Thursday, May 31, 2012

Taleb: Antifragile, and anti bankers bonuses

I never thought a presentation peppered with words like ‘stochastic’ and ‘heuristic’ would make me laugh out loud, but such is the talent of Nassim Taleb. Best known for his book, The Black Swan, he is on the road discussing his forthcoming book Antifragile: Things That Gain from Disorder. He is also an advisor to Universa LLP, an investment management firm that specializes in convex tail hedging. I attended his talk in Toronto yesterday as a guest of Horizons, who have just launched the Horizons Universa Canadian Black Swan ETF and the Horizons Universa US Black Swan ETF, the first ETFs that pair a tail risk hedge with an equity index investment.

Continuing the theme of the Black Swan (hard to predict events that have an extreme impact), Taleb’s new work is on fragility. “You can’t predict rare events, but you can tell who is going to blow up when rare events happen. It’s about vulnerability to extreme events.”

He began the presentation by asking the audience which was more efficient, a book or a Kindle. We agreed that it was the Kindle. However, pour water on a Kindle and it’s done for. The book – not so much. His point? You cannot have gains in efficiency without offsetting losses in robustness. There’s nothing wrong with going with ‘more efficient’, as long you accept this will also be ‘more fragile’. And the opposite of fragile? Not robust or strong, but antifragile – something that actually benefits from disorder. In the world of investing for example, debt might be fragile, equity might be robust and venture capital might be antifragile.

Taleb has been outspoken in his criticism of bankers, and suggested that the financial industry ‘needs to be bar belled’. He went on to explain that those who take risk should bear the cost of that risk. The system as it currently stands is skewed in that when the risk pays off the bankers benefit, but when things go wrong, bankers don’t suffer to the same extent, viz. J.P. Morgan’s Ina Drew. Those who can be bailed out by taxpayers should not take any risk at all. He was categorical, “Bankers should not take risks with taxpayer’s money.” And going one step further, he was firm in his view that ‘nothing linked to bonuses should be guaranteed by the taxpayer’ as bonuses encourage gaming results for short term payoffs.

Referring to the Code of Hammurabi, Taleb suggests that in today’s world, the risk gets hidden in the basement while the architect is far away, and the solution is in law 229 ‘If a builder build a house for some one, and does not construct it properly, and the house which he built fall in and kill its owner, then that builder shall be put to death.’ He quickly added that he meant this metaphorically only.

I have not been able to do justice to Taleb’s humorous anecdotal delivery. I encourage you to watch the video clips in the sidebar. Many commentators have addressed the issues of banker’s compensation, but none in such a common sense manner.

Tuesday, May 22, 2012

Volunteer bloggers wanted for responsible investment conference

SRI Monitor is looking for volunteer bloggers to write previews and on-site articles about this year’s Canadian Responsible Investment Conference, to be held in Montreal from June 18-20.

The theme of this year’s conference is SRI+20, the future of investing, Topics up for discussion include executive compensation, green real estate and marketing, the UNPRI, ESG and pensions, and impact investing. The conference will also feature a series of technical workshops aimed at financial advisors, portfolio managers and ESG analysts.

Guest speakers and panelists include Paul Martin, Wolfgang Engshuber, Roland Lescure, Tom Rand, Bob Walker, Jacqueline Ottman, Dominique Ferrand and Lynn Stout.

The articles will be published before and during the conference, and distributed on SRI Monitor, the Social Investment Organization’s e-mail Listserve and the SIO website.

This is the third year SRI Monitor and the SIO have worked together on conference-related social media.

If you'd like to take part as a blogger or if you are interested in distributing the content on your website, please contact social media coordinator Doug Watt at

Friday, May 18, 2012

Canadian SRI Funds Performing Strongly: Report

A research brief from the Social Investment Organization finds that the perception held by many advisors that SRI funds underperform the market doesn’t hold up to scrutiny.

“Using the most recent performance numbers provided by Fundata, a portrait is emerging of a strongly performing industry with outperforming funds in every major fund category,” says SIO associate director Ian Bragg.

For example, in the Canadian Equity fund class, the average of SRI funds outperformed the average of all Canadian equity funds on a one, three five and ten-year basis.

In the Canadian fixed income category, the SRI funds average outperformed the industry average on a one, three and five-year basis and was almost identical on a ten-year basis.

The report notes that the long-term performance of SRI funds in some categories, such as Canadian equity balanced and global equity, must be cautiously interpreted because the majority of these funds have not been running long enough for five and ten year results.

“It will take some time for the long-term performance of the SRI industry to reveal itself because of the relatively short-term track record of most funds, but early results are encouraging.”

“Our study shows that there are more than enough leading SRI funds to choose from with strongly performing funds in every major fund category.”

The research brief is available here.

Thursday, May 17, 2012

Binding 'Say on Pay' on its way

In an interview with the Financial Times, Michel Barnier, the EU’s financial services regulator, suggests that shareholders be given a binding vote on pay. Investors in banks would be able to set a cap on bonus levels and “curb ‘morally indefensible’ pay”.

When Say on Pay began (in the UK in 2002, and Canada in 2007), the larger and better governed companies were the first to sign on. It was more a less a rubber stamp of good corporate governance. In the first couple of years, the votes were in favour, no surprise. We all knew that the interesting times would come when shareholders voted against the executive compensation package.

According to the National Association of Corporate Directors , ‘Moving into May and the peak of annual meeting season, executive compensation is one of the top stories in the business media. To date, eight companies have failed their annual say-on-pay votes. With the bulk of annual shareholder meetings in the coming months, this number is expected to increase.’
The most high profile cases so far have been at Citibank, where 55% of shareholders voted NO ,  and at Aviva, where CEO Andrew Moss resigned after 54% of shareholders rejected the proposed executive compensation packages.

According to the New York Times, companies do address the issues raised by ‘no’ votes. “Mr. Ferri and David Maber, an assistant professor at the Marshall School of Business at the University of Southern California, examined companies whose pay practices received objections from more than 20 percent of the shares cast. They found that after such votes, these companies were more likely to remove provisions that were seen to reward failure than those where shareholders had not expressed high dudgeon over pay. Once the problematic provisions vanished, the companies experienced lower dissent — or none at all — in the next proxy season.” Read more about that research here.

On the other hand, in the midst of explaining a two billion dollar trading loss, J.P. Morgan received a 91.5% approval rating from shareholders on their executive compensation. However, it’s likely that many of the votes were cast before news of the failed trading strategy was made public.

Dermot Foley of Vancity Investment Management sees benefit in a binding vote. “ The votes in Canada have been pretty low, probably because they aren't binding. It does encroach a little bit on management responsibilities. However if it's for the top three or four executives, that might provide a pretty good disciplinary measure, particularly if performance measures aren't being met yet executives continue to get bonuses as has happened here in Canada.”

Thursday, May 10, 2012

Enbridge AGM: resolution fails, but points well made

The vote was 28.5 per cent for, 60.7 per cent against, and 10.7 per cent abstained, said Jamie Bonham, Manager, Extractives Research & Engagement at NEI Investments, the parent company of Ethical Funds.

Co filers on the resolution were Desjardins Investment and Vancity Investment Management.

Here’s the text of the resolution:

Be It Resolved That:

The Board of Directors provide a report to shareholders by May 2013 (at reasonable cost and omitting proprietary information) that details how the board has assessed the risks associated with First Nations’ opposition to the Northern Gateway Pipeline (Gateway). The report should discuss how First Nations’ opposition will factor into the final decision to pursue Gateway. If the project will be pursued regardless of opposition, the report should detail how the company will mitigate the operational, reputational, and legal risks of such opposition.


The company’s proposed Gateway pipeline is a $5 billion project that involves over 80 Aboriginal communities and organizations. Numerous court rulings have reaffirmed that Aboriginal communities must be consulted and accommodated on developments that potentially impact their title and rights, as guaranteed in the Constitution. Gateway faces vocal opposition from several Aboriginal communities who state the project will be detrimental to these rights.

For example:

-The Coastal First Nations have signed a declaration banning crude oil tankers off the coast of Northern BC.‐downloads/Coastal%20First%20Nations%20Tanker%20Ban%20Declaration.pdf

-The First Nations Summit, representing the majority of First Nation communities in BC, issued a declaration that Gateway must not proceed without the free, prior and informed consent of the affected First Nations.

-The Carrier Sekani Tribal Council, whose territory covers over 30% of the proposed pipeline route, has been clear in its opposition to the pipeline. Tribal Chief David Luggi has stated, “…as far as we are concerned, this project is not going ahead. They (Enbridge) are misleading investors that they are achieving certainty. Carrier Sekani First Nations have unequivocally said no to the project, and it is not allowed in our territories.”‐supports‐first‐nations‐against‐the‐enbridge‐pipeline/

And here’s an excerpt from the comments Jamie made at the AGM, “At the heart of our proposal is the concern we have over the significant risks that First Nations opposition poses to the Gateway project, and beyond that, the risks that face the company as a whole as a result of this opposition. Enbridge provides a good deal of information about Gateway, but it does not address this vital issue adequately in its disclosure. There appears to be a fundamental divide between the plans of the company and the expressed aspirations of many of the communities along the proposed pipeline and tanker route. The opposition appears to be significant, widespread, and hardening daily.”

Stay tuned! We're still in the early innings of this story.

Wednesday, May 9, 2012

Before the Enbridge AGM today

With chants of ‘No more pipelines, no more tankers’ and ‘Tar sands Shut down, Enbridge Get out’ a passionate but orderly crowd protested against the Northern Gateway pipeline as Enbridge held it’s AGM at the King Edward Hotel in Toronto this afternoon.

The protest was organized by the the Yinka Dene Alliance and it’s supporters. The YDA is a coalition of Carrier and Sekani First Nations in northern BC that includes Nadleh Whut'en, Nak'azdli, Takla Lake, Saik'uz, and Wet'suwet'en First Nations whose territory comprises 25% of the proposed Enbridge Northern Gateway oil pipelines and tankers project.

Here’s what NEI/Ethical Funds has to say:

Enbridge’s Northern Gateway Pipeline: When Bad Projects Happen To Good Companies

"First Nations’ opposition to Enbridge’s Northern Gateway pipeline project threatens to squander years of effort building corporate social responsibility leadership – one of several reasons why we will be taking a shareholder proposal to the company’s Annual General Meeting.

We filed a shareholder proposal with Enbridge asking how First Nations opposition has been factored into the decision to pursue the Northern Gateway pipeline. Despite a courteous and respectful dialogue with the company on the proposal, we appear to have a fundamental difference of opinion about the risks facing the project, so we will be taking our issue to the Annual General Meeting on May 9, 2012.

Enbridge has spent years building a reputation as one of the most progressive companies in the oil patch, something it is rightfully proud of. And the value of this reputation is not in the number of awards it has won: it is in the ability of the company to win its social license to operate, to be a place where employees can be proud to work and to be an attractive partner for future projects.

This makes the company’s approach to its pursuit of the Gateway project perplexing. It seems clear to us that the company’s current approach is leading straight to a battle with First Nations, and whether the battlefield is in the courts or on the ground it is unlikely to be quick or quiet. If this happens, hanging on to that hard earned reputation will be difficult for Enbridge, if not impossible.

There will, be monetary costs to such a battle — the legal fees, the cost of continued delays, and the opportunity cost of company executives spending their time occupied with Gateway instead of pursuing other profitable projects. These can ultimately take a significant bite out of shareholder returns.

To this end, we are looking for answers from the Enbridge board and we hope that other shareholders are just as curious."

Here’s some media coverage:

Enbridge CEO Pat Daniel ready for Protests

VanCity Enbridge Investments Draw Members' Ire, Protest

More to come…

Monday, May 7, 2012

Greenpeace lauds Mackenzie following pulp & paper divestment

Greenpeace Canada is praising Mackenzie Investments after the mutual fund company announced it would no longer invest in Asia Pulp & Paper’s (APP) pulp operations, which have been linked to illegal logging and the clearance of endangered Sumatran tiger habitat.

“Mackenzie has shown commitment to ethical and environmentally responsible investing,” said Shane Moffatt, forest campaigner with Greenpeace Canada in a blog posted on the Greenpeace website. “Until APP stops destroying rainforests and critically endangered Sumatran tiger habitat, it will keep shedding customers and remain a pariah in the investor community.”

Mackenzie held shares in the APP subsidiary PT Indah Kiat Pulp & Paper worth US$24 million.

Greenpeace says Mackenzie’s announcement comes after another large international investor, Norway’s Skagen funds, said it was selling its shares in Indah Kiat, based on a “review of investment philosophy, ethical guidelines and our aim of providing our unit holders with the best possible risk adjusted return.” Indah Kiat’s share price is off 31% compared to last year.

Earlier this year, Greenpeace released a report following an investigation which found that the Indah Kiat mill is systematically violating Indonesia’s laws protecting the internationally protected tree species ramin. The report also revealed that the mill is supplied with rainforest timber from areas mapped as habitat of the Sumatran tiger.