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Competition has been the core driver of evolution since life began. This has been as true for single-celled organisms as it has been for the incredible achievements of the human race.
Healthy competition, that is.
Healthy competition drives us to improve and collaborate because we cannot win on our own, or without constant improvement. Healthy competition requires a level playing field, teamwork, humility from the winners and respect for them.
Likewise, unhealthy or unfair competition is a less than zero sum game. And the problem with that is that we are all actually invested in the sum, not just a few selected parts — just as doping in sport damages sport as a whole.
That’s why we — as the people whose money it is that is actually being invested, and our investment managers who we pay to look after that money — should all support fair competition and seek to prevent the companies we collectively own from trying to gain unfair advantage.
As investors, through our Isas and pension funds, our money is invested very broadly across the economy and across the world. As citizens, we all benefit from national and global economic growth. It creates jobs, produces goods and services for us to consume and delivers tax revenues that underpin education, infrastructure and the welfare state.
It may be superficially attractive to think that we will be better off if a company or an industry that we are invested in can somehow tilt the playing field in their favour. And indeed, for a while, as investors, we may feel richer. But we will ultimately be poorer if that company or that industry later goes on to bring down the financial system (whose debts are then transferred to us), pollute the planet, use socially offensive tax planning or pay structures, sell us food that makes us unhealthy or create drugs that harm us.
Unhealthy competition inspires the beneficiaries to complacency and diminishes the drive to improve. It inhibits challengers. Why bother if you can’t win? If the losers then decide to fight to tilt the playing field in their direction, the cycle of corruption is complete.
Unhealthy competition creates gross inequality — both within single states and globally. And while there are a very few big winners, the total outcome is less than the sum of the parts. It reduces our personal wealth but more importantly, it keeps much of the human race in poverty and fear of imminent violence.
Big issues, indeed. But what role can “stewardship” of your money by investment managers play in helping to drive change and creating a win-win outcome? Potentially a very significant role, but investment managers need to recognise that investors are exposed to more than just this bank or that motor manufacturer, or any other company that they are holding on your behalf.
Investment managers should choose a company because they believe that its strategy and its management have the ability to deliver long term, sustainable returns for your benefit. But managers should do so on the basis that the company can win in a healthy competition and they should use their engagement with the company and their voting power to prevent any attempts to unbalance the playing field.
Individuals save and invest for many reasons; to protect themselves from financial shocks, to pay for the things they dream of and to enable them to enjoy a decent standard of living as they get older. As a consequence, the vast majority of individuals have objectives that can be measured in decades, not months.
That’s why great stewardship by investment managers can and should focus on long-term strategies and avoid shine, crash and burn. Good stewards support, encourage and cajole companies to deliver long-term returns that benefit not just you, their clients, but society as a whole — of which you, the client, are of course a part.
Good stewardship means investment managers working with the companies in which they invest on your behalf on a very wide range of issues. They include:
● Environmental sustainability — it’s not a good long-term investment if it’s fouling its own nest. And the planet is ultimately the nest of every single one of us.
● Health and safety — think BP, think VW. Can investment managers be better predictors and averters of problems?
● Diversity — gender, age, social, ethnic and educational background. The more diverse the thinking about problems, the better the solutions.
● Human capital development — companies that treat their employees well and help them add value to themselves through training and teaching them new skills are more likely to be long-term winners.
● Strategy — does the company have a winning long-term strategy and does it have a winning executive team to deliver it?
● Incentives — does pay incentivise long term success and avoid perverse outcomes?
● Governance — does the board have the right people to support and oversee management, do they get the right information, do they have good conversations at board meetings that help managers do a better job?
The next frontier for investment managers is for them to use their influence, their clout and (if necessary) their votes to promote healthy competition. This means supporting companies in making sure that governments and policymakers understand their businesses, and the pros and cons of various policy and regulatory initiatives. But it is also a means of telling companies not to seek to gain undue influence through lobbying or funding of politicians or political parties.
This is crucial if investment managers are to bear down on unhealthy competition and promote healthy competition that produces thriving companies that benefit us both as investors and as citizens.
You can play your part by making sure that you are not dazzled by last year’s returns, that you support investment managers who invest for the long term and who undertake stewardship as an integrated part of their investment methodology. This does not mean giving poor performance a free pass, just recognising that a 12-month period is not a worthwhile defining period for performance — good or bad.
The investment management industry, which manages £6.5tn from the UK alone, can play a crucial role in building a better culture of healthy competition and sustainable long-term returns where the sum is greater than the parts. But investment managers will naturally do what their customers ask them to do. Transformational change is as much in your hands as theirs.