DISCUSSION Finance, business and the public good

by Luke Robinson _______22nd July 2013
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Tomorrow’s Finance Lecture Series

Colin Melvin, CEO at Hermes Equity Ownership Services Ltd gave an insightful and provocative lecture titled ‘Finance, business and the public good’ held at the Mayer Brown International LLP offices in London on 11 July 2013.

Sitting on the business panel were Gervais Williams, Managing Director at Miton Group plc and author of ‘Slow Finance’; Dr James Gifford, Executive Director of the PRI; Mike Clark, Director, Responsible Investments at Russell Investments and Richard Sermon MBE, Chairman of the City Values Forum, who served as Sheriff of the City of London in 2010/11 and as Chairman of The Lord Mayor’s Initiative ‘Restoring Trust in the City’.

The Tomorrow’s Finance Lecture series is a joint initiative ran by Tomorrow’s Company and Miton Group plc. Past lectures have featured Gervais Williams, James Featherby (Chairman, Church of England Ethical Investment Advisory Group), David-Pitt Watson, Professor John Kay, Matthew Bishop (US Business Editor and New York Bureau Chief, The Economist) and David Blood (Managing Partner, Generation Investment Management). The lecture series is inviting some of the most senior and thoughtful figures from and about finance to consider what is the purpose of finance and is the finance sector fit for purpose?

Colin was introduced by Dominic Griffiths, Partner and Head of Banking & Finance at Mayer Brown International LLP. Colin pointed out that there have been exceptionally encouraging developments in responsible investment over the last 18 months, yet, the financial services industry still appears very slow in responding to this rising interest and demand from institutional investors.

“This is because we continue to have a problem with short-termism. Despite all of this effort, short-termism in business and financial markets persists, to the detriment of our economies and societies. Indeed it seems hard-wired into our current version of capitalism and the public and political anxiety about this problem is reaching fever pitch. Consider the very many initiatives looking at short-termism and linking this to financial market behaviour and poor corporate ownership.”

 

Colin stated that he believes that the basic problem with our capitalist system, which has resulted in the current challenges over executive remuneration and short-termism, is that the system is controlled or captured by agents, rather than principals. I believe the problem of executive pay is illustrative of the basic problem with our capitalist system – that is: its control or capture by agents, rather than principals.”

The “cycle of corporate ownership which has guided Hermes” thinking for many yearsreflects that the end asset owner is not really the pension fund or insurance company, but rather the current and future pensioner or saver, who is often also a corporate employee. As such, the solution to the problem of short-termism and the opportunity to connect business, finance and public good lies with every individual. As Colin succinctly put it,“The solution to short-termism in business and finance, therefore lies mainly and simply in the principals’ greater control of their agents.”

His speech brought about a range of topics which were discussed by the panel and a lively Q&A with the audience.

Gervais spoke about the misallocation of finance into products such as ETFs and spread betting, and the disconnect between the underlying business and its investors.

“There is a problem with short-termism but there is also a problem with allocation. There is an increase in the disconnection between saver capital and individual businesses. Even in recent years, this is still driving in the wrong direction. The underlying culture of equity markets is very disconnected from the underlying issues happening in the real economy, in day to day life. However, there are some hopeful signs. There is now a much greater interest in smallness, in small companies.”

James spoke about investors eager to integrate ESG analysis rather than long-term analysis into their investment analysis as the pressures of quarterly reporting remain. “ESG factors are drivers of the long term value and asset owners are asking about these factors with their investment managers; but short term pressure to outperform is still the priority. Ironically, managers are also being asked to report on ESG performance of investee companies on a quarterly basis.”  

Mike pointed out that “long term value creation is what happens in companies, not on trading floors”. Richard gave his insight on boards and that the shockwaves following the financial crisis have prompted boards to go back to basics and look more closely at company structure and how long-termism matters not just for a business or an industry, but globally.

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