Beyond regulation: PIRC and Aviva Investors on ownership and capital market reform

I am more and more convinced that apparently robust interventions like improved regulation will deliver effective ownership and sustainable capital markets only if there is associated cultural change. This is not an argument against regulation – but it is an argument against regulation alone.

It is good to see a range of proposals now coming forward on responsible ownership and capital market reform – but one test is how they will change cultures and norms so that new behaviours are “what we believe in doing around here” rather than “what our compliance department says we have to be seen to do”.

Anita Skipper, Corporate Governance Director at Aviva Investors and Alan MacDougall and his colleagues at PIRC have both just published thoughtful contributions to the debate.

Introducing PIRC’s “Manifesto for corporate governance and capital market reform”, Alan says “Too many institutions fail to take their ownership responsibilities seriously, therefore post-crisis reform must consider their role too. There can be no return to business as usual.” The manifesto aims to “stimulate debate and spark further ideas, but most importantly to begin the process of pulling together ... radical but realistic policy reforms”. PIRC is seeking comments on its suggestions.

Anita’s piece “Corporate governance and the economic crisis: what can shareholders do differently?” appears in Aviva Investors’ The Investors Journal (Volume 3). (NB. To get access, just click either “I am a private investor” or a more appropriate category.)

She highlights barriers to good governance including “Lack of client interest”, “Human behaviour” and “Managing conflicts of interest”. Her solutions include “More client focus on governance” and “Focus on culture”.

Importantly, she says “With the right corporate culture in place, companies, boards and fund managers are more likely to make the “right” decisions, irrespective of any weaknesses of accountability, regulation, accounting standards and conflicts of interest.”

Do the multiplying plans address the challenge?

We’re seeing a lot of new plans at the moment, from Nick Stern’s new book to the CBI’s roadmap to a low-carbon economy.

An easy way to start checking whether these reflect our need to "shift our cultural assumptions to fit our circumstances and move into a more fulfilling, lower-energy world" is to keep the Transition Timeline scenarios in mind. These scenarios look at what might happen if we DO recognise the science of climate change, but DON’T change our culture, and the economic and other institutions that reflect it (Hitting the Wall) and vice versa (The Impossible Dream).

An opportunity for accountable capitalism

Government proposals on financial market reform will be published before the summer, said the financial stability section of yesterday’s budget report.

I hope these take on board the recommendations in a recent paper by David Pitt-Watson and his fellow authors of “The New Capitalists”. “Towards an Accountable Capitalism” has been published in a couple of versions – as a “Private Sector Opinion” by the International Finance Corporation’s Global Corporate Governance Forum and as a paper for IPPR’s Tomorrow’s Capitalism programme.

It highlights that “a successful economy is not just about the tensions between two separate poles: regulation or market. An economy which works effectively is like a political system which works effectively: It has checks and balances, accountabilities and responsibilities, information flows and cultures. Of course regulation is important. But there are five central principles beyond regulation on which a successful financial system depends. These are:

• That the entities in it are responsible for their actions.
• They will be responsible if they are accountable.
• Those who call them to account will need relevant information.
• That information must be independently prepared.
• And just as a healthy political system hinges on the scrutiny of vigilant citizens, a successful financial system will need the oversight of vigilant market participants."

Regulation alone will not deliver tomorrow’s sustainable capital markets. “Towards an Accountable Capitalism” offers an important steer on much of what is needed as well.

A historic but limited contribution

Today’s UK Budget Day was a historic occasion as the Chancellor announced the first ever carbon budget figures. It was even held on Earth Day. And it is good news that the HM Treasury budget web site includes a section on “building a low carbon recovery”.

Green Alliance was cautiously optimistic, calling it “Only a small step for mankind, but a big leap for HM Treasury” but the BBC asked “Green tinge or blue rinse?”.

BWEA seemed happiest, particularly due to the announcement of a deal offering up to £4 billion of European Investment Bank funding for renewables. The Renewable Energy Association offered a more restrained welcome highlighting that the proportion of stimulus funding allocated to green investment remained below the 20% recommended by Lord Stern on the information available.

The general reaction? Still a long way to go. And personally, however hard I try, I still feel under-whelmed by the announcements compared with the scale of the challenge.

Values are back...

...and don’t just take my word for it.

Stephen Haddrill of the ABI highlighted this to investors.

An appeal to values is heard in the wider debates about the crisis and the way forward. Prime Ministers Brown and Rudd debated, in the words of the former, ‘a world of shared global rules founded on shared global values’ on the eve of the London Summit.

The disjuncture caused by the current crisis has forced many to reflect critically on the values which underpin the system and form the basis of trust.

Values clearly matter – our judgements and decisions on how to act and live are based on them. Our economic and social systems require them as a foundation stone for building trust and confidence.

These themes are discussed in an excellent piece by Amartya Sen, ‘Capitalism Beyond the Crisis’ in which he challenges the proponents of a ‘New Capitalism’ such as Sarkozy and demands a new understanding of older ideas. He invokes the work of Adam Smith to explain how the crisis is partly generated by an overestimation of the wisdom of market processes and exacerbated by anxiety and lack of trust (see also ‘Adam Smith’s market never stood alone’).

I am hopeful that we can, in Sen’s words, ‘go beyond short-term solutions and contribute to producing a more decent economic world’ with greater regard given to the long term social and environmental impacts of our action.

Time for more transformational leadership?

As Martin Wolf stated at the beginning of the FT’s Future of Capitalism series, although "it is impossible at such a turning point to know where we are going, … the transformation will surely go deepest in the financial sector itself".

The following scenario from a wonderful book for people leading transformational change indicates how radically different financial services could be in the future:

• "In 2025, Philadelpia Quaker Health [PQH] is the most trusted and respected name in health care.
• [It] has close to one billion members globally.
• Once fully vested, members’ income and life care through death is guaranteed and at least half of their economic assets become more fully integrated into PQH’s Intergenerational Trust.
• [Stakeholders] are fully committed to personal, family and organisational initiatives to increase good health … and adult development.
• Senior peers choose their time of death.
• The Good Life 500 [including PQH] has continued to gain market share by comparison to the Fortune 500, the global governmental sector, and the traditional religious and educational not-for-profits".

An easy way for aspiring leaders to keep an eye on the trends that are shaping the context within which their evolving organisations and societies exist is to sign up to Outsight’s "21 Drivers for the 21st Century" e-mails.

These and similar resources help more people develop the "prospective mind" (one that’s ready to help create imaginative systemic change at times of crisis) called for by Thomas Homer-Dixon in the "The Upside of Down".

An Easter Reading List

Here are a few suggestions of articles we have spotted recently that might offer thought-provoking Easter Holiday reading:

After capitalism: The era of transition that we are entering will be disruptive—but it may bring a world where markets are servants, not masters
Geoff Mulgan's lead article in this month’s issue of Prospect Magazine

Game-Changing Strategies: How to Create New Market Space in Established Industries by Breaking the Rules
Free chapter from the latest book by London Business School’s Constantinos C. Markides.

Law clear on agent’s duty, whatever arena
Jonathan Davis’s article in this week’s FTfm.

And, finally:

Be a Good Egg
The Fairtrade Foundation’s advice on your most important holiday shopping.

Happy Holidays!

Has Turner reclaimed “bravery” from Sir Humphrey?

I spot one achievement from the Turner Review already. It may have legitimised “bravery”.

The 1980s comedy “Yes, Minister” embedded the terms “brave” and “courageous” deep in the British psyche as synonyms for “politically suicidal”. But now, some twenty five years after Jim Hacker and Sir Humphrey left their Ministry for Administrative Affairs, this could be changing.

Such is the FSA’s language shaping power that not only are we now all considering “outcomes-focused regulation” but also the need for genuine bravery.

The Turner Review Discussion Paper says that “The new model of supervision … requires a ‘braver’ approach to decision-making by supervisors” (ie. by regulator employees) and the FSA aims to have a culture that “attracts and retains quality people who act in a ‘brave’ and ‘decisive’ manner”.

Talking to others in pensions and investment recently, I get the impression that this is having an impact. With this FSA support, suddenly bravery has become a more respectable characteristic.

Many would say that - with notable exceptions - bravery has not traditionally been a strong feature of the culture of pension fund trustees and managers. But, as Hugh Wheelan’s recent Responsible Investor article highlights, trustees like the PRI’s Chair Donald MacDonald have stepped forward to share responsibility for the crisis with a notable demonstration of what we might call the “new bravery”.

I look forward to “bravery” becoming a core competency within City job specifications. It is part of the answer to one of today’s key challenges: “How do you regulate for character not for compliance?” After all, as FSA Chief Executive Hector Sants said recently “a principles-based approach does not work with individuals who have no principles”.

Did the London Summit do enough to deliver a sustainable recovery?

NGO responses vary. Oxfam's Duncan Green is “unusually optimistic” but Friends of the Earth are not. The ‘Put People First’ coalition reflects that mix of views.

Personally, I homed in on paragraphs 21 and 27 of the G20 communiqué.

First, Paragraph 27. It reads “We agreed to make the best possible use of investment funded by fiscal stimulus programmes towards the goal of building a resilient, sustainable, and green recovery. We will make the transition towards clean, innovative, resource efficient, low carbon technologies and infrastructure. We encourage the MDBs to contribute fully to the achievement of this objective. We will identify and work together on further measures to build sustainable economies.”.

While short on specifics, this sets a collective goal against which the G20 can be judged when it meets again later in the year. It gives a good basis for investors to engage further with governments and development banks in the coming weeks.

Paragraph 21 is more intriguing. It says “..we agreed on the desirability of a new global consensus on the key values and principles that will promote sustainable economic activity. We support discussion on such a charter for sustainable economic activity with a view to further discussion at our next meeting. We take note of the work started in other fora in this regard and look forward to further discussion of this charter for sustainable economic activity.”

Could this be the start of a genuine debate?

Is it the first step of a global transition from GDP towards new measures of prosperity? And towards the new approach to incentives, rules and policies that would follow this shift?

So, overall, I would say – “the jury’s still out”. The direction of travel is positive, but there is still much to do. Policy makers need to deliver not just an effective global banking system but also a major economic transition, including sustainable capital markets for long-term responsible investment. The G20 has only started the process of delivering a sustainable recovery and, by their next summit later in the year, further major milestones need to have been reached.

Investors call for 'green' focus in economic recovery measures

A group of major investors, representing over £400bn in funds under management, has today written to Gordon Brown, as Chair of the London Summit, supporting a strong ‘green’ element in programmes of fiscal stimulus undertaken by government.

The initiative was convened by UKSIF and Tomorrow’s Company.

UKSIF joins with global partners to demand green action from G20

UKSIF has joined with our sister organisations across the globe to send a message to world leaders meeting in London tomorrow to address the global financial and economic crisis.

Our statement outlines measures that world leaders can take to drive the transition to a low-carbon, resource efficient and socially sustainable economy.

This is the first time since the Earth Summit in 1992 that the global network of sustainable and responsible finance organisations has issued a collective statement.