This presentation was delivered on the 3rd June 2015 as a summary of the paper titled - 'Unpacking the Black Box: An investigaton into the decision-mkaing dynamics of South African institutional investors' - at the oikos PRI Young Scholars Academy hosted by Henley Business School at Reading University

1. UNPACKING THE BLACK BOX:
An investigation into the decision-
making processes of South African
institutional investors
1
Colin Habberton
Oikos PRI Academy
Henley, Reading, UK
1-4 June 2015

2. 2
Overview
1. Introduction
2. Motivation
3. Research Methodology
4. Findings
5. Conclusions
6. Limitations & Alternative Explanations

3. (Source: USB)
Cape Town, South Africa

4. (Source: Wikipedia)
Stellenbosch

5. Introduction
Adapted from: Piketty (2014) in Cassidy (2014)

6. Introduction

7. Introduction
(Source: Google Images, 2015)

8. Introduction
(Source: Google Images, 2015)

9. 9
Overview
1. Introduction
2. Motivation
3. Research Methodology
4. Findings
5. Conceptual Model
6. Limitations & Alternatives

10. 10
• Increasing support for normative
frameworks
• UN Principles for Responsible Investment
(PRI)
• CDP & Integrated Reporting <IR> Initiatives
Growth of Responsible Investing
(Source: UNPRI, 2015)
US$45tn
AuM
1300+
Signatorie
s

11. 11
“All retirement funds, long term insurers, collective
investment scheme (CIS) management companies
are treated as institutional investors…” (SARB, 2013)
• Asset Owners
• Public Sector: GEPF, Transnet, Eskom,
parastatals
• Private Sector: Over 4800 funds FSB
registered
• Asset Managers
• Public Sector: Public Investment Corporation
• Over 200 Retirement Funds & CIS
Institutional Investors in South Africa

12. 12
• Comparative Analysis:
• ASISA Membership Base
• UNPRI/CDP/<IR> Signatories
• SA Reserve Bank & FSB Registration
• Interim Findings:
• Of the 45 South African UNPRI Signatories
• 5 of 4800+ Asset Owners, just 1 Private
Sector
• 34 of 200+ Asset Managers
• Role of Asset Consultants in the process
Institutional Investors in South Africa

13. 13
• Analysis of 20 top asset managers in RSA:
• Top 10 managers account for the
management of >75% of private sector
AuM
• Top 20 for >95% of AuM
• Comparison to the PRI listing:
• All of the Top 10 are PRI signatories
• 15 out of the top 20 asset managers
• Yet, the growth in RI funds and PRI
signatories, especially asset owners, has
stagnated in recent years (Viviers 2014;
A Local Dilemma

14. 14
Research Questions
• What are the barriers that are limiting the growth of
responsible investing in South Africa?
• What factors influence the decision-making
process of institutional investors towards
responsible investing?

15. 15
Barriers, drivers and enablers to RI
(Source: The State of Responsible Investing in South Africa, 2007; van der Ahee & Schulschenk; IODSA , 201

16. 16
• Strong corporate culture of corporate
governance developed over 20 years:
• King Reports & Institute of Directors
“…how a company has, both positively or negatively,
impacted on the economic life of the community in which it
operated…” (IODSA, 2009).
• Localised ‘apply or explain’ version of PRI
• Code for Responsible Investing in SA (2011)
• New commercial & pension fund legislation
• Companies Act of 2008
• Regulation 28 of 2011
The legal & regulatory environment in
SA

17. 17
• 60% were PRI
signatories (n=47)
• 40% disclosed their
investment policies
• >10% of asset owners
make mandates publicly
available.
• >11% disclose their
activities or indeed any
progress made regarding
CRISA disclosure
CRISA/PRI Signatory Compliance
• 30% of asset owners that
provide any form of
information relating to
CRISA compliance,
• 90% delegated their
disclosure requirements
to asset managers.
• No details on how the
principles are applied by
any asset consultants
CRISA compliance research summary (IODSA,
2013)
South African institutional investors exhibit a “passive and
selective approach” to the practice of RI

18. Principles for Responsible
Investing
18
(Source: UNPRI, 2014)

19. 19
Research Questions
• What factors influence the decision-making
process of institutional investors towards
responsible investing?
• What are the barriers that are limiting the growth of
responsible investing in South Africa?

20. 20
Overview
1. Introduction
2. Motivation
3. Research Methodology
4. Findings
5. Conceptual Model
6. Limitations and Alternatives

21. Research design and
methodology
21
Research Problem,
Questions & Objectives
Research
Paradigm
Phenomenological
Research
Methods
Semi-Structured
Interviews
PRI Sample
Non-PRI Control
Group
Data
Analysis
Grounded
Theory
Coding
Memos
Research
Types
Qualitative
Descriptive,
Exploratory
Inductive

22. Research methodology
• The analysis of the existing data sets of the
South African investment industry provided a
quantitative departure point for the paper.
• Secondary literature research provided the
theoretical foundation to inform the concepts,
population & sample frame for interviews.
• The consequent understanding of the theory
and industry information was integrated into the
design and execution of semi-structured
interviews with industry experts.
22

23. 23
Institutional Investors
• Blume, M. E. & Keim, D. B. 2012. Institutional Investors and
Stock Market Liquidity: Trends and Relationships. SSRN
• Gifford, E.J.M. 2010. Effective Shareholder Engagement: The
Factors that Contribute to Shareholder Salience. Journal of
Business Ethics. 92:79-97.
• Piotroski, J. D. 2004. The Influence of Analysts, Institutional
Investors, and Insiders on the Incorporation of Market, Industry,
and Firm-Specific Information into Stock Prices. The Accounting
Review, 79(4):1119-1151.
Decision-making
• Bazerman, M.H. & Moore, D.A. 2009. Judgement in Managerial
Decision Making. 7th ed. Hoboken: Wiley.
• Tversky, A., & Kahneman, D. 1974. Judgment under uncertainty:
Heuristics and biases. Science.185(4157): 1124-1131.
• Langley A, Mintzberg H, Pitcher P, Posada E, Saint-Macary J.
1995. Opening up Decision Making: The View from the Black
Literature

24. 24
• Miller, S. J., Hickson, D. J., & Wilson, D. C. 1996. Decision-making in
organizations. In Clegg, S.R., Hardy, C. & Nord, W.R. Handbook of
Organization Studies. London: Sage.
• Glanville, R. 2009, Black Boxes. Cybernetics and Human Knowing.
pp153-167
Institutional Structure
• Clarke, G.L. 2000. The functional and spatial structure of the
investment management industry. Geoforum, 31(1):71-86.
Responsible Investing in South Africa
• IODSA. 2013. CRISA disclosure by institutional investors and their
service providers. Sandton: IODSA
• Van der Ahee, G & Schulschenk, J. 2013. The State of RI in South
Africa:. Climate Change and Sustainability Services: E&Y Africa.
• Viviers, S., Eccles, N.S., de Jong, D., Bosch, J.K., Smit, E. v.d.M &
Buijs, A. 2008. Responsible investing in South Africa. Investment
Analysts Journal. 69(1):3-16.
• Viviers, S. 2014. 21 years of responsible investing in South Africa: key
Literature

25. 25
“…the essence of ultimate decision remains
impenetrable to the observer – often, indeed, to the
decider himself…”
John F. Kennedy
• The Decision
• What is a decision?
• The Decision-maker
• Economic Man (Mill, Ricardo)
• Onto Administrative Man (Simon)
• Now, Insightful Man (Allison, Nonaka)
• Possible argument for Relational Man
Decision-making theory (Langley et al)

26. 26
Decision-making processes
(Source: Langley et al, 1995:263-275)

27. 27
Stakeholder decision-making system
(Source: Clark, 2000)

28. Research sample
28

29. Principles for Responsible
Investing
29
(Source: UNPRI, 2014)

30. 30
Overview
1. Introduction
2. Motivation
3. Research Methodology
4. Findings
5. Conceptual Model
6. Alternative Explanations

31. 31
• Institutional PRI/CRISA participation
• 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
Findings: Institutional Investor
Interviews

32. 32
• Accountability & Transparency
• 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
• Increase institutional investor accountability
to ownership responsibilities
• Highlight the importance of ESG decision-
making
• Increased demand may enhance choice
Findings: Institutional Investor
Interviews

33. 33
Overview
1. Introduction
2. Motivation
3. Research Methodology
4. Findings
5. Conceptual Model
6. Limitations & Alternatives

34. 34
Observed Behaviours &
Drivers?
• What factors influence the decision-making
process of institutional investors towards
responsible investing?

35. © 2015. Relatomics.
DIRECTORS
AFSCOMPANYKING
COMMERCIAL
INVESTORS

36. © 2015. Relatomics.
DIRECTORS
AFS
COMPANYKING
COMMERCIAL
Governance
INVESTORS

37. © 2015. Relatomics.
DIRECTORS
AFS
COMPANYKING
COMMERCIAL
Social
Governance
INVESTORS

38. © 2015. Relatomics.
DIRECTORS
AFS
COMPANYKING
COMMERCIAL
Environment
Social
Governance
INVESTORS

39. © 2015. Relatomics.
Environment
Social
Governance
SHAREHOLDERS
DIRECTORS
STAKEHOLDERS
AFSCOMPANY
COMMUNITIES
KING
COMMERCIAL

40. © 2015. Relatomics.
Environment
Social
Governance
SHAREHOLDERS
DIRECTORS
STAKEHOLDERS
CONTRIBUTORS
ASSET
OWNERS
ASSET
MANAGERS
BENEFICIARIES
AFS
COMPANY/
ASSET
COMMUNITIES
KING
FINANCIAL
COMMERCIAL

41. © 2015. Relatomics.
Environment
Social
Governance
SHAREHOLDERS
DIRECTORS
STAKEHOLDERS
CONTRIBUTORS
ASSET
OWNERS
ASSET
MANAGERS
BENEFICIARIES
AFS
COMPANY/
ASSET
COMMUNITIES
KING
FINANCIAL
COMMERCIAL

42. © 2015. Relatomics.
Environment
Social
Governance
SHAREHOLDERS
DIRECTORS
STAKEHOLDERS
CONTRIBUTORS
ASSET
OWNERS
ASSET
MANAGERS
BENEFICIARIES
AFS
COMPANY/
ASSET
COMMUNITIES
KING
ETHICAL
FINANCIAL
ANALYTICAL
COMMERCIAL

43. Environment
Social
Governance
SHAREHOLDERS
DIRECTORS
STAKEHOLDERS
CONTRIBUTORS
ASSET
OWNERS
ASSET
MANAGERS
BENEFICIARIES
AFS <IR> SR GRI
COMPANY/
ASSET
COMMUNITIES
KING
PRI
CRISA
CR
CSV
UNGC
ETHICAL
FINANCIAL
ANALYTICAL
COMMERCIAL

44. Environment
Social
Governance
SHAREHOLDERS
DIRECTORS
STAKEHOLDERS
CONTRIBUTORS
ASSET
OWNERS
ASSET
MANAGERS
BENEFICIARIES
AFS <IR> SR GRI
COMPANY/
ASSET
COMMUNITIES
KING
PRI
CRISA
CR
CSV
UNGC
ACCOUNTABILITY
TRANSPARENCYRESPONSIBILITY
PARTICIPATION
ETHICAL
FINANCIAL
ANALYTICAL
COMMERCIAL

45. Environment
Social
Governance
SHAREHOLDERS
DIRECTORS
STAKEHOLDERS
CONTRIBUTORS
ASSET
OWNERS
ASSET
MANAGERS
BENEFICIARIES
AFS <IR> SR GRI
COMPANY/
ASSET
COMMUNITIES
KING
PRI
CRISA
CR
CSV
UNGC
ACCOUNTABILITY
TRANSPARENCYRESPONSIBILITY
PARTICIPATION
ETHICAL
FINANCIAL
ANALYTICAL
COMMERCIAL

46. Environment
Social
Governance
SHAREHOLDERS
DIRECTORS
STAKEHOLDERS
CONTRIBUTORS
ASSET
OWNERS
ASSET
MANAGERS
BENEFICIARIES
AFS <IR> SR GRI
COMPANY/
ASSET
COMMUNITIES
KING
PRI
CRISA
CR
CSV
UNGC
CITIZENSHIP
ACCOUNTABILITY
TRANSPARENCY
ACTIVITY
RESPONSIBILITY
PARTICIPATION
ENGAGEMENT
NORMS
DISCLOSURE
METRICS
OWNERSHIP
IMPACT
ETHICAL
FINANCIAL
ANALYTICAL
COMMERCIAL

47. 47
Unpacking the Black Box…

48. 48
Overview
1. Introduction
2. Motivation
3. Research Methodology
4. Findings
5. Conceptual Model
6. Limitations & Alternatives

49. 49
• Small sample
• Robustness of the framework
• Justification of ‘proximity horizon’
• Missing factors and behaviours
• Test the validity of the model
• Applicability to contexts outside South Africa
• Limited data due to access to information,
transparency in decision-making processes
• Compare interview findings to quantitative
evidence
Limitations & Alternatives

50. 50
Final Word
“We don't know who
discovered water, but we
know it wasn't the fish.”
Marshall McLuhan

51. UNPACKING THE BLACK BOX
51
Colin Habberton
colin.habberton@relativ.co.za
@relatomics