In these times of trust deficit, Indian investment managers and investment advisors should work harder to develop and retain trust of investors.
In 2002, in an interview to Financial Engineering News, a magazine published in the US, I told that the only thing that needs to be guarded by manufacturers and sellers of derivatives is ‘Trust’. Losing trust would endanger the basis of why derivative as an asset class exists. The subsequent events leading to the 2008 financial crises would prove that derivatives could well be weapons of mass destruction.
Trust, respect and reputation are the hardest things to develop and built. Investing necessarily calls for a leap of faith and investors would put money only when there is trust.
In these times of trust deficit, Indian investment managers and investment advisors should work harder to develop and retain trust of investors.
Being Responsible Investor
Global investment managers incorporate ESG – environment, social and governance - issues into their investment decision making process.
Environmental issues – like pollution control, deforestation, etc. Would you invest in Sterlite Industries whose plant in Tuticorin had to be shut down by a court order for polluting an entire city? Would you invest in mining companies that don’t care about forests and habitation?
Social Issues - human rights issues, labour practices, etc. – are to be considered. Unfortunately, in India, corporate social responsibility (CSR) is to be mandated by the new Companies Act. So, investors should question Vedanta Aluminium when it destroys tribal life in Orissa for bauxite mining. Maruti Suzuki had to shut out its plant due to violence amounting to arson. Bajaj Auto is currently facing labour strike at one of its plants.
Governance Issues – corporate governance isn’t just about compliance with laws; it is about adopting ethical practices and going beyond compliance. Anecdotal evidence points out that companies with better corporate governance practices outlive bad business cycles, while companies will shady corporate governance practices will not survive even good business environment.
Kautilya wrote about 40 different ways of embezzlement in the Arthasastra in the 3rd century BC. This is one of the earliest records documenting the science of embezzlement. The logic for listing them out is probably to educate supervisors on what to lookout for, using the principle “set a thief to catch a thief”. At the top of the list were techniques related to revenue, in the middle were techniques related to the cost, and the bottom of the list described techniques related to the use of fraudulent measurement standards. So, the basics of defrauding are pretty much known for generations.
Being Activist
In India, institutional shareholders rarely ever drag the company and its management to the courts, suing them for misinformation and non-transparency. While we don’t need a litigious corporate world, we need active shareholders that seek and demand better corporate governance from their investee companies. The motivation to being an activist could be to protect rights of minority shareholders by responding to specific proposals put up by management for shareholder votes.
Being a Responsible Advisor
Mutual fund houses should adopt the global investment performance standards (GIPS) for reporting of fund performance. This will ensure that investors can compare different funds on their own. While mutual fund houses bemoan that investors do not subscribe to equities as an asset classes, it has a lot to do with them not investing in educating and retaining the trust of investors. Practices like clubbing underperforming funds with good performing funds, booking profitable trades to a particular fund, aggressive selling of particular products, etc. have led to investors slowing losing trust.
Investment advisors need to develop relationships with clients built on trust. The role of investment advisors or relationship managers has been diluted by banks, insurance companies and brokerage firms. These advisors are trained to sell products without understanding the client situation. There is lot of mis-selling either because the advisor doesn’t know the risks associated with the products or have failed to understand the client situation. Also, advisors are largely interested in selling products without solving other problems of the client.
Investment management gives great power to investment managers and advisors over money of others. However, that power comes with responsibility to good practices and good governance.
Shriram Subramanian is the Founder and Managing Director of InGovern Research Services, which provides proxy advisory and corporate governance research.
The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.