Trusts

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= Trusts are centuries-old institutions devised to hold and manage property for beneficiaries. Neither trusts nor their trustees may ever act in their own self-interest


Introduction

This entry introduces trusts as a legal and institutional format to protect and manage the Commons.

See also for a detailed treatment:

  1. Commons Trusts & Commons Trusts FAQ


Description

James Quilligan:

"Trusts are generally created to preserve depletable resources (natural, material), but many replenishable commons (natural, social, cultural, intellectual, digital, solar) can also benefit from trusts to ensure their regeneration.

Trustees set a cap on the extraction or the use of a resource according to non-monetized, intergenerational metrics which express presence value, such as sustainability, quality of life and well-being. Having protected a commons safely for future generations, the trust may rent a proportion of the resources beyond the cap to the private sector or to state businesses and utilities for extraction and production. The exchange value of M and the exchange process of M-C-M’ continue to operate for the benefit of free enterprise. A percentage of this rent is taxed by government and redistributed to citizens as dividends or subsistence income, with emphasis on the poor and marginalized. Rental or user fees are also reinvested in the rehabilitation of depleted resources (such as land, rivers, oceans, atmosphere) and the enhancement of replenishable resources (arts, peacekeeping, collaborative knowledge, digital codes, solar energy). The use value of C and the sufficiency cycle of C-M-C’ are thus maintained." (http://www.kosmosjournal.org/wp-content/article-pdfs/toward-a-common-theory-of-value-part-one-common-being.pdf)


Principles

Peter Barnes:

" Trusts are bound by numerous rules, including the following:

  • Managers must act with undivided loyalty to beneficiaries.
  • Unless authorized to act otherwise, managers may spend income from the trust’s activities but are not to diminish principal.
  • Managers must ensure transparency by making timely financial information available to beneficiaries.

These rules are enforceable. The basic enforcement mechanism is that an aggrieved beneficiary or a state attorney general (in the United States) can bring suit against trustees. When that happens, the trustees must prove they acted prudently; if there’s any doubt, they are fined or fired." (http://onthecommons.org/trusts-uniquely-commons-form-ownership)


Citations

the trust is to the commons as the corporation is to the market

- Peter Barnes [1]


There are already plenty of existing examples to show that stakeholder trusts can achieve things that neither government nor markets can: responsible and equitable long-term management of a shared resource.

- David Bollier [2]

Examples

  1. Airwaves Trust
  2. Aquifer Trust
  3. Fisheries Trust
  4. Garden Trust
  5. Genomic Biobanks Charitable Trusts
  6. Marin Agricultural Land Trust
  7. Potato Trust
  8. Sky Trust
  9. Watershed Trust

Discussion

Managing the Commons through Trusts

Citations are mainly from Peter Barnes in the On the Commons blog.

From http://onthecommons.org/node/696

Trusts are a good solution to manage the commons, since they have the obligation to preserve the capital for the next generation.


1. Commons are manageable through trusts

"There's a widespread (and false) belief that the commons, unlike private property, is unmanageable. This is in part due to Garrett Hardin's essay, "The Tragedy of the Commons," which argued that commons are inherently self-destructive. The truth is that there are effective ways to manage almost any commons, large or small (though global commons present special challenges).

The commons most desperately in need of better management are those gifts of creation that are near their carrying capacities: airsheds, watersheds, aquifers and habitats for other species (including the oceans). Other commons that need attention include the electromagnetic spectrum, the Internet, seeds, DNA, the arts, the "capital commons," roads and streets, and "human mind space." Here I set forth general principles of commons management and describe how several specific commons could be managed.

General principles: The commons manager is a trustee on behalf of one or more designated beneficiaries. The manager/trustee must at all times be loyal to those beneficiaries and have no conflict of interest whatsoever with commercial users of the asset. Unless specifically authorized to do so, the manager must not diminish the principal, or inherited value, of the asset. The manager must pro-actively maintain and restore the asset to assure its health and longevity. The manager has the right to limit usage of the asset, and the duty to do so when necessary to protect its inherited value. In cases where asset usage must be limited, the manager has both the right and duty to charge prices for such use. If there's income from asset usage, the manager may spend that income for asset maintenance and restoration, equal dividends to beneficiaries and/or public goods that are specified by the trust. The manager shall post all income and expenses on the Internet quarterly, and shall make a full public report to beneficiaries annually.

Here's how some specific commons could be managed:


Air trusts at various levels could manage air pollution. Unlike current regulatory agencies, these trusts would give pollutees an ownership stake in clean air. They'd reward people for conserving and penalize them for polluting. Over time, they'd catalyze a transition to clean energy.

Watershed trusts would limit the amount of fertilizers and pesticides that can be used within a watershed. This would protect streams and rivers from noxious run-offs and boost incentives for organic farming. Such trusts could also hold water and development rights.

Aquifer trusts would protect underground water tables which are being depleted faster than rain replenishes them.

A spectrum trust would charge commercial broadcasters and telecommunications companies for using our airwaves. The revenue would support non-commercial broadcasting and the media budgets of political candidates.

City street trusts would charge drivers for using crowded streets at peak times, and use the revenue for mass transit and bike paths.

A capital commons trust would be a giant mutual fund owned by all Americans on an equal basis. Publicly traded companies would contribute shares to the fund at the rate of 1 percent per year, up to a maximum of 10 percent of their shares. The contributions would be the price these companies pay for the socially created benefits of public liquidity -- a small price for the hefty benefits. (When a company "goes public," its stock leaps spectacularly because it can be sold instantly to anyone.)

It's worth nothing that none of these commons management models requires corporations to change their current mode of behavior. CEOs would continue to maximize profit, while commons managers follow different algorithms. Government would facilitate the growth of the commons sector, but not run it."

2. An explanation of Trusts and their advantages

URL = http://onthecommons.org/node/691

"When we think of economic institutions, the one that first comes to mind is the corporation. Its well-known algorithm is maximize return to capital. But there's another time-tested institution that has different algorithms. That institution is the trust. A trust holds and manages property for one or more designated beneficiaries. The essence of a trust is a fiduciary relationship. A trustee never acts in her own self-interest; she's legally bound to act solely on behalf of beneficiaries. Trust principles apply not only to private trusts set up by parents and grandparents; they extend to pension funds, charitable foundations and university endowments. They also apply to entities like the Nature Conservancy that own land or conservation easements in perpetuity. Trusteeship isn't the same thing as stewardship. A steward is someone who cares for an asset, but whose obligations are voluntary and vague. A trustee, by contrast, has strict legal obligations. Trusteeship is thus a more formal and rigorous responsibility than stewardship.The rules of trust management have evolved over centuries of common law.

They include:

- Managers must act with undivided loyalty to beneficiaries.

- If beneficiaries span many generations, managers can't favor one generation over another.

- In many cases, managers must preserve the corpus of the gift. It's okay to spend income, but not okay to diminish principal.

- Managers must assure transparency by making financial information available to beneficiaries.

These rules are enforceable by the courts. The basic mechanism is that an aggrieved beneficiary can bring suit against a trustee, who must prove she acted prudently to carry out the trust's mission. In the case of charitable trusts, a state attorney general may bring suit.

If we were to design an institution to protect pieces of the commons, we couldn't do much better than a trust. The goal of commons management, after all, is to preserve assets and deliver benefits to multiple beneficiaries. That's what trusts do, and managing trusts isn't rocket science.

Trusts have advantages not only over profit-maximizing corporations, but also over government agencies. Consider, for example, the Federal Reserve Board, created in 1913 to manage the nation's money supply. The Fed is a hybrid entity. Technically, it's a corporation whose stock is owned by member banks, but unlike normal corporations, its governors are appointed by the President to 14-year terms. In effect the Fed is an autonomous trustee of our currency.


3. Trust-based property rights

URL = http://onthecommons.org/node/685

"For decades, economists have agreed we'd be better off if businesses `internalized' their externalities -- that is, paid in real time the costs they now shift to others. The problem is, there's no one in the market to set prices and collect them. In 1920, British economist Arthur Pigou suggested that government might play this role: it could tax unwanted activities such as pollution, thereby raising their prices and discouraging them. The trouble is, this has turned out to be politically impractical. Think of a real example here: carbon taxes. A tax on carbon emissions could, in theory, reduce global warming. But in order to make a difference, the tax would have to get extremely high. This means Congress would have to raise the prices of gas and electricity year after year, hitting every business and consumer in the pocketbook. That's an improbable scenario.

In 1960, University of Chicago economist Ronald Coase came up with another idea: use property rights to set prices for externalities. For example, if pollutees had a right not to be polluted, they could cut deals with aspiring polluters: for such-and-such a price, we'll accept so much of your pollution. Government's job would be to create the appropriate property rights, then let markets set pollution levels and prices. In my view, Coase's approach is the way to go; the trick is getting the property rights right. Individual pollutees are in no position to negotiate with corporate polluters. The right not to be polluted needs to be a collective right, and pollutees -- both present and future -- need to be represented by competent agents.

Those agents, as I suggested earlier, ought to be trusts accountable to future generations and living citizens equally; what are now unstoppable externalities would become property rights owned and managed by such trusts. The trusts would set steadily lower pollution levels and collect the fees paid by polluters. They'd then divide that revenue among pollutees and/or invest it in public goods. Prices of pollution-laden goods would rise, but so would the incomes of consumers. Those who avoid pollution-laden goods would come out ahead; those who indulge in such goods would pick up the tab. What better or fairer set of incentives could we devise?"


Trusts as a new form of common property

From Peter Barnes at http://onthecommons.org/node/995

"It seems that when it comes to "takings" of valuable property, governments in Europe as well as the United States have a double standard. If the property is privately owned, it can't be taken without fair compensation. In the U.S., this prohibition is embedded in the Constitution ("nor shall private property be taken for public use, without just compensation," says the Fifth Amendment).

By contrast, if the valuable asset is commonly owned, no such prohibition exists. A government can take from the commons and give to private owners without the latter paying a dime. There doesn't even have to be a "public use" to justify the taking.

Why this double standard? Why does private property receive royal treatment, while Common Property gets the bum's rush?

Part of the answer is that private property is more clearly "possessed" than common property. It comes wrapped in deeds and titles that give it legitimacy and legal standing. Common property, by contrast, is generally ill-defined. There's no piece of paper that says who the atmosphere, or the broadcast spectrum, belong to. So when Bob Dole, the former Republican Senator, said in 1995 that the broadcast spectrum "belongs to every American equally," he had common sense, but no deed or title, to back him up. Hence Congress could blithely hand out free broadcast licenses to private media corporations, and no one could say it acted unconstitutionally.

It seems to me this is an oversight that can and should be corrected. A taking of valuable common property needs to be compensated just as much as a taking of private property. That compensation could go to government, or to a trust representing all beneficial owners. This would put an end to further windfalls for the rich, at the expense of everyone else. It would assure that common resources are used for the common good.

Perhaps, to make things crystal clear, we ought to create a new class of property -- common property -- that lies somewhere between private property and state property. Such property could be managed by trusts rather than corporations. Such trusts would be separate from government, and government couldn't take and redistribute their property without compensation, any more than it could take Exxon's. The trusts' beneficiaries would be future generations and all living citizens more or less equally. Trustees would be legally bound to serve those beneficiaries, just as corporate directors are legally bound to serve stockholders. Each citizen's beneficial share would be a non-transferable birthright.

One can imagine such trusts protecting common gifts such as the atmosphere, the broadcast spectrum and terrestrial ecosystems, paying equal dividends to living citizens, and supporting renewable energy, public transportation, non-commercial broadcasting and other common goods.

In short, by giving common property the same respect we give private property, we could have a market economy that takes better care of the planet and of citizens who lack private wealth. This would be a better version of capitalism than the one we have now." (http://onthecommons.org/node/995)


Chris Cook on why Trust Law is inadequate

Chris Cook argues trusts are not an adequate governance mechanism:

"It's not the concept of a "Trust"/ Steward / Custodian I have a problem with: it's (judge made) Trust Law or "Equity".

I prefer (consensual) partnership law - the Japanese approach is very much along these lines: as the lawyers say..." there are as many Sumo wrestlers in the the US as there are attorneys in Japan..."

(a) Trust law is complex, laden with Latin arcana, and hence beloved of lawyers (paid by the hour, not the outcome);

(b) there is a management issue - since those who manage a "Trust" typically cannot benefit, and the entrepreneurs who set up "Social Enterprises" as "Not for Profits"/ "Trusts" find they get divorced from management of them, unless they are prepared to starve in a garret;

(c) an entrepreneurial Trust is a contradiction in terms;

(d) investment in productive assets by "Not for Profit" "Trusts" is difficult, since they have no "Equity" and require either secured loans (putting them at risk) or grants (which may detract from the purpose).

and so on.

I believe that in creating the UK LLP, the UK government inadvertently reinvented the "Corporation" in an "Open" and optimal form, allowing new financing options I call "Open Capital"."

More at http://www.opencapital.net


Chris Cook's critique of Trusteeship]]

"Trusteeship is based upon the positive control of a 'Trustee' on behalf of a ' Beneficiary', and one of the key problems is that in order to actually DO anything with assets held in trust it is necessary to employ managers as agents, whose interests are conflicted with those of both trustee and beneficiary. This intractable principal/agency conflict also applies to all Companies, whether or not operating 'For Profit'. It also applies to States/ Public Sector organisations. The P2P architecture I advocate is based not upon ACTIVE control of assets, but passive custody where the custodian has negative rights of control. ie he may say what may NOT be done rather than what SHALL be done with productive assets. The use of such custodians is already routine in the financial system. Virtually all institutional share trading takes place in respect not of the shares, but of the economic interests in the shares which are immobilised in the hands of a custodian. So it must be IMHO in order to achieve a practical real world P2P system, where undated credits in respect of the use value of productive assets (eg rental value, energy value and intellectual value) hldl in custody may be exchanged within a suitable framework of trust." (Facebook, January 2011)