In the not-too-distant future, we will look back at existing governance frameworks (public as well as private) and think of them as having been, at best, quaint. How did we allow privatized returns to become so untethered from socialized risks? How did we allow the severe imbalances that are likely to preoccupy policy-makers for coming generations? Most agree that we need to find new models to collaboratively address these challenges at a global level. What emerges must focus on addressing inequalities, including those between current and future generations.
The risk of default is high. Crises in inequality and governability increasingly feed social instability. As we have seen, this can easily lead to vicious cycles, particularly in our tightly interconnected world. But the way forward is far from clear.
A starting point should be acknowledging shared responsibility for creating many of our dysfunctional systems. Heroes and victims (as well as the usual villains), have each played a role. A second step forward is to recognize that meaningful reforms must be both political and economic. How can we alter biases, incentives, cultures and behaviours in both sectors?
How is it, for example, that the Big Three auto makers were driven to build far more vehicles than the market demanded in the runup to the auto bailouts? One study argues they did so to compete on the hours-per-vehicle metric widely used by investment analysts as an indicator of efficiency. Increasing production also allowed them to keep the costs of excess capacity off their income statements and on the balance sheet in the form of inventory. All in spite of the obvious damage to sustainable performance (and reputation).
A recent Bank of England study found that “investment choice, like other life choices, is being retuned to a shorter wavelength,” leading to irrational decisions – particularly with respect to projects of longer duration that often yield the highest private (and social) returns.
A key focus in searching for durable solutions must be on intergenerational equity. One reform, discussed at the World Economic Forum in Davos last month, is the need for new leadership norms (in both the political and economic spheres) – striking a balance between older generations and youth.
While our legal systems are infused with the notion of equity and fairness between contemporaries, we have yet to embrace the notion that justice should be facilitated between members of different generations. One exception has been in environmental law. For example, many of the provinces and the federal government have enacted “sustainable development” legislation, designed to improve environmental decision-making. The statutes define “sustainable development” as meeting present needs without compromising the ability of future generations to meet their own needs.
How can we expect better, longer-term decision-making processes when our legal frameworks are still largely reactive and short-term focused? One possibility may be to breathe new life into legal norms that have fallen out of favour over time. For example, the fiduciary duty of trustees includes a duty of impartiality, which should require them to balance short-term and long-term considerations. How many today could defend themselves from a claim that future generations are being dealt with in a less than evenhanded manner? Can they demonstrate that they have identified and impartially considered the conflicting interests of beneficiary groups – present and future?
Just as law- and regulation-making must generally be accompanied by cost-benefit analysis and “notice-and-comment” procedures, perhaps the time has come to develop a more applied principle of intergenerational equity – requiring legislatures, judges, pension fund trustees and, yes, corporate CEOs and boards of directors to consider and be held accountable for the impact current decisions have on future generations’ interests – each in their particular contexts. Such a principle would not necessarily put the interests of future generations ahead of our own, but should make those interests more explicit. In doing so, it might generate deeper sensitivity and serve as an effective antidote to the demographic imbalances and broader short-term orientation that challenge us all.
Edward Waitzer is a professor and director of the Hennick Centre for Business and Law at York University’s Osgoode Hall Law School and the Schulich School of Business and a senior partner of Stikeman Elliott LLP.