Ethical Performance
inside intelligence for responsible business


transparency would expose speculators’ ill-gotten gains

September 2007

Public disclosure of fund managers’ bonuses would help counter short-termism, says Simon Zadek

The recent turmoil in the financial markets spells disaster for the real owners of capital, and may precipitate a far grimmer set of economic and social consequences. But today’s losses will do little harm to the fortunes earned by the fund managers at the heart of this dirty business. They were amply rewarded when the market was rising, often to the tune of millions, sometimes hundreds of millions, and occasionally billions of dollars apiece.

Which one of them will hand back bonuses that in the light of recent losses look like a perverse and very unfunny joke on the people to whom they are meant to be accountable? None of course, because these bonuses were based on exclusively asymmetrical short-term trading performance – that is, they get paid on the way up, but do not have to pay back as what got pumped up comes down. In fact, vast bonuses were earned on the back of asset valuations inflated beyond their underlying economic sense by the very type of short-term trading practices guaranteed to create booms and busts in perfect rhythm to the cycle of fund performance assessments. After all, when was the last time anyone heard of a crash just before Christmas, when the bonus calculations are made?

Anguished cries of an ‘irrational’ market by journalists and learned experts are entirely misplaced. It is fund managers that have brains, not markets, and it is the logic of their incentive structures that creates super-charged bullish periods in the first place. AccountAbility first highlighted this perverse incentives problem, essentially a case of misaligned accountability, in a report entitled Mainstreaming responsible investment, prepared with the World Economic Forum in 2005. It concluded that without a radical overhaul of the basis on which fund managers are remunerated, the investment community cannot address the sort of sustainability objectives now embodied in various charters and commitments, notably the UN-sponsored Principles for Responsible Investment. Without such an overhaul, signatories, in delivering against the narrower aim of optimal financial returns, will fail in their duty of care to the owners of capital.

The latest financial crisis provides a cause for sad celebration of the significance of the report’s findings. But it need not be this way. Incentives can encourage the success of those fund managers who understand the real economy, and rid us of those whose short-term trading mentality lies at the core of the problem. One step in this direction would be to let the truth be told, through a published list of every bonus that has been earned in recent years by every fund manager involved in today’s failing funds. Then we can see how this compares to the true, medium-to long-term financial value added by these custodians of our wealth.

Simon Zadek is chief executive of AccountAbility and co-author of Mainstreaming responsible investment, which can be downloaded from:

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