Thursday, October 31, 2013

Enterprise. Finance. Choice.

Enterprise is a physical reality. It is people coming together to do work that creates wealth for themselves by contributing to the wealth of choices available to others.

Finance is a specialized form of enterprise. It does the work of aggregating savings from individuals to form capital for investment in enterprise.

Finance is a fundamentally extractive activity. It extracts value from the enterprises it funds. This extraction has to be restrained. Otherwise, society, the economy and the environment within which we all live cannot flourish.

There are many forms of finance, each with its own methods of aggregating savings, sponsoring enterprise and restraining its extractive activities.  The list includes: household finance; communal finance; religious/theocratic finance; secular/aristocratic/democratic finance; commercial/bank finance; partnership/mercantile finance; corporate/industrial finance; and the newest form of finance, which is pension/retirement finance.

Pensions are an invention of the 20th Century, but they are really only just coming into their own right now, today, in the 21st Century.

A pension is a form of what may be called an evergreen investment trust. It aggregates savings from, or on behalf of, individuals who come in and out of the plan according to the rhythms of their own lives. It invests in enterprises that flourish and fade over time according to the rhythms of choice and change. Across the generations and the innovations, the plan itself endures. It continues, ongoing and open-ended. Evergreen.

The corporation is also a form of evergreen investment trust. It too aggregates savings from individuals who, as shareholders, enter and exit the corporation according to the idiosyncratic rhythms of their own, individual lives. It too invests in enterprises, as business units or subsidiaries, that flourish and fade according to the rhythms of choice and change within an open-ended and evolving economy. It, too, endures across the generation and the innovations. At least in theory. In practice, innovation can be a challenge to the longevity of the corporation.

Pensions and corporations are both forms of evergreen investment trust, but each is formed for its own purpose. The pension is formed for the purpose of providing income security in retirement across the generations. The corporation is formed to finance growth.

Pensions should be investing directly in enterprise, in competition with corporations, offering enterprise a choice.

Instead, they are investing in corporations, denying enterprise a choice. In the process, they are not achieving their mission of providing income security in retirement across the generations. They are also releasing the restraints on the extractive processes of the corporate form, so that society, the economy and the environment are suffering from an excess of wealth extraction by the corporation.

This has to change.  And so it will.

Tuesday, October 29, 2013

Bifurcating the Narrative

In his Strategy Snack for yesterday, October 29, 2013 in the Strategic Management Bureau, Paul Barnett tells the story of an exchange he had with Professor Malcolm McDonald of Cranfield University over the use of shareholder value as a measure of corporate performance.  Professor McDonald defended its use, while Paul offered this observation:

"Between 1975 and 2010, the average period for holding shares on the New York Stock Exchange declined from six years to about six months." 

Around 1975 is when Pensions, following the lead of Foundations, applying the newest reinterpretation of the fiduciary standards of prudence by the Uniform Management of Institutional Funds Act, first started trading in securities, seeking equity rates of total return.  Up until then, Pensions invested mostly in buy-and-hold bonds, with some dividend stocks.

By 2010, Pensions had grown to control approximately $30 Trillion USD of our collective retirement savings, representing about half the total value of all Global Equities.

Between 1975 and 2010 the default form of investment became securities trading, and the standard practice of securities trading morphed from buy-and-hold to buy-low-to-sell-high to buy-high-to-sell-higher.  Along the way, the shelf life of trading positions got shorter and shorter. We got the current state of short-termism, with all its many complications for pensions, for the markets, and for us all.

Is there a connection between the change of pension investing to securities trading, the growth in savings entrusted to pensions and the increase in short-termism, or is it all just a coincidence?

Let's assume it is not coincidence. Let's assume it is a causal connection, that pensions as large and powerful investors are driving short-termism, and the current obsession with quarterly earnings and "maximizing shareholder value" as the single point of value by which corporate performance is measured.

Let's assume this is a problem and that it needs to be fixed.  Finally, let's assume that to fix this problem, we have to bifurcate the narratives on investment and wealth creation. We need to have one narrative for the new form of pension investor, for sound pension investment and for effective pension leadership. We need to have another narrative for the old form of retail investor, for sound corporate investment and for effective corporate leadership.

The corporate narrative can continue to be the familiar story of fractionalized shares, diversified portfolios, and measuring wealth creation only indirectly, through growth in share price.

The pension narrative must be different. It must begin with the special purpose and the special power that pensions have as stewards of our income security in retirement across the generations. It must build a new form of investment to fit the special purposes of this new form and investor. It must measure wealth creation directly, as cash flow generation through adaptive co-creation in a robust, resilient and regenerative economy that evolves over time, through an open-ended and ongoing process of change, and adaptation to change, through innovation and transformation.

How can we use the Public Humanities to help us bifurcate this narrative, and bring an end to short-termism, with its many complications?

Friday, October 25, 2013

Public Equities vs. Private Companies

Earlier this year, John Asker and Alexander Ljungqvist, both of NYU-Stern teamed up with Joan Farre-Mensa, of Harvard, to publish the results of an interesting study they performed, with the engaging title: "Corporate Investment and Stock Market Listing: A Puzzle?"

They state their conclusion as follows:

"This paper compares the investment behavior of comparable public and private firms, matched primarily on size and industry. Our results show that relative to private firms, comparable public firms invest considerably less and in a way that is significantly less responsive to changes in investment opportunities, especially in industries in which stock prices are quite sensitive to earnings news."

This conclusion bolsters our Evergreen hypothesis that pensions will realize better portfolio performance while helping to build a better world by de-financializing their portfolios, replacing Public Equities with Evergreen sponsorship of private companies.

Thursday, October 24, 2013

Guardian post re-posted in

The blogpost on Evergreen Direct Investing that originally appeared in The Guardian has been re-posted in

>>>  click here

Tuesday, October 22, 2013

Article in the Guardian

This article appears in the Guardian Sustainable Business blog

Evergreen investing is introduced as a way to help restore the balance that has been lost been speculation and investment.

Sunday, October 20, 2013

Opening Up Spaces for Innovating New Forms of Investment

On Friday past, I attended a conference on ESG in the Manager Selection Process hosted by Tony Hay and organized by Rachel Pine of Responsible Investor.

This Conference focused on Institutional ESG.  (ESG stands for Environmental, Social and Governance). During the wrap-up of this interesting all day presentation of perspectives, Tony Hay, Publisher of Responsible Investor, offered these two points, among others

  1. there are mixed messages circulating about whether ESG is stalled, or going mainstream, but nonetheless the conversation is continuing and gaining participants
  2. as the scope of conversation expands there is a growing need to bring consistency to the terminology
As a lawyer expert in negotiated investment, legal drafting and tax law, I am very in tune to the power of precise vocabulary (and also to the dangers of sloppy language). I am equally sensitive to the brain-numbing dullness of the vocabulary building process, so these twin challenges resonate very strongly with me.

I would propose that the ESGers need to agree on a statement of their mission and vision, and when I sort through the chatter, it becomes clear to me that ESG has twin missions.

One is to serve as the conscience of the public equities markets, and a stalwart against the rampant miscreant market manipulation associated with 2008 and other catastrophic financial market events.
Two is to promote institutional responsibility in the deployment, recovery and redeployment of Other People's Money entrusted to their care to sustainably realize fiduciary returns while contributing to a better world for the people whose money they have charge over.

The first mission, above, requires that the movement stay, as it has, within the existing default form of investment as financialized asset trading, and work as they are to increase transparency through additional disclosure and to improve accountability through increased shareholder activism.

The second mission, however, requires that they begin some new work. This is the work required to open up spaces where innovation can take place. The required innovation is new forms of investment that are purpose-built to achieve the twin goals of sustainably realizing fiduciary returns while building a better world.

One innovation may prove to be the Evergreen hypothesis. Other and better innovations may also be found, once the work is begun in earnest.  

First step. This work must begin in earnest.

Saturday, October 19, 2013

Article on ESG for National Ethical Investment Week

My friend and colleague, Raj Thamothermam, generously shared the by-line on an article published last week by in its Guide to National Ethical Investment Week (UK).

 See pages 20-23.

Monday, October 7, 2013

Both ESG 1.0 and ESG 2.0

Pensions and other stewards of an evergreen trust are a new form of INVESTOR.

Evergreen investing is a new form of INVESTMENT.

That gives us two forms of investor: time-limted and evergreen.

It gives us two forms of investment: the default form of securities trading, and the new form of evergreen investing.

The new form of evergreen investing gives the new form of evergreen investor more choice. They can use the old form of securities trading, and they can also choose the new form of evergreen investing.

The default form of securities trading is purpose-built to provide the liquidity required by time-limited investors, so they can buy when they can, and sell when they need to.

The new form of evergreen investing is purpose-built to provide longevity to evergreen investors, so they can participate directly in wealth creation matching cash inflows from sponsored enterprises to cash outflows to their entrusted beneficiaries.

The original form of ESG 1.0 works with the default form of securities trading, increasing disclosure in support of stock selection and shareholder activism.

The new form of ESG 2.0 works with the new form of evergreen investing, fusing stewardship values with time-tested equity payback structures common in real estate and other cash-flow-oriented investments.

Together, they are a complete solution.

Saturday, October 5, 2013

Will we learn the lessons of history, or relive them?

For many people, history is very personal. If it did not happen to them, it does not matter.

From those who we entrusts as stewards of our future income security in retirement, and by extension, of the future of possibilities for prosperity, we can, should and must demand more.

We must insist that they take a long view of the past, to support their long view of the future. They must learn for us the lessons that history has to teach.

The lesson begins with the story of what happens when securities trading teams up with trusts for aggregating control over Other People's Money.

We should have learned this lesson the first time, back at the end of the 19th Century, when life insurance was a new technology, and this new form of evergreen trust started speculating with Other People's Money. We got the Panic of 1897 that almost bankrupted the United States, and lead to the trust-busting of the early 1900s.  It also lead to laws prohibiting insurance companies from trading securities with premium dollars, prohibitions that still exist, as the Legal List administered by the National Association of Insurance Commissioners ("NAIC").

We didn't learn, because it happened again, in a modified form, in the 1920's.  This time, it was commercial banks lending to speculators "on margin", that is, against their portfolios of speculative trading positions, as collateral. We all know what happened then. The Crash of 1929, followed by the Great Depression.  The fix came in the form of Glass-Steagal, a law that prohibited commercial banks from participating in securities trading. A law that was repealed in the late 1990s.

We still have not learned. Now it is happening again, this time with pension funds, speculating in the securities markets with our retirement savings. This time, nothing has really changed. At least not yet.

We remain caught in a trap of Casino Capitalism that is fueled by professionally managed pensions and other retirement savings committed to the default form of investment as securities trading. 

The problem with these managed funds is that they are open-ended, ongoing and therefor evergreen. There is no natural end-date, when the books can be closed and the accounts settled. They just keep going. 

They are then being double-stacked on top of financialized forms of enterprise ownership that are also open-ended, ongoing, and evergreen. Also no end-date, when the books are closed and the accounts settled. 

That should sound like a natural match, but it is not. There is no natural way for cash to flow out of financialized enterprise and into stewardship trusts. Instead, the money gets caught in a closed loop of speculative trading on financial asset/securities valuations in a zero-sum game of extracting value by outsmarting the other guy. We get what is now called systemic risk. All the values get inflated.

2008 proved that evergreen trusts and securities trading don't mix. 

The fix this time is easy. It does not require new legislation or government regulation. The legal profession can do it. Pensions themselves can do it. All it takes is an upgrade in the standards of fiduciary duties of loyalty, prudence and competence, an upgrade that recognizes the lessons we have learned about pension investing over the last 40 years, since the last time we upgraded the standards for fiduciaries, to empower them to speculate in securities in the belief that diversification would provide protection. 

Friday, October 4, 2013

A Moment of Possibility

I had the pleasure yesterday of meeting in Providence for coffee with Bill Densmore. Bill is one of a small group who are coming together as Bill enters this conversation with a background in Journalism.

Bill told me this story. His Dad was a corporate executive in the old days, when corporations worked for all their stakeholders, not just their market-quoted share price.  That makes Bill aware that something has changed. That we can't keep doing the things we are doing, the way we are doing them. Bill reports that he finds, as a Journalist, that we are now in a moment of possibility. To say that we need to make this kind of fundamental change is no longer received as heretical, whereas even just a couple of years ago, it might be. However, Bill sees lots of silos. Different people banding together around single issues they are passionate about, but not interacting with other people who are equally passionate about different, but aligned issues. Bill sees a need and an opportunity for some form of umbrella organizing activity, that gets these silos interacting, while also maintaining their own focus, integrity and authenticity.

Maybe Evergreen?

It touches many issues, empowers actions on all the issues that it touches, but does not dictate policy to any of them.  To the contrary, we need to engage with all these silos, so they can inform Evergreen with the right policies on each of their substantive issues: income inequality/economic inclusiveness; basic research, education and innovation; climate risk, environmental degradation and ecological integrity.  And many others.

PS - Bill also expressed anxiety about the survival of Journalism in the social media age. We agree that is a problem. How can you have democracy without Journalism?

Thursday, October 3, 2013

A Safe Place to Try

If we do not try, we cannot succeed.

This is an experiment of high importance to everyone who is retired, or who is planning to retire, and anyone who wants to see the Casino Capitalism of today transformed into a new, co-creative capitalism for the 21st Century.

We have our hypothesis: pension trusts have the size, the purpose, the power and the longevity required to generalize the proven practices of cash flow based investing common in Real Estate to investment in enterprise of any kind; they have as fiduciaries both the right and the responsibility to use those unique capabilities to optimize their ability to provide income security in retirement to successive generations of current and future retirees.

We have our expectations. There will be a natural fit between enterprise as a time series that is open-ended, ongoing, and therefor evergreen, wealth creation as a time series that is also open-ended, ongoing and therefor evergreen and pension trusts that are also a time series that is open-ended, ongoing and therefor evergreen, all aligned around the shared values of optimizing cash flows over time for enterprise, for investment, for society, for the economy and for the environment within which we all must live, work, and retire.

The advantages to pension investing will include:
  1. engineered returns
  2. controlled costs
  3. chosen impacts
  4. streamlined design
  5. transparent management
The benefits to plan executives, sponsors and participants will include:
  • availability of benefits, now and later;
  • adequacy of benefits, now and later;
  • affordability of benefits, now and later.
See below.

Additional benefits:
  • to society: economic inclusiveness and financial authenticity
  • to the economy: robust, resilient and regenerative patterns of wealth circulation that drive sustainable prosperity as constant, continuous and enduring (not boom-and-bust)
  • to the environment: ownership of impacts on climate and resources
We need as safe place to try
  • de-financializing established enterprise
  • sponsoring new enterprise
  • investing for impact.

A pilot project, away from the engrained habits (and vested interests) of the default form of investment as securities trading, that is scientifically controlled and rigorously tested along multiple measures: strategy, leadership, governance, fiduciary responsibility, teaching and learning, impacts on society, the economy and the environment.

What else?

Wednesday, October 2, 2013

Linking Inequality for All with Pension Reform

Yesterday, Sharan Burrow, General Secretary of the International Trade Union Confederation, gave a speech before the United Nations Principles of Responsible Investing convening in Cape Town, South Africa.

Last night, she emailed me the text of her remarks.


In it, Sharan makes the connection that Robert Reich has not yet made in his powerful documentary film, Inequality for All, about the link between pension investing, economic inclusiveness and environmental ownership for a truly sustainable prosperity in the 21st Century.

Here is an excerpt.

"The Central Role of Pension Funds

"In the discussion on [Long Term Investing] by institutional investors, it is important to distinguish between asset owners (pension funds, insurance companies, sovereign wealth funds) and asset managers (asset management firms, bank asset management branches) and to give primacy to the former over the latter. That is particular true for pension funds with liabilities that can span over 20-30 years, (i.e., the time needed to accumulate capital to finance workers right to retirement). With over USD30tr assets under management, pension funds represent an important class of asset owners.

"Importantly, pension funds have a social purpose, that of financing workers right to retirement and most often they are established as part of a collective bargaining agreement and include member-nominated representatives on their board of directors. Given their social purpose, it would  make sense for pension funds to embrace fully both a negative and positive list approach to LTI shifting away from short-term to long-term investments, mainstreaming responsible investment practices, greater portfolio exposure to infrastructure and job creation projects."

Once pensions fully embrace their stewardship responsibilities to invest with social purpose by going long term, it is a easy step to going evergreen.

Tuesday, October 1, 2013

Recapping Progress Towards Capitalism 2.0

Sharan Burrow of the ITUC got us started with her call for pensions to "Hit the reset button".

Suzanne Lynne Duncan of State Street Center for Applied Research began the answer with her "Influential Investor".

Anne Simpson at CalPERS is now at the forefront, with her efforts to transform one of the world's largest pension plans from just being Wall Street's biggest customer, to becoming a center of true stewardship.

This comes next, upgrading pension investing by modernizing standards of fiduciary prudence and evergreening pension portfolios

That will clear the way for a renewed conversation to put ecological health at the heart of a new regenerative prosperity of adaptively co-created capitalism.

Capitalism 2.0

Another small step towards spreading the word on evergreen was taken yesterday, with a piece on evergreen investing that got published over US New & World Report. See link, below