DISCUSSION The Financial Innovation We Really Need

by Yolanda Villafuerte _______3rd February 2011

Matthew Bishop and Michael Green are the authors of “the Road from Ruin”, whose British edition is launched today (3 February 2011).

On 1 February Tomorrow’s Company gave Matthew a platform, courtesy of our partners at BLP to explore the ideas in their book.

Bishop and Green don’t buy the idea that the crisis is all the fault of the banks. Nor do they want reforms that curb financial innovation. They want more of the right kind of financial innovation. To them that means that more investment institutions take the trouble to monitor what the companies in which they have invested are u to. And that their ultimate clients, the citizens, get involved in understanding where their money is invested. Ethical consumers have helped changed the responsibility levels of retailers. Why not concerned investors voting with their feet and their wallet until the fund management industry responds by selling them products worthy of the name “stewardship”?

There is overwhelming evidence of market failure in the chain that should connect savers and investors with the companies their money is invested in. Much of it was charted in Restoring Trust by Tomorrow’s Company in 2004. People pay charges they should not pay. Fund managers churn portfolios to their own advantage and at the expense of their clients. The capital in our system is long term but it is deployed in a short term way – as Colin Melvin of Hermes put it at the event. Meanwhile the really good deals are done away from the stock market and enjoyed by a sophisticated minority who know better than to put their investments at the mercy of this expensive process.

Yet as Lisa Buckingham, Editor of the Financial Mail on Sunday pointed out, campaigns to get shareholders more involved in voting have failed.

We need to lift the whole thing to another level. To make it easier for clients to know what good stewardship looks like and to be able to ask for products that contain it, as easily as a supermarket shipper can choose a fair trade product on a supermarket shelf.

That is what Tomorrow’s Company is now working towards. The new stewardship code for fund managers means, in theory, that our institutions should be differentiating themselves on the basis of their stewardship. Now let’s turn stewardship into a consumer product that gives some kind of a solution to those consumers who have an idea of what a well-stewarded business looks like and want to find asset managers who will insist on that stewardship.

You can read more on the work that Tomorrow’s Company has carried out on Stewardship in ‘Tomorrow’s Owners: defining, differentiating and rewarding stewardship’and ‘Tomorrow’s Owners: Stewardship of tomorrow’s company’ 

Also, for an opportunity for you to be involved in setting the new agenda on governance and stewardship book your place on our forthcoming conference on the 9th March -Beyond Regulation: improving corporate governance in the UK and beyond

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