Colin Melvin explores the origins of the global economic downturn and looks at how increased corporate and bank responsibilty will be important factors going forward
Pension funds have been among the biggest casualties of the credit crunch after seeing billions of dollars wiped off their value virtually overnight. This could have been avoided if the owners of those companies had behaved responsibly.
The guardians of our pension funds, the trustees, could have protected their beneficiaries by holding to account the boards of the banks and other companies in which they invested. They could have averted many of the irresponsible practices which seeded the credit crisis.
Despite the fact that governments have stepped in around the world with multi billion dollar rescue packages to help ease the situation, there is still growing concern around the safety of our savings and impacts on the real economy. Trust and accountability in the entire financial system has reached an all time low and is continuing to suffer severe erosion.
Ultimately it has been the public at large that has had to pick up the bill for this crisis not once but three times, in what could be described as the “triple whammy “ effect of the crisis:
1. As tax payers through our funding of the billion dollar bailout packages;
2. As pensioners through the value of our pension funds diminishing;
3. As employees through job losses and reduced prospects.
It seems wrong for taxpayers to be subsidising the multi-billion dollar credit crunch while seeing the value of their own pensions plummet.
Way before the credit crisis started Hermes Equity Ownership Services had been leading the global debate, virtually as a lone voice, urging pension funds to be more attentive as corporate owners and to engage in active dialogue with the companies they are investing in to influence structure, direction and accountability.
If this warning had been heeded we would have seen less of a crisis, as some of the worst excesses such as high risk loans and misaligned incentives would have been curbed.
The governments of the OECD countries must now work together to promote good corporate governance and asset ownership and rebuild trust in companies and markets.
It is essential that this collaboration produces well-supervised and mutually supportive regulatory frameworks, which, alongside pioneering solutions from the private sector, will ensure corporate and investor accountability. This dialogue between policy makers is vital if we are to achieve long-term sustainable growth.
Chasing the dollar
This crisis is a product of the short-term focus of financial firms on Wall Street, in the City and elsewhere, which is entirely concentrated on the next quarter’s earnings and other short-term financial measures.
As institutional investors who own large swathes of corporations around the world we need to think about long-term growth and adopt a far more sustainable approach, which will be better for all stakeholders and restore stability to the market.
Pension fund beneficiaries rely on their trustees to act in their long-term interests and protect their investments.
If they succeed, this will benefit us all – as current and future pensioners and employees. However, continuing failure will fuel further extraordinary profits for the financial services industry and create another asset-price bubble, next time seeded by public money.
We have seen banks taken into state ownership and a strict regulatory regime coupled with litigation is looming but these will be short-term fixes at best.
The breakdown in trust between banks was linked to poor short-term lending practices, a vacuum of accountability and a lack of attention to the needs of their owners and customers. Their reluctance now to lend is already affecting the real economy in myriad ways.
Poor asset ownership is at the heart of this crisis and it could have been prevented. The majority of banks’ shareholders are long-term institutional investors investing the pension fund savings of millions of people. By allowing the banking industry to act contrary to their own and their clients’ interests, they failed to behave as responsible owners.
Millions of pension fund beneficiaries are completely oblivious to the fact that the shares owned by their pension funds have been traded with no substantive dialogue between companies and the guardians of their pension funds, the trustees or their appointed agents. Furthermore, many such investors will have invested in ways that have damaged the financial system on which we all depend.
So is more regulation the answer? While we support regulation and improved transparency in the financial markets in specific areas such as short selling and stock lending, regulation alone is not sufficient and in some ways could be more harmful. We should regulate to promote good practice rather than simply proscribe the bad.
In 2009 we expect the pressure on pension fund trustees to intensify further as their role as corporate owners is better understood and their beneficiaries’ retirement funds continue to diminish in value.
In the coming months and years, trustees will suffer the disappointment of millions of beneficiaries wanting answers. It’s a tough call to expect trustees, many of whom are part-time, to become experts on investments and the minutiae of exotic instruments used in the global markets today.
I believe that the more sustainable solution involves the empowerment of pension fund trustees in what will become a new paradigm in the stewardship of pension funds.
Hermes has been working alongside pension fund trustees to equip and support them with mechanisms designed to help them engage with the boards of the companies they are investing in, to ultimately create sustainable value for their investors.
This pioneering approach is winning the support of trustees on behalf of millions of investors, who have seen their savings eroded by the current credit crisis.
This new dialogue is beginning to have a positive impact on all the key stakeholders involved including:
Institutional investors – who see the value of adopting long-term investment strategies and holding the companies they are investing in to account.
Boards of directors – who are beginning to benefit from the support and challenge provided by long-term shareholders on a range of issues material to their businesses.
Pension fund beneficiaries and savers – who will benefit from supporting this new path to corporate success, which will give them greater power as owners.
I hope that pension funds and other institutions will rise to the challenges presented by the credit crisis and embrace the opportunities that it presents to create a more stable platform for future growth.
We are at the dawn of an exciting moment in the creation of a more accountable capitalism.
A more constructive dialogue between institutional investors and the companies they are investing will ultimately create a more sustainable solution to the credit crisis and a better future for all of us and for the generations to come.
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