By Bill Kelly, CEO, CAIA Association The resolution season will soon be upon us. Many will aspire to eat less, exercise more, be better partners or parents, or maybe even sit for the March 2019 CAIA Exam. Resolve doesn’t always make it across the finish line though, even with the very best of intentions, and maybe that is why we have codified laws for many things in society. But shouldn’t principles for the likes of sound corporate governance and responsible investing be codified too?
Japan is home to the world’s second largest stock market and Abenomics has rightfully looked to usher in an era of stronger governance as witnessed by the Stewardship and Corporate Governance Codes issued in 2014 under the auspices of The Financial Services Agency. These codes are equally inspirational and aspirational, where the goal is to avoid setting, or simply aiming for, bare minimum standards under a compulsory check-the-box approach. The question and the acid test: Can we all do the right thing when no one is watching?
Just last week a biennial survey by the Asian Corporate Governance Association was published. The results included an Asia country ranking of corporate governance which saw Japan slip from 4th to 7th place—but the story is likely more complicated than that, as this initiative is still nascent. Alignment of principles across asset owners, asset managers, and the corporations in which they invest, is a continuing and delicate balance but one that must be achieved in the long run. The fact that Japan has put these codes in the remit of the regulator is atypical but toothier, and it seems likely they will eventually work their way up in these league tables.
Parts of the western world are aspiring converts here too. As an example, January of this year saw the launch of a Framework for US Stewardship and Governance under the collective establishment of the Investor Stewardship Group. ESG and responsible investing leadership are less splintered by country thanks to the global efforts of PRI, so what could go wrong with all this well-intentioned aspiration?
The problem might be that capitalists don’t usually do aspiration very well or for very long. Intentions may not be the issue, but it is sometimes hard to reconcile these aspirations with the impatience of the capital that we deploy. Price discovery and short termism dominate our capital markets. Is it any wonder that The World Economic Forum research shows that the average investor holding period for public company stocks has gone from five years in 1976 to just seven months in 2015 and is likely falling further still? Maybe the shrinkage of these publicly listed equities will yield to more patience, engagement, and greater responsibility over in the private equity space as we carefully step over the carcass of Geoffrey the Giraffe.
The latter weeks of January are highly correlated with lapsed gym memberships as aspirations melt back into the reality of busy lives or other calls on our time. Governance, stewardship, and the health of our planet are too important to simply drape on the back of a dusty treadmill and we must turn our aspirational intentions into prescriptive and sustainable actions behind the power of one global shoulder.
Seek diversification, education and know your risk tolerance. Investing is for the long term.
Bill Kelly is the CEO of CAIA Association and a frequent contributor to Portfolio for the Future. Follow Bill on LinkedIn and Twitter.