3. Fiduciary Duty

The discharged duty of the fiduciary may be considered the overarching exhortation that demands good governance. The concept of fiduciary duty finds its sources in Roman law. The word “fiduciary” comes from the Latin fiducia, which refers to the transfer of a right to a person, who receives it, subject to an obligation to transfer it again at a future time or upon the fulfillment of a certain condition. This evokes the modern-day idea of a trust or of an asset held in escrow. Fiduciary duty represents a “cluster of obligations” owed by one person, the “trustee” or “fiduciary” toward another, the “cestui” or “beneficiary”, regarding an identified subject matter, which is referred to as the “res” or “subject of the trust”.

We have come a long way from the days of the legal interpretation of the Prudent Man Rule. The development of modern portfolio theory pushed the legal definition further. Codified in Employee Retirement Income Security Act (ERISA) for corporate pensions, and in the Uniform Prudent Management of Institutional Funds Act for endowments and foundations, institutional investors now have full latitude over their investments.