Pension Risk Matters : Pension Risk News & Analysis : Investment Governance, Inc. : Pension Risk & Investment

Mary Poppins came to mind the other day during a panel discussion about governance and the role of the institutional investor.

Part of a conference about fiduciary obligations, I joined Mr. Stephen Davis (Executive Director of the Millstein Center for Corporate Governance & Performance - Yale School of Management) and Ms. Janice Hester-Amey (Portfolio Manager, Corporate Governance - CalSTRS) for a discussion about governance. I believe we were successful in kicking off the day long event with some thought-provoking tidbits. We covered new rules that, if passed into law, should empower pensions, endowments and other asset owners. We opined on regulation versus voluntary action. We had a lengthy exchange about what motivates institutions and whether governance was now considered a "must do" that contributes to return versus a "try to ignore" because it is seen as a drain on resources.

In the words of this famous nanny, find the fun and the job's a snap. I'm not sure that governance will ever top the list of jollies but one does wonder when best practices will stop getting lip service and instead merit the attention it so richly deserves. Chief Governance Officer anyone?

I added commentary about what I believe fervently is an inevitable industry move towards scoring with respect to process (not the same as outcome). Several legal professionals in the audience suggested that any type of benchmark would necessarily offer limited value because of subjective bias (their words, not mine) on the part of those who construct the ABC report card.

I don't necessarily concur. There are MANY points on which rational investment stewards would agree as no-brainer elements of what is right.

For those readers who want to get my specific take on what they are and how to monetize what I think is a great opportunity, contact me. Our firm is looking for solid partners on a few initiatives that we believe break the mold in anticipation of the brave new world of indexing procedural prudence.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In my September 11, 2008 testimony before the ERISA Advisory Council, I described two buckets of organizations - those which deserve a gold star and those who don't. I went on to explain that the size of the "everybody else" bucket might be very large but that current reporting requirements make it nearly impossible to know about red flags in advance. This is cold comfort for shareholders and taxpayers who would prefer to know about financial runaway trains beforehand.

Unfortunately, those who attempt to provide more sunlight about their activities are not always rewarded. In a recent conversation with the CEO of a major asset management firm, I was told that this firm had provided detailed information about its fee structure to institutional clients. Instead of being rewarded, and because there are wide variations with report to how asset managers present performance data, sunlight led to storm clouds. Endowments, foundations and pensions responded by asking why the fees were so high. The reality was that the costs were in fact lower than those of comparable traders but, since competitors were not providing more than basic feedback, their costs were interpreted as lower and therefore "better." It's no surprise that the executive with whom I spoke expressed frustration. Here they were trying to do what they thought was the right thing and come clean with a detailed decomposition of what they charged. Instead of a reward, they were kicked in the proverbial shins.

In "Type-A-Plus Students Chafe at Grade Deflation" (January 29, 2010), New York Times reporter Lisa W. Foderaro describes a similar phenomena in the university sector. Where Princeton sought to minimize grade inflation by limiting the number of A's, top quality students found it harder to compete for jobs when graduates from other schools flashed their scores. Never mind that Princeton arguably tried to impart higher integrity data.

Is the message that transparency is window dressing and that no one really wants to have the low down on "true" outcomes? Alternatively, should we conclude that heightened disclosure rules are inevitable but it is incumbent upon providers of information to educate their recipients, i.e. make sure that underlying assumptions are clearly explained? If that does not occur, might well-intended parties (those who provide more detail than necessary) be impugned instead of rewarded for their forthrightness? 

Editor's Note: Click to read "Testimony by Dr. Susan Mangiero to ERISA Advisory Council Working Group on Hard to Value Assets," September 11, 2008. (Note that Pension Governance, LLC is now part of Investment Governance, Inc.)

• Email This
• Print
• Comments
• Trackbacks
• Share Link

According to "New Economics of Marriage: The Rise of Wives" by Pew Research Center analysts Richard Fry and D'Vera Cohn (January 19, 2010), women are besting men "in education and earnings growth." Their statistics are noteworthy for countless reasons.

• An observation that "marriage rates have declined for all adults since 1970 and gone down most sharply for the least educated men and women" suggests that those with degrees (and therefore statistically likely to earn more over their lifetime) are walking down the aisle.
• For Americans between 30 to 44 years of age, there are more females than males with college degrees.
• Three out of ten unmarried women with college degrees realize greater economic gains versus only fifteen percent of unmarried male who had gone on for higher education.
• Household incomes grew for three out of ten married men with only a high school diploma. Less than two out of ten unmarried males with no college under their belts saw their checkbooks get bigger.
• In both 1970 and 2007, 53 percent of survey-takers report that husbands and wives had the same level of education. In 2007, 28 percent of households declared that wives had more education versus 20% in 1970.
• When the wife earns more money, only 21 percent of the respondent households claim the husband as the primary financial decision-maker versus 46% of situations where the Missus gets to choose. When the husband earns more, the number climbs to 35% in terms of final say on investments and purchases. In 36% of homes, the female better half decides.

In "She Works, They Are Happy" (New York Times, January 24, 2010), Tara Parker-Pope offers that divorce rates have dropped from 23 per 1,000 couples thirty years ago to 17 today, in part due to the ability for women to earn a living without help from a spouse. The result, she avers, is a change in how much time men spend on domestic chores and earning the bacon. While not yet an equal split, today's "to do list" at home is a far cry from the plaudits of Arlie Hochschild. In her still popular book, The Second Shift, this University of California - Berkeley sociology professor laments the imbalance between working men and women when it came to childcare and housework.

Demographic research about men, women and money always provokes thought and is great fodder for cocktail party chats. That's not all. The ramifications for individual financial planning, retirement plan policy-making and industry-wide sales and marketing efforts are immense. Women tend to live longer which necessitates a large enough piggy bank to pay bills over a longer period of time. Then there are all sorts of studies about how lifetime decisions are influenced by gender, age, education and income. Marketers cannot ignore the fact that their pitches must encompass the "who" and "how" of sales for IRA, mutual fund, annuities and insurance.

As the female earnings landscape is altered, office dynamics are not immune to change. In The Male Factor: The Unwritten Rules, Misperceptions, and Secret Beliefs of Men in the Workplace (December 2009), author Shaunti Feldhahn describes the results of a large-scale survey of men to better understand how they judge the opposite sex in a business environment. Not surprising perhaps, she finds that emotions and long-winded discussions (not getting to the point) are looked upon poorly by respondents. This begs the question - Will women change by being more like their male counterparts or will men learn to go with the flow and willingly accept communication differences? Will it depend on whether the boss wears a skirt or gets the coffee instead? 

As always, your opinions count. Email Editors@InvestmentGovernance.com or add a comment to this post.

Editor's Notes:

• Click to read the full report entitled "Women, Men and the New Economics of Marriage," published by the Pew Research Center, January 19, 2010.
• Click to access life expectancy tables as provided by the U.S. Census Bureau from the 2010 Statistical Abstract.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

There are few things in business that are outright bad for everyone. Usually someone, somewhere is a winner when the rules change. In the case of proposed new bank regulations, merger and acquisition ("M&A") deal makers may be about to enjoy a bonanza.

On January 21, 2010, the White House issued a press release entitled "President Obama Calls for New Restrictions on Size and Scope of Financial Institutions to Rein in Excesses and Protect Taxpayers" in which the 44th U.S. President proposes to limit banks from owning a hedge fund or a private equity fund or "proprietary trading operations unrelated to serving customers for its own profit." Additionally, unfettered deposit-taking growth would be strictly curtailed in order to avoid another federal bailout on the basis of "too big to fail." 

Another day, another mandate, another perverse outcome. 

• Risk transfer requires a willing party to accept the uncertainty that is anathema to someone else. Companies cannot hedge unwanted price risk if there is no one on the other side of the equation. Restrictions on proprietary trading, otherwise referred to as Volcker's Rule, could arguably (and significantly) depress liquidity in numerous financial markets around the rule.
• Lumping all hedge funds into one category is a mistake. Some hedge fund portfolios are highly liquid, with net asset values being reported to investors every day. Forcing a "one size fits all" solution to a financial market sector that varies in terms of strategy, scope and risk factors is a recipe for disaster.
• Private equity funds tend to adopt a longer view than a trading operation. Is the suggested federal grab for power meant to discourage this source of  capital at the same time that bank credit is limited at best and cost-prohibitive at worst?
• Why would Fannie Mae and Freddie Mac be exempt, especially given their stated track record in the area of risk-taking?

Not everyone is a sad sack. Think about all the equity carve outs and spin-offs that will result if banks are forced to shed their prop trading portfolios. This type of forced corporate restructuring will be a huge boon for investment banks, law firms and accountants who earn considerable fees for fairness opinions, buy-sell matchmaking and papering the deals.

Don't get me wrong. Excess in the trading room is bad news for everyone. Instead of binding limits introduced by regulators, why not encourage banks to increase capital reserves, evidence better risk management policies and procedures and let the market punish those organizations that get it wrong?

Perhaps not so coincidental, sales of Atlas Shrugged by Ayn Rand are skyrocketing. In its January 21, 2010 press release, the Ayn Rand Institute cites that more than seven million copies of this 1957 novel have been sold. The premise of this international best-selling book is that captains of industry who create wealth walk away from those who take, leaving the city of Gotham in the dark, unable to survive.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

When I was a doctoral student, there were invariable jokes about spending lots of time in school, only to find myself out on the street, competing with other PhDs to deliver pizza and otherwise under utilize what I had learned along the way.

Keep in mind that my situation is somewhat unique. I grew up in industry before I went back for my doctorate in finance with a minor in math. I had already worked over a dozen years on various trading desks. As a result, my objectives for higher education focused more on understanding the link between theory and practice. I was not disappointed. The experience has served me well in countless ways. I honed my abilities to model, test assumptions, ask questions and connect sometimes disparate dots. Time in the classroom at many levels (undergraduate, graduate, executive, professional) gave me a firsthand crack at realizing the importance of clear communication.

Unfortunately, not everyone is enjoying the graduate school experience. According to "Another Reason to Just Say No to a Ph.D." by Gabriela Montell (The Chronicle of Higher Education,January 14, 2010), real earnings for those with a professional or doctoral degree have dropped between 1999 and 2008. Taking a look at an article by Professor William Pannapacker who writes under the name of Thomas H. Benton ( "Graduate School in the Humanities: Just Don't Go, The Chronicle of Higher Education, January 2009), it strikes me that there is a great need to drill down into what the employment statistics truly mean.

• Salaries in the arts may be depressed but those with deployable skills and experience for commercial endeavors such as finance and medical research have alternatives not available to everyone. 
• Some schools pay more than others. Refer to "Top 500 Ranked Universities for Highest FT Faculty Salaries." 
• Not surprisingly, compensation varies across disciplines. See "Faculty Median Salaries by Discipline and Rank (2006-07)" or "Murky Picture for Faculty Salaries" (Inside Higher Ed, January 17, 2010).
• In "Business-School Professors Learn a Hard Lesson in Competition, Study Finds" by Peter Schmidt (The Chronicle of Higher Education, November 5, 2009), private universities tend to pay more than public organizations. Whether an academy is seeking accreditation is another factor with respect to the mix between research and teaching and the related size of one's total paycheck.
• In "Harvard to offer first retirement plan for professors," Boston Globe writer Tracy Jan (December 3, 2009) 127 liberal arts, medical and education professors have been offered a chance to wind things stand in the form of a lighter teaching load, as a precursor to eventual cessation of their duties.
• While some universities and colleges are scaling back, others are enjoying a boom in students.  According to "College Enrollment Hits All-Time High, Fueled by Community College Surge," Pew Research Center's Richard Fry (October 29, 2009), two-year colleges are beneficiaries of fears about being sufficiently skilled to get work in today's intensely competitive workplace. Their tuition has risen at a relatively modest rate of 4.9 percent per year "beyond general inflation."

In the legal world, associates share the glum factor with those in the humanities. New York Times reporter Alex Williams writes that changed expectations are the reality these days. With bad economic times unduly impacting industries such as financial services, real estate and high tech, legal professionals are hard pressed to keep driving the fee train forward. In "No Longer Their Golden Ticket," Williams cites a survey by the New York City bar association that found that one out of every two attorney respondents were "seeking counseling from its lawyer-outreach program list" for mental health reasons.

Returning to my December 28, 2009 post, entitled "'Up in the Air' - Stark Reality About the Employee - Employer Relationship?". work is a four-letter word. If we stay current with sought after skills, there is a good chance that angst may not ever come to visit. MSNBC reports that accountants and compliance officers are likely to win the jobs growth lottery. That includes financial examiners, with projected growth of "more than 40 percent from 2008 to 2018." Complexity, added accounting rules and new government mandates could contribute to a rosy future for some. Click to read "Next hot job? Keepings on financial firms" (December 11, 2009). Interestingly, salaries for game programmers are not too shabby either.

Of course, besides the ability to earn a living, some posit that doing what one loves and enjoying it at the same time is a worthy notion. As a European colleague once said to me, "Americans live to work. We work to live." Love what we do and get paid for it as well? La Dolce Vita indeed!

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Not everyone is hurting when it comes to take home pay. According to "Ranks of millionaire college presidents up again" (Associated Press, November 2, 2009), higher education compensation toppled $1 million for "a record 23 presidents" with Rennselaer Polytechnic Institute ("RPI") and Suffolk University leading the way. Critics should be wary however if they think that life in the ivory tower offers a walk in the park or that numbers should be sliced downward. Recruiting experts suggest that good candidates are tough to find. Additionally, executives can add to a school's endowment which in turn impacts research projects, scholarships and renovations.

As much ado is made about how much people get paid, with the financial sector taking it on the chin big-time, consider the numerous factors that influence the nexus between supply and demand for a particular bundle of skills.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In "Risk Redux" by Kristin Fox, founder of Fox Inspires, LLC (Private Wealth, January 7, 2010), I am quoted extensively on the topic of risk management. I'm happy to note that others interviewed for the article reiterate many of the points I made.

Given the changed landscape, post Madoff and so on, the life of a Chief Risk Officer ("CRO") is even more harried than ever before. He or she is often expected to save the ship without impeding the traders' ability to turn a profit. Applied to hedge funds, the task is arduous indeed as the threat of global regulation looms closer and investors clamor for heightened transparency about fees, concentration of positions and overall risk-taking.

Since so many pensions, endowments and foundations are adding to their hedge fund allocations, the article is worth a read. Some of my talking points are listed below:

• Risk management is an integral part of a firm’s culture and one of the keys to its success. “Instead of looking at risk management as a roadblock, it should be promoted as part of your culture and viewed as the best way to ensure the firm’s longevity.”
• There is no one size fits all approach to hedge fund risk management. It depends on the size of the organization, strategy, type of clients, risk tolerance, to name a few items.
• A CRO must ask tough questions about the risk "cost" of every expected dollar in return.
• Compensation must support the notion of a risk culture or any other efforts to mitigate risk are doomed to fail.
• Kick the tires on models. Ask if underlying assumptions prevail.
• Make sure that everyone understands the nature of leverage, from the back office clerk to the front room trader.
• Acknowledge that risks seldom live in isolation. One of the unpleasant surprises of 2008 and 2009 had to do with the convergence of risks. The traditional reliance on correlations had no place in the volatility maelstrom that created heartburn for a lot of investment professionals. "For example, with structured products, liquidity risk was arguably greater than anticipated because the quality and quantity of supporting collateral was sometimes wanting. For any financial institution that had hedged part of its structured product portfolio, it may have found itself with another risk in the form of counterparty defaults. The risks are often not additive, and a good CRO needs to truly understand the interrelationships among financial, operational and legal risks, to name a few."
• Figure out a way to overcome the resistance of those who are already burdened with their own work but who are nonetheless critical to the risk management process. A good CRO must make friends and motivate accounting, legal, systems and trading to hold hands and come together to properly manage the R word.

Though written in 2003, my article entitled "Life in Financial Risk Management: Shrinking Violets Need Not Apply" is still relevant. I describe the building block concepts as well as the skill set required for an effective CRO.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Etiquette is important but sometimes more an art than a science. Consider my close encounter today with a gentleman whom I respect and like as a perfect example of trying to figure out what to do, without offending anyone or seeming "uncool."

Here's what happened.

In between meetings, I stopped by a local cafe to pick up a sandwich. To my delight, I spied said gent having lunch with colleagues, deep in conversation. When he saw me, he signaled to his colleagues that he was taking a break, came over to say hello and gave me a kiss on my cheek. If memory serves, I think my face grazed his, I passed him a business card (reflecting new contact information), offered a 60 second update on our business and held out my hand for an exit that may have been, in hindsight, anything but graceful.

Paying for my take-out order, I wondered if his buss, followed by my handshake, was an insult. Keep in mind however that this is suburban CT, not Paris. Should we have pecked cheeks again as a more appropriate sendoff, simply said goodbye or nixed the face action to begin with?

It's all so complicated.

I'm sure Jerry Seinfeld could get a lot of chuckles with this topic. Apparently, he had an episode about the "Kiss Hello" though I did not see it.

According to New York Times reporter Elizabeth Olson, "the cheek, or social, kiss is displacing the handshake, once the customary greeting in American social and business circles" but just make sure you get the positioning right. See "Better Not Miss the Buss" (April 6, 2006).

In "Do you shake hands, hug or kiss?" (April 12, 2006), Today Show anchor Al Roker and now prime time news gal Katie Couric acknowledge that a kiss is okay when you know the colleague well but head for the right cheek. Leaning left is outre. Their guest Peggy Post suggests a firm grasp of the hands instead, but "no pumping." Grasp the hand and be done with it. Other suggestions include an air kiss or double peck.

I'm not sure I will remember all of these greeting "do's and don'ts."

It was a special surprise to bump into this smart, funny and high integrity colleague, even if I didn't get the hello and goodbye parts down right.

Linking this topic back to investment matters, is there a protocol for the buy side - service provider reviews that take place every quarter? For example, if an asset manager has lost money for an institutional investor, does that nip any chance of a hug or smooch, no matter how long the relationship? Are puckers prohibited for service contracts above a certain amount or when a discussion is unduly serious? When is the double or triple cheek kiss appropriate? What if two parties are from different countries and the buss rules conflict with each other?

Let's see if Miss Manners can help.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

Work is a four-letter word so can it ever be fun? According to the Conference Board, maybe not. In a recent survey, nearly half of respondents expressed dissatisfaction about doing work that was neither meaningful nor engaging. In contrast, six out of ten survey-takers declared themselves happy in 1987. Somewhat disturbing for would be recruiters is that angst and disappointment was not unique to any particular age group or income level though persons under 25 expressed "the highest level of dissatisfaction ever recorded by the survey for that age group."

As many on the hiring side know already, finding talent can be time-consuming and sap energy from even the most ardent employers. Now add the challenges of retaining productive workers while adding bright-eyed team members in a sad sack era of layoffs, mistrust and diminished budgets. Besides turnover costs, the bottom line could be impaired if few cheer lead for their company, collecting a pay check and already planning for the next gig.

Click to read more about "I Can't Get No...Job Satisfaction, That Is: America's Unhappy Workers," The Conference Board, January 5, 2010 press release entitled "U.S. Job Satisfaction at Lowest Level in two Decades. Click to read "Where America Stands: The State of America and Its Future," CBS News Poll, January 4, 2010 which echoes the observation that not everyone is optimistic about what the future holds.

In an attempt to end this blog post on an upbeat note, I invite interested readers to take a look at the work conducted by best selling author Marcus Buckingham. Rather than dwell on employees' weak points, he urges organizations to focus on strengths. According to his website, this author of "Go Put Your Strengths to Work" and "Now, Discover Your Strengths" urges that "individuals and teams playing to their strengths significantly outperform those who don't in almost every business metric."

The discussion that needs to take place now is one of responsibility.

• Who should properly motivate and on what basis?
• Do  happy, satisfied workers self-select by joining companies that provide "thank you" goodies such as great benefits, bonuses and opportunities to retool?
• How much should and can employers do to make work fun or at least a place where people want to be for a reasonable period of time each day?
• What can organizations do to overcome the survivor worries that accompany any recession?
• How should benefit plans be modified, if ever, to marry together financial pressures with the part of the bottom line that is attributable to human capital?

We may never emulate Snow White's seven friends ("Hi Ho, Hi Ho, It's Off to Work We Go") but obviously something has to give if one out of every two workers is unlikely to stay put for more than a few months.

• Email This
• Print
• Comments
• Trackbacks
• Share Link