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Danyelle Guyatt: Investor collaboration – enlarging the shadow of the future

How might investor collaboration redress some of the current shortcomings in the financial system?

“For cooperation to prove stable, the future must have a sufficiently large shadow” (Axelrod, 1984:174)

This article is about the effectiveness of investor collaboration groups and is a continuation of previous work on this subject funded by Rotman International Centre for Pension Management. Of particular interest is how investor collaboration might be mobilised to redress some of the shortcomings in the financial system that adversely affect global institutional investors and end-beneficiaries of investment savings plans. At its broadest level the financial industry is plagued by controversies such as the Libor fixing scandal, an absence of systemic risk management processes perpetuating crises such as the credit crisis, short-termist behaviour and a misalignment of interests along the investment chain spanning investee companies, fund managers, investment brokers, pension fund executives through to end-beneficiaries. The resulting erosion of market integrity and trust in the financial system is a road we have been travelling on for some time and one that calls for collaborative action to put the brakes on and redesign the system we have created and participated in as investment agents. The good news is that investors are in the mood for collaboration. Indeed, collaborative groups have proliferated over recent years, with some focusing on broad system change while others act as a conduit for a group of like-minded investors to achieve specific goals through collaboration. One thing all investor collaborative groups have in common is that the members recognise that it can be beneficial to come together to respond to some issues as a group rather than working independently. These ‘groups’ may be small and local or large and international – run with or without a financial commitment from members – but inall cases a commitment of time and effort is required to make collaboration work well. Despite the increasing support for, and growth in, collaboration, it is not without its challenges. Indeed some collaboration efforts come and go without having achieved much during their existence. Others might get caught up in bureaucracy and power struggles, losing sight of their original goals and intentions. As Axelrod rightly pointed out, the ‘shadow of the future’ must loom large over collaborative groups to ensure that there is a strong and ongoing incentive for group members to work together and recognise their common goals and long-term interests, as opposed to getting stuck in a tangled web of differences and endless committee meetings. Against this backdrop this study examines some of these collaborative investor groups and applies the previously developed 8-step collaborative framework to analyse what makes collaboration more or less effective in meeting its goals and objectives. The collaborative groups each have different goals and objectives; hence the effectiveness of each group was measured against their own goals rather than a generic set of objectives. The aim of the study was, firstly, to identify the key design features and characteristics that distinguish one group from another in terms of their effectiveness. Secondly, to evaluate how well the 8-step collaborative framework was able to predict the effectiveness of real world collaborative groups with the hope that the framework might be applied as a tool to improve investor collaboration outcomes. Finally, to consider opportunities for cross collaboration between existing groups as a way to improve outcomes and effectiveness. The full paper and the journal article set out the complete findings and methodology, including the detail underpinning the 8-step collaborative framework.
The data source included a combination of theoretical analysis using publicly available information on the collaboration groups, as well as a survey that invited members of the groups included in this study to share their views and experiences. What are the ingredients for effective collaboration? The study found the key ingredients underpinning effective collaboration to be:
• Having clearly defined goals, with focused tasks and specific issues identified.
• A high level of trust between members, who share a similar mindset and common interests in an open (informal) atmosphere.
• A high level of interaction between group members and involvement in taking actions as part of the initiative rather than delegating or relying on the group’s executive to ‘do everything’ on their behalf.
• Evaluation is crucial. Groups that take action, evaluate, measure and report their outcomes and share experiences are more effective at staying on track and achieving their goals and objectives.
• Smaller groups tended to create the above conditions more effectively than larger groups, but this was not a universal finding as some larger groups also demonstrated a high level of effectiveness. It does suggest, however, that large groups have an additional challenge to create an open, trusting and involved environment for their members.These findings are further illuminated by the following anonymous quotations from some of the survey respondents:

  • “Small collaborations where a few investors can agree to a few small actions that can be carried out independently might be among the most successful at getting collaborators to actually take action.”
  • “We participate in an informal grouping of UK pension funds who share an interest in RI [responsible investment] issues. It’s a bit of a ‘mates club’ cum sewing circle, but therein lays the appeal. It’s about sharing experiences in a friendly informal way.”
  • “Effective collaboration seems to require a good deal of trust in the other collaborators.”

What causes collaboration to fail? The study found the following explanations:

• When a group is unclear about its goals and objectives, it increases the risk of its activities going off track.
• When there is a fragmented target group (e.g. if they are targeting regulators, other investors, companies), the messaging from the group to the target group(s) can become mixed and watered down.

• If there is no or little trust between the members of the group then it becomes difficult to achieve anything.
• If the group is bureaucratic in the way it behaves and implements its goals then the members can become frustrated and disengaged.
• It is easier for a group to lose its way when there is not enough focus on outcomes and too much focus on process (more talk than action) with a failure to measure and report success.

Some more quotes from the survey respondents illuminate these findings:

  • “Too many [groups] focus on processes rather than outcomes.”
  • “I believe there is not enough measuring of success. There are lots of pockets of collaborative groups doing various things but it’s not clear if they are delivering or not.”
  • “I don’t think the measure of success is how many have signed up to initiatives but whether or not the initiatives have led to change.”
  • “While there have been some examples of success, all groups are failing to deliver: the world has not become more sustainable or better governed and instances of [environmental, social and corporate governance] ESG issues impacting shareholder value are on the rise. So the potential of the power of shareholders to bring about positive change and reduce investment risks is not coming to fruition, or it is way too slow.”
  • “There is a risk that all groups allow business as usual to continue (the investment strategy team think they are dealing with the ‘problem’ by allowing a part of their organisation to support a particular initiative while not actually taking any real strategic decisions or embedding across their organisation).”

A call to action: the next phase of collaboration

Some specific suggestions as to how the findings of this study might be applied in the real world are provided below:
• The secretariat/executive of collaborative groups – introduce a regular evaluation of outcomes into the group’s process that involves gauging the views and activities of its members, pro-actively responding to the feedback and message from members, clearly reporting key achievements against the group’s goals and objectives and measure the actions taken by members as they relate to the goals of the group;• Members of existing collaboration groups – members of collaborative groups could apply the 8-step framework to assess whether on-going participation is still of benefit to their organisation and if they should stay committed, or indeed identify potential areas where they might become more active and involved, how they can better utilise the group’s activities and change their own organisation’s behaviour and if they can see any opportunities for cross-collaboration with other groups that will bolster the group’s effectiveness and hence the benefits to their own organisation;
• Potential members of existing groups – individuals or organisations that are considering joining investor groups could apply the 8-step framework presented in this report to assist in the decision-making process and guide discussions around whether participating in a group will bring some benefit to the organisation. This might include considering whether they think the group is effective, credible and legitimate, if they share the beliefs and priorities of the other group members and if the time/effort and financial contribution required is something that they are willing to commit to.
• Individuals/organisations considering forming a new collaborative group or cross collaboration – the 8-step framework could be used to guide discussions about establishing a new collaborative network, including the aims and objectives of any new group, what it would address, the agents it would target, what the members hope to achieve, how the group would be designed, implemented and evaluated. The discussions may also consider opportunities for cross-collaboration between existing groups and draw from the principles presented in this report to guide discussions.

In closing, the many investor collaboration groups that already exist have made some inroads into improving how institutional investors coordinate their activities, their questioning of the status quo and their quest for higher standards in processes and outcomes. The foundations are in place for investor collaboration efforts to become a force to be reckoned with in putting the financial system back on to a more sustainable pathway.

Bibliography
Axelrod, R. (1984), The Evolution of Cooperation, New York: Basic Books.
Guyatt, D (2013), Institutional Investor Collaboration: Enhancing Effectiveness. A research report funded and prepared for Rotman ICPM. The full research paper can be downloaded here
Guyatt, D (2013), “Effective Investor Collaboration: Enlarging the Shadow of the Future,” Rotman International Journal of Pension Management, Vol. 6, No. 2, 2013. The article can be downloaded here
Guyatt, D. (2007), “Identifying and Mobilising Win-Win Opportunities for Collaboration between Pension Fund Institutions and their Agents.” A research report funded and prepared for Rotman ICPM. The full paper can be downloaded here