Andrzej Kubacki, MBA, CFA
Andrzej, thank you very much for participating in the ESG 12on12 project!
You take investment decisions on a daily basis, you have been working on the capital markets for several years, achieving success as an equity analyst and portfolio manager. Today we will talk about diversity and its impact on decision making. Let’s start with explaining how the investment decision-making process in mutual funds (TFI) and pension funds (PTE) looks like?
Each TFI has its own processes. At one end of the spectrum, we have investment committees that make all decisions collegially at periodic meetings. On the other – a very strong mandate for individual portfolio managers to undertake (virtually independently) all activities, from the generation of investment ideas to their implementation through the execution of relevant transactions.
You are interested in the decision-making process itself. You wrote a great article about it on LinkedIn. Tell us how, from your perspective, the decision making process has changed and why?
The ability to make efficient and correct decisions is a key competence in my profession. Hence, I’m naturally interested in this subject. In a nutshell: along with the growing complexity of organizations and problems they are facing, growing quality of the labor force and the increasing pace of economic activity, the tendency to decentralize decision-making processes is gaining strength. This being the case, practical aspects of managing a pivot towards decentralization are not bereft of their own challenges. In particular, there is a need to be mindful of the balance between centralization and coordination. Along with growing complexity of the systems in which firms operate, challenges faced by architects of organizational structures are systematically growing.
What are the consequences from these changes for management and supervisory boards of companies?
It is my belief, that there is less and less room for inflexible organizational structures. At the same time, I am not an orthodox opponent of the hierarchy. I just believe that one should always use the right tools for each task. From the perspective of the management and supervisory boards, it is good to be mindful of this aspect of organization management. The ability to shape motivations, dependencies and responsibilities within an organization is a major asset in the hands of senior management (especially in larger companies). The handling of this issue can make a tremendous positive or negative impact on the company’s business development trajectory. I strongly encourage managers to find time to take a birds-eye view of the organization and look for potential mismatches between goals and as-is methods for achieving them.
How important is diversity in investment decision making?
Above all, it’s the variety of perspectives that matters. I think good interlocutors are very important in the decision-making process. The very need to formulate thoughts in a logical sequence in order to efficiently convey them to an audience can shed some new light on the problem. Nevertheless, the main benefit of diversity is the ability to detect and eliminate cognitive biases. High levels of diversity guarantee that experiences (and hence, subconscious tendencies towards certain ways of approaching the problem in question) of individual team members have a chance to cancel each other out, leaving only objective facts and logical conclusions.
Managing a diverse team with many voices and opinions is not easy. You have experience in it. In addition to running a team in Poland, you graduated with honors from the MBA at Chicago Booth! How did you achieve understanding and common conclusions to solve the projects?
Yes, it was definitely a very interesting ‘proving ground’ to observe decision-making processes. Project groups that had problems with the process paid a high price in terms of efficiency. Lack of assigned responsibilities and a tendency towards collegial decisions often resulted in endless discussions. At the other end of the spectrum were some groups beaming with internal friction. Conflicting visions combined with strong personalities or the presence of „stowaways” waiting for the projects to be completed by someone else, were a source of serious conflicts. The problem is, in my opinion, two-dimensional. The compromise we are looking lies in being able to benefit from the knowledge and experience of all team members without losing the ability to make decisions swiftly. We found that a healthy compromise could be reached by assigning responsibility (and decision-making privileges) for each part of the project to one individual, in combination with an open discussion on the relevant decisions to be made. This way, each decision-maker had the opportunity to use the knowledge of all team members (acting as trusted advisors), but at the same time, as a 'subject matter expert’, they had the right to make the final call (and the responsibility that goes with it).
30% Club Poland „Diversity in supervisory boards 2021” report shows that 65% of the survey respondents do not believe that gender of supervisory board members has an impact on corporate results. Abundant international and domestic research shows that companies with more diverse boards obtain superior financial results and less risky. These are elements that institutional investors should take into consideration. How to persuade them?
There is a sort of evolutionary mechanism at work in the capital market, that rewards correct decisions. Customers „vote” for institutions managing their assets by investing their funds with institutions that offer attractive returns and acceptable risk. Making investments in companies that take full advantage of the benefits of diversity is certainly beneficial from the perspective of reaching client goals. I believe that the investment performance and customer approval, as measured by the flow of assets, will have tremendous impact on the actions of institutional investors.
At the same time, the survey showed that 50% of institutional investors’ representatives surveyed take into account the diversity of company boards in their investment decisions, and 33% of respondents take into account the board gender diversity indicator. How can institutional investors integrate diversity into their decisions?
Data on the composition of corporate bodies is publicly available, there is no problem with taking it into account while conducting research. This being the case, I believe that running a simple scoring model before committing funds to an investment does not fully discharge the asset manager’s fiduciary duties towards clients. In my opinion, a full analysis of a given investment through lenses of corporate strategy, market position, financial condition, competitive situation, potential risks and other relevant factors constitutes a valid basis of an investment decision. Nevertheless, I am of the opinion that the relationship you described in the previous question is true. To the nay-sayers, I recommend the following exercise: when researching a given group of companies in order to add one to the portfolio, once the analysis is concluded, please look at the diversity metrics for your chosen company. I think this is the easiest way to verify, that the relationship actually exists.
How do you think the issue of incorporating ESG criteria, particularly those related to diversity, will evolve in Poland? Will it be more a matter of regulatory pressure or customers, e.g. the emerging generation Z?
Currently, the main 'push’ is definitely coming from the direction, of the regulator. However, in my completely private opinion, it would not hurt the local asset management industry to engage with clients a bit more. I think there is room to differentiate oneself by researching customer needs and creating tailored products that address them. As a side note, I would also pay attention to the 'investor life cycle’. Generation Z, born in the 1997-2012 time frame, has not yet built up sufficient savings and purchasing power base to shape the market to a significant extent. Generation 'X’ and the 'Millenials’ currently have the greatest influence on the market.
Working on the Polish capital market, it is easy to notice that women are a minority on corporate boards. 30% Club Poland data shows that at the end of 2021 in the 140 largest listed companies women constituted only 16.6% of the authorities. At the same time, the survey showed that c. 10% of respondents regularly nominate women for supervisory board members (exercising voting rights on behalf of clients) or have voting policies for supervisory board members. What is the reason behind such low proactivity on the part of institutional investors?
I don’t think there is a simple to this question. I would point out the unusual (compared to the US) shareholder structures. For the majority of WSE-listed companies, the controlling stake is held by a single strategic investor. This means that institutional investors have, in practice, very little influence on decisions made by the General Meetings of Shareholders. As a result, adopting an activist stance at the General Meeting often does not translate into the ability to shape the decisions made. I see echoes of the “Prisoner’s Dilemma” in this problem. A coalition is needed to take a given action, but if all actors act independently, they can choose not to act at all. In this context, it seems to me that the next logical step, after your 30% Club Poland initiative ramps up, is to consider a formal agreement between the Club members, as per Article 54 of the Act on Investment Funds.
The survey showed that institutional investors identify two key reasons for the infrequent nomination of women as independent board members: 1) insufficient number of women in their own candidate bases and 2) the less active way in which women promote their candidacies. What solution do you see for this situation?
I think it’s time take action. The 30% Club Poland initiative has built a good foundation and should, in my opinion, increase the chances of appointment each time, yet 'modus operandi’ of female candidates should remain unchanged. First, one needs to identify target companies. What I mean here is finding entities in which the competences of a given person match the needs and the shareholding structure and timing creates an opportunity for changes in a reasonable time frame. The second step should be to start a dialogue with each major shareholder.
What about diversity of investment management professionals? Tell us, please, how diverse is our Polish capital market? Has anything changed in this regard over the several years of your career?
Even though you yourself are living proof of the fact that women are great at working in the investment management industry, and despite the fact that the vast majority of women employed with investment banks and asset managers in Poland have been very successful, the industry has historically seen little interest from female candidates. At the beginning of my career, just a few percent of the talent pool applying to fill a given front-office vacancy were women. However, there is light at the end of this tunnel – although we are still a bit short of the proverbial 50% goal, a noticeable improvement has taken place in the last 2-3 years. Suffice it to say that the last 3 jobs that have been filled in the Asset Management Department of my current employer are women.
Data shows that women are a minority not only among the institutional part of the capital market, but also among individual investors. What is the reason for this?
I think this is, to some extent, a measurement problem. Some of the people classified as retail investors are clients of trading platforms offering so-called 'Gameification’ of the investing experience. This boils down to offering solutions that are in fact a socially acceptable form of gambling. The tendency to such behavior is, depending on the research, 2-7 times higher in men than in women. In my opinion, a remedy for such an investor base structure is to foster a culture of systematic wealth building through investments as an alternative to seeking the thrill of quick profits.
Andrzej, thank you so much for sharing your opinions and supporting women!