17% Women Board Directors in World

December 12, 2017 Ben Yeoh

I found these numbers shocking. In the ACWI world index, only 17% women board directors. Only 28 out of 2,541 members of the MSCI ACWI Index (1.1%) had boards consisting of at least 50% women. Only 7 had boards majority female. (My data is from 2017, but this MSCI paper is 2015 data, which is all a little worse)

23% of ACWI have all male boards (as of Oct 2017). That's over 1 in 5 ACWI companies.

Sure, we must focus of equality of opportunity and not necessarily outcome. But, these indicators suggest we still have some way to go.

Is it a surprise we have MeToo when the makeup of people in power are so dominantly men?

Of course, there are other lens to seek diversity of thought and to reflect the fabric of our society. But we can be intersectional and multi-faceted, running ‘identities’ in parallel.

Mother, daughter, girlfriend, sister, partner – we can be all these at once. It is healthy for the boards of the companies of our world, not to better reflect the mix of our world?

A note on academic papers below here

In terms of eg company profits, Peer-reviewed academic data is mixed (despite what certain media and consultant reports might say) made harder as causality/correlation is difficult. There is a good non-technical summary by Katherine Klein (Wharton) here examining two meta-studies (Post and Byron, 2015, 140 studies of board gender diversity with a combined sample of more than 90,000 firms from more than 30 countries) and (Pletzer, Nikolova, Kedzior, and Voelpel (2015) in a different approach, conducting a meta-analysis of a smaller set of studies — 20 studies that were published in peer-reviewed academic journals and that tested the relationship between board gender diversity and firm financial performance (return on assets, return on equity, and Tobin’s Q).

Klein concludes: "The results of these two meta-analyses, summarizing numerous rigorous, original peer-reviewed studies, suggest that the relationship between board gender diversity and company performance is either non-exist (effectively zero) or very weakly positive."

But, it seems safe to conclude there is no academic case against a more gender equal board. So we can have more women directors for gender equality, societal reflections and positive cultural reasons and NOT impact business. That should be reason enough.

(I will note one recent positive correlational study "Using annual data on over 3000 US firms from 2007 to 2014, we show that the presence of women on the board has a positive effect on firm performance, and this effect varies at different parts of the performance distribution. Critically, we demonstrate that the presence of women directors alters the dispersion of firm performance. " by Conyon (wharton) and He (SUNY) (2016, 2017) This paper also has good references to other papers; but I think the meta-studies carried more statistical weight; you can find some individual positive and negative correlational studies in the literature, but not overwhelmingly pointing in one direction).

If you'd like to feel inspired by commencement addresses and life lessons try: Ursula K Le Guin on literature as an operating manual for life; Neil Gaiman on making wonderful, fabulous, brilliant mistakes; or Nassim Taleb's commencement address; or JK Rowling on the benefits of failure. Or Charlie Munger on always inverting.

Cross fertilise. On investing try a thought on stock valuations. Or Ray Dalio on populism and risk. You can also click on the Carbon tag below.

A lesson from autism here. And a post on the seductive story of Bitcoin

Lost Einsteins. Cost of Inequality.

December 4, 2017 Ben Yeoh

This paper makes for sobering reading on the cost of inequality for lost inventions in the US.

Full paper here. Summary paper here. NYT article here.

“We characterize the factors that determine who becomes an inventor in America by using de-identified data on 1.2 million inventors from patent records linked to tax records. We establish three sets of results. First, children from high-income (top 1%) families are ten times as likely to become inventors as those from below-median income families. There are similarly large gaps by race and gender. Differences in innate ability, as measured by test scores in early childhood, explain relatively little of these gaps. Second, exposure to innovation during childhood has significant causal effects on children’s propensities to become inventors. Growing up in a neighborhood or family with a high innovation rate in a specific technology class leads to a higher probability of patenting in exactly the same technology class. These exposure effects are gender-specific: girls are more likely to become inventors in a particular technology class if they grow up in an area with more female inventors in that technology class. Third, the financial returns to inventions are extremely skewed and highly correlated with their scientific impact,as measured by citations. Consistent with the importance of exposure effects and contrary to standard models of career selection, women and disadvantaged youth are as under-represented among high-impact inventors as they are among inventors as a whole.”

From the NYT:

“Much of human progress depends on innovation. It depends on people coming up with a breakthrough idea to improve life. Think about penicillin or cancer treatments, electricity or the silicon chip.

For this reason, societies have a big interest in making sure that as many people as possible have the opportunity to become scientists, inventors and entrepreneurs. It’s not only a matter of fairness. Denying opportunities to talented people can end up hurting everyone….

…

The project’s latest paper, out Sunday, looks at who becomes an inventor — and who doesn’t. The results are disturbing. They have left me stewing over how many breakthrough innovations we have missed because of extreme inequality. …

I encourage you to take a moment to absorb the size of these gaps. Women, African-Americans, Latinos, Southerners, and low- and middle-income children are far less likely to grow up to become patent holders and inventors. Our society appears to be missing out on most potential inventors from these groups. And these groups together make up most of the American population….

...The groups also span the political left and right — a reminder that Americans of different tribes have a common interest in attacking inequality….

Cross fertilise. On investing try a thought on stock valuations. Or Ray Dalio on populism and risk. You can also click on the Carbon tag below.

A lesson from autism here.

Wolverhampton

November 30, 2017 Ben Yeoh

Oh when the wolves (Oh when the wolves) go marching in (Go marching in) Oh when the Wolves go marching in I want to be in that number When the Wolves go marching in....

This was my first time to Wolverhampton and the "Black Country".

Two possible origins of the term Black Country.

(1) the exposed coal seams that run through the country (2) the smokey black fog that was prevalent in the 1800s.

I also learnt the gold and black colours of Wolverhampton Wanderers FC originate from the city's motto 'Out of darkness cometh light', with gold and black representing light and dark respectively.

Many Wolverhampton workers are feeling happy at the moment as they sit top of their football league table (Championship).

And we know happy employees, satisfied employees (better #ESG) make better companies (!) and better stock returns. See Alex Edmans paper.

Listened to the West Midlands Pension Fund AGM and spoke about ESG, stewardship and #responsible #investment.

A topical question was asked on engage / divest conundrums. When a shareholder divests they may no longer influence the board/management. If coal [insert controversial item] assets are divested to a less responsible owner - is the problem solved or made worse?

The discussion revolved around needing both engage and divest prongs at work. Neither alone is as effective together. Discuss.

There is no simple answer, but universal owners such as index funds have a duty to engage; and active managers gain more returns if they do successfully engage - this paper would suggest.

If one puts the active ownership paper together with the work on the outperformance of Global Equity managers described here, one can start to build a defense of Active Management; where John Kay would argue Active Managers should compete on style and philosophyin any case.

Why is the rise of intangibles important for active equity management?

November 14, 2017 Ben Yeoh

Why is the rise of intangibles important for active equity management? In my previous post, I looked at Stian Westlake’s arguments for the rise of intangibles.

Out of many, these two points strike me.

Intangibles are difficult to measure, sometimes impossible to quantify.

Intangibles now make up more of the value of a firm than ever before.

Hold those thoughts.

Now, it is a guide of active management that if consensus (the market or Mr Market) is correct about a company or an asset, then an active investor will not make any outperformance from investing.

An investor has to be correct in her view about a company/asset, and the market consensus has to be wrong.

This is difficult for active investors to achieve consistently. This is because the collective efforts of market participants reflect information into the market price of assets. (This flows from and is a central idea behind the efficient market hypothesis - more in another post).

We know 27% of investors ignore material ESG (the intangible Environment Social Governance factors) completely, only 35% of investors look at ESG systematically (this is examined in this post here).

ESG factors are part of the intangibles that are (1) difficult to measure, sometimes impossible to quantify and (2) now make up a significant value of a firm.

If an active investor can identify positive or negative value in these ESG / intangible / sustainability factors, that market consensus has missed (and it seems market consensus will continue to overlook these factors as many investor still ignore them and do not value them) then she can outperform. Indeed that is what Alex Edmans' paper on Employee Satisfaction (one of those ESG intangibles) suggests.

Does the stock market fully value intangibles? Employee satisfaction and equity prices by Alex Edmans. findings: (1) employee satisfaction is positively correlated with shareholder returns (2) the stock market does not fully value intangibles, even when independently verified by a highly public survey on large firms...

Now an investor does not necessarily have to quantify such intangibles with an $Xbn assessment. She only has to know that the intangibles are material, valuable and overlooked by the market. (Both positive and negative).

It is my belief that investors who assess such intangibles (like ESG) accurately should be able to outperform peers (and the majority of the market) who do not.

Along with this academic study on the benefits of Active Ownership and ESG engagement . If one puts this work together with the work on the outperformance of Global Equity managers described here, one can start to build a defense of Active Management for a global manager.

If you'd like to feel inspired by commencement addresses and life lessons try: Neil Gaiman on making wonderful, fabulous, brilliant mistakes; or Nassim Taleb's commencement address; or JK Rowling on the benefits of failure. Or Charlie Munger on always inverting; Sheryl Sandberg on grief, resilience and gratitude or investor Ray Dalio on on Principles.

Cross fertilise. Read about the autistic mind here.

The rise of intangibles. Capitalism without Capital.

November 14, 2017 Ben Yeoh

Stian Westlake (full disclosure, is a friend) and Jonathan Haskel have written a book: Capitalism Without Capital: the rise of the intangible economy.

They argue: Why Intangible Investment Is Different Now - there is nothing inherently unusual or interesting from an economic point of view about a change in the types of things businesses invest in. Indeed, nothing could be more normal: the capital stock of the economy is always changing. Railways replaced canals, the automobile replaced the horse and cart, computers replaced typewriters, and, at a more granular level, businesses retool and change their mix of investments all the time. Our central argument in this book is that there is something fundamentally different about intangible investment, and that understanding the steady move to intangible investment helps us understand some of the key issues facing us today: innovation and growth, inequality, the role of management, and financial and policy reform. We shall argue there are two big differences with intangible assets.

First, most measurement conventions ignore them. (Me: I shall come back to this as it has important implications for investing) []

Second, the basic economic properties of intangibles make an intangible-rich economy behave differently from a tangible-rich one.

They further argue:

(1) intangible investment tends to represent a sunk cost. If a business buys a tangible asset like a machine tool or an office block, it can typically sell it should it need to. []

(1a) Intangible assets are harder to sell and more likely to be specific to the company that makes them. []

(2) intangible investments generate spillovers.

(ME: I'm think they should also consider halo or anti-halo effects: due to reputational effects of many intangible investments. Potentially employees are often not attracted by the state of equipment but are attracted by brand, reputational value, strength of R&D and thought leadership etc.)

“The tendency for others to benefit from what were meant to be private investments—what economists call spillovers—is a characteristic of many intangible investments.”

(3) Intangible assets are also more likely to be scalable.

(4) intangible investments tend to have synergies (or what economists call complementarities) with one another: they are more valuable together, at least in the right combinations.

My view / also suggested: intangibles are much harder to measure (as well as being ignored)

In fact long time readers will know two quotes I like to repeat:

Not everything that counts can be counted, and not everything that can be counted counts. (Not attrib. Einstein but probably William Cameron)

Do not fall for the McNamara Fallacy.

(The first step is to measure whatever can be easily measured. The second step is to disregard that which can not be easily measured or to give it an arbitrary quantitative value. This is artificial and misleading.

The third step is to presume that what cannot be measured easily really is unimportant. This is blindness.

The fourth step is to say that what cannot be easily measured really does not exist. This is suicide.)

The authors concentrate on spillovers. I'm noting halo as I have feedback from companies suggesting that the company's focus on eg sustainability is attracting a certain kind of top tier graduate and this allows the company to select what it thinks is best.

The authors discuss in the book:

“how the shift to intangible investment helps us understand four issues of great concern to anyone who cares about the economy: secular stagnation, the long-run rise in inequality, the role of the financial system in supporting the non-financial economy, and the question of what sort of infrastructure the economy needs to thrive.”

They aim at “ government policymakers, businesses, and investors.”

So I will concentrate on the investor point of view in my next post, as my best area of expertise. But do read the book if interested in their take on this!

I note a little overlap with a recent book, Wealth of Humans, by Ryan Avent, who also notes the rise of the intangible economy. Avent gives an example from journalism: it is hard for a journalist to move from the FT to WSJ or The Economist – it takes time to learn about the unwritten rules, processes, structures and values of the new firm even though the actual job may be very similar.

Historically the value of the firm = Physical capital + a residual (knowhow, processes etc.)

And the physical capital dominated the valuation.

Now the value of a firm = Physical capital + human capital + social capital + intangibles

Human capital is the skills and technical ability of your people. These are transferrable skills. Social capital is how those people fit together and is firm specific and not transferrable. It is hard to quantify and might impossible to measure in a meaningful way.

Today, the intangibles dominate the value of the firm. Check out the book : Capitalism Without Capital: the rise of the intangible economy.

Implications for investing? The importance of intangibles and ESG in my next post.

Cross fertilise. Read about the autistic mind here.

Engage. Divest. Invest.

November 5, 2017 Ben Yeoh

To engage or not to engage. To divest or not to divest.

As in business as in relationships.

My colleague and friend made some insightful notes on a recent podcast discussion. (FT Alphachat). It's a discussion with and about Jeremy Adelman's biography of Albert O Hirschman and focuses on his book "Exit, Voice, Loyalty" published 1970. The book is essentially about divestment or engagement. These concepts are initially applied to purchasing decisions (B2B and B2C) He later applies it to governments and how society can apply these concepts. He notes "sometimes exit of short term investors can leave the loyal ones with a longer time horizon to oversee the recovery. On the other hand exit of some of the best young managers can make recovery even harder."

One analogy would be with relationships. Relationships need work. Like bread they need to be made anew. (cf. Ursula K Le Guin, literature as an operating manual)

If they ossify or crumble, they need repair.

Sometimes the correct action is to repair. Sometimes the correct action is to let go.

Scaling the problem to organisations or indeed shareholders and wider stakeholders.

Sometimes the correct action is to engage.
Sometimes the correct action is to divest.

One insight: sometime the correct action differs between different stakeholders and shareholders.

It might be correct for one set of shareholders to divest, while another set continues to engage.

Engagement takes time. Some beneficiaries do not have that time horizon. Nor the skills to make it happen. (Personally, this is also where passive investors have to significantly step up their game; they are permanent holders of capital and need to hold management teams to much greater account - thus my disappointment with the voting results at many passive firms - for instance on climate change scenario planning - personal view only)

Some business models, some business practices do not deserve to survive (eg slavery). Some will be continually challenged and a consensus will form on if they will survive (eg land mines) or survive in current or new form (eg tobacco --> vapes?).

Although all business does evolve, if it ossified it also likely dies.

Technology and connection has enabled change at rates humanity has not seen before. Yet, I believe we can see that some of our structures and thinking has not kept up with that change.

I see it in that how we behave in the online world is not as kind or polite as the real world (to say the least). The art of thoughtful disagreement is poor in social media. (cf. Ray Dalio)

But we are living longer, healthier, more equal, more literate lives than ever before (though with deep challenges still).

Here squarely lands the difficulties of fossil fuels (FF). FF will be needed to make plastics, aluminium and for some time to come to be able to fly. FF will also be needed to bring wealth to developing nations. So this is a clear case where engagement will have to be of vast importance, although I think it might be correct for some stakeholders to divest.

Those on either side of a debate might do well to remember what techniques are useful to change a person’s mind from an entrenched view. ( here in this post here (1) Don't assume bad intent (2) Ask questions (3) stay calm (4) make the argument )

Rich, powerful, successful people running large, powerful, connected organisations are not simply going to hear 60 minutes worth of rhetoric and change course.

Humans seldom do that.

Some lessons on changing an entrenched extreme position can be found here in this post here (from Megan Phelps-Roper who grew up picketing with signs like “GAYS ARE WORTHY OF DEATH” aged five. She left 20 years later because strangers on Twitter changed her mind.)

Cross fertilise. Read about the autistic mind here.

CFA ESG Survey. 27% ignore ESG.

October 26, 2017 Ben Yeoh

27% of investment professionals ignore ESG. Who are these crazy people? Don’t they know they are leaving return/alpha on the table? Breaking fiduciary duty law and giving active managers a bad name? Hush, Ben, hush hush.

Ben, if everyone looked at ESG information and properly assessed it, you’d have no competitive advantage. If everyone does something it becomes baked into consensus, right? But, it’s the right thing to do. Well, good job no one listens to you, eh?

What about all these academic papers suggesting ESG adds value, that active ownership and stewardship also increases stock returns and company fundamentals?

Ben, Ben, Ben… when was the last time anyone you knew actually read an academic paper outside the world of School? Read the whole paper, considered the evidence and then formed an opinion?

Oh good point.

Here’s the recent (July 2017) CFA survey (n=1,588) on ESG and here is the CFA ESG resource page. So who are these crazy 27% who do not consider ESG?

Even worse, of c. 70% who do consider ESG only 50% do it systematically. So really only 35% of investment professionals are examining ESG all the time, systematically.

The US number is 32% of investment professionals who ignore ESG.

OK, so this is only one survey. But, it has strong agreement with this large academic survey from Amir Amel-Zadeh and George Serafeim (2017, Why and How Investors Use ESG Information: Evidence from a Global Survey). These authors write:

“Recent studies have documented that ESG information is associated with numerous economically meaningful effects. Specifically, ESG disclosures are associated with lower capital constraints (Cheng, Ioannou and Serafeim 2014), cost of capital (Dhaliwal et. al 2011), analyst forecast errors (Dhaliwal et. al 2012), and stock price movements around mandatory ESG disclosure regulations (Grewal, Riedl and Serafeim 2017). Moreover, industry-specific classifications of financial materiality of ESG information identify ESG information that is value relevant and predictive of firms’ future financial performance (Khan, Yoon and Serafeim 2016).”

The n=416 for the Amel-Zadeh paper.

The US = No ESG = 25% and the overall total = 18% so a little lower than the CFA, although the US number is close. So it does still suggest somewhere between 20% to 30% might be the right ball park.

Amir Amel-Zadeh and  George Serafeim  (2017) — Amir Amel-Zadeh and George Serafeim (2017)

I will leave you with this from Amel-Zadeh:

“The majority of the respondents suggests that ESG information is material to investment performance. However, which information is material likely varies systematically across countries (e.g. a country where water pollution is a more serious issue versus a country where corruption is a more serious issues), industries (e.g. an industry affected dramatically by climate change versus an industry affected by violations of human rights in the supply chain) and even firm strategies (e.g. firms that follow differentiation versus low price). For example, Khan et al. (2016) show that the vast majority of ESG data for any given industry is immaterial to investment performance and that the material information varies across industries within a sample of US stocks. Understanding how the materiality of ESG information varies across countries, industries and firm strategies therefore is of primary importance.”

This to my mind along with this study on the benefits of Active Ownership and ESG engagement and If one puts this work together with the work on the outperformance of Global Equity managers described here, one can start to build a defense of Active Management for global managers; where John Kay would argue Active Managers should compete on style and philosophy in any case.

Cross fertilise. Read about the autistic mind here. On investing try a thought on stock valuations.

Active Ownership. Academic Study.

October 16, 2017 Ben Yeoh

From Active Ownership, by Dimson et al. (see end for notes)

“Active Ownership” by Elroy Dimson , Oğuzhan Karakaş and Xi Li - this paper, in my view, suggests that successful active engagement in a collaborative and constructive manner on material ESG concerns improves the fundamentals of a company and also increases stock returns.

I differentiate this type of engagement with what one typical sees from “hedge-fund activists” or where board proxy fights occur; and where media engagements and open letters are used (although that type of activism has also seen positive returns see Klein and Zur, 2009).

Starting with the conclusions: “How does the market react to ESG activism? We find that ESG engagements generate a cumulative size-adjusted abnormal return of +2.3% over the year following the initial engagement. Cumulative abnormal returns are much higher for successful engagements (+7.1%) and gradually flatten out after a year, when the objective is accomplished for the median firm in our sample. We do not find any market reaction to unsuccessful engagements. The abnormal return patterns and magnitudes are similar for the subsamples of CG and ES engagements.4 This suggests the existence of a threshold for success to be pursued and achieved for both types of engagements. We then examine the cross-section of abnormal returns (controlling for industry and year fixed effects) and find that the positive market reaction to successful engagements is most pronounced for the themes of corporate governance and climate change. For these themes, the cumulative abnormal return of an additional successful engagement over a year after the initial engagement averages +8.6% and +10.3%, respectively.”

Then:

“To investigate the sources of the positive market reaction to successful engagements, we take a difference-in-differences approach and examine the subsequent changes in target firms’ operating performance, profitability, efficiency, institutional ownership, stock volatility, and governance after successful engagements relative to after unsuccessful engagements. We observe significant improvements in all these measures (i.e., an increase in firm performance, investor base, and governance, and a decrease in stock return volatility) following successful engagements, as compared to the unsuccessful ones.

Particularly focusing on the ES and CG subsamples, we first find that the return on assets and the ratio of sales to the number of employees improve significantly one year after successful ES engagements, as compared to the unsuccessful ones; but such improvements are less pronounced for successful CG engagements. These findings support the view that successful ES initiatives enhance customer and employee loyalty. Second, we observe an increase in shareholdings by the asset manager, pension activists, and SRI funds one year after successful ES engagements; but such an increase is not apparent for successful CG engagements. These results support the view that ES initiatives generate a clientele effect among shareholders. Third, we find improvements in the corporate governance structure of targeted firms, as measured by the Bebchuk, Cohen, and Ferrell (2009) entrenchment index, two years after successful engagements on all ESG issues. This suggests that good ESG practices signal improving governance quality.

And to conclude:

“We conclude that environmental, social, and governance activism of the type that we study

improves social welfare to the extent that it increases stakeholder value when engagements are successful and does not destroy firm value even when engagements are unsuccessful. We note that, after successful engagements (particularly on ES issues), firms with inferior governance subsequently improve their governance and performance. Our interpretation is that active ownership attenuates managerial myopia and hence helps to minimize intertemporal losses of profits and negative externalities (see Benabou and Tirole 2010). This approach is differentiated from other styles of shareholder action, particularly hedge fund activism. Responsible investment initiatives are less confrontational, more collaborative, and more sensitive to public perceptions; yet they achieve success.”

The full methodology and discussion is in the link SSRN here (further bibliography in that paper to studies on the full range of stewardship to activism) .

An overview of several Active Ownership studies is given by Share Action here.

Summary slides given by Dimson on this paper are here.

If one puts this work together with the work on the outperformance of Global Equity managers described here, one can start to build a defense of Active Management; where John Kay would argue Active Managers should compete on style and philosophy in any case.

The chart above figure plots the cumulative monthly abnormal returns (CARs) around the initial engagements from one month prior to the engagement month to 18 months afterward. The chart examines the entire sample Each CAR is decomposed into the CAR for successful engagements (i.e., those that achieved milestones) and the CAR for unsuccessful engagements. For each event month, authors calculate the average abnormal return from holding an equally weighted portfolio of all target firms that initiated engagements in month 0. The stock returns are adjusted for Fama-French decile size-matched returns. The stock returns are winsorized at the 1st and 99th percentile levels before calculating the average CARs.