The annual general meeting (AGM) season is in full swing and chief executives at many of the world’s biggest firms are facing their shareholders, discussing the past year’s performance, and laying out their plans for the year ahead.
There have been an increasing number of shareholder revolts in recent years, no doubt prompted in some part by the backlash of excessive bonuses. This year will doubtless be no different.
After all, for many investors AGM discussions spur them to re-evaluate their portfolios and do all they can to ensure they’re invested for the highest returns with the safest pair of hands. Against this backdrop of continued shareholder questioning, it is becoming increasingly clear that we need to redress the City’s flawed remuneration practices.
If we look to the past for a moment, I would suggest that behind many of the fines levied at financial institutions since the 2008 crash were individuals in dogged pursuit of meeting their personal targets or ‘key performance indicators’ (KPIs).
From HSBC’s failure to block transactions involving terrorists, rogue regimes and drug lords to JP Morgan’s London Whale, the fines have totalled many millions. Recently, even the Bank of England was implicated in the Libor interest rate rigging scandal of 2008, suggesting unethical behaviour has been endemic at all levels within the industry.
In my view, the relentless focus on personal gain promotes a culture of greed and of excessive risk taking.
At its root, I believe a re-evaluation of the individual KPI culture is needed. This would ensure that we are able to rebuild the reputation of our industry and foster an environment where transparency and responsibility prevails.
Moving away from the current system – where many companies have individual KPIs against which employees are financially rewarded – and instead utilising a system where the emphasis is on the long-term success of the business would help to promote a culture of greater accountability.
It would do so by removing the focus on the individual: no longer would a Christmas bonus this year be the biggest motivation, instead the overall success of the business (potentially as measured by the share price) would be a more relevant indicator of achievement.
I’m a staunch believer in the power of the team. Collectively, bright professionals can achieve great things for their clients and strong returns for their shareholders if a team approach rather than an individual approach is adopted. It’s an approach we’ve adopted at City of London Investment Management, and, when you consider the good long-term performance against our peers of both our share price and our managed funds performance, it’s one I’m confident to keep advocating.
While I can only talk from my own experience, it seems to me that any system which encourages integrity and transparency should be considered a proof-point for how the financial services industry can improve and progress.
In my opinion, a ‘one-size-fits-all’ approach is something we should absolutely avoid. For example, what would work to promote responsible practices at a banking behemoth is not necessarily right for a boutique asset manager.
To allow the industry to thrive, it’s important that regulators, lobbyists and politicians are prepared to be flexible in the reforms they demand. They should listen to what’s working and what’s not and be prepared to adjust their thinking accordingly.
Now is the time for rebuilding the reputation of the City by developing a more accountable and accessible financial services industry which moves away from individual KPIs.
Employing people committed to sustainable shareholder returns delivered through responsible practices is therefore vital. Improved behavioural practices will, at a high level, result in fewer fines while in the process re-establishing respect for the industry. Furthermore, over time it will lead to lower costs in the fund management industry.
The significant culture shift toward responsibility and away from the greed of individuals will facilitate a reduction in internal audit, compliance and HR costs. This will benefit the asset manager, their shareholders and their clients.
Barry Olliff is chief executive officer of the City of London Investment Group