Research Affiliates always seemed so isolated in Newport Beach, California. It may be the hometown of the vast Pimco fixed-income business, but otherwise you need to go up to San Francisco or over the Rockies to find the next serious fund management players.
But in the age of coronavirus, nowhere is isolated. Most of us still associate Research Affiliates with its bombastic founder, Rob Arnott. It is no accident that its most famous product, the Rafi, is often called the Rob Arnott fundamental index. But the business is now run by Katy Sherrerd, who spent 19 years building up the CFA (Chartered Financial Analysts) Institute into the leading asset management research body in the world. CFA is the most prestigious acronym in investment, comparable with SJs (Society of Jesus or the Jesuits) in the Catholic Church.
Sherrerd says as we face the serious and stressful challenge of the Covid-19 humanitarian crisis we are forced to conduct business in unfamiliar ways. It is particularly tough for portfolio managers who are used to pressing the flesh at the daily “let’s be careful out there” lectures at morning meetings to work from home.
Yet Sherrerd says most firms’ business continuity plans (BCPs) focus on technical details and operational duties, not on the human aspect of working alone in a time of greater uncertainty and angst. Ignoring the human element, which is critical for success at all times, is shortsighted. “In times that call for our BCPs to be enacted, we need a high-functioning team more than ever.”
She argues that leadership differs from management. “Management is the daily practice of planning, budgeting, organising and problem solving. But at its core, leadership relates to two things: establishing direction and improving, aligning and motivating the team.” Both aspects of leadership are much harder under today’s uncertainty and when team members are isolated at home.
In industries highly dependent on human knowledge, experience and problem solving, leaders must be skilled at setting direction and motivating their teams in both good times and tough times, Sherrerd says. Not all decision-making approaches work well in periods of uncertainty. “Good times and confidence are like a high tide that lifts all boats — it is hard to tell whether a leader is truly up to the task until the tide of good fortune and certainty goes out. Establishing direction under uncertainty is an essential skill of a good leader.”
In times of relative certainty, a range of decision-making approaches can work reasonably well, though many have a downside. In good times, many paths lead to good outcomes, reinforcing a sense of confidence among leaders in their decision-making ability, much as most fund managers appear skilful in a bull market.
But for some reliance on past success leads to overconfidence (sound familiar to behavioural finance followers?). As the leaders of their organisations they believe that they are best positioned to make important decisions and that the risk of mistakes is low. As a result, they do not solicit or value dissenting views for the contribution they can make to vetting decisions, which can lead to both mistakes and “teaching” others in the organisation to withhold contrary information and views.
But uncertainty on the current scale changes everything. Current practice and direction may not be ideal, or even viable. Leaders who were not accustomed to soliciting divergent views may find themselves blindsided by unknown factors or unable to make decisions because of too little information. Many of these leaders fail the test of good leadership.
Uncertainty is always a feature of investment, otherwise there would be no time when one party wants to buy and the other to sell. In times of extreme uncertainty firms need their leaders to set the course for the organisation — and to do so with less information and more uncertainty than most people are comfortable with. Good leaders make decisions in these conditions after soliciting input, including dissenting views, from a diverse group of individuals. They see opportunity in the face of change and are not paralysed by lack of certainty or the risk of making the wrong decision. Rather than sticking rigidly to known paths, they are curious about alternatives and ready to pivot.
Good leaders understand the wisdom of soliciting input, especially opposing views, Sherrerd says, despite the inevitable discomfort associated with that approach. They embrace the concept of collective intelligence: the intelligence of a group rather than of an individual. Research shows that collective intelligence is associated with better decision-making, greater curiosity, more effective leadership and improved firm outcomes.
In SA under the current governance structure it is not clear whether the core of leadership — setting the direction and ensuring that the group is run by the best people — is the prerogative of the CEO or the board of directors. In the US, where most corporations are still run by executive chairs (and almost all are still men) there is more room for the autocrat chair such as the recently deceased Jack Welch of General Electric.
Some might argue that the dismissal of Peter Moyo as CEO of Old Mutual demonstrated good governance in action. But there are far more bad examples of boards destroying value, such as SAA and Eskom.
• Cranston is a Financial Mail associate editor.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.