Image courtesy of flickr user David Ohmer

Institutional finance – keeping shtum no more

By Fabian Gmuender

Until a few years ago, the institutional arm of the financial services industry was notorious for attempting to fly under the radar of public perception. Investment banks, private equity firms and hedge funds in particular shared little information on how they ran their businesses.

Goldman Sachs, founded in 1869 and arguably the world’s most conspicuous investment bank, waited until 1996 to hire an in-house expert to handle corporate communications.

Even so, in an interview as late as last year, CEO Lloyd Blankfein had to admit that the bank’s approach to public relations in the aftermath of the financial crisis was “flatfooted” and that as an institutional firm, they simply “did not have a relationship with the American public”.

They’re in good company. Brevan Howard, one of Europe’s largest hedge funds, limits its online presence to three paragraphs and a handful of email addresses on an otherwise deliberately blank website. 3G Capital, the Brazilian private equity group now famous for last month’s failed $143bn takeover bid for Unilever, rarely gives interviews and declined to comment for articles in leading business publications. Unsurprisingly, the Financial Times resorted to describing 3G as “secretive”.

Why so shy?

There are inherent reasons why institutional finance prefers to keep shtum. Unlike commercial banks, their business model excludes the vast majority of individual investors. This makes the need to engage with a broader consumer base, also known as the public, less obvious.

Many alternative asset managers are privately owned and hence exempt from the scrutiny and disclosure requirements that apply to listed companies. And despite impressive revenues, headcount is typically kept low, overhead minimal. There’s simply no one on the payroll to take care of public relations. The PR industry has done little to help its cause by being perennially bad at measuring where it could add value to their business. As for marketing or advertising, legal restrictions in place until 2013 would have banned alternative asset managers from running large scale campaigns in the US even if they had wanted to. Other jurisdictions have comparable laws.

The most important reason, however, is that engaging with a broader public is still seen as a substantial risk without significant upside. The pervading perception of many in institutional finance holds that public opinion, and particularly the media, are negatively biased, that there is little to be gained from challenging their anti-business views, and that by just keeping one’s head down any storm will blow over.

There may have been some truth in this in the past. After all, the success of a staggering number of companies most people have never even heard of speaks for itself. But there are clear signs that these times are over, and for three reasons mainly.

First, the industry has become too big to hide. According to Bain & Company’s latest global private equity report, dry powder, the raised capital currently available for new deals, reached a new record in 2016 by rising to $1.47 trillion.

It is not unreasonable for owners or employees of future acquisition targets to take an interest in how these investments will be managed. Hedge funds may not be as intricately linked with the success of companies or the fate of people who work for them. Still, their performance has very direct consequences for pension funds, university endowments and sovereign wealth funds. Research agency Preqin estimates the hedge fund sector alone to have grown by over $2 trillion in assets under management since the mid-90s. It may not be too big to fail, but it’s definitely too big to ignore.

Second, media coverage has fundamentally changed. Michael Bloomberg started his eponymous business information service in 1981 and later added a news agency with allegedly six reporters. Today, over 2,400 news and multimedia professionals publish 5,000 stories a day to a global audience of close to one million readers. That’s just one source of information among thousands. Twitter relays breaking news 24 hours a day.

On the absorbing end, the British communications regulator, Ofcom, estimates that UK adults now spend eight hours and 45 minutes on media and communications per day, exceeding the time they spend sleeping. This relentless stream of news has made it increasingly difficult to invest billions of dollars, or do anything at all for that matter, without entering the spotlight of public attention.

Finally, transparency standards have shifted. People expect companies to communicate more openly about their values, what drives them and how they contribute to society than they have done in the past. In part, this is a reaction to the continuing erosion of trust. Edelman’s annual Trust Barometer records that trust in business dropped in 18 out of 28 surveyed countries compared to last year. A decrease in trust naturally increases the demand for transparency. Post Lehman Brothers, this is particularly true for financial services.

How has the industry adapted to the new landscape? We are starting to see leaders who understand the challenges those changes present to institutional finance.

For a representative of an industry traditionally seen as secretive, David Rubenstein, co-founder of private equity giant The Carlyle Group, has given a remarkable number of interviews and public talks. He even hosts an online TV show named after him. His trademark amalgam of personal anecdotes and self-deprecating humour – he made headlines for rapping offbeat in Carlyle’s annual Holiday video after selling headphone brand Beats by Dre to Apple – allows him to switch freely between market commentary, his philanthropic work and thorny issues such as the politically controversial tax on carried interest.

Precisely because of the individual nature of his appearances, he manages to put a human face on a business often portrayed as ruthless, inhuman and indifferent to the values of the society it operates in.

Ray Dalio, who runs the world’s largest hedge fund Bridgewater Associates, has taken the unusual step of addressing criticism by publishing the deeply personal principles on which he claims his company is built. They include controversial methods such as recording most employee conversations and a peer-to-peer ranking app in order to establish a culture of “radical truth and radical transparency”. Dalio acknowledges freely that his company is “not for everyone” (about 35 per cent of new employees leave before 18 months). As contentious as Bridgewater and its policies may be, the firm can certainly not be accused of shying away from public discussion.

As for Goldman Sachs, the 10,000 Small Businesses initiative, an educational programme for company owners, shows how the bank’s expertise can help entrepreneurs with their growth plans. It cleverly bridges the gap between traditional CSR and Goldman Sachs’ core business, and is an important step towards building that previously missing relationship with the public.

These three strategies differ substantially from each other. Some approaches might quite rightly be called idiosyncratic. But despite their differences, they follow a common thread and achieve similar goals.

For one, all of them decided not to hide and to stand their ground in the face of public interest, thus filling a void that would otherwise lead to speculation. They extended their communication efforts beyond the small circle of shareholders, clients and LPs, signalling respect for public interest and the willingness to have a wider conversation.

They put accusations, some justified, others unsubstantiated, into perspective by shedding light on their thinking and drawing attention to aspects of their businesses that are less talked about.

No one expects these efforts to sway public opinion overnight. What they can achieve is the steady development of a corporation’s reputation.

In his book Connect, former CEO of BP, Lord Browne, urges business leaders to think about reputation every day. He sees reputation “as a reservoir of goodwill that must be filled up over time from many deep sources, not artificially engineered for last-minute use”.

In many ways, this is elementary risk management. The reputational damage incurred from an investment gone awry, unexpected losses or worse, a scandal, can wipe out an entire company. It is baffling that institutional finance, an industry that thinks incessantly about risk, and as far as hedge funds are concerned, even owes its very name and existence to a strategy developed to minimise risk, too often still turns a blind eye to such an existential threat. The leaders mentioned above understand this threat and decided to do something about it.

What’s more, it’s not just about downside risk. In an article for Strategic Management Journal published in 2002, researchers Peter W. Roberts and Grahame Dowling demonstrated empirically “that a corporate reputation is an important strategic asset that contributes to firm-level persistent profitability”. In other words, reputation pays off.

For institutional finance, embracing transparency won’t be smooth sailing. Setbacks are inevitable. People will feel misunderstood, misrepresented and misquoted. Dalio’s recent quarrel with the New York Times is a case in point. Opening up implies a change in corporate culture and should be part of a strategy, not an off the cuff reaction.

The good news is that there has never been a more diverse array of communication channels that can be owned by the companies themselves. Video content, market intelligence, research papers, client or employee testimonials can all be published on corporate websites and a growing number of social media channels without any of the risks commonly associated with traditional outlets.

Whichever strategy one may choose: public interest in how exactly investment firms with billions of assets under management go about business, the 24 hours news-cycle and demands for more transparency are here to stay. It’s time to fill that reservoir of goodwill.

Fabian Gmuender is the founder of Belcoves, a strategic communications consultancy. He has worked with leading institutions in financial services and the commodities industry.

Image courtesy of flickr user David Ohmer

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