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The sell-side doesn’t have to be the dark side!

I have had a wonderful summer since stepping down as CEO of Tomorrow’s Company. For three months I didn’t read anything except fiction and recipe books! Now I am finding I can stand back and see how much progress has been made on the agenda Tomorrow’s Company first set out 21 years ago. Take a phrase like ‘licence to operate’ which Tomorrow’s Company didn’t invent, but made part of the business language in the nineties. I remember meeting the then head of the Institute of Directors who was furious that we had dared to undermine the entrepreneurial freedom of business by suggesting that it needed to work within an informal licence to operate. Today that phrase is so widely accepted that it is used to talk about the very minimum companies must do to be socially acceptable. Or take the attitudes of the investment community. In the nineties, it would have been unimaginable that the asset managers trade body would come out, as they have done in their report in May, and tell their members to stop doing quarterly reporting because it was undermining a long-term perspective. The association of the two words ‘investor’ and ‘stewardship’ which started with our 2008 report Tomorrow’s owners – stewardship of tomorrow’s company is another area of progress for which Tomorrow’s Company is happy to be acknowledged. It led to the formation of the Stewardship Alliance – a growing group of institutional investors who are determined to take stewardship seriously, way beyond the obligations of voting on remuneration packages. Their new report defining what good investor stewardship looks like is soon to be published. In the meantime, one of the members of the Stewardship Alliance, Aviva Investors, has taken the lead, working with Tomorrow’s Company, to describe some of the changes that need to happen in the world of investment research, with particular reference to sell-side research. Tomorrow’s Company recently hosted a private discussion for business leaders where, not for the first time, an experienced listed company CEO with a passion for sustainability bemoaned the fact that analysts never asked questions about the company’s commitment to sustainability, or its human capital strategy, or how it might deal with future risks to its licence to operate. The report Investment Research: Time for a brave new world? (reviewed in FTfm), which Aviva Investors have published is based on research and interviews conducted by Tomorrow’s Company and a survey by EXTEL. It looks at some of the reasons for this gap between the factors that will drive long-term investor returns, and the factors which analysts typically talk about. 42% of analysts agree that sell-side research has a detrimental short-term focus. Only 12% of mainstream analysts’ time is spent researching companies’ prospects beyond a 12-month horizon. Now with the EU’s Markets in Financial Instruments Directive (MiFID ii) the funding of investment research is up for grabs. And the report suggests the time is right for policymakers and all market participants to change the incentives and align their behaviours to long-term wealth creation. Asset owners, asset managers, and CEOs and chairmen and FDs of companies each have their part to play in this process. It’s the same story. Change is coming. The advantage will lie with those who understand that this change brings opportunity and who see how they can work up and down the value chain to accelerate it and bring themselves more in line with the public’s expectations and their licence to operate. Asset managers can work to ensure that more money and time is spent on investment research that goes beyond the noise and volatility of short-term investing to an understanding of the fundamentals. Asset owners – pensions, insurance companies, sovereign wealth funds – can drive this behaviour by making it part of their conditions for doing business with asset managers. Investment banks who employ the sell-side researchers can ask themselves whether they can really claim to be good citizens and worthy of our trust if they are not actively promoting research which focuses on long-term investment alongside the inevitable short-term focus on research that may drive their trading income. It’s just one more piece in the stewardship jigsaw that we can expect to fall into place over the next decade. Today it may sound naïve and idealistic to suggest that sell-side research will predominantly focus on the real drivers of long-term performance. But who might have predicted 10 years ago that the asset management industry would be saying that it no longer believed in quarterly reporting?

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