This article is being published from the BSB by a guest writer, Hermes Investment Management CEO Saker Nusseibeh.
As I reflect on the extraordinary decade we have just experienced, what stands out is just how pervasive the effects of the Global Financial Crisis have been. Over the past ten years, it has defined almost every aspect of the financial world. We must constantly remind ourselves of the important lessons it has brought.
Among these is that the central cause of the financial crisis was poor culture. A culture in which people were incentivised to increase risk, not manage it. A culture where client outcomes were secondary to personal outcomes. A culture where effective oversight was a chore, not an imperative. A culture where employees could not bring their whole selves to work, creating discontent and impacting effectiveness. A culture that paid lip service to diversity, but did not embrace it, leading to group think.
Of course, this is not just a lesson for the banking sector. Arguably, the wider financial services ecosystem suffered from similar culture challenges of pre-crisis banks, but these did not surface in the same way. So, complacency set in and complacency presents dangers to any segment of our industry. From insurance to asset management, the financial services community must constantly review the way in which it operates to ensure that its culture results in good outcomes for clients and broader stakeholders.
This is particularly true in asset management, where we ask the companies in which we invest to uphold the highest standards. We cannot do so with authority if we do not live up to those standards ourselves.
We have a responsibility as asset owners to ensure that companies we invest in have productive and responsible cultures. Hermes Investment Management addressed how this approach can be practically implemented with our paper, Stewardship: The 2020 Vision.
When we were writing this paper, it quickly became clear that the principles that we must enforce to be successful stewards of capital are predominately cultural. Our vision for stewardship centres around what we believe to be the purpose of investment: to create long-term wealth.
To live up to our purpose, there are a number of cultural principles to which we must adhere. First, we have to recognise who we represent. Asset managers and institutional asset owners have a fiduciary responsibility to those for whom we invest capital. Our job is to safeguard the interests of the end investor.
To do this, stewardship needs to be embedded across investment firms. Creating a separate department for this won’t change a culture nor will it properly serve the interests of the end investor. Every investor needs to become stewards of capital and act accordingly.
Asset managers must also become more collaborative. We must collaborate with the companies we own to support and empower them to deliver sustainable returns, but equally, we must collaborate with other investment managers in order to harness our collective influence effectively.
We need broader skill sets. Modern investment requires deep expertise and we need to substantially increase, broaden and integrate a range of skillsets to be effective stewards of capital. However, without a culture that accepts this broader approach, an investor may never be able to reap the benefits of diverse thinking.
Lastly, and perhaps most importantly, we must have clear and definable objectives. If we cannot measure progress on these issues, we cannot improve. Every investment manager needs a robust framework and process by which they can be judged.
All of these changes are fundamentally rooted in the way in which we curate a culture within investment firms. If we get this right, the asset management industry will go from strength to strength and, even more importantly, achieve a lot of good for our clients and society at large.
It seems to me that the concept of culture has often been considered the preserve of the HR department. The asset management industry needs to be aware how misguided this is. Culture is a critical indicator of future value and must be treated accordingly.