The AFR called me on Friday for some thoughts on the AMP debacle - and let’s be clear, last week was nothing short of a debacle for AMP. I gave my opinion that, according to the Responsible Investment Association Australasia (RIAA), 44% of institutional investors say they incorporate ESG in Australia now, it’s remarkable how little has been expressed by them before the event or even after. Thus far it’s been limited to “this was already known” or “this was even worse than we thought”.
As luck would have it, I was in Woolworths (ironic venue, given our history of shorting the stock) on Saturday afternoon and ran into a friend from a long-only fund. Turns out they are quite long AMP! Cue awkward silence. Pointing out he’d read the AFR article, he asked what would I do if I was long the stock?
Now Morphic has no position in AMP – long or short – so this wire is just a short summary of what I’d think may be way forward for the board/shareholders from an ESG angle.
At the highest level, something is broken in AMP
The AFR did an excellent piece over the weekend that looked at the nearly 20-year history of poor acquisitions; a turnstile CEO approach; and now the banking Royal Commission.
I note that Morgan Stanley in their note this morning argues that the vertical integration model isn’t broken and that AMP can continue in its current form and that this is the optimal outcome. I’d say it’s stock price performance over the last decade – which was a less regulated world than what will be going forward - would suggest otherwise.
Also, going forward, which financial planner or person overseeing the Approved Product List is going to dare recommend an AMP Fund? Even if it’s the best product, the risks of looking tainted are so high now, that cross-sell opportunities are going to be limited. Compliance costs are going to rise further and undoubtedly more management consultants will be brought in for recommendations. I also don’t believe that owning “manufacturing” is as important today with the ability to buy in fund manufacturing and white label it at costs barely above passive fee pricing, as the industry is under huge fee pressure
TIME TO THINK RADICAL - BREAK THE CULTURE
Fund Managers and analysts are generally a sceptical bunch. The job requires one to have an awareness of the “bullshit meter” when dealing with CEO’s who are trying to convince you why their stock is the next big thing, which often leads them to overpromise and under-deliver.
As such, fundies generally have a poor opinion of their Human Resources and marketing departments. “Culture”, “branding” “Thought leadership” usually get sniggered at. We specialise in numbers, not this airy-fairy rubbish.
But what I think is broken at AMP is its culture.
Something in the culture in AMP is seeing the company keep ending up in similar positions, irrespective of the CEO or Chairman that happens to be there.
Culture is an odd thing. It’s hard to quantify, but it exists. It also exists independently of the people in the organisation and it nearly always lives on beyond any one individual. I used to work at BT Investment Management. The culture that Kerr Neilson worked in the 1980’s and 1990’s, one that prided itself on aggressive and almost confrontational, lived on long past his departure.
I link here to an excellent article by a behavioural economist looking at the interplay of culture and rules. Rules are important as they help to define what the norms of a group should be. Quoting from the article:
“If we ask why tariffs were once simpler and zero-hours contracts rare, and why chief executives only recently began to pay each other millions of pounds a year, the answer is in earlier days reputable companies did not think it appropriate to do these things. So the best answer is not to attack a few topical symptoms of excess, but to restore a culture that recognises corporations are above all social organisations.”
Just read that again: ‘did not think it appropriate’. What a superb description of organizational culture: doing what is appropriate, and not doing what is not appropriate.
Do we need a rule that says we shouldn’t pull the emergency brake willy-nilly? Perhaps — but the people waiting for the bus were not neatly queueing because a rule told them so…
Just like for the good people of London, guidance on how to act as a member of an organization is largely encompassed in its culture — implicitly or explicitly. Culture facilitates herd behaviour: we see how others behave, and copy what they do, especially in situations where we are unsure. Others copy us again, and so on.
I think the above neatly summarise the problems at AMP and the banking sector in Australia currently. Because I suspect the reaction will be to put more rules in. More rules about client advice; more rules on platforms; more committees to oversee platforms; etc. These are attacking the symptoms.
TIME TO THINK RADICAL – BREAK THE BUSINESS
I personally do not think the culture can be changed by a new CEO or codified by rules. So how do new cultures emerge? Obviously, new businesses form their own social norms through time, but I believe demergers also create new cultures. It’s a fresh start and with that comes new perspective.
If I look at Rinker, which demerged from CSR in the early 2000’s, friends that worked there before and after the demerger talked about how Karl Watson, despite not being the CEO, drove cultural change to a return on capital focus. Rinker was eventually acquired by Cemex at a price that was multiples higher than what CSR shareholders were given the script for (a US housing cycle clearly helped!).
I think the only way forward for AMP is to break the business and let new cultures emerge from the ashes. Some businesses will thrive, some will wither. And who knows, some of them may even be put back together in the future.
But what I do know, is the current one hasn’t delivered for shareholders and if something good can come from this bad week, it is hopefully a fresh approach.
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Chad co-founded Morphic Asset Management in 2012. As a stock picker Chad is also a generalist but has strong regional knowledge of Europe and the Americas. He has also been awarded the CFA Charter.
I agree. As I listen to the Royal Commission live streaming each day I keep thinking to myself over and over again: when did this become accceptable? As you rightly point out a great culture always does what is appropriate and right for its clients. And if you need rules to tell you what is right and appropriate then that is the problem right there.
While I enjoyed your article, I do not believe culture exists; individuals decide whether to behave appropriately of not. For many it is just easier to go with the flow rather than change things. The reason I say this is culture is often used as an excuse in sporting teams and organisations as a blanket excuse for poor behaviour whereas looking at specifics will actually give you insight into what needs to change - in AMP's case deeper analysis of business practices is required.
AMP has always had a culture of knowing all and always being correct. Their arrogance of agents, fin. planners etc., in past years knew no bounds. But the institutions and regulatory authorities have never held AMP accountable. Result is here for all to see. Forgot to mention share price $14 to $4.
In that case it appears the entire Capitalist system is broken or breaking. The culture all over seems to be grab whatever you can from whoever you can.
Yep! Like other aspects of company analysis, you can only start with where you're at: good, bad or ugly (queue AMP). It's reasonable to assume more of the same unless there's a reason not to. And right now, in the case of AMP and the Big 4, there's no reason not too. Where may the smell of rotten corporate culture lead us next? How about the 'legal' gambling industry in Australia. I use the term loosely (queue Crown Resorts). Put the carrots away. Get out the biggest stick you can find. I'd like to see a Royal Commission get after these rogue's and force some institutional reform down their throats.
AMP has for decades had the biggest excuse book for business excuses and poor life assurance returns. Boards that were there for the directors fees. I must however admit a bias as I had always steered away from acquiring their shares hover, I was seduced by a prominent Brokers strong buy recommendation in late February. I only have myself to blame
The culture at AMP and most financial product and services organisations reflects how they make money, which is from the sale of their products. They align the incentives of those directly and indirectly involved in the sale of products with selling more product. Broadly people act in self interest and AMP and others use this human trait. Stealing a Mungerism, show me the incentives and I'll show you the outcome. AMP's involvement in the advice industry is for the primary purpose of selling more product and again advisers are provided incentives (too many to mention, some big, some small) to sell product and too often this will be contrary to the interests of the client. I doubt many of us expect much in the way of real change to come out of the Royal Commission and while the current incentive structures remain nothing will change. I'd like to see just one, that has the potential for massive cultural change, not only for AMP but the broader financial services industry, and that's the complete banning of commissions and conflicted pricing structures on investment/super/insurance products. Remove the conflicted incentives and you will dramatically reduce the conflicted behaviour.
Hi Patrick: Thanks for your thoughtful feedback. Likewise, I have to disagree with you. Of course groups consist of individuals making choices. Most of these choices are not clear cut, like assault or something of that ilk (Though the provocative book "Hitler's Willing Executioners" would argue even the most abhorrent behavior is rationalised in groups). They are culmination of little choices. I think that better answers the perennial question: "why do good people do bad things?".
Hi Jason Smith: An excellent point on the Mungerism and whilst we are a not "buffet-phile" investment house, I have huge admiration for Charlie and often use that quote! Yes, if there is to be new rules, they need to set the incentives correctly. Whether the RC has the level of knowledge to structure future rules correctly, I'm not sure, though the team's depth of knowledge of a sector that they are not from has been impressive thus far.
Hi Albert Quo: I'm not going to disagree with your assertion that capitalism today has got structural issues - I've written for the AFR on this topic and some white papers you can read on our website. But I'm also an optimist. There's a reason why paying people to donate blood doesn't see a rise a in blood donations (which if everyone was selfish, you would expect) -humans are social animals and like to act and believe in a higher ideal of the group. I think there's enough evidence that says groups can change norms for the better.
From the middle 1980's until Mt Isa Mines was taken over around 2003, my company consulted to MIM. We worked for over 10 divisions of MIM over this time and, with the exception of 1 division, all MIM personnel and their division of MIM stood by "my word is my bond". If we were asked to start an urgent project you did so immediately knowing that once you submitted your account the full amount was paid.
Lack of performance meets lack of disclosure and transparency. Honestly why is anyone surprised?
The simple problem as is with ASIC and government is the knowledge that nobody in the corporate or public service sector go to jail. Only the guy who steals a loaf of bread from a shop ends up in court. Its nothing to do with the capitalist system it's simply the lack of enforcement of the blatantly broken rules! How is the train driver or bus driver or ticket collector or normal worker supposed to trust the system when it consistently over many years proves that the top end of town are collusive with the public service and media in regard to corrupt practices. Remember the phone tapping bin the UK?