GLOBAL - Shifting the pension industry towards an approach focused purely on long-term investing and value-creation will involve a “sea change in attitudes”, according to Keith Ambachtsheer.
In his September letter for KPA Advisory Services, titled ‘From “Beauty Contest” trading to Long-Horizon Investing’, the director of the Rotman International Centre for Pension Management highlighted the challenges faced by investors seeking to emphasise long-term sustainability in remuneration packages.
Citing from Vanguard Group founder Jack Bogle’s most recent book ‘Clash of the Cultures’, he said the proposed changes in investment strategies would require “courageous leadership by individuals who are able and willing to make a difference”.
In introducing key figures in the shift away from a Total Shareholder Return executive pay approach and a greater focus on responsible investment overall, he said: “We caution that their actions amount to, at best, the end of the beginning. A sea change in investment attitudes and practices still lies ahead of us.”
Ambachtsheer threw his support behind Roger Martin, dean of Rotman School of Management, in arguing against remuneration using stock-based incentives, which, according to him, can lead to management approaches targeting short-term stock increases.
“While this game can be played for some time, it can’t be played for ever,” he said. “Eventually, bad behaviour in the form of earnings guidance, earnings management and even accounting fraud will result.”
However, this should not rule out the use of stock in pay packages, the Dutch-born president of KPA Advisory said.
Instead, executives should simply be forced to hold the shares until several years after they vacate their senior management role.
Ambachtsheer nonetheless concluded that the “idea” of long-horizon investing was “alive and well”.
“Around the globe, courageous people are both saying and doing the right things,” he said. “But it is still early days.”
He added: “Turning the current trickle into a flood requires a sea change in the thinking of pension system fiduciaries around the world, and in the thinking of the people who advise them. That has yet to happen.”