Let’s debate Inclusive Capitalism
POSTED ON: 13 August 2015
The following article by NZ Super Fund CEO Adrian Orr was printed in the NZ Herald's 'Mood of the Boardroom' series on 13 August 2015.
To borrow from Churchill, capitalism is awful, except for every alternative.
It’s the least worst system for organising ourselves into allocating scarce resources and putting them to productive use.
At its heart, the system argues for nothing more than a well-functioning marketplace where the reward for capital and labour can be freely determined. Of course, markets frequently fail because of compromised access or information, or undesirable consequence. The more catastrophic of these failures have given rise to successive new forms of capitalism—each a product for a new age—and the system’s adaptability has proved its greatest strength.
The past decade has brought many of capitalism’s current failings to light. Short-termism, misaligned incentives, and hubris combined to create a global financial crisis that destroyed jobs and accumulated savings, the aftershocks of which still echo These same factors now also frustrate efforts to meet the defining challenges of the time ahead – climate change, environmental degradation, population ageing, and others. Lastly, today’s capitalist system falls short in providing access to all who demand it and the reassurance that their contributions will be fairly rewarded.
It is time again for change and several new efforts are now directed to the design of more relevant and resilient capitalism.
As some of the cornerstone participants and beneficiaries of the capitalist system, asset owners and institutional investors have a critical role to play in its reinvention.
What does our role look like? As stewards of other peoples’ money, we are sensibly bound by a mandate to maximise risk-adjusted returns.
When interpreted narrowly, such mandates preclude the involvement of institutional investors in activity that does not directly influence the portfolio’s bottom line on grounds that this constitutes a breach of fiduciary duty.
However, a longer-term perspective on the task before us provides both the rationale and the imperative to act on making capitalism more inclusive.
A more inclusive system, with greater participation and democratic buy-in, is also one that is more stable and less risky. The sponsorship of such a system by the investor is inescapable if it generates larger, more stable, returns, and an increasingly persuasive body of evidence suggests that it is exactly so.
“The investment markets are characterised by relationships that are distanced and not enduring. For example, shareholders in listed equity and debt instruments can sell, generally, at will. If, instead, we can forge strong relationships with the companies we invest with where all partners are aligned on the same long-term goals based on mutually-beneficial engagement, then, again, a more sustainable capitalism results. Such engagement is only one salient aspect of being a “responsible investor”. Institutional investors must exercise their voting rights in favour of governance structures, boards, and incentives that promote longer-term returns.
It is desirable that investors collaborate with their peers, managers, advisors and industry on setting meaningful, enforceable, standards and practices.
I stress that none of these actions are at the expense of returns and neither are they founded in a moral code—such ethical determinants for investment are personal and do not have place in setting institutional investment strategy.
Rather, these investor actions seek to abstract focus away from short term noise, unsustainable short-term profit, and towards real increments in corporate value over the long term.