The Exchanges

Q And how did your career trajectory evolve from there at Wellington?

A So I started in Boston. I was there for a couple of years. And then I ended up going to San Francisco. And that was one of those sort of serendipitous things where my husband was offered a job in San Francisco. He's a private equity investor. And so I went to Wellington and said, we really need a West Coast office, don't we? Because we did not have one at the time. And after a number of conversations, it was agreed that we did. And so I went to San Francisco and I stayed there for seven years. That role was leading the growth of the business on the West Coast, trying to understand a very different investment community, connecting Wellington, which particularly at that time, it was global, but it was very Boston-based, connecting that more to the West Coast. And obviously there were very strong firms on the West Coast like Capital and others out there already.

AI assessment note: “I started in Boston. I was there for a couple of years. And then”

Q And we're probably in the first or second inning of some influential business executives saying the same thing. How do you get the message out?

A So we've done it in a couple of ways. One is it's very helpful to us. So we have a great board and group of supporters. I should start with that. So our board is made up of leaders of some of the most well-respected companies like Unilever or Dow, asset owners like CPBIB or GIC, or asset managers, people, you know, BlackRock and many others. So one is by having a group of well-respected people sort of Support this. Get the message out. Another is by having that influence more broadly. So the Business Roundtable published some things about quarterly guidance earlier this year, just a few months ago. That was very helpful. We obviously have a lot of overlap with the Business Roundtable. So having organizations like that. And then on that one in particular, the National Investor Relations Institute, which is sort of the group that covers investor relations people, has also changed their policy on quarterly guidance. Of course, they made their own decisions, but our work went into that. That is how we get that message out. And we're all about change, right? We're trying to move the dial on capital. We're not a think tank. Mark Wiseman likes to say we're a do tank, not a think tank. So we don't, we're not interested in having research that sits on a shelf. We're interested in moving capital. And so how do we do that? Part of that is by having big backers.

AI assessment note: “So we've done it in a couple of ways. One is it's very helpful”

Q decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now, back to the show. So at the company level, we have guidance, which we know is pernicious, and how that filters into compensation plans and capital allocation. Are there other key areas that you're looking at at the company level?

A So the other key thing we're working on at the company level, and then we can switch to the investor side, but at the company side is the board. So what happens time and again is that the board is cited either as a source of short-term pressure or as a ballast, sort of as a, as the, as a long-term, um, uh, ballast. And so the question is why? Why does one corporate board behave in a short-term way and another corporate board behave in a long-term way? Even sometimes when they have some of the same individuals on them, and so that is part of the work that we're doing now. We've put out one paper on that, which we're calling an idea exchange. It's really meant to be a conversation starter, and it came out of a summit that we had, uh, about some of the practices of, of longer-term boards, um, but that's actually the, one of the projects that we're in the midst of, but it's very clear that the board is a key contributor to either, uh, Um, that short-term mindset or the long-term mindset. I'll give you one very simple example. Amazon's board, Amazon is often quoted as a very long-term company, actually explicitly has in their corporate governance documents that their, uh, their responsibility is to what they call the long-term share owner, and so they don't get themselves into this who's our duty to. Their duty is to the long-term share owner, and that's very clear, and if you don't…

AI assessment note: “the other key thing we're working on at the company level... is the board.”

Q What did you learn about investing from your time at Wellington?

A So I think that the first thing I've learned is that investing has changed a lot over that time. So from the time I started, which was the early nineties until now, obviously the investment world has changed. Back then we could know information that other people didn't know. We could talk to companies and they would really tell us what they were thinking. That was before Rule FD. There were plenty parts of the market just to pick on energy. One of Ernst's saying was, you know, if you show up in Houston in August and Calgary in January, it's amazing what you learn. And, um, that was true. So you could really know some things that people, others didn't know. I think that's really not true anymore. It's just much, much harder to have an information edge. You can have an analytical edge, but not an information edge. And I think that the way that investing has evolved, obviously, is much more quantitatively driven, much more data driven. At least in those early days, it was really fundamental research in the classic sense of the word.

AI assessment note: “It's just much, much harder to have an information edge.”

Q So let's unpack that a little bit. What's a long-term company and what's a short-term company?

A So the typically what you see is that long-term companies continue to invest through cycles. So if you look at R&D as an example, and if you look at Short-term company versus a long-term company. A longer-term company will continue to invest through that, whereas a short-term company, knowing that they're going to miss their earnings because, you know, markets are bad, they will pull back on that. And so then, of course, they have to restart. And so you see the difference in how that pays off. And usually the long-term companies are the ones that are doing things like building earnings, not just EPS. So you, if you look at sort of EPS relative to change in earnings, which usually means you're changing, you know, your shares around. If you look at R&D or other sorts of CapEx, if you look at accruals versus revenues. So there, if you look at companies that are willing to miss their guidance. So you can find these sort of tells of what a long-term company is, but typically long-term companies are more counter-cyclical, and short-term companies are more pro-cyclical. Markets go, get bad, they lay everybody off, they retrench. Whereas a long-term company will then go and try to pick up customers and employees and so on.

AI assessment note: “typically what you see is that long-term companies continue to invest through cycles.”

Q And are there other mechanisms on fees that you've thought of in addition to this sort of loyalty discount?

A Well, clearly performance-based fees that are back-ended. There's a lot of behavioral work that says that something that is escrowed is longer term than something that's a clawback. We have this loss aversion, right? So sometimes people have these fees and there's a clawback if you then underperform. Doesn't really work with our brains very well. So something where you actually don't receive the fee until longer periods of time is clearly very helpful. So what I have found in the investment business is that most investors are really trying to do the right thing. They're trying to perform, and so most people are not gaming a fee, but you have to think about what the incentive is because that is human nature. You also have to think about the way things are presented. So sometimes investors, Complain that their LPs are very short-term, or their clients are very short-term, but then you read their investment letter, and it starts with, dear investor, this quarter we returned 7.2% versus a, well, of course they're short-term. You just told them to be. So one of the other things, it sounds very simple, but that a number of our members and others are doing now, is that typically the way investment reports work is they show you return versus a benchmark, quarter, year to date, last 12 months, one year, three year, five, and We're actually flipping it, and so you start with the number t…

AI assessment note: “clearly performance-based fees that are back-ended. There's a lot of behavioral work”

Q And then the quarterly guidance clearly over time has worked its way into perceptions that meeting guidance improves the stock price, and stock price is tied to compensation plans. How have you thought about compensation in corporate executives?

A So we haven't done deep work on compensation yet, but I will tell you, you know, a couple of interesting things. The first is we've done some work with some, George Serafim at Harvard Business School, who you may know, who's done a lot of work in this area, who's terrific, and one of the things that's very clear is that executives that have longer-dated compensation act in a longer-term way. Now, this is, should not be a surprise to anybody. We think a lot of the problems around short-termism have to do with incentives, If you pay people to be short term, they will. It's sort of habits. We've got all these strange habits that have built up in the capital markets, and then also some of these behavioral finance mistakes that we all know about. But if you pay someone to be short term, they will be. So their numbers show that that's very clear. The longer compensation leads to longer term behavior, but that the average duration of CEO compensation, realized duration in this country is about a year and a half. So if you're paying somebody on about a year and a half, You kind of expect them to act in that time frame. That shouldn't be a real surprise to anybody. And part of that comes back to the board, which is another thing we're working on.

AI assessment note: “executives that have longer-dated compensation act in a longer-term way.”

Q You must have thought along the way about the group of activist investors and the impact that they have on boards and shorter long-term behavior. Any thoughts?

A Yes. So clearly the activist investors have had a lot of impact on boards and management teams. They've had impact where they've been involved, and they've had impact where they haven't even been involved because people know they might be involved. And so the way that I think about that is, if there is a company that is poorly managed, um, let's say they've, you know, they've got lots of corporate jets and they're, they don't have their eye on the ball, then an activist can come in and they can raise the returns for everyone. They can raise the returns for both the short-term investors and the long-term investors. Um, and that is what some of the activists have done. The, the challenge is most companies know that, and they're trying to do that to themselves these days. So then the question is, what is the time frame of an activist versus the time frame of a long-term shareholder? Particularly for, obviously for our passive holder, but even for a large, any sort of large fund or a large asset owner, they will own most companies that are listed essentially forever. They will own them in different proportions, but they will own them for very long periods of time. So they don't really care very much when value is realized. They just want value to be realized over some period of time. Activists, on the other hand, as a general rule, have a much higher discount rate. They have sort o…

AI assessment note: “clearly the activist investors have had a lot of impact on boards and management teams.”

Q That seems like a nice segue to talk about what you've been doing since you left Wellington. So before we get there, what was the rationale after 21 years? It's a lifetime by some stretch, but you're still quite young, so what was the decision process to lead?

A So I loved Wellington. I had no plans to leave Wellington. I think it's a wonderful place. I was very lucky to be there and be a partner there for a long time. But I met Mark Wiseman, who at the time ran the Canada Pension Plan, and Larry Fink, who runs BlackRock, and Dominic Barton, who runs or ran until just recently McKinsey. They had this idea. This was their idea about what is wrong with capital markets. What's wrong with capital markets is that if we take a step back and say, why do we have capital markets in the first place? The reason we have capital markets is that we have savers who have a long-term need to generate money. They don't need the money right now, but they need to put it somewhere. Usually they're saving for a long-term goal, such as their retirement or the next generation or future students of the school or whatever it is. So they have a need to generate return over long periods of time. At the other end of the spectrum, you have management teams who have an idea. They want to enter a new market or build a new product or Create something. And usually those are also long-term ideas. Those take a while to come to fruition. So long-term needs to deploy capital. Long-term needs to use capital. Makes perfect sense. You put them together. The challenge is that the way that those get put together is through our capital markets. So typically what happens is that …

AI assessment note: “I had no plans to leave Wellington. I think it's a wonderful place... But I met”

Q Is there research on the capital allocation process? You mentioned it in terms of dividing up long-term and short-term companies.

A So we're still working on that, but there's two problems with the capital allocation process. One is how capital is actually allocated within a firm, and that's very important, and then the other part is how that capital allocation process is explained to their investors. Investors are typically somewhat cynical and know that the management teams come and say, oh, we've got all these wonderful plans, but many management teams haven't done a great job of saying, well, over history, we've invested like this, and here's how it's paid off, and so They, having built a track record of being good capital allocators, and because CEO turnover is fairly high, it's easy to say, well, the last guy screwed that up, but you know, I, I've got a great plan. So I think both of those sides are important, but I'll, I'll give you a quick story. I won't attribute it. What, what, I was speaking with somebody from one of our members who was talking about their own capital allocation process, and he said they look at everything over three years. So I said, well, what if you've got, um, ah, pretend you've got a hypothetical project, and it looks like A five-year zero coupon bond, okay? You're going to get zero, zero, zero, zero, and then in year five, you're going to get a return that's twice your hurdle rate. Will you do that? Ah, I'm not sure we could do that. That is the problem. That makes no sense…

AI assessment note: “we're still working on that, but there's two problems with the capital allocation process”

Q And it's, that's probably dovetails into thinking of asking, which is, as technology has sort of just started to work its way into the asset markets, how do you think about the importance of technology on this agenda over time?

A Yeah. I think it's critical, because I think that many of us were brought up with the idea that the way you manage money Is you start with a blank piece of paper, and you sit down and talk to somebody who runs a company, and you decide whether they seem to have a good strategy and know what they're doing or not? That's not the way most money is managed, and it's certainly not the way money's going to be managed in the future. You know, we've been thinking about how do you have an engagement when it's actually quantitative structure or a quantitative investment strategy? How do you have, do computers have engagement? You know, I don't know. So I don't have the answer for that, but I think it's absolutely critical because there's no question that that is where this world is going.

AI assessment note: “I think it's critical, because I think that many of us were brought up”

Q So what are your next set of either tools or initiatives to promote this going forward?

A So I think that the big ones that we're working on right now, one is this more deep work on investment risk, and there, obviously, there are a lot of people who've thought a lot about investment risk, but it's this sort of the interaction of investment risk and real people, particularly when it's not their money, and particularly over time. So how do you, those time trade-offs, those communication trade-offs, I think that's really fundamental. The goal, as one of our board members likes to say, The goal is excellent long-term performance with reasonable short-term performance. So what's the definition of reasonable and how do you make, because if you, you know, if you get taken out in the, in the meantime, it doesn't matter, right?

AI assessment note: “one is this more deep work on investment risk”

Q And the concept is great. What do you do?

A Yes. So we're really thinking about it in three ways. The first is, can you quantify the problem? Is this a big problem? Is this just an annoyance? Or is this actually a real problem? Is it a quantifiable problem? And so the first question is, how big is this? And so with McKinsey, we've done a lot of work. And we can go into it more detail, but sort of the punchline is, if you look at how long-term companies have behaved, long-term companies on a number of financial metrics, versus how short-term companies have behaved, what you see is that long-term companies outperform in terms of revenue, profitability, share appreciation, job creation, all the things that you would look at over any reasonable period of time. But in the crisis, you could see that they got punished much more harshly than short-term companies. So, Managers are not wrong when they say, I want to be long-term, but I feel this pressure. So what we see is long-term companies outperform short-term companies over any long-term period of time, but it's challenging. And to put some metrics on it, in the United States over the decade leading up to 20 16, if the short-term companies in this country, and I know this is a big if, if the short-term companies in this country had been able to behave like the long-term countries, They would have created a trillion dollars of additional asset wealth and five million more jobs…

AI assessment note: “we're really thinking about it in three ways. The first is, can you quantify”

Q If you imagine a world 10 or 20 years from now where you've been successful And there's a meaningful shift in the amount of capital that is in the hands of, let's just call it, more long-term investments. Relative to the asset management universe today, who are the winners and who are the losers in market share?

A Well, I would start with that I think the winners are the savers at the end of the day. Because remember, let's, you know, take a step back, right? The, the, the goal of this Is to benefit savers who will be old at some point and need to be supported, and we all know we've got a massive time bomb in terms of our pension system. So to be successful, you know, what we hope would happen is that those savers live better in their retirement, or those, that next generation has a better standard of living, and that at the other end of that investment value chain, they're communities, they're real people, they're people who have a job, who wouldn't have a job, Or have a product that, uh, or a medicine or whatever it is that wouldn't have otherwise been developed. And so, you know, we're a, we're a nonprofit. We're a five Oh one C three. So that is the ultimate goal is to improve life for the savers and the communities. You know, in terms of market share, one of the things that I find fascinating about the investment business is that they're always smart people trying to figure out, you know, the angle. So the more, if we get more indexed, then theoretically, at least those active Players who are left will make more money, and there should be some balance at some point there. So it's hard for me to predict who the, who a winner from a market share would be, but I think that the goal is …

AI assessment note: “So it's hard for me to predict who the, who a winner from a market share would be”