Abstract

https://ssrn.com/abstract=2805427
 


 



Public Wealth Maximization: A New Framework for Public Fund Fiduciary Duties


Paul Rose


Ohio State University - Moritz College of Law; Bocconi University - BAFFI Center on International Markets, Money, and Regulation; Tufts University - The Fletcher School of Law and Diplomacy; Fundación Instituto de Empresa, S.L. - IE Business School

July 4, 2016

Ohio State Public Law Working Paper No. 356

Abstract:     
This article challenges the standard doctrine that public pension funds should be managed solely for the benefit of plan participants and their beneficiaries. Instead, economic logic suggests that public pension fund trustees owe their duties to the public collectively. This analysis is driven by the fact that in practice individual pension fund claimants function more like senior creditors than the residual claimants that are the typical recipients of fiduciary duties, and that the public in general, and current and future taxpayers specifically, are the true residual risk bearers for public pension funds.

This reframing of fiduciary duties in public funds has dramatic consequences for the investment policies of the funds. Most importantly, a shift in the locus of fiduciary duties to public wealth maximization will require fund managers to more fully consider the externalities accompanying their investments, which should serve to help them fully and accurately price their investments. Private investors might ignore certain negative effects, such as uncompensated harms from pollution or depleted natural resources, because the government absorbs the costs of such externalities. Indeed, a strict fiduciary duty to act in the interests of the fund would obligate a private investor to ignore such externalities, so long as they do not negatively affect the returns of the fund’s investments. The government — and by extension, the public who funds the government—that absorbs the cost of these externalities, however, should view investments differently, with a view to minimizing negative externalities, particularly those that are significantly more expensive to remediate than to prevent. Similarly, a strict reading of fiduciary duty would suggest that funds should ignore positive externalities from investments that benefit society but not the plan participants; a focus on public wealth maximization would suggest that positive externalities should also be taken into account in investment decisions, which might, as a consequence, result in more investment in sustainable enterprises and long-term projects.

Number of Pages in PDF File: 37

Keywords: public pensions, sovereign wealth, fiduciary duties

JEL Classification: K1, K20, K22, K29


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Date posted: July 7, 2016 ; Last revised: February 15, 2017

Suggested Citation

Rose, Paul, Public Wealth Maximization: A New Framework for Public Fund Fiduciary Duties (July 4, 2016). Ohio State Public Law Working Paper No. 356. Available at SSRN: https://ssrn.com/abstract=2805427 or http://dx.doi.org/10.2139/ssrn.2805427

Contact Information

Paul Rose (Contact Author)
Ohio State University - Moritz College of Law ( email )
55 West 12th Avenue
Columbus, OH 43210
United States

Bocconi University - BAFFI Center on International Markets, Money, and Regulation ( email )
Milano, 20136
Italy
Tufts University - The Fletcher School of Law and Diplomacy ( email )
Medford, MA 02155
United States
Fundación Instituto de Empresa, S.L. - IE Business School ( email )
Calle Maria de Molina 12, Bajo
Madrid, Madrid 28006
Spain
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