This is a presentation deck relating to a paper that was submitted to the 12th Development Dialogue, an academic conference hosted by the Insititue of Social Studies, Erasmus University, The Hague on 17th October 2014.

1. INVESTOR GOVERNANCE
REVISITED:
The risk and reward of democracy in
institutional investment decision-making
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12th Development Dialogue
‘Rethinking Democracy’
Colin Habberton
ISS, The Hague,17 October 2014

2. 2
Introduction
• The rich are getting richer and the poor are
getting poorer quicker than ever before
(Piketty, 2014) due to the return on capital.
• Financial markets host the trade of capital
instruments within and across nations.
• Institutional investors dominate the
investment activity within financial markets
(Blume & Keim 2012; OECD, 2014; ASISA, 2013).
• The paper investigates whether institutional
investors consider the interests and opinions
of individual capital contributors.

3. 3
Democracy
“If liberty and equality, as is thought by some,
are chiefly to be found in democracy, they will
be best attained when all persons alike share in
the government to the utmost.”
Aristotle

4. Historical Evidence
(Source: Piketty, 2014 Adapted)

5. 5
Return on Capital v Growth Rate
R > G
(Piketty, 2014)

6. 6
Research Questions
• Is good governance applied and practiced in the
by institutional investors in taking responsibility
for investment decisions on behalf of stakeholder
communities?
• Should individual contributors participate in
decision-making processes, holding institutional
investors as their agents accountable?
• Should institutional investors be more proactive
in providing access to information, education and
opportunity to participate in decision-making?
• What are the risks and rewards?

7. Research methodology
• The analysis of the existing regulatory and
normative frameworks forms the theoretical
foundation of the paper.
• Secondary literature research refined the
conceptual framework to inform the selection of
population, sample frame for interviews.
• The consequent understanding of the theory,
industry and experts was integrated into the
design and execution of semi-structured
interviews with industry experts.
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8. Research sample
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9. The Rise of Responsibile Investing
• Role and rise of institutional investors
• Dominance of total assets under management
• ‘Responsible’ Investing
• ESG Orientation
• Awareness of issues of sustainability in profit
• UN Principles for Responsible Investing (PRI)
• Importance of normative frameworks
• UN Global Compact, UNEP-FI
• Cadbury Report, King 1,II, III
• PRI & CRISA 9

10. Institutional Investor dominance
• Over 67% of market capitalisation in the USA
• Own 73% of the US’s 1000 largest companies
• 33 OECD countries average is 40% ownership
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(Source: OECD, 2014)

11. Principles for Responsible Investing
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(Source: UNPRI, 2014)

12. • Increasing support for normative frameworks
• UN Principles for Responsible Investment (PRI)
• CDP & Integrated Reporting <IR> Initiatives
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Growth of Responsible Investing?
(Source: UNPRI, 2014)
US$45tn
AuM
1200+
Signatories

13. Institutional Investors in South Africa
“All retirement funds, long term insurers, collective investment
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scheme (CIS) management companies are treated as
institutional investors…” (SARB, 2013)
• Asset Owners
• Public Sector: GEPF, Transnet, Eskom, parastatals
• Private Sector: Over 5000 funds FSB registered
• Asset Managers
• Public Sector: Public Investment Corporation
• Over 200 Retirement Funds & CIS companies
• Over 100 Insurers

14. Institutional Investors in South Africa
• Comparative Analysis: SAFI Relational Matrix
• ASISA Membership Base
• UNPRI/CDP/<IR> Signatories
• SARB & FSB Registration
• Interim Findings:
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• Of the 45 SA UNPRI Signatories
• 5 out of 5800+ Asset Owners, 1 Private Sector
• 33 out of over 200 Asset Managers
• Role of Asset Consultants in the process

15. Governance in South Africa
• SA one of the leading countries on the
African continent in terms of governance
(Mo Ibrahim Foundation, 2013)
• King Reports & Institute of Directors SA
• Influencing business and legal practice
• King III – Sustainability & Stakeholders
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• “…characterised by the ethical values of
responsibility, accountability, fairness and
transparency…based on the moral duties that
find expression in the concept of Ubuntu.”

16. 16
Pension Funds: A Systemic Model
(Source: Clarke, 2000)

17. Investor Governance
• Role of Professional Investor
• Fiduciary responsibilities as an agent
• Accountability of pension fund trustees
• Skill vs. experience vs. representivity
• Appointed by wide range of Stakeholders
• Transparency of decision-making process
• Investor participation & inclusion
• Need for transparency & engagement
• Investor education & responsibility
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• Creating & understanding mandates

18. Findings: Institutional Investor Interviews
• Institutional PRI/CRISA participation
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• Perception of institutional ‘window-dressing’
• Unanimous acceptance of importance of ESG
• Investment decision-making
• Delegation of decision-making to skilled specialists
• Influence of unregulated asset consultants
• Fee structures heavily geared towards benchmarks
• Responsibility
• Different perspectives on definition of responsibility
• Maximisation of return overriding intent
• Evidence of ‘change agents’ and awareness

19. Individual Investor Participation
• Risks
• Resistance to concept by the ‘professionals’
• Requires additional resources and time
• Potential disregard for analysis and depth
• Inefficient, chaotic driven by sentiment
• Lack of investor literacy and prudence
• Rewards
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• Increase institutional investor accountability
to ownership responsibilities
• Highlight the importance of ESG decision-making
• Increased demand may enhance choice

20. • Investment industry characterised by profit
driven strategic and systemic constraints.
• Improved access to information,
transparency in investment processes needed.
• Role of asset consultants and their influence
over decision-making is significant.
• Investment mandates and fee structures are
drivers of investment behaviour.
• Institutional investors should assume
responsibility and accountability for their
decisions as agents of stakeholders.
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Conclusions & Further research…

21. Final Word & Questions
“With great power comes great responsibility.”
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(Voltaire)

22. INVESTOR GOVERNANCE
REVISITED
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Colin Habberton
colin.habberton@relativ.co.za
@relatomics