Royal Institution: Investing As If The Long Term Matters
Investing As If The Long Term Matters
Dr. Raj Thamotheram
CEO, Preventable Surprises
Visiting Fellow, Smith School, Oxford University
14 - 10 Club, Royal Institution
15th January 2015
Thanks to Robert Schwarz for research support
The Great Disruption Has Started
[Climate change risk] “should compel all elected leaders to take
Mayor Bloomberg, 2012
“The hallmarks of tomorrow’s
world will be scarcity – of land,
oil, food and ‘air-space’ (for
US National Intelligence
The Perfect Storm is Gathering?
(UK Government Chief Scientist,
John Beddington, 2009)
Loss of Conﬁdence in Mainstream Politics
“How Republicans Went Crazy,
Democrats Became Useless, and
Middle Class Got Shafted”
“Jean-Claude Juncker Facing
Credibility Crisis After Latest
Luxembourg Tax Avoidance
60%-70% of Top 10% are Executives
Irrational Belief in Flawed Theories?
Paul Woolley (formerly GMO Woolley):
“All the data suggests all these theories are valid
only in specific and highly artificial situations…
These theories are widely overstated and form a
weak theoretical foundation for the whole sector.”
Systemic Disregard for Negative Externalities?
Economies are becoming more dysfunctional
Bubbles – more frequent, more damaging
CFOs will trade off practically everything to protect the
Kay Review: investors are driving corporate short-termism
McKinsey & Co and CPPIB:
“short-termism is undermining the ability of companies to invest and
grow, and those missed investment, in term have far-reaching
consequences, including slower GDP growth, higher unemployment, and
lower return on investment for savers.”
“Designed by intermediaries for intermediaries”
Sunday Times, May 6, 2012
“The bulk of incremental financial
activity is trading, and trading, while
it may provide a little useful public
information about market opinion, is
largely a way to transfer wealth from
those with inferior information and
calculation ability to those with
more. There is no enhancement of
economic efficiency to speak of.”
Robert Solow, the Nobel prize
winner and an MIT Emeritus
Momentum Investing is Out of Control!
He’s not the problem!
HFT & Dark Pools are!
Conception of risk
SYSTEM O&G SECTOR BP
The Drivers of “Preventable Surprises”
Investors = 1° enablers of dysfunction behaviour
“[…] the destruction of shareholder value through legal means
is pervasive, perhaps even a routine way of doing business.
Indeed we assert that the amount of value destroyed by
companies striving to hit earning targets exceeds the value
lost in these high-profile fraud cases.”
John GRAHAM, Campbell HARVEY & Shiva RAJGOPAL
“Value destruction and financial reporting decisions”, Financial Analysts Journal, Vol 62 No 6, 2006
“Investors don’t care about Sustainability”
Business Week, 9th Nov 2010
(Global Compact / Accenture survey)
Investors are more important than even regulators in shaping
PwC, Annual Director Survey 2010
Most Investors Have No Reason To Care!
Deep understanding of
More like to support
management thru ST
20% of market
(incl index & closet
Supporting or not
isn't part of their reality
Bet against market
with regards to news
Interested in earlier
access to better news
Adapted from McKinsey & Co
Market Eﬃciency Fundamentalists
Sustainability Smooth Talkers
Five (Financial Sector) Patient Types
= Different faces on the same problem!
Ignorance is not bliss!
“If we were told - in any sphere - that we
had at least a 90% chance of averting
disaster through changes we ourselves
could make, wouldn’t we take action?”
Former Republican U.S. Senator (Maine)
Analysis by Andrew White, Inflection Point Capital Management
Disclosure Alone Has Little Value
Self Regulation Isn’t Working
Investors: Talking ‘Long’, Walking ‘Short’
² Only 5 -10% of US $1 Tn/yr needed to de-carbonise has been
committed (using IEA ﬁgures)
² Investors have not acknowledged that emissions per unit of
world GDP have to fall 6%/yr. through 2100 to stay within 2
² Few are actively supporting political eﬀorts to hold warming to
2°C (vested FF interests have much greater inﬂuence)
² A “delay then panic” scenario accompanied by economic, social,
and political turmoil remains the most likely outcome
“The crisis is in implementation”
Kofi Annan (2002)
Why Aren’t We Responding?
Re-discover the purpose of business and finance = to serve
COMPANIES: Long-term wealth creation by delighting
customers and engaging employees
INVESTORS: Fiduciary capitalism and universal ownership
Urgency: Current activity (PRI, ICGN etc) is all good. But
like treating a patient in septicaemic shock with paracetamol
and aspirin. Need equivalent of IV fluids, antibiotics,
steroids and emergency surgery.
The Treatment Principles
1. Reduce corporate capture of politics
"People with economic power shouldn’t be allowed to buy political power:
Friends of capitalism should follow US Senator Rand Paul’s lead and advocate a
war on crony capitalism."
Tim Montgomerie, The Times
2. Reduce income inequality
3. Take stewardship actions to get us back on track for 2 degrees max
4. Use disclosure and stakeholder accountability to drive internal change
5. Transform the research supply chain – sell side, credit rating,
investment consultants, auditors, legal etc
The Treatment Steps
Be Contrarian/Brave in a Socially Useful Way
“Scientists are understandably protective of the dignity of
science and are horrified by publicity and overstatement.”
It’s time for more Positive Mavericks to Just Do it!
Perfection is Not Mandatory!
Thank you & Questions!
Which preventable surprise do YOU really care about?