Will the last institutional investor supporting democratic institutions turn out the lights?

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We have been exploring explanations for investor silence about the US presidential election, both in the run-up and now in the difficult transition. The active corrosion of democratic standards and attacks on truth are eroding trust and accentuating voter polarization and popular discontent. Few politicians are above denying some facts some of the time, but it is second nature to populists and dictators. Given the (still) outsized global influence of the US, this is likely to have high costs in the short, medium and longer term domestically and internationally (think Hungary, Brazil or Venezuela on steroids).

If the US Chamber of Commerce, the Business Roundtable, the American Enterprise Institute, associations for hedge funds and private equity managers can go public – along with several Main Street companies and CEOs who all have customer facing brands – then we really don’t understand why most institutional investment managers and the “responsible” mainstream investment trade groups can’t do so too. There are notable exceptions: Blackrock, Blackstone, and Marsh & McLennan were among a group of 166 New York business leaders publicly urging for an orderly transition. The Principles of Responsible Investment published a blog. But they are the minority.  Most fund managers have been quiet and as of today, we have seen no press releases or even social media acknowledgements from, for example, the Council for Institutional Investors, the Investment Company Institute or the International Corporate Governance Network.

It is essential to try to get to the bottom of what we believe is yet another systemic governance failure. Why? These investor failures are not new, as independent commentators who experienced the Global Financial Crisis can attest. They will repeat themselves without corrective action.

Talking to a range of contacts, we are observing three main reasons for this:

A) Some fund management executives actively support the Trump administration’s agenda on tax cuts and deregulation (and possibly his worldview). They wouldn’t mind more – democratic standards be damned. Political donations are one indicator of this leaning: Fund Fire reports a big difference between employee and executive donations – and note that Senator McConnell is the biggest recipient of donations by investment executives, although interestingly, even one of Trump’s biggest donors – Blackstone’s Stephen Schwarzman – has called on him to resign and hand over to Biden.

B) Some lack the courage of those who have spoken out. They fear retaliation. They hope the issue goes away or that others will take care of them (a tragedy of the commons issue). This courage deficit is reflected by their trade groups who are keen to avoid internal conflicts – many vocal laggards and few persuasive leaders. These attitudes are a mix of temperament but also experience (e.g. as Bob Eccles notes, investors were also less responsive to the pandemic than corporations). Occasionally these views are informed by rigid approaches to fiduciary duty. But chasing alpha and safeguarding beta are different mindsets and demand different skills/experiences.

C) Some feel at sea or helpless in the face of something they really didn’t think was possible for lack of political risk foresight, perhaps compounded by less contact with those outside their professional bubble. The financial bubble was certain that Hillary Clinton would win too, and dismissive of those who warned what Trump would do unless he was defeated by a landslide. Traditional fund managers showed low engagement with election integrity projects like Leadership Now Project, Civic Alliance etc.

What other reasons do you see? What is the mix of reasons at your organization? What can you do to help your firm be a bigger part of the solution on a timescale that’s relevant? It is now 19 days after the election.

As of today (23 November), The General Service Administration has signalled that the transition can formally begin, effectively acknowledged Biden won. The frivolous legal strategy has been damaging to democracy, heightened polarisation and set a precedent for impaired transitions of power going forward.  But for now at least, the crisis seems over.  The question is what needs to be learnt from these 19 days of self imposed silence, including whether today’s statement from New York business leaders was decisive. Share your thoughts (info at preventablesurprises dot com).

 

Bill Baue, Senior Director, r3.0, Senior Adviser, Preventable Surprises

Keith L. Johnson, Chair, Institutional Investor Services Group, Reinhart Boerner Van Deuren s.c., Senior Adviser, Preventable Surprises

Thomas O. Murtha, Columbia University, Senior Adviser, Preventable Surprises

Michael Musuraca, Chair, Preventable Surprises

Richard D. Pancost, Head of School Earth Sciences, Cabot Institute for the Environment, University of Bristol, Senior Adviser, Preventable Surprises

Jerome Tagger, CEO, Preventable Surprises

Alison Taylor, Executive Director, Ethical Systems

Raj Thamotheram, Senior Adviser and founder, Preventable Surprises

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