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Hugh Wheelan: Happy New Year! Will 2014 be the year when the long-term starts to matter again?

The call for asset owners to step forward and act as sustainable owners is getting louder.

Happy new year to RI readers! 2014 is already shaping up to be significant for long-term, responsible investment.
If you haven’t already, you need to make your first 2014 big picture reading a major new article titled “Focusing Capital on the Long Term” running in the Jan-Feb Harvard Business Review (see link at the foot of this article). Dominic Barton, global managing director of McKinsey & Company and Mark Wiseman, president and CEO of the CA$193bn Canada Pension Plan Investment Board, a PRI signatory, are the authors. (1) They argue that despite much of the post financial crisis political tub-thumping and regulatory posturing, short-termism in financial markets continues unabated, and is getting worse. It says: “As a result, companies are less able to invest and build value for the long term, undermining broad economic growth and lowering returns on investment for savers.” The conclusions echo what was for me one of the most significant financial books of 2013, titled “The Road to Recovery: How and Why Economic Policy Must Change” by Andrew Smithers, the renowned UK economist. (2) Using an arsenal of data, Smithers showed that in the past two decades corporate executives have maximised either share price or short-term return on equity rather than promote longer-term financing of research and development. The effect is to gear up their own incentives via quick profit-taking at the expense of more socially beneficial, strategic, durable corporate spending. Indeed, this is what the ‘market’ is telling them to do. The Harvard article says that until the world’s largest asset owners – which they term the cornerstone of the capitalist system – radically change their strategies towards the long-term and act in their own self (and societal) interest, then this will not change. If asset owners could talk serious long-term turkey with enlightened companies and regulators the result could be genuinely transformatory. Speaking at the RI Americas conference in New York in December (3), Keith Ambactsheer, director of Rotman International Centre for Pension Management, and a respected pensions thinker, said such an asset owner drive matched writer and management consultant Peter Drucker’s “lead wagon theory,” which posits that a committed bandof organisations best placed to do so has to strike out for change and bring the pack in behind them. Ambactsheer said the world’s major pension funds are those best poised to combine “mission, motivation, competence, and scale to be effective asset owners” and to push for sustainable capitalism that starts to close the principal-agent gap and return control of companies to long-term shareholders. To compound the power that large asset owners can have in this regard, Ambachtsheer said they needed to get serious about collaborations: “Lead wagons from companies need to talk to lead wagons from the investment side,” he said. “We haven’t done enough to create constructive forums to create dialogues and discussions from both sides.” Ambactsheer said a number of such forums are being developed to point up areas where companies and investors can see ‘win- win’ scenarios. One is being developed by the New York-based Ira M. Millstein Center for Global Markets and Corporate Ownership. RI strives to be at the heart of the crucial and complicated debates around long-term, sustainable finance, and to keep its readers informed on them. Our series of articles at the end of 2013 on the UK Law Commission’s hugely important fiduciary duty review (4-8) – a major building block for the long-term strategic changes outlined in the Harvard article – we hope will be revisited by many of you, and acted upon. Responses to the review must be submitted by the end of January. In the vein of successful collaborations of the kind outlined above, we also today publish a fascinating article by Danyelle Guyatt which looks at what makes for successful collaborations. It also puts forward some testing, anonymous ‘home-truths’ into whether the existing collaborations in the responsible/sustainable investment world can really be said to be working based on measurable outcomes. Only by challenging ourselves can we hope to challenge the status quo. We hope you’ve enjoyed a relaxing and energising break; there’s much to do in 2014!

1. Harvard Business Review: Focusing Capital on the Long Term

2. Andrew Smithers: The Road to Recovery: How and Why Economic Policy Must Change

3. RI Americas conference report

4. Fiduciary Duty: climate should be treated like other highly modelled investment/longevity risks

5. Fiduciary Duty: perspectives from the world of Church and charity investment

6. Fiduciary Duty: Law Commission on trustees and ESG

7. Fiduciary Duty: ShareAction on the long and the short of the Law Commission’s review

8. Link to the UK Law Commission report and consultation