Responsible Investor

Could the wisdom of crowds help investor and regulator madness on governance and ownership?

An anonymous survey of investor concerns might be the basis for neutral dialogue to prevent future systemic crises.

Charles Mackay’s 1841 classic book: ‘Extraordinary Popular Delusions and the Madness of Crowds’, has been a staple for readers – notably financiers – interested in some of the biggest – and strangest – societal neuroses in recent centuries. Alongside a fascinating chapter on the ‘Influence of politics and religion on the hair and beard’ (bear with me), there are accounts of the wildest and most damaging historical financial speculations: Tulipomania in 17th century Holland, the South Sea bubble in 18th century England and the Mississippi Scheme of 1720 in which Scots rogue, John Law, bankrupted the French state and many of its citizens with promises of riches in the Americas. The book records the seemingly inexorable link between greed, folly and herd mentality; all present and correct in our latest financial breakdown to such devastating affect. Re-reading Mackay got me thinking about the practical, tangible responses of regulators and institutional investors to the credit crunch to try and ensure it doesn’t happen again. Amidst the political and public clamour for resolution, I wondered if there had actually been any action yet, outside of short-term banker bonus hysteria? Are we doomed to relive the same calamitous bubble manias over and over again, and can we afford to? The answer to the last question should, I hope, be no, with the caveat that financial bubbles are probably unavoidable. Systemic blowouts, however, almost certainly are, if the right combination of monetary policy, regulation and sustainable ownership of assets is

applied. Where institutional investors manage public money the avoidance of systemic breakdown should arguably be hardwired into their investment DNA. Savers cannot be penalised twice: both as backstop bailout taxpayers and victims of market catastrophes that destroy the value of their pensions and investments. The lack of action got me wondering whether our current governments, regulators and institutional investors might not be pray to an extraordinary delusion? Paul Myners, UK Financial Services Secretary and former chief executive of Gartmore, the UK fund manager, certainly appears to think institutional investors are. Apologies for a UK-based analogy, but I think it demonstrates a broader point. In a speech last month to the UK All Party Parliamentary Group on Corporate Governance, Myners didn’t mince his words: “To date, institutional investors have said little about the lessons they have learnt over the last two years. Put simply, they have not produced satisfactory answers to the question: ‘what were the owners of these banks doing?’ Remember that shareholders approved value-destroying transactions, and remuneration practices that now appear to have been poorly aligned with corporate health and shareholder wealth. I expect institutional investors, on behalf of their clients, to be much more challenging in the future than they have in the past, but I wonder whether their clients have similar increased expectation and have reflected this in their manager dispositions and incentives.” Tough words, which Myners intimated would be followed

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