10 Jul PUBLIC PENSION CORNER, #48: Fiduciary Drift
NEWS:
I. SEC Chairman Says No-Action Policy Suspension Was Less Disruptive Than Many Expected
Securities and Exchange Commission Chairman Paul Atkins said this week in a speech at the Society for Corporate Governance Conference in Nashville, Tennessee that last year’s suspension of the Commission’s no-action letter policy worked out well and created far fewer disruptions than observers expected and activists warned:
In November 2025, the SEC’s Division of Corporation Finance (CorpFin) announced that its staff would no longer respond to no-action letter requests related to Rule 14a-8 of the Securities Exchange Act of 1934, which governs rules on shareholder proposals, for the proxy season running from October 1, 2025, to September 30, 2026. The announcement drew mixed predictions, Atkins said….
“Nearly eight months later, it is clear that neither of these dire predictions materialized, and I am happy to report that the world did not end simply because the Commission staff stopped responding to no-action requests,” Atkins said….
A review of the proxy season in June by Cooley LLP noted that “despite the heightened drama of the 2026 shareholder proposal season…the year-over-year trends remained largely consistent with the prior year.”
II. World Bank Shelves Climate Finance Goals
Under pressure from the Trump administration, the World Bank has agreed to drop its plan to direct 45% of its financing over a five-year period to projects with climate “co-benefits.” The Trump administration opposed the goal, claiming that it distracted from the Bank’s principal goal of promoting economic growth:
The World Bank Group announced that it will extend its Climate Change Action Plan, its strategy to support countries and private sector clients to address climate and development challenges together, but that it will also retire a key target committing 45% of its financing to projects with climate co-benefits.
The World Bank’s climate finance activity has increased significantly since launching its climate strategy 5 years ago. The move to retire the climate finance targets follows pressure from the Trump administration, which has argued that the goal distorts the organization from its mission to reduce poverty and drive economic growth. The U.S. is the largest shareholder in the World Bank Group….
Under the Trump administration, however, the U.S. government has pressured the World Bank to drop its climate finance target. In April 2026, U.S. Treasury Secretary Scott Bessent argued that “The World Bank must maintain focus on its core mission of reducing poverty and increasing economic growth,” adding that this “means jettisoning the World Bank Group’s 45% climate finance target that breeds inefficiency, distorts economic decision making, and moves the Bank away from its core mission.”
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“Fiduciary Drift”
Recently, my friend and colleague Allen Mendenhall and his friend and former colleague Daniel Sutter published an article in The Journal of New Finance that capitalized on a unique and uniquely opportune set of circumstances to make a handful of points about governance, fiduciary duties, and fiduciary “drift” in the contemporary era.
Mendenhall and Sutter took a look at the returns generated over twenty years by two of Ohio’s public pension systems, the State Teachers Retirement System of Ohio (STRS) and the Ohio Public Employees Retirement System (OPERS). Specifically, they examined the reported investment returns for the two systems and compared them to their audited returns. What they found was both interesting and unsurprising:
[At STRS] Reported investment returns exceeded audited returns in 19 of 20 fiscal years examined (2003-2022), with an average annual overstatement of 0.33 percentage points and a single exception in fiscal year 2020, resulting in approximately $9.3 billion in cumulative overstatement. By contrast, the Ohio Public Employees Retirement System (OPERS) exhibited minimal, bidirectional discrepancies (0.08 percentage points), consistent with measurement variation rather than systematic bias.
This is a perfect case study – so rarely found in the wilderness these days – because the two systems are very similar: same state, same statutory framework, same macroeconomic environment, same (or at least nominally similar) investment universe. The difference between the two largely boils down to one thing: performance bonuses. Put simply, STRS sets performance bonuses based on reported returns, while OPERS’ bonuses are based on audited returns. Or, to put it even more simply: STRS had a tangible motive for exaggerating the system’s reported returns, even if unwittingly.
The authors are very careful here, offering several caveats. For example, time-weighted vs. money-weighted methods and alternative-asset valuation lags could account for some of the gap. The 2022 outlier (1.79 pp) is partly consistent with valuation lags in a severe down market. Nevertheless, methodology alone cannot explain a directionally consistent 19-of-20 pattern; if it could, OPERS would show the same pattern, which it does not. In other words, the findings are robust.
What’s most interesting and most relevant here is not that STRS’s staff had an incentive to look good. That applies to almost every institution, almost everywhere, almost always. Rather, what’s striking is that STRS built a structure in which two different numbers could coexist in the same official document, one shielded by CPA liability and one shielded by nothing at all. Mendenhall and Sutter borrow a phrase from public choice literature to describe this: it functionally operates as two sets of books. The information in both is “accurate,” as far as that goes, but they serve very different purposes and produce very different results.
This is why the STRS story is important – and useful beyond Ohio and beyond this single analysis. Fiduciary duty, at its heart, is a duty of loyalty and information. A fiduciary owes beneficiaries not just good-faith effort but an honest accounting of what that effort produced. STRS’s structure quietly but categorically separated those two things. The number subject to legal accountability (the audited return) and the number that, in practice, determined compensation (the reported return) were permitted to diverge for two decades, without anyone ever being obligated to reconcile them or even, for that matter, to compare them to one another. To be clear: that’s not a scandal in the conventional sense. No one is accusing anyone in this story of fraud. Nevertheless, this is a textbook illustration of fiduciary drift. Drift happens, in this case, not through the efforts of a single bad actor (or group of bad actors), but through institutional design, which guilelessly but undeniably rewarded the more flattering number.
In conservative circles, there is a tendency to view most unelected public officials with trepidation. They’re not all bad actors, per se, but they could be, and at the very least, because they’re self-interested, they’re not always (or ever) publicly spirited. The tendency on the Right is to assume that they are more concerned about their own interests or that of the organization than they are about the broader populace. The term “bureaucrat,” for example, is, historically, purely descriptive, but to most people today – and especially on the Right – the term is seen as a pejorative.
Using the framework of public choice theory, Mendenhall and Sutter show that this doesn’t necessarily have to be the case for institutions to govern poorly. They use the Ohio pension plans to show that a governance failure doesn’t require a villain; a compensation structure alone can produce exactly the outcome public choice theory predicts. As the authors note, “[t]he problem is not individual malfeasance but systemic misalignment of incentives.” Governance issues can – and do – arise for reasons other than intentional misconduct. Complex structures, institutional inertia, and competing mandates and constituencies all contribute to the existence and persistence of fiduciary drift.
Given this, in the case of the Ohio pension plans, Mendenhall and Sutter don’t suggest that the solution to drift is to overhaul STRS’s board, restructure its governance, or relitigate the ESG fights that have consumed so much of the pension world’s attention lately. Rather, their suggestion is much narrower: tie the number that determines bonuses to the number the auditors are willing to sign their names to.
The bottom, broadly applicable line here is that fiduciary drift happens, that it is often the result not of intentional misconduct but of institutional design or misaligned incentives, and that responses can and usually should be modest and not disruptive. The key, therefore, is constantly to review premises and practices, aware that governance concerns can evolve quietly and unintentionally. Semper Vigilans, in short. Or, more concretely, always use the numbers the auditors would sign.
