Asset Management and Trust after Madoff

Whom do you trust? The Economist in 2008 reported estimates for professionally managed assets was around USD 64 trillion at the end of 206, while the whole global system was approximated at around USD 150 trillion . Professionals manage other people’s money in the realms of finance and investment. That is a lot of responsibility, and that responsibility can be misused to devastating effect. Making others your agents depends upon trust. Some hard lessons have been learned about risk, leverage and regulation. And re-learned about trust. Banking, and the value of money, will forever be viewed differently because of the events of the past 24 months. We are a generation with a scar. Some of us will be smarter. In these uncertain times, new lessons in business, banking and regulations are being learned by policymakers and investors. Just this week the role of the SEC was affirmed, while the US government stepped back from ruling maxima for executive pay with a factsheet issued by the US Treasury entitled Providing Compensation Committees with New Independence. The more market-based approach announced by Geithner this week of empowering investors to ask questions and vet pay at the annual shareholder meeting (although non-binding) is a victory for years of ESG shareholder initiatives via proxy votes on say-on-pay the past few years by firms such as Tm Smith at Walden Asset Management. Many people still recall the 2003 GSK shareholder revolt on executive pay for JP Garnier as the watershed event for the issue in Europe, dating back to 2001. Current GSK chief Andrew Witty is communicating on executive pay. It is smart regulation. Legislation would authorize the SEC to require annual shareowner votes on executive compensation, and would require standards of independence for corporate compensation committees.

"Companies will have the opportunity to include additional resolutions on specific compensation decisions: Companies will have the opportunity to ask shareholders’ views on specific compensation decisions, including decisions related to various aspects or categories of pay. Each company, however, will be required to permit shareholders to vote on a resolution addressing all of the compensation disclosed in the annual proxy"

In 2008, approximately USD 4 trillion in assets under management (AUM) was managed explicitly integrating environmental, social and governance (ESG) factors according to the Social Investment Forum. Furthermore, the Carbon Disclosure Project 2008 (CDP6) counted 475 international institutional investors with $55 trillion in AUM, including major international investors, pension funds and investment banks. So we know that our work in making capital integrate the sustainability meta-theme is having some small impact. But at a very fundamental level, Madoff on the front page of the third-last edition of Portfolio magazine kind of sums this all up. His betrayal of family, friends and celebrities is "biblical". The poster child for excess is the front page story for a journal that launched as asset management reached glossy magazine status, and whose failure as the financial meltdown exposed the scheme, also brought down the magazine. I liked the journal, and the graphics. Like many existing hardcopy papers, even legendary brands like Boston Globe and The New York Times which are wobbling. R.I.P Portfolio. The man has a family name which will replace “Ponzi” as THE name for a fraudulent scheme, such as creating a pyramid scheme where a second person’s money was flipped to a first person’s money to give false “performance”. The SEC has been beaten up about its role and must be gritting its teeth knowing the SEC website will have to update with the definition of a "Madoff", which happnened on their watch, and with warnings...The CNBC’s coverage in 2008 was classic “60 Minutes” type material, with the usual breathless title: "Scam of the Century: Bernie Madoff and the $50 billion Heist". Apparently it was CNBC’s highest rated documentary premiere telecast EVER in both adults 25-54 and total viewers. It is never too early for the guys at CNBC to be claiming a century brand, yes?! Probing questions from good investigative journalists keep picking through the wreckage that one man’s greed, and accomplice’s assistance, has brought to the state of trust (see Madoff's secretary's comments). Just like the damage to the brands of “MBA”, “investment banker” and even “Wall Street”. It is a tough time to be an investment advisor, with popular media offering up plenty of "can you trust your financial advisor" material.

Trust has been shattered, and this generation has changed their opinions on whom to trust and with what. NYT's pointed question is How Do I Know You’re Not Bernie Madoff?. Our asset management industry has questions to answer. Hollywood was burned by the Madoff scandal, and so I assume a new version of the iconic 1980s financial excess movie Wall Street will soon be filming, but here’s hoping it is way better than The International. While I like Clive Owen, I drifted off to my own dream creativity somewhere over the Atlantic in seat 37A during the Guggenheim shootout…