A presentation to business school students on how academics could be a bigger part of the solution when it comes to pensions and long (and not so long) term risks

1. Whose Risk Counts?
And how academics could be a
bigger part of the solution
Dr Raj Thamotheram
CEO, Preventable Surprises
Visiting Fellow, Smith School, Oxford University
Canterbury Christ Church University
19th February 2014

2. DIAGNOSIS

3. Pension members are getting a raw deal!
•
Dutch/Danish young person can expect a pension which is at least 50%
higher than a British young person would get. (Tomorrow’s Investor Project,
RSA)
Thanks to Heather Hachigan

4. Not transparent & big questions about value for money

6. 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
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.”

7. The Eco-Resources Crunch
7

8. The Great Disruption
s
“The hallmarks of
tomorrow’s world will be
scarcity – of land, oil, food
and ‘air-space’ (for
greenhouse gases)”
US NIC, 2008
The ‘Perfect Storm’
(UK Government Chief Scientist,
John Beddington, 2009)
[Climate change risk]
“should compel all elected
leaders to take immediate
action”
Mayor Bloomberg, 2012

9. “Why the World Faces Climate Chaos”

10. Back to the Future = Exploding Inequality & Extremism
“A hungry man is an angry man”
Bob Marley
http://www.guardian.co.uk/world/2013/apr/01/greece-golden-dawn-globalambitions
(0:00 – 1:05)

11. The Key Question!
WHY AREN’T WE
RESPONDING?
“the crisis is in implementation”
Kofi Annan (2002)

12. How Are We Doing – Views From The Frontline
Accenture
http://www.guardian.co.uk/sustainable-business/video/
peter-lacy-business-strategy-sustainable-investmentsystemic-change?INTCMP=ILCNETTXT3486
(0:35 – 3:30)
Unilever
http://www.reversethefuture.org/discussions/47/resourceefficiency-shareholder-value/
(25:20 – 26:57)
12

13. Investors = 1° enablers of dysfunction behaviour
Investors are more important than even regulators in shaping
directors’ priorities.
PwC, Annual Director Survey 2010
“[…] 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)

14. Processes & Reporting Aren’t Delivering Outcomes!
Thanks to Inflection Point Capital Management

15. PROGNOSIS

16. Five (Financial Sector) Patient Categories
Happy
Imbeciles
Suppor2ve
Pessimists
Denialists
Market
Efficiency
Fundamentalists
Sustainability
Smooth
Talkers

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

18. “The Dominant Narrative” – the BP version
“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

19. The dots we shouldn’t join up…
Azerbaijan
Gas leak
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
Up until April 19 [ie the day before the Deepwater Horizon explosion], his [BP’s] performance was
An investor close to BP quoted by The Financial Times, July
excellent.
25th 2010
“
Grangemouth
2000

20. How much attention did “sell-side” pay to safety?
Before the oil spill, 6 occurrences every 100 pages
= the vast majority of reports do not talk about these risks at all.

21. “Analysts are biased”
Analysts claim that BP has a good operational momentum because of its “firstmover advantage in cost cutting”
5 = buy or strong buy recommendations
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

22. Are asset owners & “buy-side” much better?
Sadly, no!
Only 60% of capital voted at BP’s 2010 AGM
57% of votes in favour of chair of safety committee! (Only
leaving in 2012!)
Even proxy voting agencies recommended abstain (ISS)
or vote against (Glass Lewis)
Source: BP plc, ISS ProxyExchange

23. Today’s ESG Doesn’t Address “Preventable Surprises”
Narrow
Conception of risk
Weak concern
for negative
externalities
Outdated
approach
To safety
Focus on
riskier
and dirtier
O&G
SYSTEM
O&G SECTOR
Ineffective
regulation
Regulatory
capture
Shareholder
value
fundamentalism
M&A and
Outsourcing/SCM
BP
Saviour CEO
Weak safety
culture
Organisational
Learning disabilities
Leadership &
Governance
failures

24. Screening vs Stewardship – the Balance is Wrong!
What is it RI?
Integration
Stewardship
Incorporate
ESG analysis into
investment decisions
Investing
Responsibly
&
Sustainably
Monitor,
Vote & Engage to promote
LT success
24

25. Research Governance
Corporate and Practice Failures Galore!
25
Copyright © 2011 Richard Leblanc.
Copyright © Richard Leblanc.
All rights reserved.
All rights reserved.

26. An Overly Intermediated System
Companies
Deals
Pensions
Fees
Mandate
+
contribu2ons
Informa2on
Pension
Funds
Sell-­‐side
Analysts
Informa2on
Fees
Advise
Investment
Consultants
Returns
Investment
Banks
Brokering
Informa2on
Informa2on
Mandate
+
fees
Selec2on
Investment
Managers
Fees

27. Momentum Investing is Out of Control!
“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 Professor
Sunday Times, May 6, 2012

28. Majority of Investors Have No Reason To Care!
Intrinsic investors
Mechanical investors
Traders
Deep understanding of
strategy/sector
Mathematical formulae
(incl index & closet
index)
Bet against market
with regards to news
More like to support
management thru ST
volatility
Supporting or not
supporting management
isn't part of their reality
Interested in earlier
access to better news
20% of market
30%
35%
4-10 positions
100-150 positions
20 positions
28
Adapted from McKinsey & Co

29. TREATMENT

30. Incremental Progress vs. Fundamental Change

31. What academics should avoid doing!
•
Frederic Mishkin, Professor, Columbia Business School
http://www.youtube.com/watch?
v=8lHvTKzfu8Q&feature=player_embedded#t=0s
•
Glenn Hubbard, Dean Columbia Business School
http://www.youtube.com/watch?v=CaXNqGgIcg&feature=player_detailpage#t=6s

32. But Good Guys Can Also Mess Up!

33. Be Brave! (Jeremy Grantham)
“Scientists are understandably protective of the
dignity of science and are horrified by publicity and
overstatement.”

34. Challenge Convention (Alice Stewart)
“Pioneering woman scientist whose
research into the dangers of x-rays
and nuclear radiation shook the
Establishment”
(GUARDIAN OBITUARY)
"We have already doubled the level
of background radiation today.
What is the effect on human genes?
That is the really important question:
it won't show up for two or three
more generations.”

35. Approx. right vs precisely irrelevant! (Anat Admati)
http://www.preventablesurprises.com/
Some take-aways:
• Avoid paralysis by analysis
• Be approximately right, not precisely irrelevant
• Manage one’s own anxiety about peer criticism

36. “Bridge the Gap!” (Campbell Harvey)
“Often academics don’t know the
important problems facing industry”
Survey methodology to bridge the gap
Disguised the real question
Big impact – earnings management
isn't primarily by accounting but rather
by cutting budgets
1900 Google cites (2006 paper)

37. Look where the keys were lost, not where there is light
•
Analysis of PRI Academic Network 66 papers from academics past two
conferences (2011 and 2012)
•
1 of the 66 papers focus on the ‘gatekeepers’ of information (sell side, credit
ratings, investment consultants).
•
15 of 66 address systemic problems (behavioural, cultural and institutional)
•
7 of the 66 papers address public policy
•
What is getting attention? Doing well and doing good- that is, how integrating
ESG can lead to better financial performance, using the same old models.
•
E=G>S
•
Fundamental investors > Index Investors
•
Stock picking/valuation > Stewardship
Thanks to Heather Hachigan

38. Thank you for listening!
“Homo Financialus”