In cautionary tales like Enron, WorldCom, or Lehman Brothers, a lack of governance controls is blamed for the devastation. They had boards of directors, internal audits and compliance programs. But they weren’t quite robust enough. The solution? Double down on them. Add more controls. Bureaucracy be damned. 

The hard truth is that every governance framework is vulnerable in some respect – they are only as ‘good’ as the people they seek to govern. In our view, the best way to protect stakeholder interests over the long-term is to pair pragmatic strong governance processes with a team that puts as much emphasis on ethical behaviour as it does on talent, skill and experience. If that were easy, everyone would do it.

Why being ethical is hard

Ethical behaviour is often skittled by the real gravitas of short-term gains. For example, in the context of fund management, shareholders and managers often seek to maximize fee revenue and profits through cost-cutting measures, asset hoarding, or a refusal to sell assets at the right time. It’s difficult for controls to prevent such behaviours; big personalities can weave convincing justifications, ones they might genuinely believe because they aren’t looking through an ethical lens.

The reality is that determined executives can circumvent internal controls. I’ll say it again: more controls are not the answer. Instead, we need key decision makers who, through their life and work experience, have come to understand that making (hard) ethical decisions now pays double in the long run, both financially and in the shape of proud legacies. Put simply, they understand that durable businesses are the best kind.

Durability as the goal

I recently returned from a trip to the Arctic. With the ubiquitous fresh air and thinning glaciers, I again found myself thinking about Patagonia, the outdoor clothing and recreation company. Their positioning centres on ‘durability’, a claim made believable by the quality of their clothing and gear, and the promise to repair anything that breaks, at any time. I love the idea of never having to buy another waterproof jacket. That probably puts me in the minority. But my strong affinity for the brand, multiplied by the rest of the so-called ‘minority’, rolls up into an enviable, generational business.

Fund managers should adopt a similar ‘durability’ mindset if they want loyal stakeholders. Investors, for their part, should expect to feel an affinity for their chosen fund manager akin to their favourite brands.

Building an ethical firm that endures

If we are to build a firm where ethics is paramount, the ethicality of the leadership team could not be more important. That’s one of the most exciting things about launching Evonite. The slate is clean. We have the privilege of choosing who we work with. And those decisions are being made based not just on what people can do, but who they are. Ethical behaviour percolates from the top. Get that right and half the battle is won.

Then, our job is to design, build and manage Evonite in a way that promotes and supports ethical behaviour from the rest of our team. Below are some of the things we’re doing to achieve that:

• Design our interview process to test for transparency, empathy, respect for others, and consistency between what candidates say and do.
• Define what ethical behaviour means to us, not just in a documented form, put through ongoing discussions and debate.
• Ensure our people feel safe and supported enough to openly voice their dissent or discontent to avoid brewing resentment.
• Make ethical behaviour a KPI and a key determinant when promoting people internally.

We’re not naïve. Even ethical people can make bad decisions, especially as a firm grows and becomes more complex. People, too, can change. We do have strong governance structures, inspired by the most effective iterations we have seen collectively during our careers. They are, in a word, necessary and we take them very seriously. But we cannot and will not solely rely on them. They are a safety net, a first  line of defence but shouldn’t be the only line of defence. Thinking otherwise is a quick road to complacency and loss.   

Maybe ESG should be renamed. Let’s call it ESE instead.