The FT describes how Norway’s sovereign fund management sets the standard. Government Pension Fund-Global, part of Norges Bank, was set up by the Norwegian government in 1990 and manages about €235 billion. It has worked with authorities in Kazakhstan, East Timor, Bolivia, the Faroe Islands and several African countries among others.
“We make no strategic investments,” said Martin Skancke, director-general of the fund at the Ministry of Finance. “We invest in individual companies and sec tors. We are invested in between 3,000 and 4,000 companies in 40 countries and average ownership of a company is below 1 per cent. We do not feel that this distorts markets.”
Investment decisions are either made by individuals at the fund with specific investment mandates or are contracted out to external asset managers. At the end of 2006, 22 per cent of the fund was managed by 50 external managers with 80 different mandates.
Transparency is paramount. The ministry receives advice on the investment guidelines from the Central Bank of Norway. Consultants are also employed to help with this work as well as to judge performance and the management of costs.
Ethical Guidelines for the Government Pension Fund – Global Norwegian Ministry of Finance
Principles for Corporate Governance and the Protection of Financial Assets
A comprehensive review of the characteristics of the world’s main financial centres by The Economist (EIU): Magnets for money. While the impact of technology on transformations of financial centres in recent decades is analysed, there could have been a more critical review of the outlook for the decentralisation of financial services through ICT.
A new report claims that excessive executive compensation in the US is taking a staggering economic and social toll on American society, threatening leadership in the business, government, and nonprofit sectors and creating instability in the economy. The report gives a good summary of the gross disparity between top earners and average earners and disparages the arguments justifying the excesses.
According to Executive Excess 2007, the fourteenth annual survey of executive compensation from the Institute of Policy Studies and United for a Fair Economy, the figures stand in stark contrast: the CEO of a large company pulls down an average $10.8 million per year in salary and bonuses (excluding perks and some stock options, whose value can run to many millions more. But the average wage is only $29,544 (only about 160% of the poverty level for a family of four). Despite an increase this year to $5.85 per hour, the real value of the minimum wage has declined 7% over the past decade and real wages have risen little over the same period. During this time, executive pay has soared by 450%. The stark comparison even raises the illegitimacy of capitalism and democracy because the socio-economic profile is so feudal. You have to ask what these “leaders” stand for when they are so intent on grabbing more from so many who have relatively little.
The report appropriately debunks the rationalisations for excessive compensation: Excessive compensation is not necessary to attract talent. In fact it may do the reverse by attracting machiavellian individuals out for themselves rather than their employer. Executive Excess 2007 makes the case that it actually erodes good leadership by giving the highest rewards to those who ignore long-term stability in favor of short-term market gains. Employee relations may also suffer, leading to negative impacts on company performance. Enlightened analysis has shown for a long time that money does not make happiness, in fact often the reverse once average needs have been met. And high CEO pay does not correlate with outstanding performance either. The great illustration today is Angelo Mozilo of Countrywide Financial, “the sixth highest paid CEO in 2006…with $42.9 million. In July 2007, the company’s sub-prime mortgage woes drove its foreclosure rates to the highest level in more than five years and contributed to a global liquidity crisis.”
The report makes some proposals for change:
- Eliminate tax subsidies for excessive CEO pay.
- End preferential tax treatment of private investment company executive income.
- Cap tax-free “deferred” executive pay.
- Eliminate the tax reporting loophole on CEO stock options.
- Link government procurement to executive pay.
Download report here. See Social Funds’ review here.
A new study by two professors at Penn’s Wharton School lifts the lid on a “secret” of private equity managers. The findings of Wharton professors Andrew Metrick and Ayako Yasuda show that, “on average, leveraged-buyout funds can expect to collect $10.35 in management fees for every $100 they manage, whereas about half that, $5.41 for every $100, comes from carried interest.” Those numbers in total equate to over 15% of funds under management – a big number.
Investors that become aware of this statistic may negotiate more on the terms of management agreements where the GP is given the ability to be on both sides of the table when it comes to negotiating corporate finance fees. It should also encourage a move to more appropriate fee structures in which interests of LP and GP are more closely aligned, such as replacing carry with fund equity and making the management company a subsidiary of the fund.
The 53 page study dated September 9 which was featured in the Wall Street Journal will also hardly help private equity firms with their argument that the pending carried interest bill will damage the buyout industry.
An interesting review of the run-up to the sub-prime mortgage meltdown shows that SR investors started considering the implications of sub-prime business exposure back in 1999 and a number of institutional SR investors adjusted portfolio exposure accordingly. It shows that investors who take a broader view of business (social and environment as well as economic) have a built in capacity to screen for off-screen risks. While they may not know who will be the next Enron or Countrywide Financial or Northern Rock, they are more likely to have lower exposure to sectors or companies with unrecognised dangerous risk profiles.
See the analysis by Social Funds here.
The recent launch of Supercapitalism by Robert Reich which criticises CSR has stimulated debate about its role in private enterprise. You can see The Economist’s take here and an interview with the author by BusinessWeek here.
It is naive, even primitive, to argue that corporations have no ethical dimension, rather it is increasingly their role to reflect the values of their shareholders. It is simplistic to reduce the objective of a company to “making profits”. While businesses must be profitable to survive, their organisation has never been the objective of making profits but to provide an understood system for cooperation between people who would like to create something greater than they can individually. (If the objective was only profits there would be no rationale for being in any particular business and criminal activity, with its very high return on investment would be the most attractive option.) Company organisation offers a substitute for feudal hierarchy and as we insist on ethics in government so we demand ethics in business.
For most businesses the discussion has moved beyond “is it appropriate for companies to pursue social responsibility?”, the answer to that is “of course”. The challenge is now how to build ethics in to everything we do and reflect the values of our stakeholders; how to make the organisation more human.
According to a survey of more than 500 business executives by Grant Thornton, executives believe that corporate responsibility programs can positively impact their business and help achieve strategic goals. While commentary by traditionalists might suggest that CSR will be a cost, without benefit, only a quarter of survey respondents agreed that profits need be sacrificed, while three quarters believed corporate responsibility could enhance profitability – 77% said they expected corporate responsibility initiatives to have a major impact on their business strategies over the next several years.
The press release with summary analysis is here and Social Funds’ analysis is here.
The Columbia Program on International Investment and the Economist Intelligence Unit published World Investment Prospects to 2011: Foreign Direct Investment and the Challenge of Political Risk. The report contains the first authoritative data on FDI flows for 2006 and forecasts flows until 2011, with 2007 set for a new record. It pays special attention to the rise of FDI protectionism and regulatory risk. Download pdf of the World Investment Prospects to 2011 report.
I came across a recent compilation of presentations from various events entitled Integrity: A Positive Model that Incorporates the Normative Phenomena of Morality, Ethics, and Legality (page down to find link to full study). The authors present a positive model of integrity that provides powerful access to increased performance for individuals, groups, organizations, and societies. They note that integrity is thus a factor of production as important as knowledge and technology, however its role in productivity has been largely ignored by economists and others. Their model reveals the causal link between integrity and increased performance and value-creation, and provides access to that causal link. The point: honesty is good business.
Carlyle, the large successful private equity firm, has always been a cause for concern because its claim to excellence at its inception a decade ago was the raft of politicians on its board. The New York Post revealed recently that it paid $12.3 million in fees to a company tied to former state Comptroller Alan Hevesi’s top political consultant. Carlyle, which invests $1.3 billion for the state pension fund, paid the fees to Searle & Co., of Greenwich, Connecticut, from 2003 through 2006, when Hevesi served as comptroller. Apparently the fees were “in connection with Hank Morris’ work as a placement agent related to [state pension-fund] investments”. Searle, is not the medical company which was run by Rumsfeld which “lobbied” for approval of aspartame, but a small financial-service firm headed by Robert Searle, a longtime personal friend of Morris. Morris has been employed by Searle since 2003. Connections and behaviour like this do not depreciate the value of Carlyle, which is expected to launch an IPO soon. Investors prefer conflicted connections to integrity.