Tuesday, 12 June 2007

Wrong thinking on directors' pay

I came across this piece in the Telegraph whilst I was on holiday. I can't think of a bit of commentary recently that I have disagreed with so much (apart from the Indie editor's response to Blair's speech on the media today!).

Here's the first bit I don't like -

The shock is that Richard Lapthorne, chairman, and his management team, have doubled the value of the company over the past 12 months, adding £2bn to the value of the pension funds which own it.

He is ascribing increase in share prices to management competence. The more I learn about the stockmarket, the less I am willing to believe that share prices are anything more than a consensus of ignorance. I am wary of attributing movements in the price to anything more than trading activity, so I do not believe you can stand up the claim that the C&W management have created money for pension funds. the shares have gone up - that is all.

Second gripe -

If someone had called me this time last year (never mind in the dark days before that), and said C&W could consistently be in the top three of the world's telecoms businesses I would have hung up assuming they had got their lines crossed.

Another insight I have gleaned from my geeky interest in behavioural economics is our poor ability at interpreting stastistics. A good example of this is reaction to failures. If a football team gets walloped 5-0 in one game, and the manager makes changes to the team and next time they win 1-0 he might be hailed as a turnaround expert. But in reality it could just be the randomness of the data. After a heavy defeat (or an extreme event if you prefer) the probability is that the next result will be less 'extreme'. It is likely to be so regardless of what activity is undertaken.

However because of our desire to see causality when it is isn't there, will likely attribute a modest victory following a major defeat to tactical nous (unless we are talking about Steve McClaren). There is no reason why this should not apply to businesses. Unless you believe that C&W was a basket-case, it was likely to turn the corner after a dodgy period, that's just the randomness of reality.

Gripe 3 -

The shock is that management, notably John Pluthero who runs C&W's UK business, have already got so close to reaching all their targets that a £20m cap on how much he can receive, has been removed. It's easy with hindsight to say that those targets must have been too soft when agreed last year. Well actually no, they weren't soft, and no one said they were.

Wow, so the company looks liek hitting targets that it set itself. And how can we say whether the targets were "soft" or not except with hindsight? I'm also presuming that his "no-one" here is a reference to analysts, who are not celebrated for their ability to predict the future. Directors themselves will tell you that they manage down analysts' expectations in order to ensure they can hit targets.

Gripe 4 -

What's shocking is that more companies don't align management and shareholders' interests more closely and that shareholder groups, such as the Association of British Insurers, don't insist on it.

Eh? Quite clearly the big shareholders have spent a lot of time trying to do precisely this over the past few years. Has he slept through that? Either that or the "point" is that shareholders aren't suggesting packages like the C&W one often enough, In other words we aren't paying our directors enough money.

Gripe 5 -

At least C&W's biggest shareholder, Standard Life, has come out in support of the plan. More should follow.

I will resist questioning Standard Life's motives on this one, as corp gov people I have met there have always struck me as very straight. However the support of one institution proves nothing.

And finally - where in all of this is any recognition that the success of C&W recently is the result of the efforts of anyone below board level?

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