The document discusses the potential for Finland to lead in long-term investing and addressing short-termism. It notes that short-termism is hurting end beneficiaries, companies, economies and future generations. It suggests Finland could innovate new forms of private equity investment, like "Evergreen" models, that focus on sharing long-term cash flows rather than seeking short-term gains. The document argues Finland's large pension funds have the power, scale and longevity to pioneer such approaches and in doing so could pull other long-term investors to consider new ways of investing that focus on long-term value creation.

1. Investing Because The
Long Term Matters
Can Finland Set The Benchmark?
Dr Raj Thamotheram (with thanks to Tim MacDonald)
Finsif sysseminaari 28.10.13
1

2. Another narrative!
2

3. Can Finland lead?
3

4. Can Finland lead?
3

5. Can Finland lead?
3

6. Can Finland lead?
3

7. Can Finland lead?
3

8. Can Finland lead?
3

9. Can Finland lead?
3

10. Can Finland lead?
3

11. Can Finland lead?
3

12. Short-termism isnt working!
For end beneficiaries
For companies
For economies
For biodiversity or future generations
4

13. End beneficiaries are hurting
5

14. 6

15. 6

16. “....rethinking the purpose of current solvency
regulations would make it possible to devote a
larger proportion of Finnish pension asset to
long-horizon, return-seeking strategies, thus
raising the expected return on investments.”
Keith Ambachtsheer
Evaluation of the Finnish Pension System,
Finnish Centre for Pensions (2013)
7

17. 7

18. Is
so
much
hedging
of
short-­‐term
solvency
risk
really
needed?
Could
funds
take
a
more
robust
long-­‐
horizon
investment
view?
Are
ac=ve
equity
strategies
as
light
in
“beauty
contest”
inves=ng
as
they
could
be?
7

19. 8

20. 11 fatalities
17 injuries
8

21. 11 fatalities
17 injuries
Latest BP cost estimate $40 billion
30% share price drop
1-year suspension of dividends
8

22. The dominant narrative =
blame someone else!
9

23. The dominant narrative =
blame someone else!
“an Act of God”
Rick Perry, Governor of Texas
9

24. The dominant narrative =
blame someone else!
“an Act of God”
Rick Perry, Governor of Texas
“I left BP a long time ago, four
years”
Lord Browne
9

25. The dominant narrative =
blame someone else!
“an Act of God”
Rick Perry, Governor of Texas
“I left BP a long time ago, four
years”
Lord Browne
"It's very dangerous to join up dots that
may not be appropriate to join up"
Tony Hayward
9

26. The dots that we shouldn’t join up….
Azerbaijan
Gas leak
Grangemouth
2000
Thunder
Horse
Accident
Texas
Refinery
Accident
Alaska
Oil
Spill
Charges for
Manipulation
Of gas
market
Gulf of
Mexico
Oil spill
Violations
Of Clean
Water Act
Texas
Refinery
Accident
Penalties
From the
OSHA
Source:
Yahoofinance.com
10

27. The dots that we shouldn’t join up….
“Up
un'l
April
19,
his
performance
was
excellent.”
Azerbaijan
Gas leak
Grangemouth
2000
Thunder
Horse
Accident
Texas
Refinery
Accident
Alaska
Oil
Spill
Charges for
Manipulation
Of gas
market
Gulf of
Mexico
Oil spill
Violations
Of Clean
Water Act
Texas
Refinery
Accident
Penalties
From the
OSHA
Source:
Yahoofinance.com
10

28. How much attention did “sell-side” pay to safety?
Occurences of keywords
30.00
22.50
15.00
7.50
"In
ci
d
en
t"
o
r"
“F
ac
at
ci
al
de
ity
nt
”o
"
r"
de
"O ath
SH "
A"
"B
To
ak
ta
er
ln
"
um
be
ro
fo
cc
ur
en
ce
s
ry
”
ll”
pi
ju
“In
al
"P
en
“S
s"
tie
e”
“F
in
af
et
y”
“S
ea
lth
”
0
“H
Occurences
Before
the
oil
spill,
6 occurrences every 100 pages
=
the
vast
majority
of
reports
do not
talk
about
these
risks
at all.
2005 - August 2010 (post GoM included)
2005 - April 2010 (post GoM not included)
11

29. Behavioural finance expert: “analysts are biased”
n Unicredit: analysts claim that BP has a good operational momentum because of its
“first-mover advantage in cost cutting”
5
=
buy
or
strong
buy
recommenda2ons
4
=
add,
overweight,
outperform
and
accumulate
3
=
hold,
perform,
neutral
2
=
reduce,
underweight
and
underperform
1
=
sell
or
strong
sell
Source: SHEFRIN Hersh, CERVELLATI Enrico Maria, “BP’s failure to debias: underscoring the importance of behavioral
corporate finance”, 21st February 2011
12

30. Economies are becoming
more dysfunctional
CFOs will trade off practically everything to
protect the quarterly number
More bubbles, more damaging
Kay Review: investors are driving corporate
short-termism
13

31. The global situation is clear …
unless you are in denial
14

32. The global situation is clear …
unless you are in denial
The ‘Perfect Storm’
(UK Government Chief Scientist,
John Beddington, 2009)
14

33. The global situation is clear …
unless you are in denial
“The hallmarks of tomorrow’s
world will be scarcity – of
land, oil, food and ‘airspace’ (for greenhouse
gases)”
US NIC, 2008
The ‘Perfect Storm’
(UK Government Chief Scientist,
John Beddington, 2009)
14

34. The global situation is clear …
unless you are in denial
“The hallmarks of tomorrow’s
world will be scarcity – of
land, oil, food and ‘airspace’ (for greenhouse
gases)”
US NIC, 2008
[Climate change risk] “should
compel all elected leaders
to take immediate action”
The ‘Perfect Storm’
Mayor Bloomberg, 2012
(UK Government Chief Scientist,
John Beddington, 2009)
14

35. What’s gone wrong?
15

36. What’s gone wrong?
Investors are neither evil nor the sole
culprits, rather we are co-creating this mess
Theory (MPT), codified in law (fiduciary duty)
acts as a liabilty shield AND a straight
jacket
Outcome = misaligned rewards + externalised
costs + systemic risk
15

37. The Way Forward?
Focus on the PURPOSE of pension funds!
Match assets with very LT liabilities in a way
which values inter-generational fairness and
is based on good economic/scientific/common
sense
16

38. Five priorities
17

39. Five priorities
Address “Preventable Surprises” (eg stranded
assets) - valuation and stewardship
17

40. Five priorities
Address “Preventable Surprises” (eg stranded
assets) - valuation and stewardship
Embrace Integrated Reporting (investors too!)
17

41. Five priorities
Address “Preventable Surprises” (eg stranded
assets) - valuation and stewardship
Embrace Integrated Reporting (investors too!)
Fundamentally re-think pay, incentives, timeperiods, clawbacks
17

42. Five priorities
Address “Preventable Surprises” (eg stranded
assets) - valuation and stewardship
Embrace Integrated Reporting (investors too!)
Fundamentally re-think pay, incentives, timeperiods, clawbacks
Engage in public policy and challenge anti-social
corporations
17

43. Five priorities
Address “Preventable Surprises” (eg stranded
assets) - valuation and stewardship
Embrace Integrated Reporting (investors too!)
Fundamentally re-think pay, incentives, timeperiods, clawbacks
Engage in public policy and challenge anti-social
corporations
INNOVATE new investment forms
17

44. New international best
practices are emerging!
Sharan Burrow of the International Trade Union
Confederation has it right with her call to “hit the re-set
button”
Suzanne Lynne Duncan of State Street Research
documents what’s wrong with her “Influential Investor”
Keith Ambachtsheer of International Center for Pension
Management says “The window to mount an R+D project
to assess how to best do this may now be open.”
Paul Woolley, Jeremy Grantham, Jon Lukomnik, John
Fullerton...
18

45. How can Finland be the
first to act?
19

46. Starting Assumptions
Pensions have
scale
purpose
longevity
Yes, they can trade,
but what else can
they do?
POWER
20

47. Negotiate
Real Estate
Energy
Infrastructure
Private Equity
Let’s assume we want to
make PE more like RE,
i.e. we want to make it
Evergreen.
How can we do that?
21

48. What is Evergreen?
Evergreen is a form of investment that
enables long-term investors such as pension
funds to share in the cash flows of mature
stable businesses.
Financial returns are earned through these
planned cash distributions, rather than
through a hoped-for sale of the stock at a
higher price than originally purchased.
In addition, interests can be truly aligned,
with values negotiated into the sharing
formulas, up front.
22

49. How does it differ from
traditional private equity
Traditional PE
Evergreen PE
targets underperforming companies
for transformational turnaround
through a time-out from trading,
targets healthy, market-leading
companies generating robust and
enduring cash flows for permanent
exit from the trading markets
seeks to profit by increasing
seeks to share directly in cash flows
enterprise value which they realize currently being generated by proven
by selling that enterprise
enterprise leaders
requires a compressed timeframe
within which to complete the
required transformation and effect
the required exit-by-sale
just keeps going, sharing in cash
flows as earned to support ongoing
liabilities to retirees across the
generations
23

50. Evergreen
Investor
Mechanical
Investors
Traders
Deep understanding of
sector
Algorithm (incl index)
Makes bets
More likely to support
Supporting/not
management thru’ ST supporting management
volatility
is irrelevant
Interested in earlier
access to better news
20%
30%
35%
4-10 positions
100-150 positions
20 positions
Adapted from McKinsey & Co (“Communicating with the right investors”, Spring 2008)
24

51. Innovating a new balance
Short-horizon active management
Long-horizon wealth creating
Liability-hedging management
40%
40%
ish?
Finn
“Institutional investors, led by pension funds,
must continue to build and support dedicated,
^
non-conflicted, special-purpose entities that
translate good theory and empirical research into
actionable strategies that consciously promote
long-horizon wealth-creation.”
20%
Keith Ambachtsheer
The Ambachtsheer Letter
October 2013
25

52. The safety analogy investors can do the same!
26

53. The Audience We Need to Convince
27

54. The Audience We Need to Convince
27

55. people who want
things to continue
as they are
The Audience We Need to Convince
27

56. people who want
things to continue
as they are
people who want
to make a change
The Audience We Need to Convince
27

57. people who want
things to continue
as they are
people who just
want to do the
right thing, right
people who want
to make a change
The Audience We Need to Convince
27

58. people who just
want to do the
right thing, right
people who want
to make a change
The Audience We Need to Convince
27

59. people who just
want to do the
right thing, right
people who want
to make a change
The Audience We Need to Convince
27

60. people who just
want to do the
right thing, right
people who want
to make a change
The Audience We Need to Convince
27

61. half look backward, to
what is being done
people who just
want to do the
right thing, right
people who want
to make a change
The Audience We Need to Convince
27

62. half look backward, to
what is being done
people who just
want to do the
right thing, right
people who want
to make a change
The Audience We Need to Convince
27

63. half look backward, to
what is being done
half look forward, to
what is can and should
be done
people who just
want to do the
right thing, right
people who want
to make a change
The Audience We Need to Convince
27

64. ESG2.0 can pull the forwardlooking half forward, to see
the possibilities through the
window of R&D
half look backward, to
what is being done
half look forward, to
what is can and should
be done
people who just
want to do the
right thing, right
people who want
to make a change
The Audience We Need to Convince
27

65. ESG2.0 can pull the forwardlooking half forward, to see
the possibilities through the
window of R&D
half look backward, to
what is being done
half look forward, to
what is can and should
be done
people who just
want to do the
right thing, right
people who want
to make a change
The Audience We Need to Convince
27

66. ESG2.0 can pull the forwardlooking half forward, to see
the possibilities through the
window of R&D
half look backward, to
what is being done
half look forward, to
what is can and should
be done
people who just
want to do the
right thing, right
people who want
to make a change
The Audience We Need to Convince
27

67. We all matter!
28

68. We all matter! Yes YOU!
28

69. We all matter! Yes YOU!
28

70. We all matter! Yes YOU!
Identify & empower the outliers who have the
potential to succeed despite the odds (“Positive
Deviants”)
28

71. We all matter! Yes YOU!
Identify & empower the outliers who have the
potential to succeed despite the odds (“Positive
Deviants”)
Act on what we already know is right (“Giving
Voice to Values”)
28

72. We all matter! Yes YOU!
Identify & empower the outliers who have the
potential to succeed despite the odds (“Positive
Deviants”)
Act on what we already know is right (“Giving
Voice to Values”)
When a critical mass of “bystanders” get off the
fence, the team/company/sector will “tip”
28

73. We all matter! Yes YOU!
Identify & empower the outliers who have the
potential to succeed despite the odds (“Positive
Deviants”)
Act on what we already know is right (“Giving
Voice to Values”)
When a critical mass of “bystanders” get off the
fence, the team/company/sector will “tip”
Develop collaborative solutions to reduce freerider/first mover disadvantage
28