FINDING THE NEW VALUE DRIVERS

Leading businesses are creating value through developing and nurturing their relationships with stakeholders. The financial services industry needs to develop the tools to measure that value, says Colin Melvin.
Colin Melvin
Founder & Chief Executive Officer
Hermes Equity Ownership Services
“What we need is a new business culture and new code of ethics that allow the financial services industry to serve its clients and through that create value for a
wider set of stakeholders.”
Colin Melvin

When the financial crisis hit, Colin Melvin expected retrenchment. Like many others, he believed businesses would all focus exclusively on the short term and on getting out alive. Indeed, some did as expected, but to Melvin the greatest surprise was that largely the opposite happened. People started questioning the system.

“I think that, as the crisis hit, people realized that this was a crisis of responsibility. They saw the damage done and realized that this was not about just getting back on the same track, and that instead we needed better leadership within business and in investment,” says Melvin. He is the founder and Director of Hermes EOS, a financial services company specializing in facilitating responsible and active ownership. As Chair of the Investor Group, he was deeply involved in formulating the UN-backed Principles for Responsible Investment (PRI) launched in 2006 and he currently serves on the PRI board.

When he talks about leadership and responsibility, Colin Melvin speaks with conviction and in terms that are not usually associated with his work environment – the financial district in the City of London. He talks about compassionate and respectful leadership and of the importance of nurturing and developing talent, but most of all he talks about relationships.

“I think we’re seeing a massive shift in leadership thinking, away from the idea that business is all about simple transactions and towards a focus on business being driven by relationships. Businesses are social machines and the quality of their
internal and external relationships is what creates value. If you can maximize the quality of those relationships, you maximize the utility of the company – not just in monetary terms, but also in terms of benefits to society, the economy and the environment,” says Melvin.

“This is really stakeholder management taken seriously,” he explains. “It can also be explained as an evolution of business; from thinking with the ego-centred reptile brain to engaging the higher social and affiliation functions and realizing that we can be more successful together than on our own. “The best companies understand this. They might not describe it in those terms, but they are already doing it,” says Melvin.

Nevertheless, even though a growing group of companies is starting to look on their relationships and stakeholder management as the vital value drivers in their business, this perspective is far from universal. Moreover, in Melvin’s own part of the business world, the financial services industry, it is unfortunately still very absent. This is perhaps understandable in a sector that more than any other has a business model focused on facilitating and creating transactions. However, what it means is that investors and asset managers are perhaps five years behind the corporate world in developing a business understanding that is suited to the  challenges facing them today, as Melvin puts it.

He sees an urgent need for the financial services industry to take a critical look at its own business models and how they create value.

“The role of the investor should be to provide good stewardship and create value for underlying beneficiaries, and the proper function of the City should be the efficient allocation of capital to where it can be best applied. Unfortunately, the financial services industry is a long way from that at the moment. The City and Wall Street make their money from transactions, from the simple buying and selling of stocks, and that adds very little value, if any,” he says.

And this is where Melvin returns to relationships. Because if tending to relationships is what really makes a business valuable – for all stakeholders – investors should know how to measure that in order to move capital to the companies that do it best – and help develop the laggards.

“The idea that we’re seeing now in the investment world is that if you can properly analyse the quality of a business’s relationships, you can both predict the firm’s future performance and contribute to that performance as shareholders by using your ownership leverage to bring about change,” he says. And although progress towards that goal is slow, there are encouraging signs.

“Some of the heads of the world’s biggest investment firms and certain management companies are starting to use the right words. And what’s perhaps most important: companies and pension funds are really the principals of the system, and they are starting to get this message. Once they start applying pressure on the financial services industry from both sides, that’s when there will be change,” says Melvin.


WHAT’S NEXT?
A NEW CODE OF ETHICS

Seen through Colin Melvin’s eyes, the financial services industry needs to develop a greater sense of professionalism. “It’s about knowing your clients and looking after their interests like good doctors or lawyers do, putting clients in the centre,” he says. That is not what Melvin sees in the financial services industry today. Quite the opposite.

“In essence, many companies in the financial services industry make use of the fact that they have more information than their clients to their clients’ detriment and make money for themselves first,” he says.

“What we need is a new business culture and new code of ethics that allow the financial services industry to serve its clients and through that create value for a wider set of stakeholders,” says Melvin.