics are suggesting that current interpretations of fiduciary duty create a myopic short-term vision that paralyzes fiduciaries in their attempts to address factors that can't be immediately monetized …

Lydenberg argues that some level of reasonableness and rationality need to co-exist to truly fulfill fiduciary obligation. Doing so, he states, will make investment more long term and more oriented to interpreting and affecting the real economy.

Canada's Rotman International Journal of Pension Management is opening a parallel debate. Economics Professor James Hawley and law professors Keith Johnson and Ed Waitzer, writing recently for the Toronto-based publication, note that fiduciary duty is “at an inflection point” because the influence of modern portfolio theory on fiduciary theory has led to an over-emphasis on short-termism and market relativity, and an underestimation of systemic and long-term risk. We might put it this way: Such trends are a legacy of a long-disappeared capital market in which collective investment vehicles were trivial players. Funds have grown to dominate equity ownership; but fiduciary duties guiding their behavior remain stuck in the early 20th century.

In the United Kingdom, the charity FairPensions just published a report titled, The Enlightened Shareholder: Clarifying Investors' Fiduciary Duties, that calls the current status of interpretation of fiduciary duty “increasingly dysfunctional,” not the least because “fiduciary duty is frequently invoked to justify behavior that could actually damage savers in the long term—such as neglect of ownership responsibilities and sustainability factors.” FairPensions is asking Parliament to clarify the laws that govern fiduciary duty. The group has enough credibility that the report itself was released at the House of Commons and enough political acumen that it was coordinated with a call for change in The Times signed by such British investing heavyweights as Aviva Investors, Hermes Fund Management, and Jupiter Asset Management. The British government's Kay Review into short-termism, due to report in June, is expected to call for what one official recently termed “explosive” reforms to fiduciary duty. That could be code for the FairPensions approach.

Modern portfolio theory's view of financial assets in a vacuum is colliding with the traditional fiduciary idea of loyalty. Around the world, thoughtful critics are suggesting that current interpretations of fiduciary duty create a myopic short-term vision that paralyzes fiduciaries in their attempts to address factors that can't be immediately monetized, but that nonetheless have long-term effects upon their beneficiaries. The repercussions of that collision are already being felt. For example, the SEC now mandates risk disclosure about climate change, which has led more investors to consider it as a risk factor in their portfolios, less than a decade after it was generally dismissed as an inappropriate concern for fiduciaries. It is arguable that investor concern about labor and human rights in supply chains and supply chain sustainability are undergoing similar mainstreaming. Indeed, some may see the rapid rise in assets invested in sustainable or socially responsible funds as a direct attack on the “rational” interpretation of fiduciary duty. Such assets zoomed to more than $3 trillion in 2010, a 380 percent increase in just 15 years. That rate of growth is 46 percent higher than the rate of growth in professionally managed assets overall.

Our belief is that those eruptions are not just random hot spots, but connected surface indicia of the pending changes in the interpretation of fiduciary obligation. Moreover, the corporate community ought to welcome them and accelerate them wherever possible.

Why? Yes, modernized fiduciary duty could prompt investors to be more engaged owners. That's certainly one of the aims of advocates. And on its own, such an outcome could make things worse—if investors stayed short term in their timeframes. But should reformers have their way, fiduciary obligation would alter so that it propels more investors to think—and act— long term. That, in turn, would grow investor support for a variety of long-term corporate approaches, from appropriate research and development and capital expenditures to making acquisitions that may have positive rates of return over time but short-term dilutive effects to investing in sustainable supply chains.

Let's hope for the fiduciary earthquake. Let's hope it exposes the fault lines exposed by Lydenberg, Hawley, Johnson, Waitzer, Meyers, and others. Far from breaking asunder corporate managers from institutional investors, it should help to bring them together.