Before we can get to the challenges of empowering values-driven business leadership, we first have to fix the problem of perpetually entrusted funds caught in a trap of closed-loop trading of financial assets.
Many of the most pressing problems of sustainability and social responsibility can be traced to the changes in fiduciary laws made in 1972, that allowed stewards of perpetually entrusted funds to begin speculating in the stock market. Speculating with other people's money entrusted for some other purpose has always been considered under the law as a breach of fiduciary duty. It still is. But in 1972, the Uniform Management of Institutional Funds Act codified the view that diversification can be used to effectively manage volatility within a properly constructed portfolio of trading positions in public equities. This was premised upon the validity of Efficient Market Theory and Modern Portfolio Theory, although neither theory is actually endorsed in the law. The law just states that prudence in investing evolves and the laws of fiduciary duty must evolve to keep pace with new knowledge and experience.
Knowledge evolves in context, and the context in which the knowledge of Efficient Markets Theory and Modern Portfolio Theory evolved did not include market participation by large, purposeful, powerful stewards of perpetually entrusted funds. The markets of the day were characterized largely by individuals investing their own money, for their own account, mostly on changing cash needs. As individuals, we buy stocks when we have money available, and sell when we need the money back. In between, there may be some trading on price, in an effort to get a better return, but mostly we just buy and hold. Even when we do speculate, we speculate with our own money.
Not so with pension funds and other stewards of perpetually entrusted funds. First, they never have a need to sell. They always have a need to be invested. So, when they sell, they always sell on price (except for small amounts of selling, to fund their fiduciary responsibilities). Second, they are not investing their own money. They are investing money entrusted to them by others, to be used to accomplish a very specific purpose, which is to generate fiduciary returns equal to or in excess of their fiduciary obligations.
Efficient Market Theory and Modern Portfolio Theory may work well in the context out of which they evolved, but more than 40 years of experience is showing they do not work so well in the context of markets heavily influenced by speculative trading by perpetual trusts. Buy-and-hold becomes buy-low-to-sell-high, becomes buy-high-to-sell-higher, as the markets gyrate through ever larger, and more frequent, cycles of boom that go bust, with catastrophic consequences to the markets, to portfolios of perpetually entrusted funds and to the economy and society, more generally.
Underneath this all remain the challenges of empowering values-driven business leadership, but before we can get to those big challenges, we need to first deal with this small systemic fix. We need to get perpetual funds out of the markets, so the markets can return to authentic trading on changing cash needs.