Taxing questions

I wrote a few weeks back about the true cost of the abolition of dividend tax credits in 1997. Yesterday the Government released documents revealing civil servants' views of the potential impact of the change, and it's interesting to see how the reporting of it varies.

If you are geeky enough to read the documents released yesterday it is clear that officials outlines a range of possible impacts, and a range of potential costs. For example at one point it is said that a possible result would be a major fall in the stockmarket. This has clearly not occured. At the other extreme the possibility is also raised that institutional investors would simply push for higher dividends and as such the impact might be limited. Throughout the documents the officials repeatedly state that the outcomes are uncertain.

However juding from some of the coverage today one could be forgiven for thinking that Brown was clearly told that the tax change would destroy final salary schemes, and given clear figures on how much it would cost. For example here's the introduction from the Telegraph's coverage today.

Gordon Brown was warned explicitly that he would cause the death of the final salary pension scheme and cost companies and individuals billions of pounds when he took the knife to the pension system in his first Budget.

Confidential documents sent to the Chancellor before he axed the dividend tax credit in 1997 also warned that the worst-hit victims would be the poorest members of society.

The internal Treasury forecasts, released last night under the Freedom of Information Act, state that the changes would "cause a shortfall in existing assets of up to £75 billion" and that "employers would have to contribute about an extra £10 billion a year for the next 10 to 15 years to get pension scheme funding back on track".

Got that? £10bn a year, according to the Telegraph.

Now here's the intro from the FT's (no less critical) report.

In confidential memos dating from 1997 and published on the Treasury’s website on Friday night in response to a freedom of information request, the officials are shown warning Mr Brown that the loss of tax credits would cost providers about £4bn a year.

Though officials said a planned cut in the main corporation tax rate would reduce the effect of this to about £3.3bn, they warned that employee benefits might be reduced and that the shift towards defined contribution schemes could accelerate, with few new defined benefit – or final salary – schemes set up.

So that's £4bn a year, or maybe £3.3bn a year (closer to the figure suggested by the Pensions Policy Institiute research I posted previously). In fact if you want to you can find even lower figures in the papers released. And those are just projections, even now there is no agreement on what the cost actually is. In both cases - the projections and the actual costs - the Telegraph simply grasps for the highest possible number.

I'm not just going to whinge about the numbers used. What about the claim that it caused the 'death' of the final salary scheme? No-one, as far as I am aware, is claiming that the change didn't cost pension schemes money. And of course any increase in costs is going to add to the pressure on employers. However I think that the impact of the tax changes is a minor factor compared to other factors such as the stockmarket correction, the disclosure of pension deficits on company balance sheets and, obviously, increased longevity.

The Telegraph says that far less defined benefit schemes are open now than when the tax credit was abolished. That's true, but it's that old question of confusing correlation and causation. DB schemes have been in long term decline (in terms of membership) for probably 20 years. That didn't really start accelerating until the stockmarket correction, which reinforces the perception that the tax credit abolition didn't have much of an impact.

And talking from my own experience, in the time I was a trustee of a DB scheme it never came up as an issue. The major pressures related to the liability side of the equation. So I just don't buy it.

Finally, one interesting insight from the documents released is a hint of officials' views of the pensions industry.

“The industry will publicly paint a much bleaker picture, and ministers will have to be prepared for lots of outcry.”

“I would expect the industry to try and persuade large numbers of employees and pensioners to write and complain, so ministers’ postbags will be pretty full.”

And the rest! If I remember rightly the NAPF described the tax change as the biggest attack on pension schemes since the Second World War.

Quote of the week

From US investor Mary F Morse in support of her shareholder resolution to limit executive pay at Coca-Cola to $500,000 a year per director.

"The limit of one half million dollars in remuneration is far above that needed to enjoy an elegant life-style."

Quite.

Shareholder value fundamentalists

I posted a bit a while back about the proposed loyalty dividend at DSM. I still think this was a really good initiative and a practical response to short-term pressure from some investors.

Well, they've scrapped it, because of the intervention of US fund manager Franklin Templeton. Basically Franklin raised the issue with the Enterprise Section of the Amsterdam Court, arguing that the proposal violated the principle of equality of treatment for shareholders. The Court subsequently ruled that the loyalty dividend couldn't be proposed at the company's AGM yesterday. DSM can appeal the decision but it said this could take up to 2 years, and as such has decided to throw in the towel.

Separately the monster Dutch public sector pension fund ABP has said that it would like DSM to keep plugging away, but I suspect it's unlikely that will happen.

In effect a very fundamentalist interpretation of shareholder value has been used to kill off an attempt to encourage long-term ownership. Although 17% of DSM's shareholders had already pre-registered for the dividend, Franklin, with about 2%, managed to get it scrapped. And we wonder why companies complain about short-term pressure from the capital markets.

When the facts change, I change my mind

Here's a great quote I've shamelessly lifted from Andrew Glyn's interesting Left critique of where we are at today, Capitalism Unleashed.

“Much of classical economics, with its [concepts of the] long-run ‘stationary state’, had a fairly well-developed limits-to-growth argument… the argument that growth that would have to stop because of limiting factors – most notably land - was definitely there.
Furthermore, the writings of our esteemed colleagues of the past are full of references to the idea that society will achieve general satiation in the distant future… With more than enough to go around, people will work less and enjoy leisure more. This vision is expressed in the writings of Marx, of Mill, of Keynes and of many others.
It can be argued that these economists underestimated the potential of technical change, or that they did not really understand human nature. Maybe that is true. But I must say it gives some pause in trying to think about the distant future. Maybe it is we who are now underestimating the potential for technical change or it is we who do not really understand human nature. If we mainstream economic thinkers reversed ourselves so strongly over the last century, why shouldn’t we reverse ourselves again over the next century?”

Martin Weitzman, Professor of Economics at Harvard, commenting in 1992 on the Limits to Growth controversy

GMB meets private equity firm

The GMB leadership today met with their favourite people, Damon Buffini and crew from the private equity outfit Permira. There's a vague positive statement on Reuters:

LONDON, March 27 (Reuters) - Permira [PERM.UL] managing partner Damon Buffini and the GMB union said they held constructive talks on Tuesday about the Automobile Association, the roadside assistance firm owned by the private equity firm.

"The parties have agreed to consult further and to seek to build a constructive dialogue," they said in a joint statement.

The discussions represented a landmark meeting between Permira and the union, which has made Buffini the centerpiece of its highly vocal campaign criticizing the private equity business model and its effect on jobs.

After repeated requests to meet, Buffini sent a letter last month to Paul Kenny, the general secretary of the GMB, in a bid to calm the rising antagonism, saying he was "eager to set the record straight."

The GMB has not been the AA's recognised union since March 2005 when thousands of members left to form the AA Democratic Union. Some of the company's 7,000 employees remain affiliated with the GMB, however.

Permira said on Tuesday its position remains that employees can be represented by whomever they choose.

Because you're worth it!

Executive pay is one issue where I become more left-wing as I get older. It's like that old line about hotdogs - the more you know about how they are made the less you want to eat them. The more I have learnt about executive pay the less convinced I am either that the levels are justified, or that there is genuinely a 'market' at work in setting the 'price'.

As the late great J K Galbraith famously once said:

"The salary of the chief executive of a large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself."

There is a great demolition of the argument that executive pay is a market on the Performance And Reward blog.

Today there is plenty of coverage of the pay Barclays president Bob Diamond took home last year. The Diamond geezer apparently trousered more than £22m in 2006, including a £10.4m performance bonus. It's big by UK standards, but let's not be under any illusion that executive pay is under control here. The rewards directors take out of companies go up year after year, easily outstripping, in percentages terms, pay rises for other employees in the same companies.

Shareholders have proved to be an ineffective force in bringing back some sanity to executive pay. If the people you pay for managing your money (the fund managers) ever graciously decided they might tell you the lowly punter how they use your money, in terms of shareholder voting rights, you would see that most of them nod through almost all executive pay policies. Only the really obviously bad ones ever take any flak. That implies that the problem is at the (extreme) margins.

I consider myself a fairly moderate lefty. But on this issue I think there is a serious problem, and I find myself genuinely sickened by some of the pay awards. If there is no serious attempt to rein in executive pay I really do think this risks undermining people's faith in 'the system'. Funnily enough some of the investor community feel the same way. Here's what the International Corporate Governance Network had to say a couple of years ago.

"We cannot ignore the societal impact of what seem to be unfair or disproportionate rewards being received. At one extreme there will be some people to whom any compensation above an arbitrary multiple of average earnings in an economy is wholly unacceptable. Our suggestions will not appease them. On the other hand, if the electorate as a whole reacts against a system that enables people to be remunerated on a basis that seems unjustifiable to any reasonable mind, then the managerial capitalism that dominates the world at present may be under threat."

Their full report is here.

Ten years ago the GMB mounted a high profile campaign against Cedric 'the pig' Brown at British Gas. What Brown got paid as a salary then would barely register as top-up bonus for today's executives. Maybe it is time for a renewed offensive on executive pay, this time through our investments?

Remember YOU have a stake in this. If you have a pension, or an ISA, somewhere along the line your money is being used to support (or oppose) executive pay policies. Find out what your fund manager is doing, and if you don't like it put pressure on them to do it differently.

BP faces investor pressure over pay and safety

There is plenty of coverage today of the looming investor revolt at BP over executive remuneration arrangements. For example see the Grauniad, Indie and Telegraph.

There are two elements to investors' criticisms of BP - the structure of remuneration and the link to safety performance. On the first point, one of the key questions is why Lord Browne is being allowed to participate in the Executive Directors' Incentive Plan (EDIP), a long-term incentive scheme, when he will have left the company in a few months. In addition the potential rewards he gets when he leaves could be sizeable.

On the safety question, the Local Authority Pension Fund Forum (LAPFF) has argued that there is insufficient linkage between executive pay and management of safety issues. BP has said that in future safety factors will be taken into account when deciding annual bonuses. However bear in mind that, as I posted previously, the directors managed to take home 50% of their maximum annual bonus even in the wake of serious criticism from the Baker and CSB reports. LAPFF goes further and makes the point that if BP is serious that safety is a central and long-term issue for the business then why isn't it a factor in determining the directors' long-term incentives?

What can we expect at the AGM? Who knows. LAPFF only represents just over 1% of BP's shares, and the ABI and RREV have given the company's remuneration report the all-clear. However there are rumblings amongst other shareholders, including some from overseas. In addition one report suggested that the ECCR - a religious group active on CSR issues - may also got into bat on this one.

Tough turkey

It's strange to see BP get some credit for only paying Lord Browne £4.6m after the company's recent serious safety failures. For example see this bit in the Lombard column of the FT recently. The company has cut directors' bonuses for example, although only by 50%. That means Browne gets a bonus of 'just' £900,000.

Let's not forget that the bonus cuts come in the wake of the Texas City refinery blast that killed 15 people, and the Prudhoe Bay spill. Plus the highly critical Baker and CSB reports. It does beg the question what would have to happen for the company to decide that it was not appropriate to pay any bonus. It reminds me of the situation at Jarvis a couple of years ago where the directors were awarded bonuses in respect of the year of the Potters Bar rail crash.

More broadly you have to wonder what kind of impact this sort of 'sanction' actually has. It's pretty meaningless in terms of how much directors get paid. The situation is comparable to the directors being offered a massive banquet, far more than they could possibly eat, but being told: 'But you're only getting half a turkey'.

As a result not all shareholders think BP has gone anywhere near far enough. More soon.

Management buy-ins lead to job cuts

Another day, another bit of research about the impact that private equity has. This time it's the Work Foundation. According to The Observer the Work Foundation's report has found that management buy-ins (ie an outside team taking over) lead to cuts in the workforce and leave remaining employees worse off.

This report follows the recent Nottinghamshire study which claimed that private equity could lead to an increase in employment. Though from memory that was looking out management buy-outs (ie the existing company management remain in place and take the company private).

So the argument is getting more nuanced. This is an entirely good thing. It would be a mistake, for example, for the unions to allow themselves to be painted into a corner where they look like they are simply anti private equity. They need to develop an appreciation for distinguishing the good from the bad - both in terms of strategies and investors.

Pension fund vs private equity

There's a good bit in today's Grauniad about the tussle between the trustees of the Sainsbury's pension fund and the private equity consortium that wants to make a bid for the company. The trustees have, rightfully, said that a change in ownership would change their perspective. In addition they have apparently told the consortium that they should come first on the list of lenders in the (hopefully unlikely) event of insolvency.

In all of this I think the trustees are doing exactly the right thing by the scheme and its members. This is just the sort of approach that the Pensions Regulator has been telling trustees they ought to take. However I wouldn't be surprised to see them take a bit of flak from commentators in the business press and/or from the pensions industry.

When cases like this were talked about in theoretical terms when the Regulator first started spelling out how trustees ought to act it was notable that there was (anonymous) criticism from the investment banking mob. This will put a damper on companies' M&A activity they said. (Of course their stance on this issue was entirely neutral and not at all influenced by their direct stake in M&A work.) So that argument might resurface. In addition the trustees might be attacked for being too risk averse.

There are a couple of things worth remembering here. First is that the scheme deficit is effectively a debt owed by the employer to the scheme. As such the trustees are absolutely right to try and get upfront committments from the new 'owners' of that debt, and to do some background checks on the business plan etc. A bank would do exactly the same thing.

Secondly, the deficit might be an irritating figure on a balance sheet for the PE consortium, but for the trustees it represents real people's pension entitlements. There is a perfectly reasonable case to be made that it is more important that promises to beneficiaries are kept than that the ownership of the company changes, or, more widely, that M&A activity take place. I am frequently struck by the way people in the City only seem to be able to see pension funds as a drag on the system (despite the fact that they make quite a lot of money from the assets involved). Who do they think capitalism is for?

Finally, if the unions are smart what they should be doing is getting their member-nominated trustees (MNTs) from the likes of WH Smiths, M&S and Sainsbury's to talk to union MNTs on other funds. They ought to give MNTs guidance on what to do in the event of a bid. Trustees in this situation should hold out for the best deal possible. How the bidder responds will tell them a lot about how they would act as owners of the company. If the bidder walks away the trustees - and the company - may have had a lucky escape.

Shareholder voting disclosure in the US starts to have an impact

Thanks again to Oliver for sending me this piece from SocialFunds.com about the voting records of US shareholders. I'm putting up a large chunk of the article because it's free access anyway, the full article is here. The article argues that disclosure is forcing fund managers to take a more considered position on shareholder resolutions that address corporate social responsibility issues.

Apparently, the rubber stamp is dying a slow death. Optimists predicted that the SEC rule requiring mutual funds to disclose their proxy voting records starting in August 2004 would deter funds from reflexively voting with company recommendations--which almost invariably suggest voting against shareowner resolutions. Research on fund voting on corporate social responsibility (CSR) resolutions addressing social and environmental issues provided to SocialFunds.com by Jackie Cook, a senior research associate with The Corporate Library (TCL), provides a more realistic perspective. This data complements research Ms. Cook conducted for a recent TCL report on voting by 29 large mainstream funds on corporate governance resolutions that examined over 6 million voting decisions parsed from over a thousand N-PX filings, the SEC form where funds disclose annual proxy voting records.

According to the data on CSR resolutions, funds are collectively inching their way toward more conscientious voting. Ms. Cook analyzed 592 CSR resolutions that elicited more than 24,000 voting decisions over the past three proxy seasons by 60 fund families (up from the 45 fund firms Ms. Cook analyzed last year for SocialFunds.com.) She found that overall support for CSR resolutions fell from 15.7 percent in 2004 to 14.8 percent in 2005, then rose to 21 percent in 2006.

Support for CSR resolutions by the 52 mainstream funds surveyed fell slightly from 2004 (7.8 percent) to 2005 (7.7 percent) before rising to 13.4 percent in 2006. The eight socially responsible investing (SRI) funds surveyed showed much more robust support for CSR resolutions-- from 68 percent support in 2004 to 61.9 percent in 2005 to 71.8 percent in 2006.

"Looking at the big picture tells an incomplete story--a closer examination reveals several layers of complexity," Ms. Cook told SocialFunds.com. "For example, the progress made overall comes despite significant lagging by some of the largest firms."

Do something positive about Iraq

Thinking about Nick Cohen's talk the other idea I thought it might be useful to provide some links for people who want to do something positive about the mess we have created in Iraq.

You can help the TUC's work in support of the Iraqi trade union movement by donating online here. And you can buy the book Hadi Never Died: Hadi Saleh and the Iraqi Trade Unions. They were also asking for people to send in old mobile phones too.

The website of the General Federation of Iraqi Workers is here.

There is also Labour Friends Of Iraq. The group contains both pro and anti-war Labour supporters.

And there is the Iraq Child Appeal being run by the UK's Iraq Association.

Sainsbury's update

Plenty of coverage about the private equity-backed bid for Sainsbury's today. The FT says that the trustees of the supermarket chain's pension fund are pushing for up front cash payments or assets. It suggests the consortium behind the bid have offered £300m to £500m.

The following sentence in the FT article made me chuckle.

The trustees are understood to be concerned whether a private equity buyer would be willing or able to make additional contributions over the next 60 years.

Surely it's tongue in cheek? Even the loudest champions of private equity don't claim that its time horizons stretch that far ahead!

There is also a good bit in the Lombard column comparing the situation at Sainbury's with previous bids for M&S, WH Smiths and Corus. It argues that Corus is the most directly comparable example.

Trustees of the British Steel pension scheme had to weigh the threat to the fund’s covenant with its corporate sponsor and the risk that the UK’s Pensions Regulator would find it hard to chase down an Indian (or Brazilian) owner against the fact that the Anglo-Dutch steelmaker’s future prosperity depended on finding a suitable international partner. Tata Steel, the eventual winner, granted enough concessions and was deemed sufficiently benevolent to outweigh the concerns.

In the case of Sainsbury, a change of control is not essential to the retailer’s future. In fact, a trustee with a duty to current and future pensioners might say that a foreign leveraged vehicle was replacing benevolent British family shareholders, aggravating fears about the strength of the fund sponsor and its accountability to the UK pensions watchdog. That should make the talks much tougher than at Corus.

Pro-war/pensions pile-up

Last night was Nick Cohen's talk on his controversial book What's Left. It's one of the most talked-about books on the Left for ages for all the right reasons. He basically holds a mirror up to a lot of the recent thinking/positioning/posturing on the Left and pretty it isn't. His main question is why people who supposedly champion left/liberal values ally themselves to a greater or lesser extent with movements and organsations that oppose them, simply because these movements are in opposition to 'the West'.

It was a very interesting talk, perhaps slightly let down by the lack of dissenting voices from the floor. A bit surprising given the level of hostility the book has generated from bits of the Left. There was a good contribution from an Iranian bloke though. And there were leaflets handed out by an organisation called Third Camp who say they oppose both US militarism and Islamic terrorism. I'd be interested to hear if anyone knows anything about them and if they are worth supporting.

Back to the talk, I think one of Nick Cohen's more interesting arguments is that the sort of ingrained 'oppositional' thinking prevalent on the Left is actually a very easy option, it's opting out. 'Not In My Name' is almost like 'I'm washing my hands'. In contrast, he argued last night, solidarity is hard work.

John Gray (whose piece on the talk is here) asked a good question about how seriously we should take the Far Left. Nick's response was, if I remember rightly, that although they may be small in number their type of arguments are influential beyond their (tiny) membership, and as such they need to be challenged. We are all Hizbollah now? Not in my name!

Two final points. First, the Iraq war hardly featured at all in the talk. Which rather undermines one of the arguments doing the rounds that the book is somehow a giant defence of his pro-war stance. Secondly, it is also worth stating that he is still very much a lefty. I have heard Trotty types try and claim that somehow he is right-wing because of his stance on the war. This is patently not true if you listen to the sorts of people he argues the Left should be supporting overseas. In any case it comes to something if someone's politics are defined solely by their position on a solitary, albeit very important, issue. I opposed the Iraq war but there are numerous people I know who are very active and committed lefties who supported it. If they suddenly overnight become right-wing because of the stance on the war how come they aren't out canvassing for the Tories? or Respect?

Finally, an interesting attendee at the meeting was Pensions Minister James Purnell. He kindly took this photo of Nick, John and I, which is frankly rather poor in quality. John diplomatically blames the camera, I say it is symptomatic of Blairism and would not have occured if Labour was still committed to the common ownership of the means of production, distribution and exchange. Or something.

Budget - Brown boosts Financial Assistance Scheme

Excellent news that Brown is increasing the funding to the Financial Assistance Scheme - which provides support to members of pension schemes where the employer went insolvent. There is a reasoanable theoretical argument that the Government should steer clear of the private sector's failures, and a lot of the commentary from the pensions industry was incredibly hypocritical.

But the bottom-line reality was that the people affected deserved to be helped out - this is what Labour governments are for. In addition purely in political terms this was a stick that was being used effectively to beat the Government with. It was giving the impression that Labour wasn't bothered about people who had lost their life's savings. As John Gray said on his blog a while back - it was an own goal.

Nice one Gordon.

Research on shareholder engagement

Thanks to Oliver for sending me this great list of research papers on shareholder engagement. Lots of interesting stuff here, I'll try and put up some summaries if I get time.

* The Price of Sin: The Effects of Social Norms on Markets, by Harisson Hong and Marcin Kacperczyk (Princeton University Working Paper). http://papers.ssrn.com/sol3/papers.cfm?abstract_id=766465

* Returns to Shareholder Activism Evidence from a Clinical Study of the Hermes U.K. Focus Fund, by Marco Becht, Julian Franks, Colin Mayer, and Stefano Rossi (ECGI Working Paper). http://papers.ssrn.com/sol3/papers.cfm?abstract_id=934712

* The Cost of Virtue: Corporate Social Responsibility and the Cost of Debt Financing, by Allen Goss and Gordon S. Roberts (York University Working Paper). http://papers.ssrn.com/sol3/papers.cfm?abstract_id=955041

* Monitoring the Monitor: Evaluating CalPERS' Activism , by Brad M. Barber (University of California at Davis Working Paper). http://papers.ssrn.com/sol3/papers.cfm?abstract_id=890321

* Mutual Fund Attributes and Investor Behavior, by Nicolas P.B. Bollen (Vanderbilt University Working Paper). http://papers.ssrn.com/sol3/papers.cfm?abstract_id=899382

* The Effect of Socially Responsible Investing on Financial Performance, by Alexander Kempf and Peer Osthoff (University of Cologne). http://www.cfr-cologne.de/index.php?target=workingpaper

* Cleaning a Passive Index: How to Use Portfolio Optimization to Satisfy CSR Constraints, by M.A. Milevsky et al. (Journal of Portfolio Management 2006). http://papers.ssrn.com/sol3/papers.cfm?abstract_id=630622

* The Effects of Corporate Governance on Firms' Credit Ratings, by H. Ashbuagh et al. (Journal of Accounting and Economics 2006). http://papers.ssrn.com/sol3/papers.cfm?abstract_id=511902

* Socially Responsible Indexes, by Meir Statman (Journal of Portfolio Management 2006). http://papers.ssrn.com/sol3/papers.cfm?abstract_id=705344

* Beyond Dichotomy: The Curvilinear Relationship between Social Responsibility and Financial Performance, by Michael Barnett and Robert Salomon (Strategic Management Journal, forthcoming). http://papers.ssrn.com/sol3/papers.cfm?abstract_id=885950

Banana terrorism

There's been quite a bit of coverage of everyone's favourite food company Chiquita and its payments to the right-wing paramilitaries of the AUC in Columbia. For instance here's the Beeb's report. What I didn't realise is that they were giving money to the FARC too. So it was more like a protection racket (often happens when politicos get guns doesn't it?) than political support for right-wing nutters.

It also reminded me of a great NGO called Banana Link who do a lot of work trying to improve working conditions in the banana industry. At one point they were considering trying to talk to investors (Chiquita is a listed company for example) but I'm not sure where that is at. Worth supporting.

Long and short

There's been a sprinkling of comment pieces appearing about short/long-termism in the investment markets. Some of it was in response to Al Gore's speech at the NAPF last week which, appropriately enough, drew heavily on recycled material (is anyone not aware that the average length of time shares are held has gone down?). For example there was this piece (scroll down a bit) in the Telegraph which is a pretty superficial take on the issues at hand.

More interesting is this piece by Tony Jackson in the FT yesterday (you'll need a sub I think). Here's a chunky excerpt:

The most obvious weakness is the so-called agency problem, whereby managers have a different set of incentives from the owners. One response to that was the rise of value-based management in the 1990s. Executive rewards should depend on results as measured by the shareholders. Of course, it did not work. Rewards went up a lot faster than the stock indices. And when stock options lost their value in the bear market, they were often repriced. Executives still marched to a different drum and they still called the shots.

Other basic drawbacks have more to do with behaviour than rewards. For instance, boards can work badly because of clashes of personality or ambition. The non-executive chairman – if there is one – may not be able to handle this.

The obvious people to sort it out are the owners. That is fine if this is a small group of insiders, as in private equity. But in public companies they are a leaderless army.

Behavioural theory also suggests that executives cannot always analyse the mass of data in front of them. They respond by going for a safe solution.

This may partly account for the way most public companies today are reluctant to leverage their balance sheets as much as shareholders want. It may also explain their reluctance to go for radical strategies unless pushed by an aggressive shareholder.

Take Cadbury Schweppes of the UK, which last week abruptly agreed to demerge, having publicly dismissed the notion less than a month before. This was a virtually instant response to the appearance of the US activist Nelson Peltz on the share register.

At this point, companies will point the finger of blame at shareholders. The market, they say, is obsessed with quarterly earnings.

If an otherwise sensible long-term strategy would hit those earnings, forget it. But shareholders also press for big moves such as mergers and demergers. Where is the consistency?

Even if true, that is not strictly relevant. What matters is not who is to blame, but whether the system works as a whole.

If it induces irrational behaviour in both owners and managers, so much the worse.

This reminded me of a fantastic essay Alfred Rappaport wrote about investors' fixation with short-term earnings. This article is buzzing with ideas, which I'll try and summarise in another post at a later date. One key insight that I drew from it was the idea that stockmarkets can be 'efficient' (or not) in more than one sense. Markets might exhibit ‘informational’ efficiency, with all known information factored into share prices, in turn meaning investors are unable to outperform the market over a prolonged period. But the market may also demonstrate ‘allocative’ inefficiency because decisions regarding capital allocation are not being made on the basis of sound valuations.

Think of this in terms of the tech stock bubble of the late 90s early noughties. Share prices were informationally efficient - because they reflected all available public information and market views - but were allocativley inefficient because the valuations were way out of line with the reality of the underlying businesses.

PS. I posted a few days back about the loyalty dividend proposed by Dutch business DSM including the possibility that they might get sued. Well it looks like that might just happen according to Reuters.

AFL-CIO calls for investor protection

The US unions have long been pioneers of capital stewardship. The AFL-CIO (the US equivalent of the TUC) is now lobbying Congress to carry out hearings on the continuing failures of US corporate governance and capital market regulation.

These hearings should address (1) executive pay excesses and the apparent widespread and flagrant legal violations involved in the stock options scandals; (2) the impact of the growth of hedge funds and private equity on the health of our capital markets and our economy overall; (3) the effect that corporate America’s retreat from providing pensions has on our system of corporate finance; and (4) the relationship of our increasingly regressive tax system to the explosion in executive pay, our growing budget deficit, and our inability to fund basic governmental obligations.

You can find the full statement here.

The business community in the US has itself been lobbying for a watering down of the Sarbanes-Oxley Act, the major piece of US corporate governance reform introduced in response to the likes of Enron and WorldCom. Some have argued that the Act is causing more companies to list outside the US to avoid the requirements of Sarbox.

But the Securities and Exchange Commission has come out fighting. In a speech last week the SEC chair Christopher Cox defended the Act and also pointed out that the decline in companies listing in the US predates the Act by some years.

Local authority funds criticise lack of equal pay data

Here's the latest release from the Local Authority Pension Fund Forum:

Shareholders are being denied information on companies’ policies on equal pay despite its increasing importance as both a legal and corporate social responsibility issue, a major investor survey has revealed.

The Local Authority Pension Fund Forum (LAPFF) wrote to all FTSE 350 companies (excluding investment trusts) last August asking for information on equal pay policies and audits, but found only a small minority willing to communicate with investors on their approach. Just 20% (60) of the companies contacted responded to the survey, and many companies which had carried out equal pay audits were unwilling to disclose the findings.

The LAPFF believes that companies which fail to deal effectively with equal pay may be exposing themselves to financial and reputational risks, which may in turn be detrimental to investors.

Overall 67% (40) of those companies responding to the survey stated that they have equal pay policies in place, however this represents just 13% of the companies that LAPFF had contacted. A total of 58% (35) of respondents stated that they had conducted an equal pay audit, but this accounts for just 12% of companies surveyed, leaving investors in the dark over what other businesses are doing in this crucial area. Of the 35 respondents that had an equal pay audit in place, only 63% were willing to disclose their findings to the Forum.

The Forum has adopted the best practice set out by the Equal Opportunities Commission (EOC) as the framework under which it expects listed companies to identify, address and report on equal pay issues.

Cllr Darrell Pulk, chair of the £70 billion strong Forum, said: “A company’s approach to equal pay is an important new criterion for pension fund investors to assess how the company values its employees and manages it ‘human capital’. The benefits of audits will outweigh the costs in the long term, but in order for shareholders to reward companies’ efforts in the market, they need to see performance and progress on equal pay reported in annual reports and accounts, using meaningful key performance indicators, on the basis of equal pay audits. The Forum will continue to campaign for companies to take the issue of equal pay seriously, as part of its ongoing campaign for best practice in human capital reporting.”
The Forum recognises that although equal pay legislation has been in force for over 30 years, women still earn on average 81% of the hourly earnings of male employees. Continuing inequality increases the risk of equal pay cases being taken against companies, resulting in both the actual costs of proceedings and settlements, and indirect costs arising from reputational damage and loss of shareholder confidence. More hidden costs include those arising from lower productivity and absenteeism amongst women workers who feel they are discriminated against by low levels of pay.

Survey Findings
Overall 60 companies, representing 20% of companies contacted, responded to the survey. Of these, 31 (52%) were from the FTSE 100.

Respondents Policy in place Audit in place Willing to disclose audit results
60 (100%) 40 (67%) 35 (58%) 22 (63%)


Companies in the FTSE 100 were more likely to have a policy or audit in place, and more willing to disclose the results of an audit than those in the FTSE 250.

Market Cap Respondents Policy in Place Audit in Place Willing to disclose audit results
FTSE 100 31 (100%) 23 (74%) 21 (68%) 16 (76%)
FTSE 250 29 (100%) 17 (59%) 14 (48%) 6 (43%)

IUF private equity buyout site

Another great idea. The International Union of Foodworkers (IUF) has launched this website as a way of keeping track of private equity related news.

Do the Sainsbury's pension fund trustees hold the key to a potential bid?

There's an excellent bit on Robert Peston's blog on the Beeb site about the role the trustees of the Sainsbury's pension scheme will play in any private equity bid. As so often, trustees - many of whom are trade union members - have a lot more power than is typically recognised. Does USDAW have anyone on the Sainsbury's fund? If so they ought to be talking to them asap.

Canadian shareholder resolutions thwarted

There's an interesting article on the SHARE website detailing the way that corporate law is being used to thwart attempts by shareholders to put forward resolutions on CSR issues.

Attempts to introduce ownership thresholds as a prerequisite of filing shareholder resolutions are bound to result in less being put forward. It's quite hard work to put a resoltion forward in the UK, because of the required ownership threshold, and the result is that we see very few each proxy season. Some in the UK argue that such resolutions are the 'nuclear option' in terms of shareholder engagement. I would have agreed with this in the past, but having recently been involved with one such campaign I have to say my views have changed.

I think making it easier to file resolutions in the UK would improve shareholder engagement. At the moment it tends to be restricted to discussions between fund managers and companies. That relies on fund managers a) taking the issues that stakeholers raise seriously and b) being effective in their engagement with companies when they do raise such issues. Neither of these are givens. It's a particular moan of mine that even the more 'activist' fund managers have tended to have little interest in labour issues, unless they relate to supply chains, and tend to have more focus on the environment. That makes it quite difficult to rely on even the good (in terms of committment to CSR issues) fund management houses to act as effective advocates.

In retrospect I don't think the FirstGroup campaign would have been as effective as it has been if it had relied on simply briefing fund managers and encouraging them to engage with the company. The resolution gave the issue a lot more traction, and forced fund managers to take a position. This year's TUC Fund Manager Voting Survey will include a list of fund managers' votes on the resolution so it will be interesting to see how the SRI managers measure up.

Finally on this subject, I would also recommend people have a look at the shareholder resolution database on the SHARE site. You can access it here. This is an excellent idea, and the first thing of its kind that I'm aware of, so it's great that it's come from an organisation affiliated with the labour movement.

Now That's What I Call Political Music 1

A random collection of political tunes. Apologies that it is bit skewed by my age and tendency to go for shouty punky or beaty electronic stuff. Any suggested additions welcome, unless it's weedy hippy stuff!

Sorry too that it's all a bit 'revolutionary', but there just aren't that many good politico songs about mixed economies. If someone does a decent New Rave version of We Shall Overcome rest assured I will add it to the list.


Rise - Public Image Limited
Hypocrisy Is The Greatest Luxury - Disposable Heroes Of Hiphoprisy
Swastika Eyes - Primal Scream
Stand Down Margaret - The Beat
Black White - Asian Dub Foundation
Music Has No Meaning - Consolidated
Make Way For A Panther - Paris
Age Of Panic - Senser
Between The Wars - Billy Bragg
It Doesn't Make It Alright - The Specials
Revolution Action - Atari Teenage Riot
Rock The Nation - Michael Frant & Spearhead
Holiday In Cambodia - DKs
Racemixer - P.O.W.E.R
Burning Too - Fugazi
(Give Me All Your) Money - Radio 4
We Want Your Soul - Adam Freeland
Microwaved - Pitchshifter
Pardon My Freedom - !!!

Union private equity campaign makes the front page of the FT

The private equity debate continues to rumble on, and the union campaign is gathering significant interest. The front page of the FT reports on today's TUAC meeting in Paris which is part of a push for the leaders of the G8 to investigate the potential threat posed to the financial system by private equity, hedge funds and the 'financialisation' of business. In the comment section of the FT there's also a piece from TUC general secretary Brendan Barber. And here is the TUC's statement ahead of the TUAC meeting.

Elsewhere the T&G has made a submission to the FSA's discussion paper on private equity.

Who are the mystery 16 managers who disclose their voting?

Ed Balls gave another speech today, this time to the NAPF investment conference. In it he again talked about the disclosure of shareholder voting records by institutional investors. It's unquestionably a good thing that he has raised this issue twice in a few days. The fact that the pressure for disclosure is coming from the Economic Secretary to the Treasury, rather than a DTI official (the reserve power to mandate disclosure is in the Companies Act, which is DTI territory) gives it a lot more momentum.

But who is feeding him the line that 16 managers disclose their voting records?

I applaud the progress made by institutional investors in voluntary disclosure of voting. In 2003 only 2 institutions disclosed how they voted their shares. In a group of the largest firms, that figure is now 16 out of a possible 33, and represents 42% of managed UK equities. But there is clearly a long way to go before all savers can know how the ownership rights of shares - bought with their money - are exercised.

It sounds like it might be data taken from the IMA's annual survey engagement survey. But it's a very misleading claim. Here's a list of the fund managers that I'm aware of who do disclose useful info, and it's a bit less than 16!

Insight
Hendersons
Hermes
M&G
F&C (can't find their record!)
Standard Life
BGI
CIS (the real pioneers of disclosure)
Fidelity

If anyone knows any others do let me know.

Dutch unions target hedge funds

Here's an interesting story from Investment & Pensions Europe about the Dutch trade union confederation the FNV trying to grapple with hedge funds. I'm posting the full article as you can access IPE's web content for free. The story is online here.

I will provide a link to the FNV paper if I can get hold of it.

Dutch unions take on hedge funds via pension schemes

IPE.com 12 March 2007 15:47:

NETHERLANDS - ‘Union-unfriendly’ companies might face Dutch unions using pension funds investment policy as a weapon to force a change of tack, warned union umbrella grouping FNV.

Although it does not reject hedge funds in every case, activist hedge funds are definitively not acceptable, the FNV made clear in a new policy paper on responsible investment, hedge funds and private equity.

“Activist hedge funds usually try, with borrowed capital and through a short-term strategy, to make profits to the detriment of workers,” it said.

FNV unions are represented on the boards of almost all industry-wide pension funds and some of the larger company pension funds in the Netherlands. Among the schemes are the €209bn civil service fund ABP and the €81bn healthcare scheme PGGM.

“We fundamentally reject investments in hedge funds which want to take over the company management. That way, the boards of pension funds become (indirectly) responsible for the company policy and as such abandon their role as a shareholder,” the FNV says in its policy paper.

“The schemes’ boards are not equipped to carry out company policy, and this creates an undesirable entwining of responsibilities,” it added.

The FNV’s policy paper concluded that the components ‘people’ and ‘planet’ are still very soft and little transparent in pension funds’ reporting on their responsible investing.

The unions’ umbrella has a mixed opinion of private equity and hedge funds. “Their investment options have created desired returns and spread of risk, as well as improved the financing of starting companies,” it stated.

“However, we have noted that a number of private equity funds seem to develop from mid-term investor to an investor for the (very) short term. As investors, pension funds should be increasingly alert because of the social aspects of this investment strategy.”

According to the FNV, the US retailer Wal-Mart is an example of a union-unfriendly company. “But there are also service providers which increasingly try to keep out the unions,” it said.

The FNV is the largest unions umbrella group in the Netherlands. It represents 16 unions with 1.2m members.

Pensions, climate change and short-termism

It's the NAPF investment conference this week, and the keynote speaker at this year's bash is unsuccessful Bush-defeater Al Gore. I'm assuming most people will know this but in case you don't, Gore is actually involved in fund management these days through an outfit called Generation Investment Management. He runs it with a guy called David Blood so the outfit is sometimes 'hilariously' referred to as Blood & Gore (oh my sides).

In any case, Gore's speech went big on the need for trustees to think long term, and specifically to try and get a grip on climate change. The quote below is taken from the Reuters report.

Gore, chairman of a UK-based sustainable investment management company, Generation Investment Management, said the pensions market was suffering from "short-termism" in a bid to chase higher returns.

"Thirty years ago, in my country, the average holding period for equities was seven years and now the average mutual fund turns over 100 percent its portfolio in less than 11 months," he noted.

Gore said research showed that most company pensions had still not conducted a "careful analysis of the assumptions on longevity built into their plans", and that sustainable investing had a "hand and glove linkage with long-term investing".

"If you do truly invest on a long-term basis, then it's easy and more profitable to fully integrate sustainable factors into your analysis," he said.

"We have everything we need to make this transition with the possible exception of the will to act, but the will to act is a renewable resource," he added.

Actually this has been on the radar of the more responsible investors for a few years now. For example Mercer Investment Consulting issued a report on the subject 18 months ago. And the Institutional Investors Group on Climate Change has been going even longer. And the TUC put out a very short paper on the subject last tear.

What trustees themselves can actually realistically be expected to do is less clear cut. Most of the info I have seen to date doesn't given them many practical options bar asking their fund managers a few questions (which is the answer we all seem to provide for trustee engagement with FMs over any CSR issues). And I'm a bit sceptical about how much of a progressive force financial analysis can be. It is not a given that climate change analysis must be long term. I remember reading a while back about an SRI hedge fund for example.

Might be intersting to see if Generation has any views on the DSM proposal, since it addresses exactly the question of increased trading of shares that Gore criticises.

Do investors really believe in long-term shareholder value?

There's a very interesting issue coming up at the AGM of the Dutch company DSM later this month. The company has proposed paying a 'loyalty dividend' to investors who hold its shares for at least three years. Those that do will qualify for an initial 30% bonus after 3 years and a further 10% for each additional year the shares are held. It's not big bucks but it is enough to provide a little bit extra to those who back the company over the long term.

The company's stated objectives behind this proposal are to strengthen its relationship with shareholders who have along-term perspective, and to improve communication with investors by having a clearer idea of who actually owns the company's stock. You can read the company's full explanation here. So far so good, and it sounds like quite an innovative idea to deal with the short-term trading that often unsettles companies.

However the proposal has actually created some division in the investment community. Some have argued that the proposal is a defence mechanism, others have said that it goes against the principle of equality of treatment of shareholders. One US mutual fund manager has gone as far as to threaten to sue DSM. The proxy voting agencies are also split. Global behemoth ISS has recommended a vote against the proposal, whilst the ECGS has come out in favour.

I have to say I have no problem siding with the company on this one. As employee-investors surely we want good companies to prosper, and recognise the need to provide a stable environment for them to do so. The proposed dividend does not affect the ability of investors to trade the company's shares, or lock them into ownership, it merely rewards those who stay the course. I think those investors who oppose the proposal give them impression that trading is the most important question. It's a warped interpretation of shareholder value in my view.

The company's AGM is on 28 March and it will be very interesting to see how the vote goes. Trustees who are interetsed in long-term investing would do well to find out from their fund managers what stance they intend to take.

Local authority funds look at China

The Local Authority Pension Fund Forum has just published a guide which is aimed at enabling trustees to assess their fund managers' engagement with companies over labour standards in China. Details here, the guide itself can be downloaded here.

Zimbabwe - the investment opportunity

As the chaos in Zimbabwe gets worse, with harrassment of the opposition movement and trade unions increasing, at least some people can see the bright side. With impeccable timing one fund management outfit is launching a Zimbabwean fund. The logic being that the country will have to reform sooner or later, and when it does investors can make out like bandits.

The text below is taken from an article in the FTFM supplement to the FT which comes out on Mondays. The full article is here but you will need a subscription to view it.

Conventional wisdom has it that the time to invest in an asset is when it is out of favour. If so, a Zimbabwe investment fund launching this month could prove a stroke of genius.

In what it admits to be a "contrarian recovery play", Botswana-based Imara Asset Management is launching a fund dedicated to a country where inflation is estimated at 2,500 per cent, real GDP has halved since 1999 and an all-powerful despot shows no signs of relinquishing power any time soon.

Imara's own fund documentation cautions investors that they face hyperinflation, political risk and the danger that assets may be nationalised. "A permanent loss of capital is possible," it adds helpfully.

However, John Legat, chief executive of Imara AM and lead manager of the fund, prefers to look on the bright side. "Inflation is estimated to be 2,500 to 3,000 per cent and there are very few regimes around the world that survive that," he says.

"We believe the economic situation is unsustainable and Zimbabwe will be forced to adopt a reform programme like much of Africa before it. Such a programme would result in a sharp re-rating of Zimbabwean assets in US dollar terms."

Mr Legat, who has lived in Harare for the past decade, adds: "When the Berlin Wall fell you couldn't invest in eastern Europe because it didn't have a stock exchange. Zimbabwe is a country with a well developed financial system, stock exchange and pension fund industry, very good infrastructure, good mining prospects and good economic potential. It is potentially an explosive market in terms of upside."

Tories' private equity love-in

As Labour has started to look at the role of private equity in the economy naturally at some point the Tories would join the debate. Last night Shadow Chancellor George Osborne gave a speech at the annual dinner of the industry's trade body the BVCA. It's worth a read if only to disabuse yourself of any notion that the main parties are all the same.

Osborne's broad argument is that the Tories will stand 'shoulder to shoulder' (or 'head up backside') with the industry against attacks from 'the left'. In return the Tories would like it if the industry would be a bit more open, say a bit about the environment, and put some of their moeny into young companies rather than just taking existing public companies private. All very unthreatening, and as is the current way with the Tories very little detail.

Most interesting is the section of the speech attacking the unions and the left:

Under attack from the trade unions who contribute 90 per cent of the funding to the Labour Party.

And under attack from the Cabinet members who need their votes in the party's deputy leadership election.

As you yourselves know better than anyone, the success and size of your industry makes you an increasingly visible target.

The GMB are trying to brand you "amoral asset-strippers". Brendan Barber of the TUC preferred "casino capitalists".

It's not just the unions. Alan Johnson said the GMB attack "raised some important points".

Harriet Harman wants to stop what she calls your "excessive, ridiculous bonuses".

Peter Hain called your bonuses "grotesque", and raised "serious concerns" about private equity. And he's in the Cabinet.

Fund managers move on voting disclosure, or do they?

The voting disclosure element of yesterday's speech by Ed Balls has received a bit of coverage today. Basically the Institutional Shareholders Committee (which brings together all the big investor trade bodies) has agreed to draft a set of principles for disclosure of voting records beased on the UK's favourite 'comply or explain' approach.

The spin this development has been given is quiet interesting. For example the Financial Times suggests that the industry has been forced to move. The snippet in yesterday's Times took a similar tone.

But I wonder how far this is true. I remember the fact that the ISC was going to draft a set of principles being publicly talked about at the NAPF Investment Conference last year. And rumour has it a draft of the framework was circulating well before Xmas. Now we hear that the principles should be ready by the summer. That's the best part of 18 months. If anything the industry has done a sterling job of delaying the inevitable as long as possible.

By the way, the report in today's Guardian includes some dodgy arguments:

City sources point out there has already been progress as 16 of the major managers already publish their voting records on their websites. However, it is thought the pages are not attracting many hits.

First, there is no way that 16 managers disclose information that is actually useful. I would imagine that number includes some fund managers that simply disclose a statistical breakdown. Secondly there are a couple of reasons why their disclosures don't get much traffic. One is that several of those managers which do disclose bury the info in an obscure place on their website and/or disclose in a way that makes it very hard for the un-geeky to read. Another is that one manager's disclosure on its own is hard to make sense of.

When people want to compare the investment performance of fund managers they don't expect to have to hunt around the websites of individual fund managers and pull the information together for themselves. They know they can rely on an adviser, or maybe a personal finance mag, to give them comparable data. Ultimately they should be able to expect the same kind of info in relationship to the 'ownership' bit of what fund managers do.

At the moment we have a situation comparable to fund managers deciding whether or not they will disclose performance data to potential clients. A 'comply or explain ' regime under the ISC principles will do nothing to alter this. Some fund managers will no doubt want to 'explain' that potential clients can't have data.

John Reid authorises creation of anti-terrorist clone army

A new 100,000-strong army of clone community anti-terrorism officers will be created as part of the Government's Preventing Extremism Together programme, Home Secretary John Reid has announced.

Reid said that while his decision to authorise the creation of a clone army was a reluctant one it was necessary to combat the terrorist threat, which he described as "the most dangerous since the Second Galactic War".

"I know some people will have concerns about our initiative, and it is a step I take with great reluctance, but it is necessary if we are to combat the extremist threat in our midst. Our clone officers will work with the muslim community to promote peace and democracy," he cackled.

The duties of community anti-terrorism officers will include:

* working with imams and mosque officials in the UK
* distributing a British Muslim citizenship 'toolkit' to equip Islamic societies, mosques, parents and youth to deal with extremist tendencies
* the construction of a fully operational Death Star to act as a community-based anti-terrorist 'hub'
* hitting terrorists with blasters at Stockwell tube station

Reid revealed that the spawning of clone anti-terrorism officers had aleady been initiated with a phased roll-out expected to take place over a three year period from 2009 to 2011.

Investors are increasingly short-termist - WSJ article

Thanks to Peter C for pointing this one out to me!

It's an increasingly common complaint from companies that may shareholders aren't interested in the long term. This is often directed at hedge funds (who sometimes don't even appear on the share register). As many people, such as Warren Buffet (see 2005 letter to shareholders), have pointed out, increased trading is mainly just an extra cost for investors. That messsage doesn't seem to be getting through though...

Wrong Way?
Street Signs
Point to Speed
Wall Street Journal
February 26, 2007; Page C1
Investors are trading so quickly they may not see the risks in the market for the speed.
In the stock market, the idea of holding on to an investment for the long term doesn't seem to hold much allure any more. According to Sanford C. Bernstein chief investment officer Vadim Zlotnikov, the average holding period for stocks on the New York Stock Exchange and American Stock Exchange last year was less than seven months. In 1999 -- stereotyped as a time of rapid-fire day trading -- the average holding period was more than a year.

In fact, the last time stocks were being held for as short a period as they are now was 1929, when students of history may recall something happened to the market.

Mr. Zlotnikov's analysis doesn't include the increasingly popular, and complex, derivative strategies that investors use to gain exposure to stocks without actually holding shares. On the Chicago Board Options Exchange, for example, the trading volume on individual stock options was 40% higher last year than it was in 2005.

Technology has a lot to do with the increase in turnover. Increased computing power means strategies that 10 years ago existed only in theoreticians' notebooks now can be put into everyday use. Lower trading costs and the 2001 switch to decimalization -- the pricing of stocks in dollars and cents rather than dollars and fractions -- have let investors profit from price anomalies that used to be too expensive to exploit.

Also driving the increase: the rising prominence of hedge funds. Because they tend to be judged by each year's performance, few professional fund managers have the luxury to ignore short-term price swings and invest for the long haul. Losing your job and then having history prove your investing acumen right is nobody's idea of fun. For hedge-fund managers, the short-term performance pressures can be intense -- first, because the high fees they charge make their investors intolerant of losses, second because some of the trading strategies they use mean the losses they face if a position goes wrong can be steep.

The result is a constant trading in and out of positions to capture returns. In today's marketspeak, hedge funds are emphatically working to "generate short-term alpha." What it boils down to is the age-old practice of stop-loss trading -- automatically buying and selling stocks when they rise or fall to specified levels.

Despite all the moving in and out of stocks, stock-price movements have been remarkably quiescent. Stock market volatility -- as measured by actual price movements, rather than the options price-generated "implied" volatility measured by CBOE's market volatility index -- is at its lowest level in 10 years. (Implied volatility is near a decade low.) It may be that the combined effect of all the sophisticated trading strategies in place today have put the stock market into a state of dynamic tension, where all the tugging and pulling effectively cancels each other out, muffling price movements.

At the same time, investors' intolerance of short-term losses could mean that if the stock market seriously stumbles, the droves of fund managers engaging in stop-loss selling could overwhelm the market. When volatility comes back, it could do it in a grand fashion.

Private equity update 2 - Balls

Economic Secretary Ed Balls has made his heavily-trailed speech. As expected it goes heavy on private equity, mainly defending it, but does announce the tax review. There's also an interesting review of the 'investment chain' and what Labour has tried to do to address failings within it.

There's a rather cynical view of the motives behind the tax review in the Telegraph.

There's a bit in the Balls speech about voting disclosure too (something I'll return to later):

A further area highlighted by Myners I want to mention particularly is the need for greater accountability for the exercise of voting rights attached to shares - a crucial element in an effective engagement strategy. Again, some progress has been made, but there is clearly a long way to go. We have taken a reserve power in the recent Companies Act to enable us to require disclosure, but our preference is for voluntary, industry-led approach, with an effective 'comply or explain' code of practice based on a clear set of principles.

I met the Institutional Shareholders Committee this week to discuss progress with a voluntary approach and am pleased to say that the ISC have agreed that we should have an industry comply or explain code up and running by the Summer, following a period of consultation. The Treasury will cooperate fully with the ISC in this and we will encourage them to involve a wide range of interested parties in the development of this code.

So in this area too, we look forward to further progress.

Private equity update

The news just keeps on coming...

The most significant developments of the week include the announcement that the Treasury select committee will look into private equity. The remit of the committee, which is headed by Labour MP John McFall, does not seems to have been made clear yet. However it's worth noting that the committee played a very positive role in respect of the Government's plans for the new Personal Accounts system.

Also in Treasury-land Ed Balls has announced a review of the tax treatment of debt. This is an interesting turn of events as in recent history Ed Balls seems to have been going out of his way not to frighten the City (which is understandable). Of course the review may lead nowhere, but the fact that it is going ahead suggests a recognition that serious concerns about private equity come from a range of interests, not just the unions.

Elsewhere The Guardian reports Ernst & Young's analysis of buyouts which suggests that there could be some major collapses ahead. And the bidders for Sainsbury's have been told to 'put up or shut up' by the Takeover Panel.

Is there really £5billion-a-year pension tax?

One of the most common attacks on the Government's record on pensions relates to changes to the treatment of Advance Corporation Tax in the July 1997 Budget. Basically in 1997 Gordon Brown removed the ability of pension funds to claim dividend tax credits. This is frequently referred to as a "£5bn a year tax raid". And in some of the loonier commentary is blamed for the pensions crisis. But was is the reality?

In fact independent research by the Pensions Policy Institute produced a couple of years ago on precisely this issue found that at no point was the change costing £5bn a year, and that the cost to pension funds might be falling each year.

This figure included savings from not granting tax relief to other investors, such as some individuals and charities. The cost to pension funds was lower, at £3.5 billion per year.

The actual cost could be even lower than £3.5 billion because the lower corporation tax rates give companies who make profits more scope to increase their pension contributions, without being worse off. A recent estimate is that the offsetting gain to pension schemes could be as much as £1 billion per year. This means the cost could be as low as £2.5 billion.

The PPI concluded:

[I]t is clear that when the reforms were introduced in 1997 they cost pension funds significantly less than £5 billion per year. It also seems likely that this cost will have reduced over time.

So independent research undermines the £5bn-a-year figure, but has this been accepted by the media? Hardly, in fact the Telegraph claimed last year that the costs to pension funds had been in execess of £100bn. This is based on independent research by an actuary called Terry Arthur. A quick Google reveals that he helped co-wrote a consultation response for the Adam Smith Institute, is a fellow of the Institute of Economic Affairs and contributes to the website of the Libertarian Alliance.

But the Telegraph piece also quotes pensions experts in defence of the figures and the impact of the 1997 tax changes.

While controversial, Mr Arthur's calculations are supported by Stephen Yeo, a senior consultant at Watson Wyatt, one of the most prestigious firms of actuaries.

Mr Yeo said: "This ACT tax change was clearly very unhelpful to pension funds. In terms of its likely long-term effect, £100 billion is certainly a reasonable number."

Stephen Yeo is quite open about the fact that he is a former pensions policy adviser to the Conservative Party. The Telegraph also includes a positive quote from some bloke called George Osborne who I am told may have Conservative connections too.

My point is not that people like Terry Arthur shouldn't be able to air their views. Of course they should. But shouldn't national newspapers be clear about the political affiliations making political points? Equally why is an apparently unsubstantiated figure - £5bn a year - repeated without question by the financial press when a figure backed by indepedent research is available?

Private equity again

There's more discussion of private equity this weekend. There's a long bit in the Observer talking to Peter Rossman from the IUF which you can read here. Private equity also gets a mention in Simon Caulkin's column.

I think one of the most balanced pieces of commentary so far has come from Martin Wolf in the FT. He's not a person I find myself agreeing with a lot of the time but this piece goives both sides of the argument and research to back it up. Contrast that with this rather mindless piece in the Telegraph's business commentary. Apparently 'transparency' is the only real problem with private equity. Clearly everything would be ok if they just explained why they load companies up with debt. They just need to communicate their tactics better.

Which incidentally is what the industry is planning to do. The BVCA has set up a working group to draft some voluntary best practice standards.

PS There's also a pretty shallow bit about hedge funds as activists in the Observer.