Saturday, November 30, 2013

Investment, Architecture and Stewardship

On a visit to my son the other day, I was leafing through a back issue of ArchitectureBoston (Spring 2013), where I found an article - an interview, really - on a conversation about the education of architects. It opened with this quote, from the 19th Century: "Shall the pupil of architecture be educated in some mechanical workshop, in an art studio or a polytechnical school?"

One of the interviewees, Nadar Tehrani, offered this insightful comment: "What's remarkable is all the other things that quote overlooks that we consider indispensable to the study of architecture today - history, anthropology, sociology..."

Buildings define our public spaces, the spaces we share with others. Building architects are the co-creators and co-curators of our public spaces; stewards, really, of the shared spaces within which we live and work in community together.

The education of building architects has evolved so that it now includes an understanding of how architecture itself has evolved, over time and within the changing spaces that buildings define and that define the possibilities for how we can live in community together.


I imagine it is because the profession has built up over time an institutional memory of how bad the experience can be when buildings fail to define public spaces effectively.  There is as much art as there is engineering in the design of effective public spaces, and just as all art evolves out of the art that went before it, architecture, too, has learned to evolve out of the architecture that preceded it. And not just the architecture, but the entire human experience of living together, in community, within publicly shared spaces that are co-created and co-curated through building design, construction and use.

Architects are stewards of our experience of living in community, in publicly shared spaces that change from time to time, and over time, as our economy, our technology and our society also change from time to time, and over time. As stewards, they must have a sense of the whole, and not just their part.

The parallels are strong to Pension Trustees, who as stewards of our retirement savings, are also evolving into stewards of our shared experiences of prosperity across the generations. This is new. Before the 1970s, pensions were not significant contributors to wealth creation.  But it is happening. Since the 1970s, pensions have grown is scope and scale, to the point where some individually, and all taken together, now drive the global financial markets, and that drives the global economy, co-creating and co-curating our shared prosperity (and also our episodic losses of shared prosperity - think 2008).

Where building architects use the design of buildings to co-create and co-curate our public spaces, Pension Trustees use the design of their investments and investment portfolios to co-create and co-curate our shared prosperity.

The parallels to education are also strong. The ideal Pension Trustee will be well-grounded in the mechanics of investing; the polytechnics of technology, industry and trade; and also in history, anthropology, sociology and all the other aspects of the story of the evolution of knowledge, work and wealth, from time to time, and over time, that sometimes delivers prosperity, and sometimes does not.

There is as much art as there is mathematics to investing in new wealth creation. Like art and like architecture, new wealth evolves out the wealth that preceded it.

And just as thoughtless building leads to ineffective sharing of public spaces, thoughtless investing leads to ineffective sharing of prosperity.

Good Pension Trustees know that. Evergreen Trustees act on it.

Friday, November 1, 2013

A New Choice. A New Narrative.

Yesterday, I had the chance to visit with Dr. Philip Grant, a Research Fellow in Social Studies of Finance at EPIFM, School of Social and Political Sciences, University of Edinburgh.

Philip is in New York doing anthropological research on how the capital markets work at an interpersonal level. Fascinating, and very timely.

We met for a visit and some lunch at Douro, in Greenwich CT, with my colleagues at the Capital Institute.  Philip wanted to know more about the Evergreen hypothesis as an interesting variation on the main theme of his research, which focuses on current standard practices in securities trading.

Among the many excellent topics Philip raised was a question about why an enterprise would choose evergreen over the usual corporate finance solution. The answer comes in the form of a choice about who the enterprise wants to be accountable to, and what it wants to be accountable for, when it accepts other people's money as equity capital.

In the default choice of corporate finance, the enterprise becomes accountable to the securities trading markets for constantly increasing the price of financialized fractional shares. This gets phrased as growth and it provides the liquidity that is the primary value proposition that securities trading offers to investors: instant liquidity, at an uncertain price. Growth provides the expectation that the selling price, although uncertain, will usually be higher than the purchase price, especially over time.

In the new choice of pension finance, the enterprise becomes accountable to the stewards of the pension trust for passing agreed equity payback milestones that are established through negotiation. As those milestones are passed, equity payback is achieved, and accountability to the providers of that equity diminishes. It never goes away entirely, because the equity is evergreen, but as payback milestones are passed, and sharing formulas get reset, enterprise leaders earn back both a higher share in the profits they are generating, and more autonomy in running the enterprise going forward.

Its a path to ownership earnback.

In the default standard corporate finance option, Management never earns back ownership. It always works for the stock market and always has to be "maximizing shareholder value" in a perpetual present.

In the new evergreen pension finance option, leadership does earn back ownership, and always works to optimize competitiveness under changing competitive conditions.

It's a new choice, that requires a new narrative to understand.

Which do you choose? Let's discuss.

Article in Investment & Pensions Europe

Raj Thamotheram once again generously shared his byline, this time in an article out today in Investment & Pensions Europe.

This piece on ESG 2.0 presents our thoughts about what PRI members could usefully focus on in this next and rather critical phase of the evolving conversation on institutionally responsible investing.

Whenever there are internal governance debates and tensions over competiing strategies – important as these may be – it is sometimes also useful to look outside and ask the hard question, so what are we here for now?  Here's what Raj and I agree would make a good narrative going forward. We look forward to hearing what you think too.