INTERVIEW: Else Bos & Lars Dijkstra talk long term
Asset owner vs asset manager
Pension funds, asset managers and companies focus too much on the short term. Lars Dijkstra, CIO of Kempen Capital Management, believes this needs to change. He finds an ally in Else Bos, CEO of pension provider PGGM.
Pension funds, asset managers and companies find themselves locked in a stranglehold. They are held accountable for their results in the short term and are obliged to operate in a world of rankings, benchmarks and quarterly results. Dijkstra believes the emphasis should in fact be on value creation and responsible investing in the longer term, and he sees it as his mission to trigger a culture change.
Yet you cannot change a culture on your own. This has prompted Dijkstra to seek allies, by being the Chairman of the 300 Club, a group of international CIO’s, by publishing opinion articles, participating in the international project Focusing Capital on the Long Term and by drawing up a long-term ambition statement in conjunction with other CIO’s of Dutch asset managers and pension funds.
Else Bos is one of the co-signatories of that ambition statement. "What drives you?" Dijkstra asks. "Pensions are all about the longer term. Long-term liabilities require long-term investments,” Bos says. "Moreover, I feel personally involved. I want to enjoy my pension in a world worth living in. We face severe threats, such as climate change and a shortage of food and clean water. At the same time, financial structures are increasingly focused on the short term. There is a discrepancy here that needs to be remedied."
A shift in focus to the longer term yields many benefits, according to Bos and Dijkstra. "It results in fewer risks, a better match between investments and longer-term liabilities, and ultimately leads to a higher return in the longer term; at least when combined with the societal return," Bos claims.
‘I want to enjoy my pension in a world worth living in’
"We agree on the mission," Dijkstra concludes. "The question now is: how do we go from talk to action?" Bos identifies four methods for triggering a domino effect. "Firstly, it is important to incorporate sustainability factors into policy. For instance, we have formulated the investment policy for PFZW (Pensioenfonds Zorg en Welzijn) for the next few years, devoting greater attention to long-term risks and to tangible targets, such as a quadrupling of impact investing. Furthermore, we invest in companies with a deliberate long-term orientation and opted for themes we can use as a basis for entering into dialogue with companies and wielding influence at shareholder meetings."
The second step is effecting an internal culture change. "This starts with a clear mission and strategy for the longer term," Bos explains. "Yet it is also important to provide employees with inspiring examples from companies that are pioneers in this field."
"This also requires different incentives," Dijkstra comments. Bos agrees. "Our remuneration structure has been substantially altered over the past few years. The variable remuneration now contains more incentives focused on the longer term and that complement the incentives on financial performance. Sustainability and conduct, for example."
Thirdly, in Bos’s opinion fundamental social changes need to be considered more. "For instance, for me personally it is highly inspiring to think about a circular economy and the consequences for corporate business models."
Finally, Bos argues in favour of applying long-term mandates and collaborating on these with asset managers. "Asset owners need to tell asset managers exactly what they wish to achieve in the long term; in social as well as financial terms."
In Dijkstra’s view, a shift in focus to the longer term also requires communication between these two parties to be conducted differently. "We therefore need to look not just at the share price of companies, but also at the intrinsic value of companies and the return on equity in the longer term." Bos nods in agreement. "The current price is merely a snapshot. It doesn’t tell us how a company will perform in the long term.”
Bos and Dijkstra believe that all the parties in the investment value chain can benefit greatly from this. "Banks and investors could cooperate more," Bos says as an example. "They both provide capital to companies: banks provide loan capital and investors provide equity capital. Yet they do not communicate with each other and do not provide the same incentives to companies. This is odd, really, as they both share a common interest: that companies perform well in the longer term."
"Companies are also under pressure to perform in the short term," she continues. "They sometimes complain to me that they are rarely asked about the long term at meetings with analysts."
Dijkstra points out that both the EU and companies are considering options for discouraging investors from simply seeking a quick profit, for instance by rewarding long-term shareholders with additional dividends or greater voting rights.
"I am not keen on greater voting rights for loyal shareholders," Bos admits. "Yet it is remarkable that 10-year government bonds yields are higher than 1-year bond yields, while in equity investment no distinction is made between long-term and short-term shareholders, and short-term traders out for a quick profit. It does make you think."
Dijkstra also mentions the role of the supervisory authorities. "Organisations such as the AFM and De Nederlandsche Bank also adhere greatly to existing structures. Perhaps their roles should also change." Bos agrees. "Supervision focuses more on the risks in the short than in the long term. I do not believe we should ignore the short term completely, but it would be helpful if there were greater attention to the longer term."
This article appeared in the Kempen Insight - July 2015