When Barack Obama was awarded this year’s Nobel Peace Prize it tended to overshadow all other prizes, including the one for economics. The Nobel prize for economics went to two US academics, Elinor Ostrom of Indiana University and Oliver Williamson of University of California Berkeley, for years of work into the efficiency of institutions, such as large companies, compared with the marketplace in general. Their work has generally been supportive of the behaviour of companies, as well as other groups acting together, rather than individuals.
A lot of this has to do with lower transaction costs to the group or organisation. As admirable as this work no doubt is – not to mention esoteric even in a discipline noted for its happy departure from the real world when it suits – it does seem a little odd that it comes at a time when senior management and boards of many companies, especially those in financial services, are being criticised more than ever for greed, ineptitude and lack of regard for shareholders. Meanwhile, Dean Paatsch, the head of the Australian arm of corporate governance group RiskMetrics, last month delivered a brave and extraordinary speech at the SuperRatings annual conference in Melbourne, “A Day of Confrontation”.
He said afterwards that he’d written the speech the previous evening, but the contents must have been bubbling away in his brain for many years. He declined to allow the speech to be published in full – only to be referred to as in standard reporting. Even corporate governance advocates, it seems, need to think about their careers. Paatsch, who is no stranger to numerous conference podiums and the odd public stoush, went much further than usual in his criticism of investor lethargy and corporate selfishness. There was a sense that he was venting years of frustration. Here are his opening comments: “The great Argentinean singer Mercedes Sosa has a famous song in which she asks God for just one thing: freedom from indifference. If I was granted five minutes with God, I would make the same request on behalf of trustees who are overseeing the nation’s superannuation savings. “I’d ask: .
That you are not indifferent to the undeserved millions that have been trousered by executives in the companies your members own. . That you are not indifferent toward directors that have overseen the destruction of billions of dollars or given away value to the investment banking cartel in the course of raising discounted capital that has diluted your interests. . That you are not indifferent to the challenge of investing for a sustainable future. . That you are not indifferent to your responsibility to make the risk within your funds transparent to the investors who entrust their life savings to you.” The problem is that even after the most severe financial dislocation in living memory the signs are there that most, if not all, of the criticisms of boards and management and investment bankers and funds managers and brokers and you name it, are still justified. In financial services, there is no sign that the massive disconnect between the industry’s remuneration and its value-add nor the disconnect between the industry’s remuneration and similar endeavours among other professionals is going to be resolved.
Some funds managers – but not many – have a long history of privately and, when necessary, publicly criticising misbehaviour or poor governance of listed companies. But they are probably not in the best position to, say, tell the board or senior management of a big bank that it should reduce its leverage and, by the way, cut your top remuneration packages in half or more while you’re at it. Super funds are in a far better position to take on corporations, including their funds managers, but this sort of activism takes effort, time and money. And according to at least one long-time governance activist, Robert AG Monks, it is unlikely that the war will ever be won without government intervention. Monks, the octogenarian warrior who spoke at last year’s AIST Global Dialogue conference in San Francisco, is the founder of Lens Governance Advisors, a law firm that advises on corporate governance in shareholder litigation, as well as being adviser to and shareholder in Trucost, an environmental research company. He published a paper in September which asks the question:
“Is there genuine commitment to an ownership-based governance system”. He says “no”. He therefore suggests two main policy initiatives: . There must be effective enforcement of existing law so as to require fiduciaries to take appropriate action to protect and enhance the value of portfolio securities, and . There must be arrangement for financing activism, either as an appropriate corporate expense or as a designated portion of the investment management fees. Monks believes that companies should pay for whatever additional costs are involved in improved governance and that index funds should perform the long-term role of stewardship.
“It might well be that this is the best answer, as what is wanted is both long-term stewardship and a perspective for the investment world as a whole, in contrast to individual companies,” his most recent paper says. Our two Nobel economics prize winners have also studied examples of economic endeavours not only by individuals or by institutions but also by communities. Some old fishing communities, for instance, without property rights to the fish, develop their own sophisticated governance systems to make sure the resource is not depleted over time. While Monks may be right that government action is necessary, in the meantime, super fund trustees and executives can always do a little bit more.