The future for responsible investment
It has been a fascinating autumn for those that believe in responsible investment. There have been so many developments, there has hardly been time to catch your breath.
Granada, and BSkyB are just two examples of UK companies whose governance has been heavily questioned and indeed influenced. In the Netherlands the 40 Peters Corporate Governance recommendations made as long ago as June 1997 are at last moving forwards and we should have a new corporate governance code in place at the start of the new year.
The US seems to have spent the last few years focussing mostly on scandals but one commentary I can recommend, although it is hardly light reading, is a report by Richard Breeden’s addressed to the Hon Jed S Rakoff, the United States District Court for the Southern District of New York, on ‘Corporate governance for the future of MCI Inc’*. It contains a number of radical proposals which although designed for the situation in the US will likely have implications for the ongoing debate in Europe.
However, one of the highlights for me was the result of the recent USS competition to design a long term pension fund mandate. I followed the competition entitled ‘Managing pension fund assets as if the long term really did matter’, with much interest and even though it did not gain much publicity in Europe, a good international audience listened to the winners explain their strategies at an EPFIF seminar in Amsterdam at the end of October. I am not convinced that the result could be described as a blueprint for responsible, long-term investing but the debate has certainly made progress.
It is however frightening to think that one of the UK’s major pension schemes felt it had to organise a competition to get the investment industry to focus on what a long-term business pension fund investment should be.
Recent equity market shocks may have focussed attention on poor short-term numbers but the trend to think only about short term performance has been clear for many years. Too many asset managers have focussed too much of their attention on quarterly figures without regard to long term strategy. This really could never be sustained for very long. At the end of the day, after 30 or 40 years or more, the performance of a pension fund over a particular quarter is quite irrelevant. Somehow or other we have to convince accountants of this fact.
It was also quite reassuring the other day to attend a conference organised by Tomorrow’s Company, an independent think-tank. Some months ago it set up a heavyweight inquiry team, headed by Sir Richard Sykes, the outspoken former chief executive of GlaxoSmithKline. The inquiry may only have been investigating the UK investment industry but its interim conclusions and preliminary thoughts are worth discussion throughout Europe.
Essentially, the inquiry believes the investment industry needs to adopt a new set of operating principles to improve its transparency, accountability and long-term thinking. One cannot help but think that it is indeed good principles and standards we need not rules. If one looks over the Atlantic one can see what a mess the US investment industry is in at the moment.
Over the last few weeks we have seen the largest US public pension fund launch a stinging attack on the New York Stock Exchange (NYSE) saying its corporate governance reforms were “doomed to failure” without a complete separation of its regulatory function and more board seats for investors.
The $150bn (E128bn) CalPERS (the California Public Employees Retirement Scheme has publicly asked the US SEC (Securities and Exchange Commission) to reject the NYSE’s proposal to address regulatory and governance weaknesses through the appointment of a supposedly independent board of directors. Calpers and other big pension funds want a greater say in the right to regulate stock exchange members.
However, the biggest development in the US has been the scandal of improper mutual fund trading. When it first blew up it seemed that insiders defended the practice of allowing directors and big customers to “market time” or rapidly trade mutual funds by saying it wasn’t against the rules. But by allowing certain people to buy or sell mutual funds at set prices – when you knew the market had moved the other way – was at best unethical and at worst downright fraudulent.
Already we have seen a few state pension funds remove money from Alliance Capital Management and billions of dollars from Putnam Investments (the first mutual fund company to face civil charges in the probe). Putnam apparently lost a staggering $14bn, or about 5% of its assets in the first week of November alone. I am sure it will not stop at just a couple of firms but there is now no doubt that investors really want to question the ethics of all investment management firms.
Pension funds want to see their managers adopt firm principles not rules that can be got round. It is ethics not ethical investment that counts. Now that really would amount to what I could call ‘responsible investment’!