Long Term Matters: Investment can be a true profession
Carillion, the UK construction company that collapsed recently, reminds us, once again, that investment is yet far from being a credible profession. Of course, investors are technically skilled, highly paid and still held in high regard by many. But computer hackers have high levels of technical skills, the mafia are well remunerated and influential, and celebs often have significant public popularity but none of these would be called professions.
Compared with medicine and law, investment falls short in all three characteristics of a true profession. Professions have an education which is fit for purpose. They have a well-functioning code of conduct which is enforced. And they learn from failure.
It is true, investors do have the option of universal education – the CFA programme or regional equivalents – but as Keith Ambachtsheer explains in this edition of IPE (see this month’s Guest Viewpoint), the formal training – I am not commenting on voluntary ESG modules – is, in many ways, backward looking and part of the problem. In language that is understandably diplomatic – he is a member of the CFA’s future of finance advisory council – Ambachtsheer asks an important question: “If economic activity produces too much carbon, environmental degradation, income and wealth inequality, and financial instability, we have an increasingly unsustainable ‘system’. Should the CFA curriculum not expose candidates to this kind of thinking?”
Referring to my November 2017 piece, ‘Elephants in the sustainability room’, co-authored with fellow Canadian and leading corporate lawyer, Ed Waitzer, Ambachtsheer confirms that perverse incentives, a too-shallow talent pool, and wrong-headed investment policies continue to pose formidable barriers to a more effective, productive, sustainable form of capitalism. It is painfully clear that the CFA curriculum does little to ensure candidates understand these system barriers, and even less to learn how to help remove them.
But over and beyond bottom-up training, professions need a code of conduct that is universal, fit for purpose and above all, enforced. No profession can claim to have a perfect system, but the investment industry is a long way off on both the two core characteristics of such a code.
First, each firm is able to set its own code or value statement. And with the codes that are broader in scope (for example, the CFA Code of Ethics & Standards of Professional Conduct), in practice they focus on personal ethics defined in a distinctively American way (that is, sexual and financial mis-behaviour) and how the job of investment professionals is currently defined (that is, maximising shareholder value for customers with a focus on the short term). They do not explicitly acknowledge that investors have duties, as institutional custodians, to ensure society’s financial assets deliver what society as a whole needs and with the focus on the longer term. Clearly, this includes preventing – and where not possible to prevent, then mitigating – systemic risks.
Second, there is no independent body with the power to censure managers who deviate from the code. This is especially so when professionals work in the largest organisations that have the biggest influence with bodies like the CFA. What other professions have found essential is a governing body, composed of respected members of the profession, to oversee members’ compliance. Through these codes, grown-up professions forge an implicit social contract with wider society. We need to create a context where ensuring healthy economic systems becomes an integral part of the identity of investment professionals – a self-image which then most are motivated to maintain. Instead, today it is possible for investment professionals to support personal codes of conduct and then lobby vociferously against the industry having an explicit duty to put its client first.
Finally, professions invest in what management guru Chris Argyris calls “double-loop learning” – a recognition that the way a problem is defined and solved can be a source of the problem. And those professions that have a big negative impact on society when they fail – that is, aviation, uniformed services or civil nuclear engineers – invest heavily in “learning from failure”. So take a pause and be honest with yourself: do you think the investment industry has really learnt much – that is, really changed much – as a result of the many ‘preventable surprises’ (like the dot.com crisis, the global financial crisis, BP, Tesco, VW) that it has enabled and experienced?
It is the nature of addiction to be ‘blessed’ with ever-serious wake-up calls. Carillion is yet another reminder of investors’ addiction to ‘quarterly capitalism’ and when the full costs (such as construction delay and litigation) become clear, it is much more likely to be a £6bn (€6.8bn) scandal than a £600m one.
Carillion is far from being a surprise; the warning signs were many and started several years ago. And investors are far from being blame-free: 80% supported the egregious pay arrangements that contributed to the crisis. The argument that all investors do this is exactly my point – the sector’s standards are so low that being ‘best in class’ is largely meaningless.
So, is society doomed to keep repeating this pattern? Much depends on what decent investment professionals choose to do.
Even if their employers and trade or professional bodies choose to keep their organisational heads in the sand, individual investment professionals could come together to do a learning exercise about Carillion. They could collectively choose not to be bystanders and there is safety in numbers. Organisations such as Preventable Surprises could facilitate such dialogues between these positive mavericks and take this learning to the wider community.
Of course, it would be best if this learning was led by well-resourced formal groups – for example, national chapters of the CFA or, as Carillion was, a UK company, the body responsible for investor stewardship in the UK, the Investor Forum. For this to be useful (that is, not more of the problem) these groups would need to do something novel. They would need to ensure that self-censorship and conflicts of interest did not undermine the authenticity of the learning. Culturally, this would be a giant step forward.
Legislators and regulators could also trigger deep learning by ensuring that the inquires that are held explore the enabling role that investors played and name names.
So back to a Hippocratic Oath for Investors. Could it happen? The good news is, that proposal is based on an idea from senior Harvard academics, Rakesh Khurana and Nitin Nohria, who is now dean of Harvard Business School. They are hardly radicals. The bad news is that their proposal was made in 2008 and has got nowhere. But now that the investment industry is also starting to feel the pain – recent moves by BlackRock to boost its stewardship work being a good example – it is time to resurface this important proposal.
Raj Thamotheram is founder and chair of the responsible investment think-tank Preventable Surprises