Paul Rissman’s excellent post When Fiduciaries Collide: Foreshadowing a Looming Conflict in Corporate Governance identifies a structural contradiction at the heart of modern corporate governance in the United States. On one side stand corporate directors, bound by fiduciary duties under Delaware law to maximize the long-term value of the corporation. On the other side stand fiduciaries of diversified investment portfolios—particularly pension trustees—who must safeguard the financial welfare of human beneficiaries across the entire market. I doubt I can improve Rissman’s arguments. Instead, I share some ideas below to update fiduciary duty to address systemic risk.
As Rissman notes, when corporations generate negative externalities such as carbon emissions, labor exploitation, or other systemic harms, these two fiduciary mandates collide. Directors may rationally refuse to reduce such externalities if doing so would harm firm-level value, while diversified investors may rationally demand their reduction because those same externalities threaten portfolio-wide returns. Again, this is not merely a theoretical tension—fiduciaries acting rationally within their respective domains systematically work at cross purposes. The concern is urgent: estimates of systemic risk impacts—including climate, inequality, and instability—suggest huge potential losses, materially impairing diversified portfolios over timeEstimates of systemic risk impacts—including climate, inequality, and instability—suggest potential losses large enough to materially impair diversified portfolios over time.
System on Fire: Updating Fiduciary Duty to Address Systemic Risk and Music for a Democratic Corporate Governance
Background and Constraints
This is not a failure of either set of fiduciaries; it is a failure of legal architecture. Corporate law remains rooted in a firm-centric model of value. As Judge Laster noted in McRitchie v. Zuckerberg (Del. Ch. 2024) “The fact that shares are freely alienable by default means that, from the directors’ standpoint, the ultimate human beneficiaries of that value are incidental.” (Credit to Rick Alexander and The Shareholder Commons for the idea of the lawsuit, funding, and work with Heyman Enerio Gattuso & Hirzel LLP)
Because of modern portfolio theory and the recognized benefits of diversification, capital markets are portfolio-centric. Huge funds manage investments on behalf of millions of investors. These large institutional investors are “universal owners,” exposed to economy-wide risks rather than firm-specific outcomes. Externalities that depress overall economic performance—climate change, inequality, or systemic instability—are therefore internalized at the portfolio level, even if they remain external to any single firm. As scholars have noted, this creates a divergence between firm-level optimization and portfolio-level welfare.[1]
The result is a paradox: actions that maximize the value of individual firms can erode the value of the market as a whole, thereby harming the very investors corporate law and the very concept ‘fiduciary duty’ is meant to serve. Recent scholarship suggests this divergence may require not just expanded discretion, but a redefinition of fiduciary prudence itself to incorporate systemic risk.
I don’t see us readily abandoning the corporate form or broadly redefining fiduciary duty to run directly to “humanity.” Such a move would destabilize the predictability and coherence of corporate governance. See my discussion on Shareholder Primacy. The easiest path forward is probably a series of reforms proceeding incrementally, preserving the entity-based model while updating the content of fiduciary duty to reflect the economic reality of diversified ownership. However, incremental reforms may ultimately need to culminate in deeper changes to trust law itself.
Redefine Materiality to Capture Systemic Risk
The first and most immediate reform could be to clarify that systemic risks can be financially material under securities law. Current disclosure regimes often emphasize firm-specific impacts, but this approach is increasingly artificial in a highly interconnected economy.[2]
Amend (SEC regulatory guidance or rulemaking)
Amend Regulation S-K (Item 105 – Risk Factors) to provide:
“A risk shall be considered material if there is a substantial likelihood that it will affect the registrant’s long-term financial condition or operating performance, including through systemic or market-wide economic impacts that influence demand, supply chains, capital costs, or financial stability.”
This clarification would:
- Legitimize board consideration of systemic risks
- Improve disclosure consistency
- Provide evidentiary grounding for future fiduciary analysis
Safe Harbor for Systemic Risk Mitigation
Even where systemic risks are recognized as financially relevant, directors may hesitate to act due to fiduciary constraints. A targeted statutory reform can address this concern without dismantling existing doctrine.
Amend Delaware General Corporation Law (new §141(l)
“In discharging their fiduciary duties, directors may consider the effects of corporate conduct on systemic risks and on the long-term financial interests of diversified shareholders. A director shall not be deemed to have breached any duty of care or loyalty solely by reason of considering or acting upon such effects in good faith.”
This approach preserves the business judgment rule while expanding the permissible scope of board deliberation. It also follows a familiar pattern in Delaware law, where fiduciary doctrine has evolved incrementally to address emerging risks, as reflected in the recognition of board oversight duties in In re Caremark International Inc. Derivative Litigation.[3] Over time, what begins as a permissible consideration may (or may need to) evolve into an affirmative fiduciary obligation, particularly for diversified investors. Many risks, such as climate change and microbrial resistance, are urgent. These and other risis are not marginal—credible estimates suggest they could erase a substantial share of global portfolio value over time.
Broaden Ownership Through Employee Equity
Doctrinal reform alone cannot resolve the underlying misalignment if governance remains dominated by actors constrained to firm-level thinking. A complementary structural reform is to broaden share ownership among nonexecutive employees.
Employees:
- Possess superior firm-specific information
- Experience localized externalities
- Are not bound by fiduciary duties requiring strict wealth maximization
Encouraging employee ownership introduces a class of shareholders capable of balancing financial and non-financial considerations in ways fiduciaries cannot.
Amend ERISA (29 U.S.C. §1103(a) and related provisions)
Add language such as:
“To the extent plan assets include employer securities, such securities shall, where practicable, be allocated to individual participants with:
(1) minimum holding periods of not less than three years; and
(2) pass-through voting rights exercisable directly by participants.Trustees shall not exercise voting authority over such securities except where participants have not provided instructions.” (Maybe uninstructed ballots should be voted proportionately as directed by those exercising such rights to avoid capture of such votes by management?)
Additional incentives could include:
- Tax advantages for broad-based employee equity grants, while avoiding control capture levels by employees
- Safe harbors for companies meeting minimum employee ownership thresholds
This reform would:
- Embed informed, locally affected shareholders into governance
- Reduce incentives to externalize costs onto workers and communities
- Improve long-term firm performance, as supported by empirical research [4]
Disclose Employee Ownership and Incentives
To allow markets to respond to governance differences, disclosure must be enhanced.
Proposed SEC rule (new Item under Regulation S-K)
“Registrants shall disclose:
(1) the percentage of outstanding equity held by nonexecutive employees;
(2) the distribution and vesting terms of such holdings; and
(3) the extent to which voting rights are exercised directly by employees.Such disclosure shall be provided to allow investors to conduct a material to an assessment of governance, incentives, or long-term performance.”
This would enable investors to price governance structures, facilitate comparative analysis across firms, and enhance accountability in ownership design. This approach is consistent with the broader trajectory of disclosure-based regulation, which seeks to improve market outcomes by improving information rather than mandating specific conduct. [5]
Enable Retail Shareholders Through Standing Voting Instructions
Retail shareholders represent a largely dormant but potentially decisive governance force. Unlike institutional investors, they are not constrained by fiduciary duties and may be willing to support trade-offs that reduce externalities. The barrier is procedural friction.
Proposed SEC and Proxy Plumbing Reform
Amend Exchange Act Rules 14a and 15c to require intermediaries to implement standing voting instructions (SVIs):
“Broker-dealers and other intermediaries shall provide beneficial owners the ability to establish standing voting instructions applicable to recurring or substantially similar proxy matters. Such instructions shall be implemented automatically unless revoked or modified by the beneficial owner.”
Key features should include:
- Predefined policy templates (e.g., climate-focused, labor-focused, governance-focused)
- Customizable voting policies
- Transparency and auditability of vote execution
This reform would:
- Dramatically increase retail participation
- Introduce broader preference diversity into voting outcomes
- Reduce reliance on concentrated institutional voting power[6]
Reinforce Trust Law to Address Systemic Risk
Parallel clarification in trust and pension law is necessary to legitimize systemic risk stewardship.
Proposed amendment to ERISA fiduciary duty provisions:
“A fiduciary shall consider risks to the portfolio arising from systemic economic conditions, including environmental, social, and governance factors, where such risks are reasonably likely to affect long-term investment performance.”
This aligns fiduciary duty with modern portfolio theory and protects trustees from claims that such considerations are non-pecuniary.
Updating Fiduciary Duty to Address Systemic Risk: Toward Doctrinal Convergence
Over time, these reforms can support a gradual evolution in corporate law itself. Courts may begin to recognize that the “best interests of shareholders” include their interests as diversified investors whose returns depend on the health of the broader economy.
This shift need not be abrupt. It can emerge through:
- Disclosure-based litigation
- Oversight claims involving systemic risk
- Judicial recognition of financial interdependence
Updating Fiduciary Duty to Address Systemic Risk: Conclusion
The conflict Rissman identifies is not temporary; it is the predictable result of applying firm-centric legal doctrines to portfolio-centric markets. Modern portfolio theory has reshaped investing, but fiduciary law has yet to catch up.
The solution is not to abandon shareholder primacy, but to update its meaning. By redefining materiality, creating safe harbors, broadening ownership, enhancing disclosure, and empowering retail investors, the law can reconnect fiduciary duty and corporate governance to the real economic interests of the human beings fiduciary law was invented to protect.
In our interconnected world, fiduciary duty must evolve from a doctrine that operates within isolated firms to one that reflects the interconnected system in which those firms—and their shareholders—actually exist.
References
[1] Ronald J. Gilson, Jeffrey N. Gordon & Roberto Tallarita, Systemic Stewardship, 2021 Colum. L. Rev. 1501.
[2] Jill E. Fisch, Making Sustainability Disclosure Sustainable, 107 Geo. L.J. 923 (2019).
[3] In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996).
[4] Joseph R. Blasi, Richard B. Freeman & Douglas L. Kruse, The Citizen’s Share: Reducing Inequality in the 21st Century (2013).
[5] Merritt B. Fox, Civil Liability and Mandatory Disclosure, 109 Colum. L. Rev. 237 (2009).
[6] Lucian A. Bebchuk & Scott Hirst, The Specter of the Giant Three, 99 B.U. L. Rev. 721 (2019).
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Dear James:
This is very insightful and thought-provoking, and I would support these clarifications of fiduciary duty law. Just a few thoughts for consideration, if I may. This also reflects the discussion at the excellent 5th Annual Symposium on System-Level Investment organized by The Investment Integration Project las Tuesday:
1. The dynamic nature of fiduciary duties law.
While the proposed amendments are clearly helpful, we do not require them. The application of existing fiduciary duties principles is already evolving towards a system-level approach to accommodate the new circumstances of climate change, biodiversity loss, and large-scale nature loss. ERISA requires “care, skill, prudence, and diligence *under the circumstances then prevailing* that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims….” This provision concerns pension funds, not companies, but the principle of dynamic evolution is derived from and inherent in common law and equity.
• For an overview of the evolutionary nature of fiduciary duties principles, I refer to the section on “Dynamic Nature of the Prudent Standard of Care” in the excellent Chapter 16 of Jon Lukomnik and Bill Burckart’s brilliant new Handbook on System-Level Investing. Also:
• For an example of that evolution in response to new facts, see Tulip Trading v van der Laan. As Lord Justice Birss explained in that case: “…the facts of this case … are new and quite a long way from factual circumstances which the courts have had to examine before in the context of fiduciary duties. … the common law often works incrementally and by analogy with existing cases, and rightly so; but if the facts change in a way which is more than incremental, I do not believe the right response of the common law is simply to stop and say that incremental development cannot reach that far.” Tulip Trading was not a climate case, but nonetheless reflects the evolving approach of fiduciary duties principles.
• See also (US) Restatement of Trust, Third, para 227, Introduction: “Trust investment law should reflect and accommodate current knowledge and concepts. It should avoid repeating the mistake of freezing its rules against future learning and development.”
2. The climate change, biodiversity loss, and large-scale nature loss as systemic risks.
Lord Sales, a UK Supreme Court Justice, commented in a speech in 2019: “… companies’ interests may be so implicated by climate change effects that [directors’] general fiduciary and due care obligations actually require them to cause their companies to take action to reduce their contribution to climate changing activity.” That was more than half a decade ago, and the “circumstances” Lord Sales mentioned are now becoming reality. Recent studies emphasize more than ever that climate risk, biodiversity loss, and large-scale nature loss are no longer just a material financial worry for investors, but also key system-level concerns.
• Does this mean that Board directors can take these risks into account? The Delaware Chancery Court in McRitchie v Zuckerberg held that directors owe fiduciary duties only to “the shares” and that they are company specific. But that is not the law everywhere. Delaware may be an important jurisdiction, but in other jurisdictions (especially outside the US), there is or may be more scope for taking other stakeholders and systemic risks into account. See the insightful Opinions for the CCLI on Directors duties and nature-related risks in Australia, Canada, England and Wales, Hong Kong, India, Japan, New Zealand, and Singapore; CCLI, Directors’ Duties Navigator: Climate Risk and Sustainability Disclosures (2025).
• Perhaps more important, the obiter dictum in McRitchie v Zuckerberg allows (and arguably requires) directors to take system-level impact into account *if and where it affects the long-term viability of business run by the company*. The Chancellor said: “Directors can and should consider a broad spectrum of issues, including how a decision affects stakeholders, the economy, and society, when making decisions about what will promote the value of the firm over the long term.” As I understand it, this means Delaware law would not allow the board to take decisions based on the impact on society (negative externalities), unless these also affect the shares. And IMHO they do, in the case of climate change, biodiversity loss, and large-scale nature loss, because these particular systemic concerns will boomerang to hit the company itself. I refer, for instance, to Rebonato, Climate Risk and Equity Valuation, Should Investors Worry? (EDHEC, 2024), warning that a business-as-usual scenario could see asset values decrease by at least 40% net present value (more if tipping points are reached). So, we are not enlisting Delaware directors to solve collective action problems for others, but collective action problems that damage the company itself.
3. Obligation to protect interests of future beneficiaries
Fiduciary duties invite – indeed require – fiduciaries to act “to provide the greatest financial benefits for the present and future beneficiaries” (the UK case of Cowan v Scargill), and “to preserve assets to satisfy future, as well as present, claims” (the US case of Varity v Howe). These cases are about pension funds and not about “corporate fiduciaries “, but surely, it cannot be in the current and future shareholders’ and the company’s best long-term interest to ignore, for instance, the social cost of carbon as a mere externality, where
• (a) that approach could lead to ex post liability under tort, negligence, nuisance, etc.;
• (b) ex post liability may be greater than the cost of preventing it;
• (c) the costs of emissions in terms of system level risks are not just imposed on others, but also on the company itself and its future shareholders; and
• (d) the climate crisis to which the company contributes leads to system-level risks that could dramatically undermine the viability of its business or investments.
I am not suggesting that all system-level considerations (like the ones you mention) are of the same importance, and that they all affect the viability of companies’ businesses. But climate change, biodiversity loss, and large-scale nature loss do. Just read the five alarming reports by the UK Institute and Faculty of Actuaries, like “Planetary Solvency” (2025), each more worrying than the previous. And they are not the only ones.
4. Conclusion
In sum, Boards can and should take into account climate change, biodiversity loss, and large-scale nature loss as system-level risks under the law as it stands. Of course, they are not required to do the impossible, but where they can act to preserve the long-term value of the company in the interest of future shareholders and relevant stakeholders, they must. There is another reason to acknowledge this evolution: in the current political environment, the proposed amendments may not succeed. That should not be an impediment, however. The proposed amendments are a “codification”, clarification, or recognition of an ongoing evolution, and even if these amendments are not adopted, that does not mean the law as it stands has not evolved to integrate system-level analysis.
For further detail, I refer also to our NZLA paper (“Sustainable Fiduciary Duty: How fiduciary duties can be a key to escaping the climate prisoner’s dilemma”, available at https://www.netzerolawyers.com/publications/sustainable-fiduciary-duties—the-time-has-come-for-financial-fiduciaries-to-adapt-to-the-new-climate-reality).
All the best
Maurits Dolmans
(commenting in my own capacity, and not on behalf of my firm or clients)