The prudent man rule: from substantive to procedural and "communicational" prudence of investment
Montagne, Sabine (2009), The prudent man rule: from substantive to procedural and "communicational" prudence of investment, 21st SASE Conference- Network P, Paris, 16-18 July,, Paris, FRANCE
TypeCommunication / Conférence
Conference title21st SASE Conference- Network P, Paris, 16-18 July,
MetadataShow full item record
Institut de Recherche Interdisciplinaire en Sciences Sociales [IRISSO]
Abstract (EN)The ongoing financial crisis is largely explained by the fact that organizational rules and governance of finance would have continuously reduced perception of risks since the 1980s because of successive financial innovations and correlative financial bubbles. This paper analyses this argument in the case of the prudent man rule, the legal standard used by fiduciary institutions to regulate their investment policies. Analysis of case law shows that the notion of « prudent investment » as defined by courts resisted financial innovations because such investments were taken as too speculative by the legal tradition of trusts. But, thanks to legislative and judicial changes, it fitted the conception of prudence imported from the new financial theory in the 1970s and allowed institutional investors to invest in riskier asset classes since the 1980s. Finally, it contributed to the drift of finance in the late 1990s and in the 2000s since it failed to prevent and punish too risky behaviours. Part I describes changes of this standard and identifies three historical steps. From the 19th century to the 1970s, the prudence was substantially defined. From the 1970s to the 1990s, the pension law ERISA focused on the conformity to a procedural model of investment decision making process. From the late 1990s, prudence has consisted in disclosure procedures by trustees and become public relation matters. Part II examines structural features of this legal tradition of trusts that are responsible for that dramatic shift and the inability of this law to be a gate keeper of finance and to support a more Keynesian understanding of finance.
Subjects / KeywordsGouvernance; Investissements institutionnels
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