Are Boards Lock, Stock, and Facing Two Smoking Barrels?
All a question of time. In his latest cough-free diary entry, JB considers the broader environmental questions that arise from the COVID-19 pandemic, philosophises on the regulator’s priorities and cautions fund boards whom may be tempted to use the 2- month extension for the Assessment of Value disclosure. A story of near- and long-term risks and the implications of lockdown.
We iNEDs find ourselves locked-down and looking down the barrels of a double shotgun. Firstly, a short-term existential pandemic crisis in the form of a COVID-19 and a longer-term, but no less existential, climate risk. Both are arguably a threat to humanity of varying magnitude. Yet the former has now utterly overshadowed the latter in terms of public awareness, media, stock markets and the political response. It plays to Maslow’s hierarchy of needs (safety) and Freud’s instinctive emotional response to fear and rationale response to rules. It has touched all aspects of working life, even our Prime Minister, all encapsulated by the global lockdown applied to different extents, in different countries. That variance in rules is something we can identify too when it comes to country and industry response to climate change.
Consider that societal acceptance of the lockdown arose from a clear empirical case being presented and through ‘Big Government’ taking a direct role. That case was built around contagion and infection rates; scientists will have much to think about for decades to come, as should fund boards committed to UN principles of responsible investment. Reflect that the positive story of falling emissions was accidental, the consequence of addressing COVID-19, and will prove short-lived as and when the economy returns to some sort of new normal. COVID-19 still dominates my boards and day-to-day life, my only takeaway being it has not led to panic-based decision-making (yet). No equivalent of boardroom toilet roll wars thankfully.
Our work continues, virus or no virus, albeit remotely. In terms of NED matters arising then, after industry lobbying the FCA has agreed to allow extensions for fund reporting; (including a 2-month extension to the Assessment of Value reports). The reasons for extending should be operationally driven not by virtue of market turmoil alone. Most fund boards that report after the financial year end, typically will cite performance data to the previous year end. Composite reporting may prove somewhat trickier. Thus, the need to delay on performance grounds alone is unnecessary. Now is exactly the time to reaffirm value to investors and intermediaries. This is especially so given the likelihood for a second and potentially more severe bite from markets, as the inevitable macro ricochets. Therefore, for those boards attracted to using the extension I would urge ‘be careful of what you ask for’.
Committees this month were driven by liquidity; the liquidity management of funds and issues such as fund suspensions (e.g. property funds) and dilution levies. Concerns over the fate of the High Street are well founded. The value of land will prevail; the repurpose of property will become the increasing talking point. It is interesting to note recent REIT discounts, filings and the evaporation of the hubris, from a couple of months ago, coming out of the closed-end industry. The liquidity and pressures on the underlying asset; (being buildings, tenants, leases and rental income) traverse all fund structures and that illiquidity will simply manifest itself in different ways. On the positive side the equity trading volume data I am privy too indicates that markets are continuing to operate and thus far central bank interventions have prevented a liquidity crunch 2.0. This bear market and inevitable recession then presents quite a different challenge for investors and Boards alike. It is likely to be the most severe since the 1930’s depression but relatively short lived; even if the effects of monetary policy will have a much longer hangover.
Just as it will take China time to get back to normal; then so to for our industry and it really needs to, as we hurtle towards Brexit and post a number of FCA letters. Like everyone, the FCA too will be torn between near and long-term priorities but its latest DP20/1: ‘Transforming culture in financial services – driving purposeful cultures’ seems a concerted enough effort to engage Boards at a more fundamental level. Meanwhile FCA interventions on liquidity seem more provocative than helpful but in fairness that regulatory ball started well before the virus.
COVID-19 has created a wartime capital model. What then of the second barrel, climate change? As fund boards we should likewise recognise the empirical case being presented and anticipate Government taking a more direct role in the future. It is a question of time. Short-term and long-term. If, like COIVID-19, climate change is seen as a war that threatens the populous then the scope to change the capital model becomes possible. The precedent has been locked.
‘Right. Let’s sort the buyers from the spyers, the needy from the greedy, and those who trust me from the ones who don’t. Because if you can’t see value here today, you’re not up here shopping, you’re up here shoplifting.’ [Character: Bacon. Played by Jason Statham]
‘Lock Stock and Two Smoking Barrels’, Directed by Guy Ritchie, 1998.
JB Beckett, FBC iNED Member
iNED, Author ‘New Fund Order’
In his monthly column, Diary of an iNED, JB will record his experiences on the boards of two very different organisations as he navigates the highs and lows of a plural career at a time when the fund industry is beset with challenges and opportunities in equal measure.
JB can be contacted at email@example.com.
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