When a board can't detect fraud...

I’m still utterly amazed at large company fraud. Christo Wiese owns 23% of Steinhoff and was Chair, and didn’t know anything about it at Steinhoff.  Highlights to me that choosing the CEO is still one of the most important if not the most important job of a board.

“Normally when you’re in a business, and you’re responsible, you can see the problems coming, you’re aware of them,” Mr Wiese said. “This came like a bolt out of the blue.” “I can only say that cleverer people than this board have been duped before by people committing fraud,” he added. “To detect fraud in a company is an extremely difficult if not impossible task and it becomes more difficult when, as is alleged in this case, the CEO is directly involved.”

Jan 31, FT article here  and  Dec 2017, Bloomberg article here   

Also, highlights the problems the board has if it can't assess what management are showing them. In the light of the UK's Carillion failure, its board have been given a hard time too.

Plastic Problems

Continue to be amazed at Humans poor skills in thinking long-term (I include myself here) or perhaps simply valuing short term convenience (packaging!) over unseen consequences. This applies to investing, as to much of life.

Along side many other problems, we seem to have been sleep walking into a plastic ecological disaster. Let’s hope human ingenuity can bend this problem away.

Marine life is facing "irreparable damage" from the millions of tonnes of plastic waste which ends up in the oceans each year, the United Nations has warned. 7 Charts from the BBC.

Beaches that were covered with pristine sand in the 1990s are today littered with plastic debris, washed up from countries around the Pacific Rim and beyond — an estimated 37 million pieces, weighing 18 tonnes. (Independent article)

“This is just the tiniest snapshot of our problem with plastics. Every year an estimated eight million tonnes of the material flow into the oceans. And, over the past few months, there has been a huge increase in public and political concern about this marine pollution, to a level where it is approaching climate change as an environmental issue.”  A detailed look in the FT (behind pay wall) in a very good long read.

Another summary of the problem from the UK Natural History Museum.

ESG is important, to you too fund manager. FT article.

Not everything that counts can be counted and not everything that can be counted counts.

Through a long-term orientation and stewardship, this is the time for active investment managers to show their worth. It starts with asking the right long-term business questions. Some companies are giving us answers, but are we really listening?

My full opinion article in the FT.

Blackrock CEO supports ESG and Long-Term in 2018 Letter

Larry Finks 2018 Letter to CEOs is titled  “Sense of Purpose” he writes:

“We also see many governments failing to prepare for the future, on issues ranging from retirement and infrastructure to automation and worker retraining. As a result, society increasingly is turning to the private sector and asking that companies respond to broader societal challenges. Indeed, the public expectations of your company have never been greater. Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.

Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures to distribute earnings, and, in the process, sacrifice investments in employee development, innovation, and capital expenditures that are necessary for long-term growth. It will remain exposed to activist campaigns that articulate a clearer goal, even if that goal serves only the shortest and narrowest of objectives. And ultimately, that company will provide subpar returns to the investors who depend on it to finance their retirement, home purchases, or higher education.”

My personal view is that reflects close to a consensus view amongst thoughtful long-term investors and those interested or practicing a sustainable or integrated ESG part of their investment process.

However, I do not believe that this is the predominant line of investment practice in the assessment management world.  I have no direct data on this, it’s culled from experience and anecdote. The reasons are multi-factorial compounded by incentive structures, short-term pressures and job career risk. A lot of what it means to be human is not initially geared for long-term sustainable thinking. Perhaps this will be humanity’s

downfall.

Under:  A new model for corporate governance, Fink suggests: “ In managing our index funds, however, BlackRock cannot express its disapproval by selling the company’s securities as long as that company remains in the relevant index. As a result, our responsibility to engage and vote is more important than ever. “

“…The time has come for a new model of shareholder engagement … companies have been too focused on quarterly results; similarly, shareholder engagement has been too focused on annual meetings and proxy votes. If engagement is to be meaningful and productive – if we collectively are going to focus on benefitting shareholders instead of wasting time and money in proxy fights – then engagement needs to be a year-round conversation about improving long-term value.

“….: a company’s ability to manage environmental, social, and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process.

Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world?”

FT’s Authers comments: “CEOs who think this is politically correct claptrap (there must be plenty) can of course ignore him. They can be safe in the knowledge BlackRock is not going to sell, whatever happens”

(Truly active) managers oft scoff at passive managers ability to engage. 40 ppl engaging 4,000+ companies, is not 10 ppl engaging with 50 cos.

Passive managers remain skeptical of how many active portfolio managers are effectively engaging.

But as Dimson et al. Active Ownership academic study implies +ve stewardship is good for multiple stakeholders: employees, company, shareholders environment…

Long-term stewardship should be a win-win for All.

But as my earlier post on actual effectiveness and mainstreaming sustainability, where we can see Blackrock itself only voted in favour of Climate Change proposals for the first time in 2017 and then on very few (2%) of climate proposals, one could argue we still have some way to go. 

There are also reasonable arguments that can be made suggesting that this is so far rhetoric which might not be supported by the current voting record. Although others would note it is complicated and that much good engagement can happen regardless of vote.

Link to climate proposals post

Link to BlackRock CEO 2018 Letter

Link to Active Ownership paper here:  H/T Xi Li, Elroy Dimson and Oğuzhan Karakaş https://www.thendobetter.com/investing/2017/10/16/active-ownership-academic-study

---

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. 

Is ESG sustainable investing going global?

Is ESG investing going global? Is sustainability / ESG truly mainstreaming? A Bloomberg article (ref i) argues 2017 is the year ESG went global. There are some surface data supporting that. Ex, the amount of money flowing into “ESG” funds (ref ii), but other facts suggest we have ways to go. The article suggests 4 asset managers (AUM > $10,000,000,000,000 yes, that’s $10 trillion, est $1tn+ in equities) finally voting for a climate related proposal is positive.

Personal View: the counter is that it has taken until 2017 for 4 of the most significant asset managers in the world to vote for the FIRST TIME for such a proposal, + the voting record is behind the median industry view (which some argue is below where it should be).

I’m discouraged that these votes are so little + so late. That might sum up where we may be on climate (cf. Vaclav Smil on climate, ref iii).

If ESG is mainstreaming, then that doesn’t square with the lack of mainstream reporting of the largest RI/ESG investment conference (UN PRI). No mention in FT, WSJ or others. Very very few “mainstream” portfolio managers attending. Hmmm.

I often put myself in an optimistic camp. But, we have to be true. I remain uncertain if sustainability has gone mainstream.  Links and more in comments.

Finally, investor surveys (ref iv) show 27% investors ignore ESG, 35% are unsystematic, thus only 35% systematically incorporate ESG. I’m unsure it counts as mainstream. I question what type of ESG participants define. One of the assets mngrs above states “Actingon material environmental, social and governance (ESG) opportunities or risks in our investments.” So it would self-define itself as integrate ESG. Some would argue its record on voting is not aligned to this. Other might want to know its engagement record.

Ref i - https://newsletters.briefs.bloomberg.com/document/wjZIuqmna7F.0H-sfcWRmg--_9ez2hhvxnqgzbspk5q/year-ahead

H/T Gregory Elders, photo source via Bloomberg which sources Ceres

Ref ii  https://www.ussif.org/files/publications/sif_trends_14.f.es.pdf

US SIF suggests $1tn to $4tn from 2012 to 2014 for US-dom funds with ESG tilt.

Ref iii  https://www.thendobetter.com/investing/2017/7/19/vaclav-smil-energy-expert-awesome

Ref iv  https://www.thendobetter.com/investing/2017/10/26/esg-survey-cfa-amel-zadeh

Note: Personal view. No organizational endorsement.

17% Women Board Directors in World

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.

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….

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.

Wolverhampton

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.

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.