Where is the line and how do you know when it has been over-stepped? The most recent example of this was in the context of influencing government, brought to the news by David Cameron’s actions, adviser to the now collapsed Greensill Capital, and his role in getting Lex Greensill in front of key ministers. In watching and reading the various press commentary around this episode, I found it curious that many said that whilst technically there may not have been any rules broken, it just didn’t pass the ‘smell test’
This imaginary line that I refer to in my opening paragraph is faced by many of us in our day to day lives. Certainly, those seeking to promote investment strategies to asset owners will be very familiar with the rules concerning corporate entertainment, although even in this scenario there is no hard and fast regulation; rather, investment companies are obliged to interpret the Financial Conduct Authority’s rules and create internal policies. In turn, those policies will often be open to interpretation and will be flexed depending on the circumstances – interactions with public entities being much stricter than those with private/corporate bodies. In my previous firm, one’s knowledge of the policies and how to interpret them would be tested on a frequent basis, with failure to reach the 80% threshold pass often resulting in a weary sigh, head in hands moment before returning to the beginning of the course to restart. But all with the view of equipping us with a good understanding of what is and is not acceptable.
If I reflect back to the many compliance/regulatory courses and assessments I had to take whilst employed, it is not the specifics of the rules that guide my view on how important the ‘smell test’ was to the organisation. Rather it is the bigger picture sense of how consistent it was being applied throughout the firm. One firm used a very simple, one-page diagram entitled the ‘ethical decision framework’, that offered a series of questions each employee should ask when facing a decision in their day-to-day work. The questions ranged across a spectrum of legality through to comfort levels if details were shared publicly. The framework was often referenced by senior management and was familiar to all within that organisation, so much so that it was reflective of the culture of the organisation. Knowing this was intrinsic to the culture was actually empowering because it gave a sense of the firm having your back in challenging situations, provided you had challenged yourself with those ethical questions when faced with the decision that led to the problem.
Which leads me to why I chose to write about this topic today. Yesterday I was on a call with a client; a US fixed income manager that has embedded ESG (Environmental, Social and Governance) considerations into their investment process for over a decade. The firm’s President spoke at length about the importance of his analysts understanding the culture of each issuing company and to do so through the lens of ESG. As he was speaking and referencing Volkswagen emissions ‘defeat device’, I mentally had one of those (for me, rare) moments of clarity. Whilst it may be impossible to put in place a perfect system to avoid fraud, it is possible to assess whether the culture of an organisation passes or fails the ‘smell test’. It really brought it home to me how there are ways for us to better assess whether something seems right or wrong and when it comes to investing, ESG should rank up there alongside the traditional financial tools for assessing a company. Culture is the bellwether for how ethically an organisation will act and ESG should be the framework for assessing that culture.