Public disclosure of fund managers’ bonuses would help counter short-termism, says Simon Zadek
The recent turmoil in the financial markets spells disaster for the
real owners of capital, and may precipitate a far grimmer set of
economic and social consequences. But today’s losses will do little
harm to the fortunes earned by the fund managers at the heart of this
dirty business. They were amply rewarded when the market was rising,
often to the tune of millions, sometimes hundreds of millions, and
occasionally billions of dollars apiece.
Which one of them will hand back bonuses that in the light of recent
losses look like a perverse and very unfunny joke on the people to whom
they are meant to be accountable? None of course, because these bonuses
were based on exclusively asymmetrical short-term trading performance –
that is, they get paid on the way up, but do not have to pay back as
what got pumped up comes down. In fact, vast bonuses were earned on the
back of asset valuations inflated beyond their underlying economic
sense by the very type of short-term trading practices guaranteed to
create booms and busts in perfect rhythm to the cycle of fund
performance assessments. After all, when was the last time anyone heard
of a crash just before Christmas, when the bonus calculations are made?
Anguished cries of an ‘irrational’ market by journalists and learned
experts are entirely misplaced. It is fund managers that have brains,
not markets, and it is the logic of their incentive structures that
creates super-charged bullish periods in the first place.
AccountAbility first highlighted this perverse incentives problem,
essentially a case of misaligned accountability, in a report entitled Mainstreaming responsible investment,
prepared with the World Economic Forum in 2005. It concluded that
without a radical overhaul of the basis on which fund managers are
remunerated, the investment community cannot address the sort of
sustainability objectives now embodied in various charters and
commitments, notably the UN-sponsored Principles for Responsible
Investment. Without such an overhaul, signatories, in delivering
against the narrower aim of optimal financial returns, will fail in
their duty of care to the owners of capital.
The latest financial crisis provides a cause for sad celebration of the
significance of the report’s findings. But it need not be this way.
Incentives can encourage the success of those fund managers who
understand the real economy, and rid us of those whose short-term
trading mentality lies at the core of the problem. One step in this
direction would be to let the truth be told, through a published list
of every bonus that has been earned in recent years by every fund
manager involved in today’s failing funds. Then we can see how this
compares to the true, medium-to long-term financial value added by
these custodians of our wealth.
Simon Zadek is chief executive of AccountAbility and co-author of Mainstreaming responsible investment, which can be downloaded from: www.accountability21.net
