FCLTGlobal is developing practical tools to address the issue of balancing long- and short-term risks. Part of the process includes interviews with experts in the area of assessing, managing, and planning for investment risk. Below is the next in this series with Will Hetherton, Head of Public Affairs & Strategic Relations at Future Fund, Australia’s sovereign wealth fund.
FCLTGlobal: Will, thank you for being part of this interview series with FCLTGlobal. You have led Future Fund through an analysis of reputational risk. What inspired Future Fund to pick up the issue of reputational risk right now?
Hetherton: We have had a sharp focus on reputation risk in the organisation since we were created just over 10 years ago. Maintaining the trust and confidence of our stakeholders is central to our ability to generate and sustain long-term risk adjusted returns. As a management team and a board working together, we need the trust and confidence of the ministers to whom we report and the Parliament to whom we are all ultimately responsible. Declining trust would increase our risk of having restrictions placed on us, and that can only reduce our ability to commit to long-term investments and focus on a long-term, risk-adjusted returns. We also need a positive reputation with peers, partners, and potential staff. Reputation damage can directly impact our ability to operate and invest effectively.
So, we are really putting more and more focus on taking a holistic view of how our reputation is developed and how it can be damaged.
FCLTGlobal: Does reputation risk matter equally to public and private entities, or is it particularly important just to public entities?
Hetherton: I think reputation is hugely important for all organizations, whether they are public or private, listed or unlisted. The ability of people and groups to be heard and to influence what organisations – of any type – can do is growing enormously. Investment institutions, including those who were previously largely hidden from view, are increasingly visible and need to manage that.
FCLTGlobal: FCLTGlobal’s research about investment risk explored the perspectives of communication, measurement, and behaviour. To what extent can asset owners manage reputation risk by communicating better and setting more accurate expectations with trustees?
Hetherton: Communication is certainly a critical part of managing your reputation. In many ways reputation risk is really about that gap between expectations and the perceptions that people have. Alongside communication though, you need to think about the relationships you have, the behaviors your organization is known for, and the perceptions stakeholders form.
It is important to be able to articulate what you are here to do, why you’re doing it, and how you are going about achieving it. You need to do that at the same time as understanding what expectations stakeholders have of you and what their perceptions of you are. Being able to understand that external perspective is an important part of then being able to frame your communication.
FCLTGlobal: Reputation really is a reflection of behavior as well. We all have innate behaviors, some of which are very long-term and some of which are more short-term. How do you manage some of our shorter-term behaviors and their potential effect on reputation?
Hetherton: We can do a lot to shape and encourage long-term behavior in the way that we commit to our purpose, nurture our culture, and promote our values. Avoiding group-think is one especially powerful mechanism. Seeking out and encouraging diversity of perspectives is really important to our business and investment program as well as being vital to helping us steward our reputation. It is essential for understanding different perspectives from different stakeholders.
I have found in conversation with other investors, both asset managers and asset owners, that organizations really benefit from having a framework for their reputation. A framework means being clear about who your stakeholders are, what their context is, what their expectations and perceptions are, the risks and opportunities that need managing, and the ways in which you can do so.
FCLTGlobal: Have you formalized a framework? How have you put it to work in the organization?
Hetherton: We do have a framework and we use it to track progress and maintain a conversation about reputation risk over time. It helps us integrate reputation into our business and investment decision-making – reputation is often an explicit discussion and agenda item in investment meetings. It also helps us to think more strategically about emerging risks and our appetite for reputation risk.
We also do a lot of work with our staff. We use case studies to bring to life situations in which we have been faced with a potential reputation risk, and then we work through them, including talking about how real-life situations played out. It’s about embedding reputation risk awareness across the organization.
FCLTGlobal: My last prepared question is about opportunities associated with reputation, rather than risk. To what extent does Future Fund’s reputation help it to recruit and retain the right people or to open the right doors with asset managers? Is reputation an incentive, like compensation?
Hetherton: It is really important. We exist to invest for the future generations of Australians. Building and protecting our reputation around our purpose and around the way we operate is a very powerful incentive for people to join and strive in what we do. And of course, we want to build reputation and trust to support the kind of partnerships we want with peers and investment managers.
FCLTGlobal: We like to end these conversations with the same general question: Is there anything we should have asked you but didn’t, or anything that you think we’re missing?
Hetherton: We’re very focused on this issue of thinking about reputation risk, but we certainly don’t have all the answers, and we certainly don’t think that this is something that we can ever cross off the ”to-do” list.
It is a focus that we need to maintain. We are always very keen to have conversations with other sovereign wealth funds and other institutional investors and asset managers, about how to do this better. Sharing perspectives on reputation risk can help us be better at what we’re here to do, which is to invest for the benefit of future generations of Australians. My own observation, really, is this is a topic well worth having more dialogue on across the industry.
FCLTGlobal: Thank you. FCLTGlobal appreciates all this insight and everything that you and Future Fund have done to elevate the issue.
If you are interested in learning more about FCLTGlobal’s research on risk management, please contact Matt Leatherman, Research Director.