In 2003, former President George W. Bush stated to the world that Saddam Hussein had weapons of mass destruction. This was the basis for the invasion of Iraq. In October off 2008, the U.S. Department of Labor issued an Interpretive Bulletin Relating to Exercise of Shareholder Rights by pension plans regulated under the federal pension rules.
What do these seemingly unrelated events have in common?
Risk.
Each of these political decisions has repercussions on social and economic levels that can transform our society and transcend the stated purpose of these political acts. As the global economic crisis continues to unravel, investors and the American public in general are beginning to grasp the dark side of business and political decisions that are altering their lives in not so pleasant ways. For many years, everybody has looked at economic growth, religious and political engagement and other seemingly positive social changes while ignoring their consequences.
Unfortunately, few people have turned to coin over to look at what’s on the other side. This then is the fundamental problem that we are facing today, Most of our coins are now coming up tails and we are all getting a dose of the risk associated with our returns, be they investments or social policy decisions made over the past 25 years.
This risk proposition can be applied to practically anything in our lives and in our world. While it seems like common sense that everything in our lives and society involve risk of some sort, rarely do we apply such a conscious analysis to these events.
Narrowing this proposition a bit, the risk I speak of here takes two forms: political risk created from ideologically-based decisions of government (Ideological Risk) and political advocacy risk generated from political lobbying and campaign finance taking place primarily in Washington (Political Risk). In the opening paragraph of this post, the first event (the Iraq) invasion is primarily an ideological risk event and the Department of Labor rule change related to pension fund activism is an event that qualifies as a Political Risk event.
Ideological Risk
This type of risk has immense consequences on the world. The events in Iraq are perhaps one of the most dramatic examples of this risk. The decision to invade Iraq was an ideological decision based both upon a geopolitical view of the world defined as Neo-Conservatism combined with the personal ideology of the sitting president who sought to make his political mark by overthrowing another political leader. Whether one chooses to characterize that decision as one based upon a lie, a view largely held by the world or one based upon erroneous intelligence, the outcome is not altered. Our economy was tattered by massive military expenditures, our reputation and good will was thrown asunder, hundreds of thousands of people were killed and the objective of destroying terrorism is thrust further out into the future than it was when the Bush Administration began its campaign six years ago.
Political Risk
This second type of risk is defined as the consequence of the political players engaged in influencing the outcome of government activity. For my purposes, I am defining this further to mean lobbying and campaign finance activities in Washington DC. Using the example of the Dept. of Labor rule limiting pension plans regulated by ERISSA with respect to shareholder activities, its important to note that this rule was promulgated at the behest of business groups, led by the U.S. Chamber of Commerce.
In a previous post on Global Investment Watch - Americans Must Not Vote - I spelled out the impact of this rule, which would, in practical terms, limit the ability of pension funds to vote proxies in the interest of the fund and its beneficiaries - a right that any other shareholder can take for granted. Corporate pension funds have no similar restrictions placed on them and any other institutional investor has a fiduciary responsibility to vote their proxies and act as an engaged owner of public companies. The consequence of this rule change is that the most active institutional investors who could serve as a positive force for change are being stifled at the very time they are most needed in the capital markets.
So why does political and ideological risk matter?
Understanding these two types of risk and assessing their impact on the U.S. and global economies and the society as a whole potentially give us a forecast on changes in the world. The challenge is in developing a model for measuring these qualitative factors with an outcome that provides value for decision makers - investors, business and members of the public - in assessing world events and influencing change.
I came across an interesting post written by Jennifer Russell at Cope is Not a Force of Action. Citing Ian Bremmer, she noted that "basing global investment decisions on economic data without understanding the political context is like basing nutrition decisions on calorie counts without examining the list of ingredients."
This is the key to understanding the importance of assessing risk in the world today. When observing the ideologically based decisions of a president or congressman who make decisions based on party positions - e.g. "No new taxes" or "Stem cell research is baby murder," - we must make note of the fallout from these decisions and place a value on these economic and public policy decisions. Likewise, we must begin to measure the consequences of political influence over public policy decisions and take a more active role from a business and economic policy perspective.
With hindsight, we can all say, "Yeah, I saw that mortgage crisis coming. How could any bank make home loans for interest only?" or "I knew George Bush was lying to us about WMDs in Iraq from the get go." What is needed then is a more practical forward-looking evaluation of public policy decisions. Not so much a prediction but an assessment of the known risks associated with the decisions made and a value placed on them as a measure of probability. The world depends on this sort of forward thinking if we hope to avoid the perils of the global economy and the ever more perilous effects local political decisions have on global society.
See: Global Investment Watch: Politics and Risk