Five Questions about SRI – Weekly Expert Interview with Dr. Peter Mihalyi, Professor of Finance, University of Pannonia, Veszprem, Hungary – January 28, 2011

Each week Emerging Markets ESG publishes an interview entitled, “Five Questions about SRI.”  The interview features a practitioner’s insights about SRI in emerging markets and through Emerging Markets ESG shares this expertise with a wide global audience.  The goals of Five Questions about SRI are fourfold:

  • To reflect on what SRI in emerging markets means to practitioners;
  • To collect a catalogue of examples of SRI in practice in emerging markets;
  • To raise awareness about SRI in emerging markets; and
  • To enable SRI practitioners in emerging markets to network with peers around the world.

This week’s interview is with Dr. Peter Mihalyi, Professor of Finance, University of Pannonia, Veszprem, Hungary. 

Dr. Peter Mihalyi Ph.D. (Economics) is the author of five books and more than 100 papers.  In 1983-1993, he served at the United Nations Economic Commission for Europe in Geneva, Switzerland preparing comparative economic analyses of East European countries.   Since 1993, Dr. Mihalyi has filled a number of important positions in the Government of Hungary.  As Deputy Government Commissioner for Privatization, in 1994 – 1995, he worked with investors and companies in foreign direct investment and privatization transactions.  In this capacity, he played an important role in the privatization of MOL, MATAV and other Hungarian blue chip companies.    In 1997 – 1998, Dr. Mihalyi served as Deputy Minister in the Ministry of Finance in charge of health care and pension reforms.  Since 2001, he is head of the Finance Department at the University of Pannonia, Veszprem, Hungary

Emerging Markets ESG:  How would you define socially responsible investment (SRI)?

Peter Mihalyi:  For me, as a Finance Professor, the concept of SRI is suspicious to a certain extent.  When I read press statements of or interviews with presidents and CEOs of large companies praising SRI, I have often the impression that this is a marketing tool only.  After all, presidents and CEOs are responsible not only for making profits, but also for being likeable.  Since there is a growing readership of journals, newspapers etc. who sincerely believes SRI, these company managers speak and write for them. The same applies to certain consumers groups. In front of others – e.g. stock analysts, fund managers – they use the traditional argumentation.

Emerging Markets ESG:  What distinguishes SRI from mainstream investment? 

Peter Mihalyi:  SRI to the extent it is really different from mainstream investment is basically a second best strategy.  Instead of maximizing profits, the owners of capital accept a somewhat lower rate of return.  At the same time, they gain satisfaction from the fact that their investment supports a socially, politically, environmentally or ethically noble objective, or – at least – their investment is not causing social, political etc. harm.   In the world of business, family owned companies still play an important role.   Such companies, where the investment decisions are made by one person (or a very narrow group of persons), the nature of the ‘responsible’ investment strategy usually reflects the values and the preferences of the company owner.  In the case of public companies with millions of shareholders, it is more difficult to pass through a second-best investment policy.

It is important to recall, however, that owners of capital are often limited in their investment decisions by outside forces.  Governments and/or international institutions can impose embargos on certain countries or on certain activities.  These decisions are, usually, made on the basis of social, political, etc. considerations.  Good recent examples are for such limitations the embargo against Iran, or the international limitations on whale fishing.  Even if these areas offer exceptionally lucrative returns, the law prohibits the exploitation of these possibilities.

Emerging Markets ESG:  Which extra-financial theme – environmental, social or governance – is the most challenging for companies in Hungary to manage?

Peter Mihalyi:  There are two answers, one for big and one for small firms.  Big companies in Hungary are often foreign-owned.  Here the main challenge is to harmonize the values and the motivations of people representing the headquarters on the one hand, and those of the local managers on the other.   In these large, multi-layer companies, major decisions are centralized and there is little room for initiatives locally.  This is de-motivating.  On the other hand, local managers often think narrow-minded, and – partly because of language reasons – they are unable to understand fully what kind of actions are expected from them.   In small companies, the problem is the absence of dynamism.   Economy of scale can be achieved only through a continuous process of concentration.  Simply said: the bigger fish has to swallow the smaller fish.  This is not really happening in Hungary.  We have too many micro firms, and too little small and medium-size firms.

Emerging Markets ESG:  Which extra-financial theme – environmental, social or governance – is the most challenging for investors in Hungary to analyze?

Peter Mihalyi:  At this point of time, investors must be concerned about the overall country-risk.  Amidst the global financial crisis, Hungary has been drifted into a very precarious financial situation.  Big firms, households and the state have simultaneously accumulated debt up to very dangerous levels.   In addition, the present government which came to power in May last year, has embarked upon a risky growth policy.  The idea is to kick-start economic growth by means of an exceptional concentration of political, legal and social weapons.  Thus, in my view, the biggest challenge for investors is the governance risk.

Emerging Markets ESG:  Should ethics be a part of the finance curriculum for?

Peter Mihalyi:  Ethical issues in business are very important, but they do not fit easily into any textbook logic.  The problem is that economics and finance are taught as descriptive subjects, without any normative message or comment.  This is perfectly acceptable in the context of mass education, where a large number of professors with different values are expected to teach a standard set of information.  If every professor had the opportunity to inject normative comments, students would go crazy soon.   On the other hand, the history of finance is full of egregious scandals which ended badly (e.g. the Maddoff case).   The students must hear something about these examples.  The case-study approach is suitable to solve this contradiction.