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Identifying and Mobilizing Win-Win Opportunities for Collaboration: A Rotman ICPM Sponsored Study Rotman ICPM Workshop, 5 June 2007 Danyelle Guyatt

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Presentation on theme: "Identifying and Mobilizing Win-Win Opportunities for Collaboration: A Rotman ICPM Sponsored Study Rotman ICPM Workshop, 5 June 2007 Danyelle Guyatt"— Presentation transcript:

1 Identifying and Mobilizing Win-Win Opportunities for Collaboration: A Rotman ICPM Sponsored Study Rotman ICPM Workshop, 5 June 2007 Danyelle Guyatt

2 2 Aim of Study To identify areas where collaboration amongst pension funds and their agents might be beneficial for all parties involved To review existing collaborative initiatives to assess what works and what doesn’t To develop and apply a theoretical framework to evaluate collaborative opportunities for improving the pension fund management process

3 3 Definition of collaboration Collaboration prevails when a mutually beneficial relationship exists between two or more participating agents, recognizing that this relationship can be informal (cooperation=weak form), task specific (coordination=semi-strong form) or representative of a long-term partnership with shared goals and objectives (collaboration=strong form)

4 4 Definition of ‘win-win’ Game theory: In situations of conflict, strategies adopted by interacting agents can produce winning or losing outcomes, depending on an individual’s decision and the decision of others playing the game (Schelling, 1960) Management conflict literature: ‘Win-win’ defined as a positive- sum game where all parties can potentially gain through exploration of the sources of conflict (Walton and McKersie, 1965; Thomas, 1976) Cooperation theory: In conflict and cooperative situations, individuals have the ability to coordinate their behavior in such a way that will potentially produce benefits for all parties (Axelrod, 1984)

5 5 The challenge “Under what conditions will cooperation emerge in a world of egoists without central authority? This question has intrigued people for a long time. And for good reason. We all know that people are not angels, and that they tend to look after themselves and their own first. Yet we also know that cooperation does occur and that our civilization is based upon it. But, in situations where each individual has an incentive to be selfish, how can cooperation ever develop?” Axelrod (1984:3)

6 6 Self-interest is key The key component of any collaborative initiative is the pursuit of self-interest and that, whilst this might be a fixed goal, the inputs that determine self- interest are time varying and will differ by agent type – Neo-classical definition of self-interest is narrow and static – Profit/wealth maximization does not capture the social, economic and psychological influences on behavior that evolve over time, e.g. the use of heuristics (Kahneman and Tversky, 1979), short-term fads (Shleifer, 2000), speculative bubbles (Shiller, 2000), herding behavior (Sias, 2004) and altruism (Margolis, 1982; Elster, 1986)

7 7 Outline of study Step 1: Study existing collaborative initiatives Step 2: Theory generation Step 3: Development of framework Step 4: Application of framework Step 5: Questionnaire Step 6: Recommendations and feedback

8 8 Existing collaborative initiatives First observation: there are many! Lack of theoretical framework Practitioners ahead of academic research A lot of good projects out there BUT not all collaboration is worth the cost and effort Sustained, successful collaboration requires consideration and development of a theoretical framework AND evaluation!

9 9 Case study methodology Overview of over 30 initiatives, divided into 6 categories based on function Case studies: CDP, EAI and CII Data source: publicly available information including websites, presentations, reports, and published research papers Data analysis: textual analysis of over 500 pages Coded and analyzed under the categories of: – Factual information (objectives and characteristics) – Evaluation (positive and negative features)

10 10 10 key insights from case studies 1. Have a well-defined goal and objective 2. Be clear about the change being sought & target agents 3. Members believe that it is in their self-interest to participate 4. Recognize the heterogeneous profile of members 5. Focus on the power relations between agents 6. Keep costs to a minimum in terms of fees, time and effort 7. Measure and review the success of the initiative over time 8. Follow through and co-ordinate the activities of members 9. Trust and perception of legitimacy are key to long term success 10. Global, cross-collaborative initiatives increase power but need to be thoughtfully designed so as not to lose focus

11 11 Theoretical framework Evolutionary game theory: adaptive efficiency and the recognition that agents need not be locked into a Pareto-inferior mode of behaviour indefinitely (Samuelson, 2002) Theory of cooperation: importance of reciprocity, trust and to enlarge the ‘shadow of the future’ of any cooperative arrangement (Axelrod, 1984) Theory of conventions: collective agreement is one way in which new conventions can emerge when a group recognises the superiority of alternative conventions and deliberately sets about encouraging a change in behaviour (Boyer and Orlean, 1992)

12 12 Motives for collaboration

13 13 The collaborative framework

14 14 Specify the problems 1. Short-term investment horizon: – Limits the focus on management of long-term liabilities – High turnover and transaction costs – Narrow investment criteria 2. Absence of shareholder activism: – Trading versus capital allocation – Bogle (2005), Monks and Sykes (2006) and Davis et al (2006) 3. Poor pension fund governance practices: – Agency issues/conflict of interest – Ambachtsheer (2007); Davis et al (2006)

15 15 The conventions (I) Short-termism – Narrow valuation framework – Excessive focus on earnings – Excessive focus on relative returns to asset- based index (rather than liability-based benchmarks) – Short-term performance appraisal – Short-term investment mandates

16 16 The conventions (II) Absence of shareholder activism – Ill-specified board-level shareholder activism policy – Lack of training and expertise re activism – Weak participation in, and disclosure of, voting and engagement practices – Low importance in fund manager selection/retention – Low importance in criteria for performance review

17 17 The conventions (III) Poor pension fund governance practices – Poor accountability and transparency of board appointments – Over-reliance on for-profit external agent advice – Lack of investment knowledge, skill and experience of board of trustees – Poor balance sheet risk management

18 18 Target agents and power relations Identify the problems Specify the conventions associated with each problem (Figure 7) Specify the target agents for change (Figure 8) Consider the role of the ‘power agents’ (Figures 9, 10 and 11)

19 19 Motives Assess the priorities of the Rotman ICPM Partners for improving the pension fund management process Questionnaire spanning target agents and power agents for change What are the highest and lowest priorities? – Important to clarify before considering the design of any new collaborative initiative

20 20 Questionnaire results (I) 144 responses to a 15 question survey, with the following profile: – Small pension funds [$0 - 1 bn] = 7% of respondents – Medium-sized funds [>$1 - 20 bn] = 23% – Large funds [>20 - 100 bn] = 47% – Super large funds [>100 bn] = 2% – Consultants = 8% – Academics = 7% – NGOs/regulators/intl.organizations = 6%

21 21 Questionnaire results (II)

22 22 Questionnaire results (III) The 5 highest priority areas: 1.Review the performance of fund managers over a longer horizon than the typical quarterly review cycle (73% of respondents rated this as very important) 2.The accountability and transparency of board appointments be improved (70%) 3.Policy of voting and engagement policy adopted by a pension fund board of trustees (64%) 4.Trustee boards to have better investment knowledge and experience (64%) 5.Improve the balance sheet risk management practices of pension funds (61%)

23 23 Questionnaire results (IV) The greatest divergence by type of respondent: 1.Only ‘super large’ funds fully support collaboration, whilst 20% of small funds were unsure. This is surprising as smaller funds potentially have more to gain from pooling resources 2.On measuring and reviewing performance against a market (asset) based index, 80% of small funds believed this was ‘very important’, compared to only 19% of medium sized funds 3.All the small and super large funds rated extending the review period of fund managers beyond the quarterly horizon as ‘very important’, whilst investment consultants were more divided (55% rated ‘very important’ and 45% ‘somewhat important’)

24 24 Questionnaire results (V) Key priorities identified by respondents as additional comments: 1.Liability management – 8 comments referred to the need for better management and consideration of pension fund liabilities 2.Agency risks – 7 comments referred to the need to be aware of, and better manage, agency risks inherent in the pension fund management process 3.Trustee board skill – 6 responses made mention of the need to improve the skill of trustees and the pension fund board 4.Corporate governance and engagement – 4 responses emphasized the benefits of pooling resources for corporate governance and engagement activities

25 25 Where to from here? Some options to discuss: Pension fund governance initiative Liability-led investing initiative Change mandates to review fund manager performance over longer periods International shareholder activism and engagement efforts

26 26 Dissemination and development Disseminate results of survey on priorities for collaboration Follow up report incorporating discussion and outcomes during the Rotman ICPM June 2007 Workshop Disseminate literature for Rotman ICPM library Conference paper drafted for presentation at EABIS Colloquium, 20-21 Sep 2007, Spain Future publication of framework and results. Target journals include Journal of Evolutionary Economics, Journal of Institutional and Theoretical Economics, Evolution and Human Behavior, Organizational Science

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