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Whose Risk Counts?
And how academics could be a
bigger part of the solution
Dr Raj Thamotheram
CEO, Preventable Surprises
Visiting Fellow, Smith School, Oxford University
Canterbury Christ Church University
19th February 2014
Pension members are getting a raw deal!
Dutch/Danish young person can expect a pension which is at least 50%
higher than a British young person would get. (Tomorrow’s Investor Project,
Thanks to Heather Hachigan
Not transparent & big questions about value for money
Economies are becoming more dysfunctional
CFOs will trade off practically everything to protect the
More bubbles, more damaging
Kay Review: investors are driving corporate short-termism
McKinsey & Co and CPPIB:
“short-termism is undermining the ability of companies to invest and
grow, and those missed investment, in term have far-reaching
consequences, including slower GDP growth, higher unemployment, and
lower return on investment for savers.”
The Great Disruption
“The hallmarks of
tomorrow’s world will be
scarcity – of land, oil, food
and ‘air-space’ (for
US NIC, 2008
The ‘Perfect Storm’
(UK Government Chief Scientist,
John Beddington, 2009)
[Climate change risk]
“should compel all elected
leaders to take immediate
Mayor Bloomberg, 2012
Back to the Future = Exploding Inequality & Extremism
“A hungry man is an angry man”
(0:00 – 1:05)
The Key Question!
WHY AREN’T WE
“the crisis is in implementation”
Kofi Annan (2002)
How Are We Doing – Views From The Frontline
(0:35 – 3:30)
(25:20 – 26:57)
Investors = 1° enablers of dysfunction behaviour
Investors are more important than even regulators in shaping
PwC, Annual Director Survey 2010
“[…] 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)
Processes & Reporting Aren’t Delivering Outcomes!
Thanks to Inflection Point Capital Management
Latest BP cost estimate $40 billion
30% share price drop
1-year suspension of dividends
“The Dominant Narrative” – the BP version
“an Act of God”
Rick Perry, Governor of Texas
“I left BP a long time ago, four years”
"It's very dangerous to join up dots that
may not be appropriate to join up"
The dots we shouldn’t join up…
Up until April 19 [ie the day before the Deepwater Horizon explosion], his [BP’s] performance was
An investor close to BP quoted by The Financial Times, July
How much attention did “sell-side” pay to safety?
Before the oil spill, 6 occurrences every 100 pages
= the vast majority of reports do not talk about these risks at all.
“Analysts are biased”
Analysts claim that BP has a good operational momentum because of its “firstmover advantage in cost cutting”
5 = buy or strong buy recommendations
4 = add, overweight, outperform and accumulate
3 = hold, perform, neutral
2 = reduce, underweight and underperform
1 = sell or strong sell
Source: SHEFRIN Hersh, CERVELLATI Enrico Maria, “BP’s failure to debias: underscoring the importance of behavioral
corporate finance”, 21st February 2011
Are asset owners & “buy-side” much better?
Only 60% of capital voted at BP’s 2010 AGM
57% of votes in favour of chair of safety committee! (Only
leaving in 2012!)
Even proxy voting agencies recommended abstain (ISS)
or vote against (Glass Lewis)
Source: BP plc, ISS ProxyExchange
Today’s ESG Doesn’t Address “Preventable Surprises”
Conception of risk
Screening vs Stewardship – the Balance is Wrong!
What is it RI?
ESG analysis into
Vote & Engage to promote
Momentum Investing is Out of Control!
“The bulk of incremental financial
activity is trading, and trading, while it
may provide a little useful public
information about market opinion, is
largely a way to transfer wealth from
those with inferior information and
calculation ability to those with more.
There is no enhancement of economic
efficiency to speak of.”
Robert Solow, the Nobel prize winner
and an MIT Emeritus Professor
Sunday Times, May 6, 2012
Majority of Investors Have No Reason To Care!
Deep understanding of
(incl index & closet
Bet against market
with regards to news
More like to support
management thru ST
Supporting or not
isn't part of their reality
Interested in earlier
access to better news
20% of market
Adapted from McKinsey & Co
What academics should avoid doing!
Frederic Mishkin, Professor, Columbia Business School
Glenn Hubbard, Dean Columbia Business School
Be Brave! (Jeremy Grantham)
“Scientists are understandably protective of the
dignity of science and are horrified by publicity and
Challenge Convention (Alice Stewart)
“Pioneering woman scientist whose
research into the dangers of x-rays
and nuclear radiation shook the
"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
Approx. right vs precisely irrelevant! (Anat Admati)
• Avoid paralysis by analysis
• Be approximately right, not precisely irrelevant
• Manage one’s own anxiety about peer criticism
“Bridge the Gap!” (Campbell Harvey)
“Often academics don’t know the
important problems facing industry”
Survey methodology to bridge the gap
Disguised the real question
Big impact – earnings management
isn't primarily by accounting but rather
by cutting budgets
1900 Google cites (2006 paper)
Look where the keys were lost, not where there is light
Analysis of 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.
Fundamental investors > Index Investors
Stock picking/valuation > Stewardship
Thanks to Heather Hachigan