Below is a list of papers I was sent by someone much smarter than me that I am trying to get around to read. I've been reading a bit more broadly about behavioural biases, it seems like much of the really ground-breaking work was done by Kahneman and Tversky. Two good generalist books (ie not economics/finance related) are this one and this one.
Anyway, here's the academic list:
• Montier, James, "Who's a Pretty Boy Then? Or Beauty Contests, Rationality and Greater Fools" . Available at SSRN: http://ssrn.com/abstract=505902
• John R. Nofsinger, The Psychology of Investing, Prentice Hall
• Charles Roxburgh Hidden flaws in strategy Can insights from behavioral economics explain why good executives back bad strategies? McKinsey Quarterly 2003 Number 2
• Wiseman, Robert M, Gomez-Mejia, Luis, "A Behavioural Agency Model of Managerial Risk Taking," Academy of Management Review , vol 23 no. 1: 133-153, January 1998.
• Kahneman, Daniel and Tversky, Amos, "Prospect Theory: An Analysis of Decision Under Risk," Econometrica, Vol 47, Issue 2 (Mar., 1979) 263-292.
• Extending the model of "rational man" model of human behaviour: seven key principles, Environment Agency and the New Economics Foundation.
• 'Modeling the Psychology of Consumer and Firm Behavior with Behavioral Economics.' by Teck H. Ho, Noah Lim and Colin Camerer, in press. Posted 9/23/05 on Prof Colin Camerer's academic website http://www.hss.caltech.edu/~camerer/camerer.html.
• Thaler, Richard H., 2000, "From homo economicus to homo sapiens," Journal of Economic Perspectives -Volume 14, Number 1, pp 133-141.
• Asness , Clifford S., "Rubble Logic: What Did We Learn from the Great Stock Market Bubble?", Financial Analysts Journal, Nov 2005, Vol. 61, No. 6: 36-54.
• Barberis , Nicholas and. Thaler, Richard H (2003), " A Survey of Behavioral Finance. " In Handbook of the Economics of Finance. George M. Constantinides, Milton Harris, and Rene' Stultz editors. Elsevier Science, North Holland, Amsterdam.
• Gilson, Ronald J. and Kraakman, Reinier, "MOME (Mechanisms Of Market Efficiency) in Hindsight," Regulation, Vol. 27, No. 4, pp. 64-72, Winter 2004
• Stout, Lynn A., "The Mechanisms of Market Inefficiency: An Introduction to the New Finance" (December 1, 2003). UCLA School of Law, Law & Econ. Research Paper No. 03-23. Available at SSRN: http://ssrn.com/abstract=470161 or DOI: 10.2139/ssrn.470161
Wednesday, 28 February 2007
Bad language in pensions
Recent comments from the Conservative pensions spokesman Philip Hammond about public sector pensions reminded me of just how hysterical some of the commentary about pensions can get. Hammond actually used the term 'apartheid' to describe differences in provision between different groups of workers, according to industry mag Professional Pensions:
"There’s growing pension apartheid in this country. Private schemes are winding up in droves while the taxpayers liability for gold plated public sector schemes is spiraling out of control." (from the online news site today)
This is wrong on several levels. For one, MPs like Mr Hammond himself benefit from a more generous pension scheme than public sector workers. And actually a significant number of private sector DB schemes remain open to new members, according the employer trade body the NAPF.
But what really annoys me is the comparison of the denial of basic human rights on the basis of race under the regime in South Africa with different types of pension provision. I'm fully aware that the difference between types of provision can have a significant value for an employee, but to call it apartheid is ridiculous. Public sector workers still get paid less than their private sector counterparts (which was one of the reasons for having decent pensions in the first place) but I don't expect Unison or PCS to call that pay apartheid. Using language in this way is no different to the sort of puerile Bush = Hitler type remarks you get on the hard Left.
However this type of bad language is not uncommon in pensions. Last year the former head of the NAPF described the Government's Personal Accounts system as 'Stalinist'. Presumably there must be a line in the White Paper somewhere that if you opt out of the Personal Accounts system then you get sent to a gulag.
I think mostly this type of language backfires. The person using it looks like they don't know how to make a reasoned argument. However once in a while the argument sticks, which can be very problematic. A good example is the "£5bn a year tax raid on pensions", which I'll deal with in a separate post.
"There’s growing pension apartheid in this country. Private schemes are winding up in droves while the taxpayers liability for gold plated public sector schemes is spiraling out of control." (from the online news site today)
This is wrong on several levels. For one, MPs like Mr Hammond himself benefit from a more generous pension scheme than public sector workers. And actually a significant number of private sector DB schemes remain open to new members, according the employer trade body the NAPF.
But what really annoys me is the comparison of the denial of basic human rights on the basis of race under the regime in South Africa with different types of pension provision. I'm fully aware that the difference between types of provision can have a significant value for an employee, but to call it apartheid is ridiculous. Public sector workers still get paid less than their private sector counterparts (which was one of the reasons for having decent pensions in the first place) but I don't expect Unison or PCS to call that pay apartheid. Using language in this way is no different to the sort of puerile Bush = Hitler type remarks you get on the hard Left.
However this type of bad language is not uncommon in pensions. Last year the former head of the NAPF described the Government's Personal Accounts system as 'Stalinist'. Presumably there must be a line in the White Paper somewhere that if you opt out of the Personal Accounts system then you get sent to a gulag.
I think mostly this type of language backfires. The person using it looks like they don't know how to make a reasoned argument. However once in a while the argument sticks, which can be very problematic. A good example is the "£5bn a year tax raid on pensions", which I'll deal with in a separate post.
Tuesday, 27 February 2007
Local authority pension funds step up activism
It's interesting to see that in the UK, in common with other countries with funded pension systems, it's the public sector funds that are at the forefront of shareholder engagement.
The Local Authority Pension Fund Forum (LAPFF) is a coalition of just under 40 local govt funds that have been active for over 15 years, using their shareownership to promote high standards of corporate governance and social responsibility. Lately the LAPFF has been engaging with BP over its recent safety failures, and is about to begin a major shareholder campaign around company audit practices. (The latter subject doesn't get as much attention as it deserves, with the more 'sexy' issue of executive pay usually attracting more interest. However it's worth remembering that accounting practices were at the heart of the big recent corporate scandals.)
There is plenty of good work already going on amongst local govt funds. This is something that the public sector unions could dovetail with very easily. Good to see that Unison are increasingly active here.
The Local Authority Pension Fund Forum (LAPFF) is a coalition of just under 40 local govt funds that have been active for over 15 years, using their shareownership to promote high standards of corporate governance and social responsibility. Lately the LAPFF has been engaging with BP over its recent safety failures, and is about to begin a major shareholder campaign around company audit practices. (The latter subject doesn't get as much attention as it deserves, with the more 'sexy' issue of executive pay usually attracting more interest. However it's worth remembering that accounting practices were at the heart of the big recent corporate scandals.)
There is plenty of good work already going on amongst local govt funds. This is something that the public sector unions could dovetail with very easily. Good to see that Unison are increasingly active here.
Monday, 26 February 2007
Tragic trudge against Trident with the Trots
Completely off topic but I need to have a moan about saturday's anti-Trident/anti-war demo. This was a great opportunity for a bit of retro demonstrating (anti-nuke? how 80s!) but any potential for fun was exstinguished by the 57 varieties of Trots taking part.
Me and two mates went on the march principally because we have a problem with Trident (although we all opposed the war too). But judging from the chants you would have assumed that this was an anti-war march that a few anti-nuke people had stumbled onto by accident. Maybe I've become too cynical but I found myself wincing at most of the slogans. This wasn't helped by the fact that nearest SWP morale officer (or whatever they are) was particularly rubbish, with his rendition of "war, what is it good for" being especially poor. I think march organisers need some kind of Simon Cowell type figure to exercise some chant quality control and prevent people like that having access to megaphones.
Most irritating person on the march award goes to the twassock from the WRP (I think) who was chanting "Victory to the Iraqi resistance". Yes this type of person does really exist, it's not just Nick Cohen's paranoia. Given that the 'resistance' in Iraq doesn't at all mind killing trade unionists, why was he marching with a Gate Gourmet banner?
And what about the turnout? As we were marching we were speculating that in terms of numbers the only thing you could be sure was that the police estimate would be too low and the SWP/Respect figure would be somewhere in the billions. We weren't wrong. The police said 10,000 and Respect said 100,000 (chuckle). My entirely unscientific estimate is that it must have been something like 30,000. This is based on the fact that it looked a bit more than the average turnout at Portman Road, which is usually in the low 20s (as in thousands....).
When we got to Trafalgar Square we headed to the Chandos for a couple of beers. When we came out a couple of hours later someone was still droning on about something. I suppose some people find it inspiring, for me it was a reminder of how bad lefty demos can be.
Me and two mates went on the march principally because we have a problem with Trident (although we all opposed the war too). But judging from the chants you would have assumed that this was an anti-war march that a few anti-nuke people had stumbled onto by accident. Maybe I've become too cynical but I found myself wincing at most of the slogans. This wasn't helped by the fact that nearest SWP morale officer (or whatever they are) was particularly rubbish, with his rendition of "war, what is it good for" being especially poor. I think march organisers need some kind of Simon Cowell type figure to exercise some chant quality control and prevent people like that having access to megaphones.
Most irritating person on the march award goes to the twassock from the WRP (I think) who was chanting "Victory to the Iraqi resistance". Yes this type of person does really exist, it's not just Nick Cohen's paranoia. Given that the 'resistance' in Iraq doesn't at all mind killing trade unionists, why was he marching with a Gate Gourmet banner?
And what about the turnout? As we were marching we were speculating that in terms of numbers the only thing you could be sure was that the police estimate would be too low and the SWP/Respect figure would be somewhere in the billions. We weren't wrong. The police said 10,000 and Respect said 100,000 (chuckle). My entirely unscientific estimate is that it must have been something like 30,000. This is based on the fact that it looked a bit more than the average turnout at Portman Road, which is usually in the low 20s (as in thousands....).
When we got to Trafalgar Square we headed to the Chandos for a couple of beers. When we came out a couple of hours later someone was still droning on about something. I suppose some people find it inspiring, for me it was a reminder of how bad lefty demos can be.
Human nature vs free markets
Arguably some of the best critiques of the loonier end of free market thought these days come from a psychological perspective. Behaviourial economics undermines some of the assumptions that lie at the heart of the many free market arguments, most notably the idea of rational economic decision-making.
This may sound like an obscure little branch of academia but such a view is wrong for two reasons. First, it is genuinely surprising the extent to which some people in the City take behaviourial economics seriously. In fact there is a kind of sub-genre here known as behaviourial finance which looks at behaviour in the capital markets. Even mainstream proponents of shareholder value have recently begun to draw attention to irrational and inefficient decision-making within the capital markets (supposedly where all the best brains hang out). Worth a read here is Robert Shiller's excellent Irrational Exuberance.
Secondly, behavioural insights have been a major influence in recent pension reform proposals in the UK. The Pensions Commission's full report includes a section on behavourial economics in its analysis (see chapter 6), and the recent White Paper on Personal Accounts includes a fairly comprehensive trashing of the idea that there is a well-functioning market for certain financial products. One could argue that it is the 'inertia' insight from behavioural economics that swung the pension reform debate behind the quasi-compulsory Personal Accounts model.
These arguments continue to rage back and forth. I was just sent an interesting paper about the failure of US workers to join 401-k schemes (I can't link directly to it but you can download it here). It's fascinating to see how hard it is to interpret people's decisions about saving. This paper seems to come down more on the side of rational decision-making (people who say they can't save becaue they don't have enough money tend to be on lower incomes). But they also question how accurate that can be when the same types of people do not opt out of schemes when auto-enrolled.
I'll bung up a list of books/papers in this area shortly.
This may sound like an obscure little branch of academia but such a view is wrong for two reasons. First, it is genuinely surprising the extent to which some people in the City take behaviourial economics seriously. In fact there is a kind of sub-genre here known as behaviourial finance which looks at behaviour in the capital markets. Even mainstream proponents of shareholder value have recently begun to draw attention to irrational and inefficient decision-making within the capital markets (supposedly where all the best brains hang out). Worth a read here is Robert Shiller's excellent Irrational Exuberance.
Secondly, behavioural insights have been a major influence in recent pension reform proposals in the UK. The Pensions Commission's full report includes a section on behavourial economics in its analysis (see chapter 6), and the recent White Paper on Personal Accounts includes a fairly comprehensive trashing of the idea that there is a well-functioning market for certain financial products. One could argue that it is the 'inertia' insight from behavioural economics that swung the pension reform debate behind the quasi-compulsory Personal Accounts model.
These arguments continue to rage back and forth. I was just sent an interesting paper about the failure of US workers to join 401-k schemes (I can't link directly to it but you can download it here). It's fascinating to see how hard it is to interpret people's decisions about saving. This paper seems to come down more on the side of rational decision-making (people who say they can't save becaue they don't have enough money tend to be on lower incomes). But they also question how accurate that can be when the same types of people do not opt out of schemes when auto-enrolled.
I'll bung up a list of books/papers in this area shortly.
Thursday, 22 February 2007
Another Myners strike
Paul Myners has repeated his criticism of private equity, this time in the FT. Like the TUC's Brendan Barber he has urged trustees to make sure they know what they are getting into. He also warns about the lack of accountability and transparency when publicly-listed companies are taken private.
Wednesday, 21 February 2007
Trustees are key to the private equity debate
This is more like it. If unions want to have some control over private equity an obvious starting place is their trustees on pension funds. Some of the big pension funds (which tend to be jointly trusteed, so already union members on the board) have already put billions into PE. The key is to get them to start thinking about the implications of what they are investing in and, if possible, sorting the good from the bad.
Good news then that the TUC is planning to brief union MNTs on PE. Brendan Barber's speech last night understandably got quite a bit of coverage. The Grauniad, Indie and FT for example.
Good news then that the TUC is planning to brief union MNTs on PE. Brendan Barber's speech last night understandably got quite a bit of coverage. The Grauniad, Indie and FT for example.
Monday, 19 February 2007
Paul Myners on private equity
An interesting letter from Mr Myners in the latest issue of the New Statesman. The article he was replying to can be found here.
19 February 2007
Private dangers
Peter Wilby (Wilby's World, 12 February) will no doubt prompt those in the private equity world to respond with many stories of the declining companies rejuvenated, new jobs created and productive investments made. But such allusions to past successes will not reflect the likely outcome of the debt binge that characterises much private equity activity today, typified by the contemplated takeover of Sainsbury's.
Private equity, as we see it in acquisitions of large public companies, is almost entirely a function of exploiting tax breaks on interest payments. Over the past few years, it has thrived in benign economic conditions on the back of rising debt and the returns that this has generated. This is little different from buying a house with a wafer-thin deposit. Private equity and the banks financing it have been paid for the risks taken. But employees of private-equity-owned companies get no additional reward for the increased risk attached to their employment. And yet employees will, in some cases, pay the price for this reduced security through loss of jobs or reduction in pensions. One in six of all private sector employees now works in an private-equity-financed business, and even more are exposed, if you count suppliers or customers.
Several steps should be taken. First, private equity companies, which are highly secretive, should be obligated to maintain the same standard of reporting as is required of all companies. Second, pension-fund trustees and other investors should wise up to the huge sums being earned by intermediaries from the movement of money from publicly quoted companies to private equity.
Third, those who lead public companies should show greater conviction when making the case for accountable public ownership and investment for the long term rather than selling for a quick buck.
Paul Myners
London SW3
19 February 2007
Private dangers
Peter Wilby (Wilby's World, 12 February) will no doubt prompt those in the private equity world to respond with many stories of the declining companies rejuvenated, new jobs created and productive investments made. But such allusions to past successes will not reflect the likely outcome of the debt binge that characterises much private equity activity today, typified by the contemplated takeover of Sainsbury's.
Private equity, as we see it in acquisitions of large public companies, is almost entirely a function of exploiting tax breaks on interest payments. Over the past few years, it has thrived in benign economic conditions on the back of rising debt and the returns that this has generated. This is little different from buying a house with a wafer-thin deposit. Private equity and the banks financing it have been paid for the risks taken. But employees of private-equity-owned companies get no additional reward for the increased risk attached to their employment. And yet employees will, in some cases, pay the price for this reduced security through loss of jobs or reduction in pensions. One in six of all private sector employees now works in an private-equity-financed business, and even more are exposed, if you count suppliers or customers.
Several steps should be taken. First, private equity companies, which are highly secretive, should be obligated to maintain the same standard of reporting as is required of all companies. Second, pension-fund trustees and other investors should wise up to the huge sums being earned by intermediaries from the movement of money from publicly quoted companies to private equity.
Third, those who lead public companies should show greater conviction when making the case for accountable public ownership and investment for the long term rather than selling for a quick buck.
Paul Myners
London SW3
Union analysis of fund manager voting
The AFL-CIO pioneered union research in to the exercise of shareholder voting rights by fund managers in the mid 1990s. You can find their latest proxy voting survey here.
They were followed by the Canadian labour movement whose annual proxy voting survey is produced by SHARE. The 2006 survey can be found here.
Most recently the TUC joined the club in 2003, and its latest voting survey can be found here.
Since the introduction of mandatory public disclosure of voting record in the US there have been more specialist surveys focusing on particular types of resolutions. Both the AFL-CIO and their affiliate AFSCME have produced very interesting reports on the voting of mutual funds on executive pay.
They were followed by the Canadian labour movement whose annual proxy voting survey is produced by SHARE. The 2006 survey can be found here.
Most recently the TUC joined the club in 2003, and its latest voting survey can be found here.
Since the introduction of mandatory public disclosure of voting record in the US there have been more specialist surveys focusing on particular types of resolutions. Both the AFL-CIO and their affiliate AFSCME have produced very interesting reports on the voting of mutual funds on executive pay.
John Monks speech on the new capitalism
Ok this is a bit old but definitely worth plugging. Ex-TUC and current ETUC general secretary gave the Bevan Memorial lecture just before xmas. In it he talked about the changing face of capitalism, and the rise of new pressures on companies (and by extension their employees) from hedge funds and private equity. It's a really well measured speech.
The full text is online here.
Short-termism
Last year saw several interesting developments in the discussion about short-termism in the financial markets. This is a long-standing criticism of institutional investors and those that work for them but still hasn;'t really been settled one way or the other.
Recent reports have been put out by the CFA and Business Roundtable, the British TUC and the Marathon Club (their site seems to be down at present).
The last group is probably the most interesting as it is made up of pension fund themselves. The initiative is an attempt to develop long-term investment strategies for funds. The Club issued a consultation on possible 'long-term long only' (LTLO) strategies which drew some interesting reponses, for example a critical but thoughtful reply from Hermes.
Interestingly although many in the industry seem to find accusations of short-termism to be heresy (I think this stems from an ideological commitment to the efficiency of markets) some participants are quite open about the short-term pressures they are under and how this can affect decision-making. Chris Cheetam's piece in this collection of essays is a good example.
I think another major problem is the way trustees react to underperformance. There is an overwhelming desire to try and 'manage' the problem whereas the best strategy may just be to do nothing (accept performance is cyclical and/or mean-reverting and wait for the upswing).
Recent reports have been put out by the CFA and Business Roundtable, the British TUC and the Marathon Club (their site seems to be down at present).
The last group is probably the most interesting as it is made up of pension fund themselves. The initiative is an attempt to develop long-term investment strategies for funds. The Club issued a consultation on possible 'long-term long only' (LTLO) strategies which drew some interesting reponses, for example a critical but thoughtful reply from Hermes.
Interestingly although many in the industry seem to find accusations of short-termism to be heresy (I think this stems from an ideological commitment to the efficiency of markets) some participants are quite open about the short-term pressures they are under and how this can affect decision-making. Chris Cheetam's piece in this collection of essays is a good example.
I think another major problem is the way trustees react to underperformance. There is an overwhelming desire to try and 'manage' the problem whereas the best strategy may just be to do nothing (accept performance is cyclical and/or mean-reverting and wait for the upswing).
Sunday, 18 February 2007
Changing financial analysis
A major feature of the socially responsible investment world of the past few years has been a focus on financial analysis. Specifically there has been a trend towards getting analysts to look at possible linkages between corporate social responsibility issues and financial performance, and, by extension, share price performance.
In a sense this is a shift away from screened funds of the past. In addition more recent developments like the Enhanced Analytics Initiative have turned attention to sell-side analysts, one the reasons being that they are deemed to be more influential in terms of their relationship with companies. The EAI spscifically tries to financially incentivise the sell-side to produce research into 'extra-financial' issues.
The EAI definitelty seems to be having an impact. More specialist research is being produced. Is this just more paper being pumped into the capital markets? Is it just being used to inform trading? A good overview of some of the arguments for revamping financial analysis can be found here.
In a sense this is a shift away from screened funds of the past. In addition more recent developments like the Enhanced Analytics Initiative have turned attention to sell-side analysts, one the reasons being that they are deemed to be more influential in terms of their relationship with companies. The EAI spscifically tries to financially incentivise the sell-side to produce research into 'extra-financial' issues.
The EAI definitelty seems to be having an impact. More specialist research is being produced. Is this just more paper being pumped into the capital markets? Is it just being used to inform trading? A good overview of some of the arguments for revamping financial analysis can be found here.
Friday, 16 February 2007
Fidelity and the Tories
Despite some of the welcome comments Fidelity has made about private equity, let's not forget that they are a major backer of the Conservative Party as the Observer revealed last year.
Personally I don't think service providers like this should support any political parties (no, not even Labour). I've got an ISA with Fidelity so I'm planning to write them a letter complaining about this.
Personally I don't think service providers like this should support any political parties (no, not even Labour). I've got an ISA with Fidelity so I'm planning to write them a letter complaining about this.
'elf n safety
Here's an interesting piece about the HSE's CHaSPI project. This is an index that investors, and others, could use to measure companies' management of health and safety. The article was written by an Amicus rep and pension fund trustee called Jim Osborne.
On July 20th 2005 the HSE launched its Corporate Health & Safety Performance Index (CHaSPI). This is an extremely important initiative and CHaSPI will provide an extremely valuable tool for pension trustees provided that certain conditions are created.
Trustees have a vital role to play in creating the conditions for CHaSPI to succeed. It is unfortunate that many members of the TUC Pension Trustee Network remain unconvinced that “corporate responsibility”, of which health & safety in the workplace is an important component, can make a positive impact on their schemes’ investment returns.
This article will set out the reasons why trustees must discard their scepticism about incorporating corporate responsibility considerations into investment and throw their wholehearted support behind CHaSPI to ensure that it becomes a success. In those conditions CHaSPI will, in time, provide the necessary data which will prove incontrovertibly that good health & safety performance not only has a positive impact on fundamental measures of financial performance (cost control, profitability etc) but also has a positive effect on long term share values.
Health & safety in the workplace is a well established objective of the trade union movement – it is one of the movement’s core values. The reason why there is a lack of clear evidence linking health & safety performance to share price is that the majority of actors in capital markets do not incorporate health & safety performance appropriately into their investment analysis and stock selection decisions. We have to remember that these individuals and institutions are the agents of pension trustees. Despite this they apply their own values to the process of investment analysis. It is time for the representatives of the real shareholders – pension trustees – to insist that our values are the ones that are duly applied in the investment decision making process. By doing so we will create the conditions in which the evidence linking health & safety and long term share value will emerge. CHaSPI will be a vital tool which will provide the basis for that evidence.
What is CHaSPI?
The following is a brief summary of CHaSPI – for further details visit the website detailed in Tom's message.
CHaSPI is both a framework for companies to report their health & safety performance and a system for evaluating the performance by producing a “score”. The overall health and safety performance is scored out a maximum of 10.
The reporting and scoring system uses a number of criteria which are weighted and involves answering a number of detailed assessment questions under each of the weighted criteria. Companies reporting health and safety performance using CHaSPI are carrying out a self assessment.
The final score is subject to a verification statement which states whether the information input to the assessment has been verified internally and/or externally and by who (internal verification by a Director and by employee safety representative(s), externally via independent external audit).
CHaSPI has taken three years to develop by a process of collaboration between the HSE and a variety of stakeholders including a number of institutional investors and the TUC. There were two regional consultative conferences in early 2004 (in London and Edinburgh) to seek views and comments from a wider audience. An initial model was piloted, some changes made before further testing and a final validation process undertaken to confirm the validity of the factors used and their weightings and the robustness of the final model.
How can trustees use CHaSPI?
A key feature of CHaSPI is the compactness of the information it produces – a score out of 10 is easy to understand.
The model provides a framework for comparing the health & safety performance of companies in the same industrial sector and for monitoring changes in the level of performance at company level over time.
The time and effort trustees need to devote to monitoring the health & safety performance of their investments or potential investments is minimal given the simplicity of the scoring system. Unlike many other indexes CHaSPI is completely open for public access and will be free of charge. It can be accessed by anyone with an interest in workplace health & safety, including pension trustees, investment managers and analysts, union safety reps, employees, insurers, regulators, etc.
Use of CHaSPI will enable trustees to identify and investigate underperformance in health & safety against industrial sector benchmarks and take steps to ensure their influence as owners is brought to bear to encourage improved health & safety performance.
How can trustees promote the use of CHaSPI?
· for reporting by companies
· for analysis by investment managers
The success of CHaSPI depends upon common use by companies to report their health & safety performance. It is likely to provide a ready-made framework for reporting health & safety performance under the Operating & Financial Review (OFR), which is a requirement of companies from 2006.
It is expected that the companies who participated in the piloting and testing of CHaSPI during the development phase will report their performance using CHaSPI but it is critical to the success of CHaSPI that there is widespread take up by UK companies.
Trustees can play an important part in encouraging companies to report using CHaSPI by instructing their investment managers to promote its use through their regular dialogue with companies in whom they invest on our behalf.
Trustees can also influence the way CHaSPI is used by their investment managers in evaluating companies by encouraging them to incorporate analysis of health & safety performance using CHaSPI into their stock selection processes, into their engagement policies and priorities, and also into their voting policies.
If health & safety considerations become an integral part of stock selection and engagement/voting policies it is inevitable that companies who deliver the highest levels of health & safety performance will see demand for their shares rise, with the consequential effect that their long term share values will tend to outperform the rest. The evidence of a correlation between health & safety performance and share values, which is currently not available, will emerge in time if these conditions are created.
CHaSPI, Health & Safety and trustees’ fiduciary duty
Trustees often receive conventional advice that health & safety and other “corporate responsibility” considerations are not consistent with trustees’ fiduciary duty. Such advice is clearly of dubious quality, particularly regarding the relationship between health and safety and financial performance. Few people these days, including few company CEOs, disagree that good health & safety delivers improved financial performance at the operating level.
Furthermore, the lack of a clear correlation between health & safety performance and share value at present is the product of a lack of investor demand for the stock of companies with good health & safety performance rather than any objective factors that are capable of causing a disconnection between them. If institutional investors begin to assign an appropriate value to health & safety performance in their investment analysis, in response to their clients (which means us), the correlation between health & safety and share price will emerge (as it already has done in the correlation now proven between good corporate governance and long term share value).
The message is clear – incorporating considerations of health & safety performance into trustees’ investment policies and principles, and promotion of the use of CHaSPI is entirely and unequivocally consistent with trustees’ fiduciary duty. In fact there is a strong case to argue that not doing so would constitute a breach of that duty.
Some suggested questions for trustees to ask their investment managers.
· Did you participate in the development, piloting or testing of CHaSPI?
· Do you regard CHaSPI as a valid tool for the assessment of health & safety performance and as a suitable tool for incorporation into your investment analysis processes? Please explain your answer.
· How have you integrated CHaSPI into your investment analysis and stock selection processes?
· How are you encouraging companies to use CHaSPI to report their health & safety performance?
· How are you using information derived from CHaSPI within your processes of engagement with companies?
· How will you use CHaSPI within your voting policy guidelines?
· Will you vote against the re-election of Directors who have Board responsibility for health & safety where performance has been poor?
Please explain your policy in this regard.
The TUC Trustee Network must act
Whilst the TUC Trustee Network has no authority to issue instructions to members of the network, trustees are strongly encouraged to take the necessary steps to ensure the success of CHaSPI and to bring about improved workplace health & safety throughout UK PLC by using our influence as the ultimate, real owners of companies. It is important to do this because workplace health and safety is a major objective of the trade union movement and one of our core values. Despite the fact that doing this may be branded by critics as “politicising the investment process” taking these steps is entirely consistent with the fiduciary duty of trustees. It should be recognised that the way investment decisions are currently made by advocates of the status quo are themselves values-based and, therefore, just as “political” as the changes which will result from incorporating health & safety into the investment process.
On July 20th 2005 the HSE launched its Corporate Health & Safety Performance Index (CHaSPI). This is an extremely important initiative and CHaSPI will provide an extremely valuable tool for pension trustees provided that certain conditions are created.
Trustees have a vital role to play in creating the conditions for CHaSPI to succeed. It is unfortunate that many members of the TUC Pension Trustee Network remain unconvinced that “corporate responsibility”, of which health & safety in the workplace is an important component, can make a positive impact on their schemes’ investment returns.
This article will set out the reasons why trustees must discard their scepticism about incorporating corporate responsibility considerations into investment and throw their wholehearted support behind CHaSPI to ensure that it becomes a success. In those conditions CHaSPI will, in time, provide the necessary data which will prove incontrovertibly that good health & safety performance not only has a positive impact on fundamental measures of financial performance (cost control, profitability etc) but also has a positive effect on long term share values.
Health & safety in the workplace is a well established objective of the trade union movement – it is one of the movement’s core values. The reason why there is a lack of clear evidence linking health & safety performance to share price is that the majority of actors in capital markets do not incorporate health & safety performance appropriately into their investment analysis and stock selection decisions. We have to remember that these individuals and institutions are the agents of pension trustees. Despite this they apply their own values to the process of investment analysis. It is time for the representatives of the real shareholders – pension trustees – to insist that our values are the ones that are duly applied in the investment decision making process. By doing so we will create the conditions in which the evidence linking health & safety and long term share value will emerge. CHaSPI will be a vital tool which will provide the basis for that evidence.
What is CHaSPI?
The following is a brief summary of CHaSPI – for further details visit the website detailed in Tom's message.
CHaSPI is both a framework for companies to report their health & safety performance and a system for evaluating the performance by producing a “score”. The overall health and safety performance is scored out a maximum of 10.
The reporting and scoring system uses a number of criteria which are weighted and involves answering a number of detailed assessment questions under each of the weighted criteria. Companies reporting health and safety performance using CHaSPI are carrying out a self assessment.
The final score is subject to a verification statement which states whether the information input to the assessment has been verified internally and/or externally and by who (internal verification by a Director and by employee safety representative(s), externally via independent external audit).
CHaSPI has taken three years to develop by a process of collaboration between the HSE and a variety of stakeholders including a number of institutional investors and the TUC. There were two regional consultative conferences in early 2004 (in London and Edinburgh) to seek views and comments from a wider audience. An initial model was piloted, some changes made before further testing and a final validation process undertaken to confirm the validity of the factors used and their weightings and the robustness of the final model.
How can trustees use CHaSPI?
A key feature of CHaSPI is the compactness of the information it produces – a score out of 10 is easy to understand.
The model provides a framework for comparing the health & safety performance of companies in the same industrial sector and for monitoring changes in the level of performance at company level over time.
The time and effort trustees need to devote to monitoring the health & safety performance of their investments or potential investments is minimal given the simplicity of the scoring system. Unlike many other indexes CHaSPI is completely open for public access and will be free of charge. It can be accessed by anyone with an interest in workplace health & safety, including pension trustees, investment managers and analysts, union safety reps, employees, insurers, regulators, etc.
Use of CHaSPI will enable trustees to identify and investigate underperformance in health & safety against industrial sector benchmarks and take steps to ensure their influence as owners is brought to bear to encourage improved health & safety performance.
How can trustees promote the use of CHaSPI?
· for reporting by companies
· for analysis by investment managers
The success of CHaSPI depends upon common use by companies to report their health & safety performance. It is likely to provide a ready-made framework for reporting health & safety performance under the Operating & Financial Review (OFR), which is a requirement of companies from 2006.
It is expected that the companies who participated in the piloting and testing of CHaSPI during the development phase will report their performance using CHaSPI but it is critical to the success of CHaSPI that there is widespread take up by UK companies.
Trustees can play an important part in encouraging companies to report using CHaSPI by instructing their investment managers to promote its use through their regular dialogue with companies in whom they invest on our behalf.
Trustees can also influence the way CHaSPI is used by their investment managers in evaluating companies by encouraging them to incorporate analysis of health & safety performance using CHaSPI into their stock selection processes, into their engagement policies and priorities, and also into their voting policies.
If health & safety considerations become an integral part of stock selection and engagement/voting policies it is inevitable that companies who deliver the highest levels of health & safety performance will see demand for their shares rise, with the consequential effect that their long term share values will tend to outperform the rest. The evidence of a correlation between health & safety performance and share values, which is currently not available, will emerge in time if these conditions are created.
CHaSPI, Health & Safety and trustees’ fiduciary duty
Trustees often receive conventional advice that health & safety and other “corporate responsibility” considerations are not consistent with trustees’ fiduciary duty. Such advice is clearly of dubious quality, particularly regarding the relationship between health and safety and financial performance. Few people these days, including few company CEOs, disagree that good health & safety delivers improved financial performance at the operating level.
Furthermore, the lack of a clear correlation between health & safety performance and share value at present is the product of a lack of investor demand for the stock of companies with good health & safety performance rather than any objective factors that are capable of causing a disconnection between them. If institutional investors begin to assign an appropriate value to health & safety performance in their investment analysis, in response to their clients (which means us), the correlation between health & safety and share price will emerge (as it already has done in the correlation now proven between good corporate governance and long term share value).
The message is clear – incorporating considerations of health & safety performance into trustees’ investment policies and principles, and promotion of the use of CHaSPI is entirely and unequivocally consistent with trustees’ fiduciary duty. In fact there is a strong case to argue that not doing so would constitute a breach of that duty.
Some suggested questions for trustees to ask their investment managers.
· Did you participate in the development, piloting or testing of CHaSPI?
· Do you regard CHaSPI as a valid tool for the assessment of health & safety performance and as a suitable tool for incorporation into your investment analysis processes? Please explain your answer.
· How have you integrated CHaSPI into your investment analysis and stock selection processes?
· How are you encouraging companies to use CHaSPI to report their health & safety performance?
· How are you using information derived from CHaSPI within your processes of engagement with companies?
· How will you use CHaSPI within your voting policy guidelines?
· Will you vote against the re-election of Directors who have Board responsibility for health & safety where performance has been poor?
Please explain your policy in this regard.
The TUC Trustee Network must act
Whilst the TUC Trustee Network has no authority to issue instructions to members of the network, trustees are strongly encouraged to take the necessary steps to ensure the success of CHaSPI and to bring about improved workplace health & safety throughout UK PLC by using our influence as the ultimate, real owners of companies. It is important to do this because workplace health and safety is a major objective of the trade union movement and one of our core values. Despite the fact that doing this may be branded by critics as “politicising the investment process” taking these steps is entirely consistent with the fiduciary duty of trustees. It should be recognised that the way investment decisions are currently made by advocates of the status quo are themselves values-based and, therefore, just as “political” as the changes which will result from incorporating health & safety into the investment process.
T&G on the possible Sainsbury's buyout
And here's what the T&G had to say about the proposed PE-buyout of Sainsbury's. This is the story that has really taken the debate about private equity to new levels. There's also an interesting piece in today's FT (16th Feb) from the chief investment officer of Fidelity on some of the problems with private equity.
Private equity would take the wealth out of Sainsbury
5 Feb 2007
Heightened speculation about a private equity takeover of the Sainsbury supermarket chain drew a stinging response from the Transport and General Workers Union.
The union, which has 25,000 members spread over the retail and supply chain, said today that private equity would do nothing for a company which has turned round in the last two years.
"We are very concerned at the prospect of Private Equity taking over Sainsbury's," said Brian Revell, T&G national organiser for food and agriculture. "Such a takeover would be based on borrowed money followed by extracting as much wealth as possible from the company."
Mr. Revell said it was clear from the union's experience and that of unions across the industry in Europe and beyond that private equity companies are only in for the short or medium term and will add nothing to the management of the business. He praised the collective efforts at Sainsbury's and was highly critical of private equity.
"Sainsbury's have dramatically improved their performance over the past two years. This has not been based on a quick fix, but management and the workforce co-operating to improve the business," he stressed. "Private equity does not create wealth; they extract it for their shareholders."
Private equity would take the wealth out of Sainsbury
5 Feb 2007
Heightened speculation about a private equity takeover of the Sainsbury supermarket chain drew a stinging response from the Transport and General Workers Union.
The union, which has 25,000 members spread over the retail and supply chain, said today that private equity would do nothing for a company which has turned round in the last two years.
"We are very concerned at the prospect of Private Equity taking over Sainsbury's," said Brian Revell, T&G national organiser for food and agriculture. "Such a takeover would be based on borrowed money followed by extracting as much wealth as possible from the company."
Mr. Revell said it was clear from the union's experience and that of unions across the industry in Europe and beyond that private equity companies are only in for the short or medium term and will add nothing to the management of the business. He praised the collective efforts at Sainsbury's and was highly critical of private equity.
"Sainsbury's have dramatically improved their performance over the past two years. This has not been based on a quick fix, but management and the workforce co-operating to improve the business," he stressed. "Private equity does not create wealth; they extract it for their shareholders."
Thursday, 15 February 2007
GMB and private equity
Here's the letter the GMB sent to Labour MPs about private equity firms. I have a few misgivings but the campaign certainly has a head of steam.
8 Feb 2007
GMB publishes letter to MP's seeking Commons debate and asking them to sign motion condemning asset stripping at AA and elsewhere
This is the text of the letter sent to GMB Members of Parliament on February 7th 2007.
GMB is seeking help from our members of Parliament to secure action to rein in the activities of the venture capitalists. GMB is calling upon Gordon Brown in his next Budget, to end tax relief for interest payments on loans used by venture capitalists to buy companies like the Automobile Association, Birds Eye and Sainsbury's. This relief costs the Exchequer hundreds of millions per annum, while giving debt unfair tax advantages over equity. This transfer from taxpayers is now leading to the destruction of household name companies by venture capitalists, who are saddling these employers with massive debts. This is no small matter, UKcompanies owned by venture capitalists employ 3 million people in Britain.
For example at the AA, since the venture capitalists took over in 2004, they have loaded the AA with debts of £1.9 billion. This massive debt amounts to over six years of the subscription income from the AA's individual members. It amounts to £300,000 per AA employee. This debt is backed up by virtually no assets, since nearly all buildings and fleet used by AA are leased. At AA the venture capitalists sacked 4,000 of the 10,000 staff, saving £100m per annum on resources devoted to dealing with 4 million breakdowns per year.
Not surprisingly services to AA customers have declined. AA response times have fallen from first to third in the Which rankings. As there are fewer patrol staff to deal with the same volume of breakdowns, each patrol is forced to work overtime, and has to attend a higher number of breakdowns per day. The patrols are only able to provide a lower level or roadside service particularly to the 4 million individual AA members. More of them end up being towed to garages than was formerly the case.
Profits at AA have risen to £175 million, of which more than half is used to pay interest on the £1.9 billion loans. So rather than the Exchequer receiving tax on these profits the venture capitalists are able to claim millions in tax relief on the interest payments. Thus the taxpayer issubsidisingthe activities of the venture capitalists.
GMB opposes the unregulated and unaccountable activities of venture capitalists, their ability to get tax relief on loans, and the effect they have on companies, jobs, pensions and the economy. GMB consider that the private status of the venture capitalists is an abuse of company law and abuse of the privilege of limited liability status. The growth in this industry is leading to increased merger and takeover activity thus generating huge bonuses for the City while the management team who run the industry levy very steep charges and commissions. In effect it is a vehicle whereby the savings management sector is able to cream off large sums of money for their own self aggrandisement.
GMB is seeking an adjournment debate before the Budget to press this policy on the Chancellor. The news that these same venture capitalists are circling Sainsbury's makes this change of policy more urgent.GMB is asking all members of Parliament to submit a bid for an Adjournment Debate on the floor of the House of Commons, and request that you as an MP will also submit a call for that Debate. The more support we receive, the higher the chance we get in securing this Debate.
There will also be a new Early Day Motion on this subject very shortly, and I would ask you to also support this Motion by signing your name.
Can you please let me have a copy of your request for the Adjournment Debate so that I can brief you on the salient issues?
Yours sincerely
Paul Kenny, GMB General Secretary
Ends
8 Feb 2007
GMB publishes letter to MP's seeking Commons debate and asking them to sign motion condemning asset stripping at AA and elsewhere
This is the text of the letter sent to GMB Members of Parliament on February 7th 2007.
GMB is seeking help from our members of Parliament to secure action to rein in the activities of the venture capitalists. GMB is calling upon Gordon Brown in his next Budget, to end tax relief for interest payments on loans used by venture capitalists to buy companies like the Automobile Association, Birds Eye and Sainsbury's. This relief costs the Exchequer hundreds of millions per annum, while giving debt unfair tax advantages over equity. This transfer from taxpayers is now leading to the destruction of household name companies by venture capitalists, who are saddling these employers with massive debts. This is no small matter, UKcompanies owned by venture capitalists employ 3 million people in Britain.
For example at the AA, since the venture capitalists took over in 2004, they have loaded the AA with debts of £1.9 billion. This massive debt amounts to over six years of the subscription income from the AA's individual members. It amounts to £300,000 per AA employee. This debt is backed up by virtually no assets, since nearly all buildings and fleet used by AA are leased. At AA the venture capitalists sacked 4,000 of the 10,000 staff, saving £100m per annum on resources devoted to dealing with 4 million breakdowns per year.
Not surprisingly services to AA customers have declined. AA response times have fallen from first to third in the Which rankings. As there are fewer patrol staff to deal with the same volume of breakdowns, each patrol is forced to work overtime, and has to attend a higher number of breakdowns per day. The patrols are only able to provide a lower level or roadside service particularly to the 4 million individual AA members. More of them end up being towed to garages than was formerly the case.
Profits at AA have risen to £175 million, of which more than half is used to pay interest on the £1.9 billion loans. So rather than the Exchequer receiving tax on these profits the venture capitalists are able to claim millions in tax relief on the interest payments. Thus the taxpayer issubsidisingthe activities of the venture capitalists.
GMB opposes the unregulated and unaccountable activities of venture capitalists, their ability to get tax relief on loans, and the effect they have on companies, jobs, pensions and the economy. GMB consider that the private status of the venture capitalists is an abuse of company law and abuse of the privilege of limited liability status. The growth in this industry is leading to increased merger and takeover activity thus generating huge bonuses for the City while the management team who run the industry levy very steep charges and commissions. In effect it is a vehicle whereby the savings management sector is able to cream off large sums of money for their own self aggrandisement.
GMB is seeking an adjournment debate before the Budget to press this policy on the Chancellor. The news that these same venture capitalists are circling Sainsbury's makes this change of policy more urgent.GMB is asking all members of Parliament to submit a bid for an Adjournment Debate on the floor of the House of Commons, and request that you as an MP will also submit a call for that Debate. The more support we receive, the higher the chance we get in securing this Debate.
There will also be a new Early Day Motion on this subject very shortly, and I would ask you to also support this Motion by signing your name.
Can you please let me have a copy of your request for the Adjournment Debate so that I can brief you on the salient issues?
Yours sincerely
Paul Kenny, GMB General Secretary
Ends
Useful books
Here's a list of some useful books dealing with capital markets that have a progressive slant. I'll give them a short summary for now, and try and some post up longer reviews as I get going.
Working Capital: The power of labor's pensions
No, it's not a typo, the US-style spelling is because this book is all about workers' capital in the US. A good overview of some of the theory and practice in North America, although a little dated now. You can buy it via US Amazon.
http://www.amazon.com/Working-Capital-Power-Labors-Pensions/dp/0801439019/sr=8-1/qid=1171581683/ref=sr_1_1/002-1837687-5783260?ie=UTF8&s=books
The New Capitalists
A recently published book that tries to grapple with the implications of widespread shareownership. Probably the best overview of the whole system that has a progressive agenda and practical proposals. Even has a bit of coverage of the role of unions.
http://www.amazon.co.uk/New-Capitalists-Stephen-Davis/dp/1422101010/sr=8-1/qid=1171581929/ref=pd_ka_1/202-2819117-1755039?ie=UTF8&s=books
The New Global Investors
A slightly more mainstream take on shareholder engagement from corporate goverance veteran Bob Monks.
http://www.amazon.co.uk/New-Global-Investors-Robert-Monks/dp/1841121096/sr=1-1/qid=1171582080/ref=sr_1_1/202-2819117-1755039?ie=UTF8&s=books
Socially responsible investment: a global revolution
This book charts the growth in the SRI movement, from the early disinvestment campaigns through to the Pensions Act disclosure amendment and so on. Written by an SRI practitioner from the Methodist Church.
http://www.amazon.co.uk/Socially-Responsible-Investment-Global-Revolution/dp/0471499536/sr=1-2/qid=1171582165/ref=sr_1_2/202-2819117-1755039?ie=UTF8&s=books
Responsible Investment
A more recent take on the SRI movement in the UK. This gets into more detail and includes chapters from a range of different interested parties. Also contains quite a bit of discussion of financial analysis.
http://www.amazon.co.uk/Responsible-Investment-Rory-Sullivan/dp/1874719039/sr=1-4/qid=1171582165/ref=sr_1_4/202-2819117-1755039?ie=UTF8&s=books
Working Capital: The power of labor's pensions
No, it's not a typo, the US-style spelling is because this book is all about workers' capital in the US. A good overview of some of the theory and practice in North America, although a little dated now. You can buy it via US Amazon.
http://www.amazon.com/Working-Capital-Power-Labors-Pensions/dp/0801439019/sr=8-1/qid=1171581683/ref=sr_1_1/002-1837687-5783260?ie=UTF8&s=books
The New Capitalists
A recently published book that tries to grapple with the implications of widespread shareownership. Probably the best overview of the whole system that has a progressive agenda and practical proposals. Even has a bit of coverage of the role of unions.
http://www.amazon.co.uk/New-Capitalists-Stephen-Davis/dp/1422101010/sr=8-1/qid=1171581929/ref=pd_ka_1/202-2819117-1755039?ie=UTF8&s=books
The New Global Investors
A slightly more mainstream take on shareholder engagement from corporate goverance veteran Bob Monks.
http://www.amazon.co.uk/New-Global-Investors-Robert-Monks/dp/1841121096/sr=1-1/qid=1171582080/ref=sr_1_1/202-2819117-1755039?ie=UTF8&s=books
Socially responsible investment: a global revolution
This book charts the growth in the SRI movement, from the early disinvestment campaigns through to the Pensions Act disclosure amendment and so on. Written by an SRI practitioner from the Methodist Church.
http://www.amazon.co.uk/Socially-Responsible-Investment-Global-Revolution/dp/0471499536/sr=1-2/qid=1171582165/ref=sr_1_2/202-2819117-1755039?ie=UTF8&s=books
Responsible Investment
A more recent take on the SRI movement in the UK. This gets into more detail and includes chapters from a range of different interested parties. Also contains quite a bit of discussion of financial analysis.
http://www.amazon.co.uk/Responsible-Investment-Rory-Sullivan/dp/1874719039/sr=1-4/qid=1171582165/ref=sr_1_4/202-2819117-1755039?ie=UTF8&s=books
What's it all about?
The aim of this blog is to generate interest and discussion with the labour movement about capital markets and other elements of the financial system. For too long most of the Left has taken a very simplistic and negative view of how the system works and few have tried to develop either theoretical understanding or practical proposals for reform.
In the UK and some other countries we have well-developed funded pension systems which mean that millions of working people are directly plugged into the capital markets. Already their retirement savings are typically invested in equities (company shares) and bonds, and increasingly a part wil also be invested in some of the more controversial asset classes such as hedge funds and private equity.
I believe we have a duty to foster a greater understanding of financial markets within the labour movement. If we can teach ourselves to understand how the system operates which can identify both areas that require reform, and opportunities for influence. If we simply criticise in general terms from the outside we effectively cede control of billions of pounds of capital to others who may use it in a way that hurts working people around the globe.
Already there is a significant amount of activity around this agenda in North America. The workers' capital (or capital stewardship) movement in the US and Canadian trade unions is increasingly sophisticated. In the UK such ideas and activity have yet to really take hold. Therefore a primary objective of this blog is to contribute to the discussion and implementation of these ideas with the Labour Party and Uk trade unions.
In the UK and some other countries we have well-developed funded pension systems which mean that millions of working people are directly plugged into the capital markets. Already their retirement savings are typically invested in equities (company shares) and bonds, and increasingly a part wil also be invested in some of the more controversial asset classes such as hedge funds and private equity.
I believe we have a duty to foster a greater understanding of financial markets within the labour movement. If we can teach ourselves to understand how the system operates which can identify both areas that require reform, and opportunities for influence. If we simply criticise in general terms from the outside we effectively cede control of billions of pounds of capital to others who may use it in a way that hurts working people around the globe.
Already there is a significant amount of activity around this agenda in North America. The workers' capital (or capital stewardship) movement in the US and Canadian trade unions is increasingly sophisticated. In the UK such ideas and activity have yet to really take hold. Therefore a primary objective of this blog is to contribute to the discussion and implementation of these ideas with the Labour Party and Uk trade unions.
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