Governance & integrated thinking…. through a responsible investor lens

The challenge of academic/practitioner collaboration

Raj Thamotheram 16 September 2014

1. The context

Thank you for listening!

A “sceptical” academic/practitioner!

The dominant narrative = blame someone else!

"It's very dangerous to join up dots that may not be appropriate to join up" Tony Hayward

“I left BP a long time ago, four years” Lord Browne

“an Act of God” Rick Perry, Governor of Texas

The dots that we shouldn’t join up….

Source: Yahoofinance.com

Texas Refinery Accident

Texas Refinery Accident

Alaska Oil

Spill

Azerbaijan Gas leak

Violations Of Clean Water Act

Penalties From the

OSHA

Gulf of Mexico Oil spill

Thunder Horse

Accident

Charges for Manipulation

Of gas market

Grangemouth 2000

“Up until April 19, his performance was excellent.”

What drives Preventable Surprises?

Narrow Conception of risk

Shareholder value

fundamentalism

Weak concern for negative externalities

Regulatory capture

Leadership & Governance

failures Organisational Learning disabilities

Ineffective regulation

Focus on riskier

and dirtier O&G

Outdated approach To safety

Weak safety culture

M&A and Outsourcing/SCM

Saviour CEO

SYSTEM O&G SECTOR BP

Copyright © 2011 Richard Leblanc. All rights reserved.

Research and Practice 7 Other (corporate goverance) “blow ups”

Thanks to Richard LeBlanc, York University

Copyright © 2011 Richard Leblanc. All rights reserved.

Research and Practice 8 Other (corporate goverance) “blow ups”

Thanks to Richard LeBlanc, York University

And systemic blow-ups!

“Why the World Faces Climate Chaos”

10

The Eco-Resources Crunch

s

“The hallmarks of tomorrow’s world will be scarcity – of land, oil, food and ‘air-space’ (for greenhouse gases)”

US NIC, 2008

The Great Disruption

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

Exploding inequality

“A hungry man is an angry man” Bob Marley

Accenture: we aren’t on track! http://www.guardian.co.uk/sustainable-business/video/peter-lacy-business-strategy-sustainable-investment-systemic-change?INTCMP=ILCNETTXT3486

(0:35 – 3:30)

Unilever: investors are holding us back! http://www.reversethefuture.org/discussions/47/resource-efficiency-shareholder-value/

(25:20 – 26:57)

13

Views from the corporate frontline

Investors = enablers of dysfunction

“[…] 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)

Investors are more important than even regulators in shaping directors’ priorities.

PwC, Annual Director Survey 2010

Investors = enablers of dysfunction

“Investors are showing greater interest—but remain ambivalent and are unlikely to drive change” The UN Global Compact-Accenture CEO Study on Sustainability 2013

•  98% say investors are not doing enough to evaluate and integrate the risk of fossil fuel exposure and climate change into valuations and buy-sell decisions [Q2]

•  A bit better on stewardship: 94% say investors are not doing enough to safeguard corporate and market health [Q3]

•  3 of the top 4 things that investors should do to have maximum impact are about lobbying (ie where funds are weakest in practice) [Q8]

•  Is the criticism of investors fair? 53% say yes. 40% say the criticism is too light! [Q4] •  Strong support for public reporting & accountability (which contrasts with

organisational views) - 93% partially or fully agreed that “public accountability with a methodology independent of investor control is a good thing” [Q10]

•  Even though they are divided about whether divestment will help in the real world [Q6], 49% agreed fully and 34% agreed partially that campaigns gives ESG professionals more internal space to manoeuvre [Q7]

•  Very bullish about climate bonds: 88% strongly or partially disagreed with the comment that there’s nothing new about climate bonds or fundamentally flawed [Q18]

•  NGOs/media are the most effective agent for change, whilst investment CEOs the least [Q9]

•  Biggest block to stronger action is investor short-termism and how performance is measured/rewarded [Q5] – and long-termism also ranks highly in solutions [Q8]

ESG staff evaluate their own performance on climate

http://www.responsible-investor.com/images/uploads/articles/RI_Divestment_Survey_.pdf

2. Where are the points of maximum leverage?

Are we focusing on what matters most?

A “101” about the investment chain

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What interests (ESG) Academics Today?

•  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

Thanks to Heather Hachigan

Fundamental investors ain’t where the game’s at!

Fundamental investors

Deep understanding of strategy/sector

More like to support management thru ST volatility 20% of market 4-10 positions

Mechanical investors Mathematical formulae (incl index & closet index) Supporting or not supporting management isnt part of their reality 30% 100-150 positions

20

Traders Bet against market with regards to news Interested in earlier access to better news

35% 20 positions

Adapted from McKinsey & Co

21 14136

New technologies

Carbon constraints/climate change

Consumer and public health

Corporate governance

Employee relations, human capital

0%

5%

10%

15%

20%

25%

30%

35%

40%

Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08

As

a %

of r

epor

ts in

eva

luat

ion

'Consumer and public health' peak relating to obesity and avian flu /

SARS epidemics

'New technologies' peak relating to clean tech,

laterally including biofuels

It’s not just academics who mis-focus!

3. How to do academic research that is more disruptive/progressive?

Role models to avoid!

•  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=CaXNqGgIc-g&feature=player_detailpage#t=6s

The good guys can mess up too!

Anat Admati – “Focus on what matters”

http://www.preventablesurprises.com/

Alice Stewart – Challenge convention “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.”

Jeremy Grantham – “Be arrested”

“Scientists are understandably protective of the dignity of science and are horrified by publicity and overstatement.”

Campbell Harvey – “Bridge the gap"

“Often academics don’t know the important problems facing industry” Survey methodology to bridge the gap Disguised the real question Big impact – earnings management isnt primarily by accounting but rather by cutting budgets 1900 google cites (2006 paper)

Richard Duncan – “It’s the Communication, Stupid!”

•  “Write books, articles and blog. •  Lots of media interviews.  This requires cultivating

relationships with journalists. •  Hired PR firms. •  Website •  Speeches •  And now my Course on Udemy.com”

30

Our workout agenda!

Engage with a practitioner/academic who cares about what you care about

Show relevance to the debates that matter in your field/firm

“Tool up” to understand systemic change

Find a mentor who is “part of the solution”

Some possible “tipping point” research questions 1.  Governance failures – what did CSR/ESG teams know & do and what have they and their

management learnt?

2.  ESG/CSR – is there a gap between commitments & implementation and why?

3.  Internal power issues – eg ESG access to research budgets, ratio of sell/buy/hold recommendations

4.  Performance Metrics & Remuneration design – how do investors understand their support for linking pay with share price when there is no evidence after 35 years that this works?

5.  Whose risk counts (metrics & decision making processes) – eg bees have no value!

6.  Corporate strategy, business reporting & integration of ESG

7.  Pension funds of pro sustainability companies – how do they explain their decisions & how does this change over timehttp://www.reversethefuture.org/discussions/47/resource-efficiency-shareholder-value/ (29:15)

8.  How much are the sustainability projects at business schools changing the core curriculum? How effective are business schools at changing their own culture and managing their own immunity to change and how might this learning help them help their corporate clients/students?

A proposal for GARI…..

A global intellectual dating site between real world academics and reflective practitioners who want to show “positive deviant” leadership http://blogs.hbr.org/ideacast/2010/06/positive-deviance-and-unlikely.html (0:22- 1.43)

In partnership with all other networks (Preventable Surprises, nSFM, Long Finance Initiative, Capital Institute, The300 Club, Focusing Capital on the Long Term, PRI Academic Network, SRIConnect etc) but with focus on communities of practice

•  Different cultures of corporate governance

•  Traditional corporate governance AND “E & S” (environmental & social)

•  Economics/finance AND enhanced/behavioural corporate governance

•  Logic AND Intuition (Roger Martin = “integrative thinking”)

•  Objective AND value-led/normative – this is the one we ignore!

Conclusion…. our integration challenges are linked!

“Power concedes nothing without a demand. It never did and it never will.”

Frederick Douglass (1818-95)

Former slave turned leader of the abolitionist movement