Perhaps the assumption that markets are still anchored by predictable economic policies needs to be challenged. For the first time since the fall of the Berlin Wall, political volatility – once background noise – is potentially reshaping investment risk at a structural level.
Despite authorities taking their foot off the environmental, social and governance pedal and recent volatility in equities and bonds, the benefits of Artificial Intelligence and improved investor transparency are just beginning.
The human aspect of the ‘G’ in ‘ESG’
(Pictured: Anthony Asher)
by Greg Bright.
‘ESG’ is, for good reason, an important consideration for fiduciary investors. The ‘G’, in particular, seems to make sense and, maybe more importantly, money. But our measurement of governance has to date been pretty rough.
A group of academics from the University of NSW have now produced an interesting paper which takes a new look at governance, focusing on the human aspect. The paper, called ‘Virtue, Hubris and Risk Culture’, was presented to the Institute of Actuaries conference in Sydney early May. It was written by Anthony Asher, Victoria Clout and Tracy Wilcox.
The basic premise of the paper is that “devastating but avoidable organizational failures are often not so much a consequence of business risks but of an absence of business virtues in leadership”.
The paper says that while the importance of ‘risk culture’ is well recognized in risk management for companies, the approaches to culture are inadequate in three ways:
> they tend to fall back into a reductionist and mechanistic treatment of governance, without adequate appreciation of the firm as a complex adaptive system which should be addressed holistically
> they continue to attempt to model the future ‘scientifically’ when it is unknowable in many important respects, and
> their ethical model is that it is possible to define good behavior rather than recognizing that it is character and the basic virtues which require development.
Analysing some of the big Australian financial failures of recent years, such as at HIH, NAB and Equitable argue that they represented a failure of “virtue” rather than formal; risk management processes. Risk culture should be reimagined as a matter of integrity and a steadfast opposition to hubris and narcissistic traits.
“If it is indeed a matter of integrity, justice, diligence and prudence, we suggest that the development of detailed rules has long been known as a very poor way to develop these virtues. Indeed, it displays certain hubris on the part of regulators that they should even try,” the academics say.
View the full paper.
