“How we saved our planet”
If rethinking profit-driven investment structures could defuse the ticking timebomb that threatens to destroy life as we know it, why isn’t overhauling the capital market framework a global priority? Here, Nicholas Benes imagines the advice benign observers of our current doomed trajectory might give…
Nicholas Benes, Representative Director of The Board Director Training Institute of Japan
In 2035, Earth received a visit from the planet Vilcan, its counterpart in a semi-parallel universe. The Vilcans were roughly 1,000 years ahead of Earth technologically and had been listening to Earth’s radio and TV chatter for many years via the wormholes through which they subsequently made their way to our planet.
“We have come to give you advice; you seem to need it,” the Vilcans said. “Just as almost occurred on our own planet about 1,200 years ago, you seem unable to fend off impending climate and environmental disasters of your own making. We would like to share with you how we overcame similar challenges, because you have no time to spare. It would make us sad to see civilisation die on a rare counterpart planet like Earth.”
“Please tell us how you managed to do that?” asked Earth’s delegation.
“We are a logical people, but a bit less individually self-centred than you seem to be. So, as Vilcan neared the ‘irreversible’ level of greenhouse gases, we purposely redesigned our capital market framework so that it incentivised much more desirable outcomes, and disincentivised negative externalities.”
The Vilcans’ advice as to how they did this was truly eye-opening.
“Like you, we had not rationally updated our obsolete stock ownership system for more than a century. Non-transparent practices detracted from the collective good. They attenuated responsibility and accountability.”
The basic principles
ABOLISHING ANONYMOUS OWNERSHIP
“The first thing we did was to abolish absolute anonymity for shareholders. For all investors, encrypted ID numbers were issued. We used a distributed-network system similar to your ‘blockchain’ so that each and every share carried with it – and constantly updated – its own permanent record of exactly who had held it, for how long, and on whose behalf. Only by doing this, could we hope to track all investors’ holdings so as to hold them accountable later for their engagement with companies and proxy voting, or for their toleration of inadequate sustainability policies by executives."
THE NINE STEPS VILCAN TOOK TO SAVE ITS PLANET
The Vilcans’ advice to Earth had set forth at the end of its introduction: “From our point of view, most compensation or fee structures in your investment chain provide the wrong incentives.” It then continued in more detail:
Structural incentives to benefit both company and society
Because we had concluded that full limited liability should not be enjoyed (or abused) ‘for free’, and, in fact, it distorted incentives, we modified the laws regarding ‘corporations’ or other types of pooled equity investment vehicles (such as mutual funds, ETFs, pension and endowment trusts, LLCs and LPs) as follows..."
HOW DID THE SYSTEM AVERT DISASTER? WHAT ABOUT EARTH?
Having described their redesigned equity capital market system, the Vilcans explained why it succeeded:
"As a result of these changes, for the first time in our history, all parts of the investment chain – asset owners and fund managers, executives and employees – were truly incentivised to consider how to maximise the long-term and profitable sustainability of companies, by diligently preparing in advance to cope with upcoming new regulations and changes in customer/societal expectations.
ABOUT THE AUTHOR
Nicholas Benes is CEO of the The Board Director Training Institute of Japan (BDTI), a Japanese non-profit. A lawyer and MBA who worked as an investment banker at JP Morgan and then led his own M&A advisory boutique, Nicholas has served on a number of Japanese boards and Japanese government advisory committees. In 2013, he proposed that a corporate governance code be included in the Japanese government’s growth strategy, and suggested many of the new code's principles.