The “agency problem” is a well-documented problem and in simplistic terms is a possible conflict of interest where one party is expected to act in another’s best interest. The most basic agency problem is the conflict of interest that arises between shareholders of a company and its management, but it extends beyond this.
At its most simple incarnation, shareholders hold shares in a company and management is appointed by these shareholders to run the company on behalf of these shareholders. Unfortunately, in practice the chain of “ownership” is a lot longer. In modern finance we often have a situation where the shareholder has their assets in a pension fund for example. The pension fund appoints trustees and these trustees in many cases employ an asset allocator to determine which asset managers to invest with. These asset managers then invest into underlying companies. The true owner of the company (the person with the pension fund) may not even know which company they are invested in, nor what the management team of that company is doing. The basic premise is that each player in the chain of command will act in the best interest of the asset owner.
If we had to ask the pensioner whether they want dividends from commodity super profits or whether they want the company to diversify into other commodities, what would their answer be? If we asked whether they want the company to do a large-scale merger and acquisition when the statistics are that around 70-90% of these end in failure, what would they answer? What would the answer be if we asked someone whether they wanted their investments to emphasise ESG even if it may cost them investment performance because emphasis will be on E over S and G?
Every investor would have a personal view. On aggregate however, investors are looking for a satisfactory return on their investment. As asset managers and management of companies, we should always remember we are custodians, not owners. We are in the privileged position of trust and we should act in the best interest of the owner of the asset. Our actions, votes and decisions should reflect this. We always keep this front of mind at 36ONE with a strong and continuous focus on return and risk, and have been able to provide our clients with market beating returns at lower risk. There are always opportunities out there and we look forward to what 2022 brings.