Utdrag Finance in society

Professor Thore Johnsen.

Economist and Educator Frøystein Gjesdal

Introduction Thore Haakon Johnsen turns 70 on 22 December 2016, and will retire from his position at NHH, The Norwegian School of Economics. Thore’s lifetime contributions to the school, to his field, to his students and to the public discourse on financial matters in Norway, are unequaled. His deep and broad knowledge of financial economics, his enthusiasm, practical insights, wit and personal charm make Thore the natural center of gravity in most social and academic settings.

Thore embodies one of NHH’s core values – to engage and be engaging. According to the dictionary, engage means to attract and hold someone’s attention.

Thore can certainly do this in the classroom, in academic seminars and faculty meetings, or later in the bar or pub!

The purpose of this article is to survey in more detail Thore Johnsen’s academic contributions to NHH and to his profession. This is not an easy task as many of his contributions are intangible, and several of his tangible contributions are not publicly documented in conventional ways. A complete overview here is certainly not guaranteed!

A short biography Thore Johnsen graduated from NHH in 1970. This was a time when an academic career seemed attractive to bright students. He was immediately recruited as a research assistant. In 1972, Thore was accepted as a doctoral student at Carne­ gie Mellon University with a scholarship from the Ford Foundation. He thus 11

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followed in the footsteps of Jan Mossin and Finn E. Kydland. At the School of Industrial Administration, his advisors included some of the leading economists of the post-war period: Robert Lucas, Edward Prescott and David Cass. In 1975, Thore moved to Northwestern University for a year and then on to Columbia University where he became an assistant professor in 1977. In 1979, he returned to NHH to assume a position in the Department of Business and Management Science. He became a (full) professor in 1986. On retirement, he will have been a full professor at NHH for 30 years.

Research Thore Johnsen’s doctoral dissertation is titled Advertising, Market Equilibrium and Information. The thesis is an early contribution to information economics, a field which took off at that time. Although this work was followed up by a few working papers, Thore soon left information economics and devoted his efforts to finance. He joined his more established colleagues Karl Borch, Jan Mossin and Steinar Ekern to form the core of a formidable finance group at NHH. For NHH this was a highly significant move.

The cost of capital In academia as well as in the professions, Thore Johnsen is first and foremost associated with the cost of capital (the required rate of return). He has written about the theoretical underpinnings of familiar asset pricing models, measures of risk as well as the term structure of interest rates. However, he is best known for his applied work, determining the cost of capital in actual practical cases.

Consultants and accountants hired to develop opinions on the values of assets and liabilities; regulators charged with regulating monopolies; bureaucrats responsible for evaluating investment projects, they all know who to turn to if they need to solve convoluted problems that are beyond the comprehension of even the best practitioner.

Thore Johnsen’s The cost of capital, measurement of profitability and valuation, published in 1999, is both a textbook and a handbook. In it, he explains the intricacies of calculating the cost of capital based on market data as well as reasoning from first principles when data is not available. Theory is richly illustrated using data from Norwegian companies.

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One may only speculate on what made Thore Johnsen devote so much intellectual effort to this particular issue. The cost of capital is of course a broad and important issue – theoretically and empirically. However, one additional motivation may have been the challenge of formulating policies for evaluating petroleum projects on the North Sea continental shelf. This issue, which involves discussions of risk premia, was high on the agenda during the early 1980s.

Commodity markets A significant share of Thore Johnsen’s research output is devoted to research on commodity markets – in particular energy markets such as oil, natural gas and electricity. This body of work is, for the most part, the result of joint research with Professor Ole Gjølberg of NMBU. Gjølberg and Johnsen are primarily interested in commodity-based derivatives such as futures, investigating empirically how futures markets work, and implications for risk management.

In the early 1980s, the futures market for petroleum products was in its infancy. Markets for electricity were developed later. Risk management using derivatives became very important in Norway over time.

Regulation and governance of state‑owned enterprises In Norway, where many sectors of the economy are closely regulated and many firms are still fully or partly owned by the state, an economist is often confronted with issues of regulation and governance. During the 1990s, SNF (Center for Applied Research) was asked to review the Norwegian Government’s policy towards their own commercial enterprises. At the time, most western governments were in the process of privatizing their holdings. The Norwegian government, having few fiscal constraints, wanted to make their ownership more effective while keeping control.

The report, The State as an owner and investor, which Thore Johnsen coauthored, had a clear message: Unless the State manages to separate financial and other more political objectives, government ownership will lead to financial disaster. The report recommended that the State should emulate financial investors, who also have little industrial expertise. Such a policy also implied dividend policies dictated by company strategy and not government budgets.

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Later, Thore followed up this work with a paper published as an appendix to an official report of the Department of Industry and Trade. Here Thore also spelled out analytical techniques the State might use to follow up management.

A similar message is contained in two voluminous reports to the Department of Finance in 2003 and 2008. This time the issue is management of the Petroleum Fund. At any given time, there are numerous high-value propositions for spending the money in this Fund. Johnsen and Gjølberg warn against the dangers of mixing financial and other objectives.

With other colleagues, Thore has addressed more specific issues of regulation.

In particular, he has been concerned about the regulation of network-based enterprises such as telecoms and power distribution.

In a slightly different vein, Thore Johnsen has periodically joined the debate on tax policy. In 1992 he and three colleagues were asked by the Norwegian Parliament to evaluate the Government’s proposals for tax reform. Thore has also discussed petroleum taxation. When he pointed out that oil companies had no reason to complain about their return on investment in Norway, his popularity in this particular industry declined. Recently, he has worked actively to come up with a principled argument against the wealth tax, a tax which is strongly opposed by a small but vocal group of Norwegians. The jury is still out on this particular issue.

Financial Crises For a financial economist, financial crises are fascinating events that pose intellectual challenges. Here it may be amusing to mention Thore Johnsen’s first international publication (with C. Wolf): “The Strategic Profitability of Borrowing at 8% to Lend at 6%: A Comment” in the 1977 Journal of Banking Research.

The paper makes the point that borrowing at 8% may be all right when it only happens occasionally. Logically coherent, the argument misses the bigger picture. The Savings and Loans crises in the US happened a few years later because regulators failed to see that deregulating the market for deposits while keeping lending rates low was a recipe for disaster.

After the Nordic financial crises of the early 1990s, Thore Johnsen and several colleagues were asked to investigate the policy failures that led to the disaster.

Even more interesting is his paper from January 2005 on the Icelandic stock market and banking system, titled “Iceland – Banks and the Stock Exchange”.

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The paper was commissioned by the Norwegian Financial Supervisory Authority. It contains a financial analysis of the accounts of the three major Icelandic banks. The conclusion is clear: In a crisis the financial system of Iceland will in all likelihood crumble like a house of cards. This time he got it right!

Teacher When NHH introduced a prize for research dissemination in 2011, Thore Johnsen was the first winner. Since returning to Norway in 1979, he has worked tirelessly to spread the gospel of finance. In addition to teaching generations of NHH students and participants in the Authorized Financial Analyst (AFA) program (see elsewhere in this book), his interaction with the business community is wide and deep.

Thore Johnsen has always been in great demand as a conference speaker, and advisor and sparring partner for finance professionals, accountants as well as government bureaucrats. He has served as an expert witness in numerous court cases, and joined blue ribbon government commissions or provided research input to such groups.

The media also makes use of Thore Johnsen as a commentator on current events. He is one of those rare “one-handed� economists. He grasps an issue quickly, responds without too much time to deliberate and provides the journalist with unequivocal statements that make great copy. He is independent and speaks his mind and is not afraid to criticize powerful interests. For example, he has condemned big banks for taking advantage of small savers and criticized municipalities for gambling with public funds. In other cases, he has defended business leaders against tabloid attacks.

Sometimes Thore’s forthrightness lands him in trouble, but somehow he always manages to land on his feet.

Conclusion There are many ways for a business academic to make his (or her) mark: publishing papers, interacting with the professions, engaging students and colleagues and writing textbooks. Thore has been there and done that. His contribution to NHH as an institution must be stressed as well. Norway needs one elite business 15

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school. This has always been and should always be NHH’s role. Thore works tirelessly to make sure that we never lose sight of this important goal. It must be ingrained in our culture and in our DNA. All things considered, Thore Johnsen’s greatest achievement may have been his ability to attract good young people to Finance as a profession and as an academic subject. Today Finance is the most popular specialization in NHH’s Master of Science programs. The AFA program has attracted excellent participants for almost 30 years. Thore Johnsen has engaged students with analytical rigor and a great deal of passion. According to the candidates at the most recent AFA graduation dinner, he has now obtained the status of a legend.

People, both inside and outside of NHH, wonder what life will be like after Thore Johnsen. Fortunately, there are no signs that the man himself is in anything close to retirement mode. His energy levels and fighting spirit are as high as ever. We can safely predict that Thore will keep up his levels of activity, just moving from a position of tenured professor to a more freelance existence. His services will certainly still be in great demand, and perhaps he will finally get a chance to finish all those projects that he did not quite find the time for.

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The “Authorized Financial Analyst” (AFA) Education Program 1988–2016 Aksel Mjøs The executive program “Autorisert finansanalytiker” (Authorized Financial Analyst, AFA) has been offered since the fall semester of 1988. AFA is a joint venture between the Norwegian School of Economics (Norges Handelshøyskole, NHH)1 and the Norwegian Society of Financial Analysts (Norske Finansanalytikeres Forening, NFF)2. The AFA program covers a broad set of advanced topics related to financial analysis and is taught in eight modules over two years. Since its start 29 years ago, the AFA program has been offered annually. Each year between 35 and 50 students have been accepted to the program. In recent years, class size has been limited to 40 students. A total of 1,043 candidates have completed the program. Being an AFA candidate is commonly viewed as a necessary condition for a successful capital market career in Norway. NFF owns the AFA certification and issues certificates to successful candidates. The AFA certification is acknowledged by the European Federation of Financial Analyst Societies (EFFAS)3. Professor Thore Johnsen has been the driving force behind AFA at NHH, both during its establishment in 1987/1988 and continuously since. His contributions cannot be overrated.

In addition to the AFA program, NHH and NFF also offer specialized programs in Portfolio Management, Corporate Finance, Valuation, and Advanced

1 www.nhh.no 2 www.finansanalytiker.no 3 www.effas.net

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Credit Analysis. A combination of the AFA degree and one of these programs qualifies candidates for an Executive MBA in Finance granted by NHH. As of 1 January 2016, 393 candidates have obtained this degree.

The excellent education offered by these programs has had a significant impact on the professionalism and quality of the finance profession in Norway, and consequently the entire Norwegian financial market. Thore Johnsen has been instrumental in these developments from the outset, and is still chairman of the joint AFA steering committee, in addition to his extensive teaching responsibilities in several of the programs.

Background and motivation In NFF’s 1984 annual report, the society’s board discussed the need to create a comprehensive training program for financial analysts in Norway. NFF held a well-attended four-day training seminar for its members in September 1984 and planned to repeat this annually. They also started to explore the possibility of a more structured training program for its members. In NFF’s 1985 report, the expressed ambition was that as of 1986, the training and professional development of financial analysts would be a focus area for NFF. The intention was to offer training in cooperation with NFF’s Swedish and Danish sister associations, as well as EFFAS. The association was now dedicated to developing a course offering to its members.

At the time, NHH had a limited offering of finance courses in its four-year full-time master degree program (siviløkonom), but no offering of any postgraduate programs to industry professionals. However, the finance faculty at NHH was growing, even though the extensive contact with the finance industry and finance alumni that we see today was still in its infancy.

Preparations leading up to the AFA-program In 1986, NFF initiated a project with the purpose of documenting the relevance of the stock market for the development of Norwegian businesses directly and indirectly. The chairman assigned to this project group was Thore Johnsen. The group’s report was published in the fall of 1987 and documented the scale of the stock market and its importance to the Norwegian economy. The report also highlighted the conditions necessary for improved efficiency and more appro18

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priate contributions to society. It is clear from the report that the general public, as well as most politicians, had a rather limited, and mostly negative, perspective on the stock market and other financial markets – and its participants – in general. The report came out just after the financial market crash in October 1987, and created healthy debate on and increased awareness of the financial markets. It is reasonable to consider this report as important groundwork for the decision to create a structured training program, since NFF’s first internal training committee was also established in 1987.

NFF continued to offer annual training courses of up to one week. The need for a structured program was growing, both due to growth in the scale of the finance profession, and limited course offerings in financial analysis in Norway.

NFF has always been well connected to EFFAS and, at the time, was also part of the process to develop common European standards for financial analyst training programs and requirements for certifications.

NFF’s 1986 annual report discussed the possibility of offering a combined course that included a CFA (Chartered Financial Analyst) distance learning course adapted for Norwegian analysts. CFA certification is administered by the CFA Institute in the US, with exams also held in London and Oslo amongst other places.

In addition to developing a more general financial course comparable to the CFA, NFF saw the need for a national program that would offer training in Norwegian capital market rules and regulations. At the time, the society was not ready to invest in developing a comprehensive national analyst training program of its own.

In 1987, this strategy changed. NFF now stated that their strategy was to create a long-term [national] training program in cooperation with a Norwegian business school, to be launched in 1988. There is also evidence of a shift from wanting to offer this program solely for NFF’s members to an offering to any professional involved in finance and financial analysis in Norway.

The actual events leading up to the launch of the AFA program started with an invitation from NFF to the two relevant business schools in Norway, Bedriftsøkonomisk Institutt (BI) (Norwegian School of Business) and NHH, in a letter dated 22 June 1987. NFF enclosed the first version of EFFAS requirements as well as the CFA topics to the letters, indicating what could be expected from a new financial analyst course. At the time, BI was not prepared to partner with NFF in this venture, while NHH, represented by professor Thore Johnsen, with the full support of NHH Rector Arne Kinserdal, enthusiastically presented a proposal by the end of 1987. The partnership was established through a handshake and 19

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an agreement to negotiate a formal agreement later. Working groups from NFF and NHH worked eagerly during the spring of 1988, and a joint invitation to prospective students was sent out in June 1988. NHH, in close cooperation with NFF, was responsible for the course content, while NHH’s executive training entity, NHHK (Norges Handelshøyskoles Kursvirksomhet) administered the program the first few years. All NFF members of this working group confirmed their enthusiasm by participating in the first AFA class 1988-90.

The AFA program was developed with eight modules of 4.5 days (32 hours of study) taught over four semesters/two years, with two exams each semester. This original structure has proven resilient and is still used. There was immediate interest in the course from potential participants; the first invitation received more than 80 applicants for the 35 places offered on the first program in September 1988. These first participants consisted of a representative cross-section of Norwegian finance professionals.

The AFA partners’ motivation NFF’s motivation was based on its core purpose: improving the standards and reputation of financial analysis in Norway. At a time when no formal specialized training of finance professionals existed, combined with widespread skepticism towards the financial markets and “finance people”, NFF saw a clear need for structured training. It is not clear why a CFA-based solution was dropped in favor of the AFA program, but a joint European ambition to develop its own standards for training may have been important. Later developments actually saw the structure and content of the Norwegian AFA program becoming the reference point for financial analyst training in several other European countries. An obvious advantage of the AFA program is that it is more adapted to Norwegian market needs than the standardized CFA program from the US. The students in each AFA class also spend a lot of time studying together and in the process develop their own networks. As such, the program provides a neutral arena for developing networks between individual students with different backgrounds and positions in the capital markets. This networking has also been a highly valued outcome from offering weekend courses compared to a structure based on distance learning.

At the time, NHH had no tradition of strategic partnerships with the business community. However, enthusiasts at the school saw the strategic opportunity that lay in teaming up with finance professionals in Norway. In addition to 20

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strengthening links to NHH graduates in the finance industry, the invitation was an opportunity for NHH to be the preferred national partner of NFF for continued professional education at an advanced level. It would be naïve not to assume that rivalry with BI, and possibly other Nordic business schools, also played a role.

During the initial phase, the partners were more concerned about developing the content and relevance of the AFA program, than potential financial gains.

However, the success of the AFA program and other specialized courses has contributed significant revenues to both NFF and NHH over the years, and gradually profitability became of increasing importance.

International cooperation – CFA vs EFFAS Since the mid-1980s, CFA certification has been heavily marketed by the CFA Institute4 on the European market, including Norway. NFF helped host the CFA exam for several years until around 1992. EFFAS reacted to this challenge by establishing its own “Committee on Training and Qualifications” with the aim of setting common European standards for national financial analyst training programs. This eventually led to the certification “Certified European Financial Analyst” allocated by EFFAS. NFF seriously considered partnerships with both the CFA and EFFAS, eventually choosing the European alternative. In comparison, and somewhat problematic for Nordic cooperation, the Danish society of financial analysts left EFFAS in 2000 and teamed up with the CFA Institute.

In 1988, EFFAS established the subcommittee “Commission on Training and Qualification Accreditation Board, CTQAB”. Gunnar Winther, who at the time was secretary general of NFF, presented the Norwegian AFA course structure developed by Thore Johnsen at one of the first meetings of CTQAB. The structure was immediately acclaimed and formed a reference for developing specific European standards. This structure, with a few amendments, was first implemented in Switzerland; and apparently the Swiss claim credit for the structure.

Since 1989, NFF has been an active member of EFFAS’s standard development efforts. Until 2003, Thore Johnsen was NFF’s representative at the CTQAB. Since 2003, secretarys general of NFF have served as representatives, first Gunnar Winther, and since 2005, Guri Angell-Hansen.

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The CFA Institute was formerly a subsidiary of the Association for Investment Management and Research, AIMR, before the two organizations merged.

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Norwegian Society of Financial Analysts – key facts: • The society’s purpose is: o To contribute to public understanding of the function and importance of the capital market in the Norwegian economy o To contribute to the efficient functioning of the capital market within appropriate operating parameters o To contribute to the provision of high quality financial analysis and to promote the proper treatment of information from issuers of public securities o To contribute to the maintenance of high ethical standards in financial analysis, asset management, advisory services and trading in financial instruments.

• Established 1968 • 1,205 members as of 31 December 2015 • Main activities include seminars, structured training (AFA), setting of market standards and involvement in public policy work related to the financial markets.

Norwegian School of Economics – key facts: • A leading, publicly-owned, business school offering a wide range of full- and part-time studies.

• Established 1936 • 3,300 full time students / 170 faculty5

The AFA program The AFA program is offered to individuals who wish to expand their knowledge of, and competence related to, capital markets. This core target group includes financial analysts and investors, but related professionals are also invited e.g. industry regulators, auditors, corporate lawyers, and journalists. Applicants are required to have a master’s degree in business/economics as well as at least three years’ relevant experience after completing the degree. Applicants with less education may, subject to the committee’s assessment, be accepted if they are able to document significant additional relevant experience. These require-

5

Number of faculty at NHH excludes PhD students and adjunct professors.

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ments have been lifted somewhat in response to changes in higher education in Norway around 2004 towards a bachelor + master structure. Note that even though most students are funded by their employers, they apply individually and none are accepted based on nomination by an employer.

Successful passing of all exams in the program entitles a candidate to the “Autorisert finansanalytiker” title. Candidates also receive the European certification CEFA “Certified European Financial Analyst”.

Course structure and content The broad set of topics covered in the AFA program reflects the wide range of challenges facing professional financial analysts. However, this diversity also reflects the program’s goal to provide more generalized training instead of specialization in any sub-sector of the financial market. Specialized programs offered complement AFA in their focus on specific subjects.

Each course module is initially taught over three full days, Friday to Sunday, and each semester typically consists of two such meetings as well as a third meeting devoted to exercises and cases that apply topics from the two previous meetings. Each module ends with an individual school exam graded according to the conventional grading scale A to F. The modules in the AFA program are the following: • • • • • • • •

Module 1: Module 2: Module 3: Module 4: Module 5: Module 6: Module 7: Module 8:

Valuation Financial accounting and analysis Applied macroeconomics Analysis of fixed income securities Financial derivatives Asset management and capital market theory Corporate Finance Rules and regulations. Institutional knowledge

AFA lecturers are primarily NHH faculty, but highly capable market professionals also contribute to some of the modules. NFF coordinates Module 8; most of the lecturers in this module are lawyers or representatives from the Oslo Stock Exchange and the Financial Supervisory Authority of Norway. Traditionally, lectures have been held in Norwegian, but from 2015, following a move towards a more international finance faculty at NHH, some modules are taught in English.

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Given the high level of fluency in English amongst Norwegian professionals, this is not a problem.

The AFA program consists of 48 ects,6 in accordance with the European system for higher education, and thus requires extensive reading and preparation by the students as part of each module. Reading materials include internationally recommended textbooks at the level of master in finance, as well as selected scientific and applied journal articles. In some modules, students are also required to read business cases and prepare for discussions in class, as well as write and present reports. As a consequence, students devote a significant amount of time to studying on their own and in groups between each meeting, which is an important contributor to their learning.

During the first few years, all AFA modules were held at hotels within 1–2 hours driving distance from Oslo. This meant that students had to stay at the hotels, which created an improved environment for networking, but added significant extra costs for the students, who were already paying market rates to attend the course. Therefore, it was decided to change the location of the meetings. Currently, most are held at a centrally located venue in Oslo, usually the Scandic Solli Hotel. However, the first and the final meetings are held at hotels outside Oslo, requiring that students stay over. Given that NHH is situated in Bergen, and that a significant number of students usually are from Bergen as well, it has frequently been discussed to hold at least one module on NHH’s campus. This happened for the first time in the spring of 2016 when the class of 2015 came to Bergen.

NFF/NHH cooperation and agreement It is indicative of the challenges and complexities of the partnership between NFF and NHH that even though cooperation started in 1988, a formal agreement between the two organizations was first signed in 1991. In NFF’s annual report that year, the negotiations were characterized as “long and difficult”, but it also stated that the agreement would secure the quality and reputation of the program moving forward. The first written contract was between NFF and NHHK, as NHH was not involved in the administration of the course even though NHH faculty had teaching responsibilities and were fully involved.

6

In Norway, 60 ects (“study points”) represent one-year full-time study.

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The partnership between NFF and NHH is regulated in a general agreement, which was renegotiated in 2006 and 2012. The agreement covers the objectives of the cooperation, each partner’s roles, the joint steering committee and its duties, profit split, as well as clauses on anti-competition and dispute resolution. Each additional specialized program is also covered by a separate agreement attached to the general agreement. The agreement has no termination date, but does specify a 24-month notification of termination period.

The steering committee The AFA steering committee consists of three members and one deputy from each party, and is chaired by a representative from NHH, while NFF elects the secretary of the committee. The committee coordinates and supervises all aspects of the cooperation, and decides in particular the minimum requirements for accepting applicants, course fees, lecturers’ compensation, and the overall budget. In addition, before any major revisions of the curricula of the AFA program and other courses, the committee should be consulted. The committee appoints subcommittees in charge of each additional specialized program to supervise the program and admit new students.

The sharing of duties between NFF and NHH NFF and NHH currently share the duties in running the AFA program as follows: NHH is responsible for course content, specific curricula and selecting lecturers, as well as developing and conducting exams. NFF, through access to its members, is in charge of marketing the courses and plays an important role in maintaining the AFA program’s relevance to market participants. Administrative tasks are shared between the parties subject to decisions in the steering committee, and vary between each program.

AFA 1988–2016 The AFA program has had the same overall structure, size and topics covered since the start. Some of the lecturers have also been involved for the whole period. The curriculum and content have been frequently updated, in particular 25

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around 1999/2000 and in 2014/2015 when there were specific developments that needed to be taken into account.

AFA candidates as auditors for taxation purposes In connection with the 1992 tax reform in Norway, there was a one-time need to estimate the financial value of all private limited companies (aksjeselskaper) for tax purposes. These values would form the basis for both individuals’ wealth tax as well as the taxation of any dividends, and it was necessary to create a procedure for setting the initial values under this new regime. It represented an important acknowledgement of the AFA program when the Ministry of Finance decided that AFA candidates were automatically qualified to conduct these valuations. Certified auditors were also allowed to make such valuations, but since they could not value their own auditing clients, and wished to avoid the involvement of competing auditors, many independent AFA candidates were hired to conduct these assignments.

A European certification In 1992, EFFAS defined its requirements for formal European approval of the national financial analyst training programs offered by its member societies. The Norwegian AFA program was approved in 1993; AFA candidates could then add “Certified EFFAS Financial Analyst” to their merits. NFF was particularly grateful to Thore Johnsen for being instrumental in getting the Norwegian program approved. As of 1997, 16 of the 18 member states in EFFAS had their financial analyst programs approved. EFFAS reaccredited the AFA program in 1999, 2005 and 2011. The AFA program is up for reaccreditation again in the fall of 2016.

Around the year 2000, EFFAS attempted to develop a global financial analyst authorization, which would have required a “top-up paper” for AFA candidates to retain their EFFAS certification. NFF eventually decided not to go forward and offer this new certification, but AFA candidates still receive the European certification. This certification facilitates AFA candidates’ international careers in that, for example, UK regulatory authorities acknowledge AFA/CEFA certification when approving individuals for positions as investment professionals in London. This acceptance must be seen in light of the choice by the financial analyst society in the United Kingdom to leave EFFAS in favor of the CFA Institute in 2003.

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An Executive MBA in finance Already in its 1991 annual report, NFF’s board noted that NHH and NFF had started to work on an upgrade of the AFA program to qualify it for a master’s degree granted by NHH as an academic institution. It soon became clear that this would require students to complete additional coursework, rather than expanding the existing AFA program. The process was delayed, and NFF’s annual reports from the early 1990s express growing impatience over the situation. In 1995, NHH was given approval from the Ministry of Education to develop a new executive master’s degree offered to part-time, paying students. In 2001, following the development of the Portfolio Management program, NHH indicated that it would shortly be prepared to grant candidates who had successfully completed both programs with a “Master in Finance” degree. This was confirmed late in 2002 and implemented in 2003. As the Corporate Finance, Valuation and Credit Analysis programs were launched, it was decided that all of them, in combination with the AFA program, would qualify candidates for an Executive MBA in Finance from NHH.

Cooperation between the partners – NFF and NHH Initial cooperation between NFF and NHH was fairly informal and rested on good personal relationships and joint ambitions. Until 1996, the formal contractual party was NHHK; this structural complexity caused additional challenges. After NHHK was closed down and merged with NHH in 1997, the partnership was simplified.

The formal requirement that the new EMBA (Executive MBA) degree had to be offered by NHH and not NHHK contributed to NHHK’s challenges.

It is clear that the close and complementary partnership between NHH as the leading national business school and NFF as the only Norwegian society of financial analysts has been a major reason for the success of the AFA program. In comparison, the financial analyst program in Sweden, offered by the Swedish society independent from the Stockholm School of Economics, has not been nearly as successful as its Norwegian counterpart. Similar examples are found across Europe.

The AFA network The networking that takes place through two years of intense cooperation has always been an important element in the AFA program. In the mid-1990s an 27

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informal “AFA club” was created by the, at the time, 240 AFA candidates. The club meets 1–2 times a year in Oslo for socializing as well as a lecture on a current topic in finance. In addition, NFF hosts an annual two-day seminar on current topics in finance directed towards its members and AFA candidates.

Ethical standards NFF’s annual general meeting in 1999 approved the society’s ethical standards.

These have been updated several times, and the current version was approved in 2014:7 SEVEN ETHICAL PRINCIPLES FOR FINANCIAL ANALYSIS Financial analysis – Advisory services – Asset management 1. Be familiar with the legislation, regulations and rules on ethical behaviour that are relevant to your work – and follow them.

2. Pay careful attention to your client’s interests.

3. Check whether you or your employer has a conflict of interest with your client. If in doubt – seek advice.

4. Ensure that confidential information is managed so that it does not fall into the hands of third parties.

5. Be realistic in your valuations and advice. Never hide the risk factors.

6. Adjust your advice in response to the recipient’s familiarity with the securities market.

7. Try to prevent colleagues and partners breaking relevant rules on ethical behaviour and raise any possible breaches with them.

NFF has a committee to manage these ethical standards and handles any breaches. Compliance with the ethical standards is a prerequisite not only for being a member of NFF, but also for receiving, and maintaining, AFA certification. In 2002, NFF for the first time charged a member and AFA candidate with breaching the standards, and he was subsequently excluded as a member and lost the right to use the AFA title.

7 http://www.finansanalytiker.no/innhold/bibl_pdffiler/Etiske_regler_2014.pdf

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The specialized programs The specialized programs have mainly been developed based on perceived interest in the market. NFF is particularly well connected via its members and elected bodies to assess which new courses are of interest. Outside the cooperation with NHH, NFF has always offered shorter courses that do not offer formal qualifications. In 2000, NFF offered the Portfolio Management course on its own, with involvement from Thore Johnsen, before it developed into a joint program in 2003. Similarly, the Corporate Finance, Valuation, and Advanced Credit Analysis programs were all initiated by NFF.

The Portfolio Management program The Portfolio management program targets asset managers, analysts, regulators and others who need competence in portfolio management. The program consists of five weekend meetings over two semesters, plus a final day where the students defend and discuss their project reports. The topics covered include portfolio management and capital markets theory, statistical methods, asset management strategies, risk management, performance measurements, asset specific issues (equities, fixed income, derivatives, alternative investments), macroeconomics, and regulatory and ethical issues. The lecturers are from NHH, international institutions, and Norwegian and internationally based industry professionals.

The Corporate Finance program The Corporate Finance program was launched in 2004. It starts with an intense week of study in August at the Solstrand Hotel south of Bergen. This location is famous in Norway for the “Solstrand Program”, probably the most appreciated Norwegian leadership program, offered by NHH’s partner organization, AFF8. The corporate finance program is case-based, and core corporate finance is taught with extensive student involvement in line with practice in the best American MBA programs. Each day includes a combination of lectures and case discussions, and evenings are spent in groups preparing the next day’s case discussions. Topics include corporate governance, valuation, mergers & acqui8 http://www.aff.no/en/about-aff

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sitions, financial restructuring, leveraged buyouts and private equity, capital raising and public listing, capital structure and bankruptcy issues. The students represent a wider range of professional backgrounds and typically have more experience, compared to participants on the other programs. Following the first week, students organize themselves in groups of 3–4 and prepare an extensive company report, which is then presented and discussed over a weekend in November. Students are evaluated based on their reports and presentations.

The Valuation Program The Valuation program was launched in 2012 following a four-year process between NFF and NHH concerning course content, structure and relevance.

Earlier NFF had also offered a shorter course in “Valuation and practical equity analysis”, but it was cancelled due to limited interest. Valuation is at the core of finance, yet it is as much a craft as a scientific discipline, which makes it challenging to teach at an advanced level. The course has been well-received by equity analysts, auditors, investors and consultants, as well as regulators. The program covers valuation models, valuation related financial analyses, forecasting, international cost-of-capital, uncertainty and real options, and valuation of private companies. The course structure is comparable to the Corporate Finance program with an intensive week of lectures and some case-work, followed by a group-based valuation report. These reports are presented, defended and discussed during a final one-day session. Completion of the course is dependent on the evaluation of the report and presentation.

Advanced Credit Analysis Already in 2004/2005, NFF and NHH offered a program in Fixed Income Asset Management. Even though it attracted 20 students in 2005, the program did not receive sufficient interest to continue. A revised program in Advanced Credit Analysis offered for the first time in 2015 was well-received by the industry. Investments in credit risk securities, and in particular high-yield debt, have been growing strongly in recent years. The launch of this course, due to recent market challenges linked to falling oil prices, could not have been better timed. The program offers participants a thorough and theoretically founded understanding of credit risk, combined with training in relevant applications. Topics include credit risk modelling, understanding of the risk 30

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in various forms of debt, the management of credit portfolios, preparation of credit reports, credit rating, credit markets, debt contracts, and financial analysis. The program covers analyses of both market securities and bank loan credit. The program includes four weekend meetings plus a report prepared in groups. The report is defended and discussed on the final day. In addition, there is a regular school exam.

Program facts The AFA program has received continued strong interest from applicants, and on average has had 3.1 qualified applicants per admitted student since 1990. The peak number of applicants was in 1997 and 1998. The AFA program had two intakes in 1997, spring and fall, and 169 qualified applicants for one intake in 1998. The number of applications has varied from year to year, but with more than 100 every year up to and including 2014. The last two years have seen fewer applicants, most likely due to the state of the Norwegian economy, which has resulted in a reduced willingness by employers to fund continued education.

The number of accepted students has also varied, starting with approximately 37, and expanding to 50 for the years 1998–2004. The number has since been limited to around 40–43 students. The high demand has resulted in high-quality students, but has also made the admission process more complex. For example, applicants from previous years who reapply get a double or triple chance of admittance. Members of NFF make up a significant, but not dominant, share of the students, but are given no preference in the selection process.

There has been steady interest in the specialized programs, but clearly less than the AFA program.

Applicants Figure 1 illustrates annual applications to the AFA program, including the number of applicants who did not meet entry requirements, which has averaged 10% over the period. The finance industry in general employs a low share of women, which probably explains the 16% female share of applicants and the 15% female share of students who have completed the program. In comparison, currently 15% of NFF’s members are women.

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%

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Figure 1: AFA – Applicants and admissions

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Figure 2: AFA – Admissions and completion after 2 years

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Portfolio management

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Corporate Finance

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Executive MBA

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Figure 3: Admissions to specialized programs and EMBA

Completion Figure 2 gives an indication of how challenging the AFA program is. Of students admitted, on average 81% complete the program on time and receive their certification after 2 years.9 Many students retake exams later, thus making the accumulated completion rate higher. Students receive a letter grade of A–F for each exam following NHH’s regular criteria. The fact that not every student completes the program is also an indication that the grading is fair. In executive education, there is a general trend that high-paying students seldom fail.

Specialized programs Figure 3 shows the number of students in the specialized programs, Portfolio Management, Corporate Finance, Valuation, and Advanced Credit Analysis.

These programs target somewhat different segments of potential students, compared to the AFA program and do not lead to AFA certification. However, since

9

Recent classes have had a significantly higher completion on time rate.

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2003, NHH has granted an Executive MBA in Finance to candidates who have completed both AFA and one of the specialized programs. Of the 393 candidates who have been granted this degree, 58% combined AFA with Corporate Finance and 31% combined AFA with Portfolio Management. A large share of the students who have taken the specialized programs have not taken, nor do they intend to take, the AFA program. The number of applications to the specialized programs has varied over the years and even though neither the Portfolio Management program nor the Valuation program ran in 2016, the plan is to offer them again in 2017.

Financial impact The policy of the AFA cooperation has always been to run the courses competitively on market terms and thus convert the students’ valuation of the course into a financial surplus that supports NFF and NHH’s objectives.

The general agreement states that profits from the AFA program are to be shared between the two parties, with 1/3 to NFF and 2/3 to NHH10. From the share NHH receives, at least 50% should be used to support research and dissemination of “finance”. “Finance” is interpreted relatively widely to include the subjects covered by the modules in the AFA program. With regard to the specialized programs, the profit split is 50/50 between the parties, reflecting an equal sharing of duties. In addition, NFF has made significant discretionary contributions to research in finance at NHH for many years, in particular supporting the research seminar series at the Department of Finance and the finance part of the FOCUS research program at NHH.

The Jan Mossin Memorial Fund to promote financial research NHH and NFF established the “Jan Mossins Minnefond til fremme av finansiell forskning” (The Jan Mossin Memorial Fund to promote financial research), primarily to manage the 1/3-share of profits earmarked for research in finance, but initially also as buffer capital for the programs. Jan Mossin (1936-87) was

10

Until NHHK’s involvement in AFA was transferred to NHH, they received 1/3 of the profits. This share was subsequently transferred to NHH and the Jan Mossin Memorial Fund.

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professor of finance at NHH and recognized as one of the main contributors to the Capital Asset Prizing Model (CAPM), together with William Sharpe and John Lintner. The latter two received the Nobel Prize in Economics for their contributions in 1990, after Mossin’s death. The fund is an independent foundation11, also called the Jan Mossin Memorial Fund, and has as its purpose (translated from the fund’s Articles of Association, §2): “The purpose of the fund is to support research within the financial field, primarily at NHH, as well as the dissemination of such research.”

From the outset, it was also the ambition of the founding partners to raise additional direct private contributions to the fund, to further promote finance research. In spite of repeated efforts in connection with Jan Mossin Memorial Conferences held every fifth year, these efforts have not been particularly successful.

The Jan Mossin Memorial Fund had assets of 9.67 MNOK as of 31 December 2015. Since 1996, due to governmental instructions, the annual profits from the AFA program have been accumulated in the balance sheet of NHH as a separate item in its equity capital. The balance was 16.4 MNOK as of 31 December 2015.

The combined capital of approx. 26 MNOK should be managed and distributed in accordance with the purpose of the Jan Mossin Memorial Fund. The board of directors of the fund consists of four NHH representatives and two nominated

by NFF. The board advises NHH on the management and distribution of the AFA financed capital which is part of NHH’s equity, i.e., outside the fund itself.

The assets of the fund have been invested in mutual funds with a large share in equities, while the assets on NHH’s balance sheet receive no return.

Research contributions, scale and examples The combined distributions from the fund and the accumulated profits support three areas related to subjects covered in the AFA program: Firstly, to aid NHH in the recruitment of top researchers to its faculty. As a public institution, NHH has limited possibilities to even match the compensation offered by international business schools. More competitive compensation and research expense accounts are thus critical in the recruitment process. Secondly, to help finance

11

A “stiftelse” according to Norwegian legislation.

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general access to important research databases for faculty and students at NHH. Finally, to support specific dissemination projects, e.g. the Jan Mossin Memorial Conference. Average annual contributions have been 0.8 MNOK since 2010, recently growing to an estimate of 1.9 MNOK in 2016. The amount distributed is comparable to NHH’s annual combined profit from the partnership with NFF. Research, also in finance, has become increasingly costly in terms of access to data and travel. NHH’s share of joint AFA profits since 1988 has been a major contributor to the development of the finance faculty and finance research at the institution. In addition, the supplementary compensation for the NHH faculty who teach on the different programs is not insignificant for these individuals.

Summary and reflections An acknowledgement of the importance of finance as an academic discipline and the upgrading of the finance profession were amongst the main motives behind the creation of the AFA program. The chairman of NFF in 1988, Erik Engebretsen stated then: “It is our objective and ambition that completing the AFA program is appreciated as a major achievement within the Norwegian capital market”. As a result of the sheer number of students who have completed the program, the approval of AFA candidates as qualified to value companies for tax purposes, and the significant share of students from the media and the public sector, the combined effect of the AFA program has been to grant respect for and acknowledgement of finance as a cornerstone in a modern society. This respect applies not only to the founders and partners, but also to each and every AFA candidate. No individual deserves more respect for his efforts and perseverance in connection with AFA than Thore Johnsen.

The cooperation between NFF and NHH has been close since the beginning, with respect to overall program structures, curriculum focus, market relevance, administration and other aspects. It is clear that there is a strong and positive mutual recognition between the partners, exemplified through the repeated praise of NHH and this cooperation found in NFF’s annual reports.

Thanks to Guri Angell-Hansen, Mette Bjørndal, Eirik Bunæs, Tom Collett, Frøystein Gjesdal, Birthe K. Lange, Ove Løvik, Jøril Mæland, Hanne Refvik, Rikke Salbu and Gunnar Winther for their contributions. All remaining errors are my own responsibility.

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