Friday, 30 November 2007

Pay disclosure improves on the quiet

This is a straight lift from the PIRC website:

Blink and you would have missed it, but without fanfare the Government has suggested a small but relatively significant tweak to executive remuneration reporting. Buried deep in draft statutory instruments issued by the Department for Business, Enterprise and Regulatory Reform (DBERR) in the Autumn comes the following clause:

“The directors’ remuneration report must contain a statement of how pay and employment conditions of employees of the company and of other undertakings within the same group as the company were taken into account when determining directors’ remuneration for the relevant financial year.”

If you want to find it look at page 142 of the snappily-titled ‘The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008’ (see address below). It will look familiar to many readers as it is similar in wording to a rather famous, and famously ignored, piece of guidance in the Combined Code. In a supporting principle, the Code states that remuneration committees “should also be sensitive to pay and employment conditions elsewhere in the group, especially when determining annual salary increases.”

Critics of remuneration reporting often use this as an example of where companies provide boilerplate reporting. Trade unions, who have long argued for the inclusion of comparable information about employees’ and directors’ pay and benefits, believe that the Code guidance is routinely ignored.

If the proposed change goes through it will come into force from April 2008. As it stands it puts some pressure on companies to provide some kind of commentary, but PIRC believes the lack of guidance on the type of information to include will reduce the measure’s potential value. Given that this is a rare opportunity to improve remuneration reporting to address a long-standing criticism, we believe a bit more prescription is in order. Surely the clause could be redrafted to specify the provision of some basic comparable data on pay, pensions and other benefits?

DBERR link:

Wednesday, 28 November 2007

The crooked timber of governance

I was at a corporate governance seminar yesterday. It was Chatham House do, so I'm not supposed to attribute comments and I won't. The most interesting thing for me was to hear one former chairman and chief exec (he had held both roles, as well as combining them - naughty!) talk about the value of good governance, and non-exec directors. I noticed that he mentioned the importance of objectivity several times, which was quite telling I thought.

He said that when he had been a chief exec he had wondered what the value of NEDs was, since they couldn't possibily have access to all the information that he had, and therefore couldn't be as informed. But he has subsequently changed his view and realised that 'internal' people often don't want to tell the boss bad news and as such tend to tell a good story because they fear confrontation. Non-execs can challenge this. He also criticised both the combination of chairman and chief exec roles (on the basis that power corrupts...), and chief execs going on to become chairman (err... HSBC).

It reinforced the point for me that any governance system is dependent on the people within it. Good structures cannot turn bad managers into good ones, though they can perhaps prevent bad managers doing too much damage.

The discussion later on was about the role of investors in governance, and in particular what pension fund trustees can do. One speaker made the point that you couldn't even describe trustees as apathetic about corporate governance, as this would imply that they had thought about it and decided it wasn't worth bothering with, rather than the reality that most hadn't even considered it. Again you are reliant on good people doing the right thing for the system to work as text books tell you it ought to.

I seemed to annoy a couple of people in the audience (not deliberately!) as I said I thought if you really wanted 'owners' to play an active role you should strip the ownership function out of fund managers. My argument for this is that these are businesses that were created - and are paid - to make money out of trading, so why expect them to carry out the ownership bit to any standard? This is turn is based on my assessment that most fund managers don't take corporate governance massively seriously. Their voting records are, from my perspective, unimpressive and I doubt that most have the staff to carry out extensive engagement (whatever that term means).

Walking back to the tube station after the seminar I wondered if I was being a bit harsh. Maybe what fund managers do is simply 'good enough' rather than 'very good'. In my experience you can identify in advance the fund managers that are likely to take a tougher stance on a given governance issue. It's hard not to conclude that once again it's about individuals being willing to take a position.

Maybe we simply shouldn't expect too much of either corporate or investor governance given that at the end of the day it is dependent on human beings, with all their faults, to make any system work?

Hat tip: Immanuel Kant

Tuesday, 27 November 2007

Unite reaction to Virgin named as favourite buyer by Northern Rock

Just a lift from the Unite website:

Graham Godard, Unite Deputy General Secretary said: “We will be meeting with Northern Rock tomorrow afternoon to seek confirmation on the full details of the deal. We are glad the speculation is over but will be looking for all the reassurances we've been demanding. The company are due to sign the Charter that Unite set out last week but at the moment it looks like they are already ticking some of the boxes including job security and a UK successor. On the surface this appears to be a positive move.”


For further information please contact Jody Whitehill 020 7420 8938 or 07768 693956

Unite Charter for Northern Rock and Future Stakeholders

Recognition of Unite as a stakeholder in the future of Northern Rock
To ensure the long term job security for the employees of Northern Rock
To protect and improve terms of employment for employees
To protect the existing pension arrangements
To continue the work of the Northern Rock Foundation
To retain Northern Rock as a UK listed company.

Pension funds as owners - a view from the beach

Here's a brief bit from a much longer paper I wrote on a beach on holiday in Greece about 2 years ago when I was a bit sceptical about the prospects for pension fund activism. It's a bit dated, as the National Pension Saving Scheme is now called Personal Accounts for example, but I haven't changed my views substantially.

Pension funds’ ownership function in the future

The role of pension funds going forward will involve some contradictory themes. It is clear that some pension funds have responded to the impetus provided by Government interventions such the requirement to disclose voting and SRI policies, and the shareholder engagement thread within the Myners review process. A small but growing number of trustees are using the opportunities such interventions provide to have more interaction with their fund managers over ownership issues.

Practically this will for the most part continue to be limited to interrogating service providers over how they exercise ownership on behalf of clients. A number of initiatives have sought to formalise the provision of such information from service providers to clients. As such this is a trend that can be realistically be expected to increase.

As more pension funds clear or reduce the deficits they have incurred in recent years this might provide more breathing space for trustees to explore these issues. This will be in contrast to the past five years or more when the agenda of most trustee boards has been dominated by deficits.

However there are factors that may limit this. The recent experience, for employers, of large deficits and associated significantly increased pension contributions has likely terminally damaged the inclination for many to play a significant role in pension provision in the future. The closure of most defined benefit schemes to new members is just one element of this. As pension funds clear their deficits there might be closures to all accrual, as employers seek to completely lock down their pension liabilities.

The implications of the closure of DB schemes are twofold. First, closed schemes will inevitably become increasingly mature and as such will move out of equities into bonds and other assets. The proportion of shares held by DB schemes will be in long-term decline.

Secondly, the structure of the defined contribution schemes that are being established will become increasingly important. Many employers, believing themselves scarred by experience of playing an active role in pension provision, may opt to set up contract-based DC schemes where responsibility lies largely with the service provider. In such funds there will be even less oversight of the ownership function, if any at all. This will further reinforce the trend of the transference of ownership from pension schemes to fund managers.

A potential countervailing trend is the impact of the Government’s pension reform agenda, specifically the role of the proposed National Pensions Savings Scheme. The structure of the NPSS is still under discussion, however the model outlined by the Pensions Commission envisaged something close to an occupational DC scheme with a committee playing a role similar to that of a trustee board.

This scheme would seek to provide pensions for the many working people currently without provision. In addition it is likely that many employers may see it as a no-hassle way to provide pensions for their staff, they need simply pay in a contribution. As such it is expected that the NPSS would grow rapidly in terms of assets. The role of a national DC scheme with large assets has already attracted excitable comment, being described variously as ‘Stalinist’ and ‘nationalisation through the back door’ .

The influence the NPSS actually has will depend on how ownership issues are addressed. If responsibility is delegated to fund managers appointed by the scheme, or by the employer or carousel if an alternative model is introduced, this will mark a decisive and arguably final shift away from the notion that pension schemes or their members are in any real sense owners.

In contrast, if the scheme is established as envisaged by the Pensions Commission the governance body responsible for oversight could set an ownership strategy for the fund which mirrors the expectations set out by the Government set out in the SRI disclosure regulation and Myners. If the NPSS does adopt this role it should be expected that there will be significant criticism from some quarters on the grounds that it represents political interference in the capital markets and British business.

Monday, 26 November 2007

If voting changed anything...

I was having a chat with a work colleague about shareholder voting today and was (kind of) surprised to hear about one of the ways in which the financial services industry disincentivises the exercise of voting rights in a certain situation.

Typically a pension fund's shares are legally held in a nominee account by a global custodian. Both pension funds and custodians can make money by lending stock for a fee. From what I have heard the custodian usually does pretty well out of this even though they are the pension fund's shares. Some funds, however, stipulate that they will want to recall lent stock if a contentious voting issue arises. All well and good and exactly what Paul Myners (in the Shareholder Voting Working Group) says should happen.

However what I learnt today is that custodians make it fairly obvious that if a fund wants a recall option on its stock, it is going to go to the bottom of the list of investors they tap up when someone wants to borrow stock. Stock-lending is actually a quite a profitable thing for pension funds to do (I have a question about whether this is in tune with their long-term interest if the stock is used to short a company they own, but that's for another day) so effectively custodians are providing a financial incentive for funds to not recall stock out on loan.

Sunday, 25 November 2007

Sunday's news...

A couple of bits and bobs from the business pages today, and then some more blurb on private equity. On the Northern Rock front it looks like Warren Buffet might be about to make an appearance, lining up behind the private equity bid by the looks of it too. Also in the Torygraph is an interview with Richard Lambert, head of the CBI and former editor of the FT. He has a few interesting things to say. He argues that although the economic situation is looking rough at the moment, it's not a patch on the 70s, though that is not much comfort. And his comments on Northern Rock situation are worth a read:

"There are no good solutions, merely least bad solutions."

Which reminds me of JK Galbraith's famous line:

"Politics is not the art of the possible. It consists in choosing between the disastrous and the unpalatable."

Over on The Observer there is a half-decent interview with Sir David Walker about his recent review of transparency in the private equity industry. I agree a bit with some of things he says. This is a bit of a step forward, and it is being watched by other countries. However I think his argument in defence of not requiring private equity partners to disclose details of their pay is weak:

"[D]irectors' pay in public companies is there to protect owners; to stop managers ripping off the shareholders and feathering their nests. A typical FTSE 100 company has around 150,000 shareholders, so the only realistic way to make that information available to all the owners is to publish it. In private equity there are typically only 150 owners and they have a total flow of information, so you don't need to make it publicly available."

I think this is a false distinction between public and private companies for a number of reasons.

First, the disclosure of exec pay in public companies is not simply an argument about addressing agency problems, it is part of a much wider debate about relative rewards within society. I think one of the reasons that there is still much debate about exec pay in the UK is that seeking to 'solve' or at least take the sting out of the issue by locating responsibility for exec pay in the company-shareholder relationship has, to be honest, failed.

Second, the issue of disclosure of pay in public companies demonstrates that making information widely available can help address the failings of a shareholder-driven approach. In the case of one big pay vote this year that I am aware of corporate governance watchers on the investor side were actually alerted to something by the press. If the info in private equity firms is only disclosed to limited partners there is no scope for the press to play such a role.

Thirdly, as explored in my post on Friday about agency problems, LPs are actually in a very weak bargaining position with private equity houses presently. I wonder if there has ever been a case of LPs telling GPs they need to pay themselves less?

Notably Walker is also positive about his call for the BVCA to produce better data on PE's economic impact as he says "I believe private equity is very positive for the UK economy". Funnily enough an academic I spoke to last week who has looked at quite a bit of the evidence to date, and has no particular axe to grind, reckoned that any serious analysis of the impact on employment would probably show a small negative one. Either way it has to be a good thing that more serious data is made available.

To finish off, we need to be aware of how studies of PE might seem to suggest things that aren't really there. For example, if a company sheds jobs following a PE takeover is that because of the nature of ownership, or because it was in trouble anyway? Studies seem to show that management buy-ins (ie new management coming in from outside) have a greater negative impact on jobs. But PE firms wil argue that if it is an MBI (rather than existing management buying out) that suggests that there was a problem there already.

Flip it around and you see the problem with some of the happy-clappy talk about PE as a job creator (see the Torygraph business comment pages for most of this year for examples). But a lot of the high-profile PE activity recently has been leveraged buyouts of large, successful companies. If they continue to expand and create jobs is that because of PE, or did PE just ride on the coat-tails of a decent existing business?

Which brings me back to the point about attribution analysis that I flagged up in my previous post about Walker. The more I think about it the more I think that this is the real missed opportunity of the Walker Review (if you accept that it was never going to address the real issues that TUs have with PE). By letting PE firms not disclose this (which I understand is commercially sensitive) it will allow them to argue that they achieve their returns through better management - whether this is true or not.

A push for disclosure of this info would also line up with investor concerns about PE since if it is gearing that is really driving returns then they are surely unsustainable. So how about it?

Saturday, 24 November 2007

Get in!

The Labor Party has won the Australian election. Although they were way ahead throughout the campaign, after 1992 I never assume anything is in the bag. Making the result even better is the fact that Howard looks like he has lost his seat. The Liberal government has systematically attacked the unions in Australia and workplace rights generally, so no surprise to see, for example, the TUC calling on expats to turf them out.

Good riddance.

Friday, 23 November 2007

Who is fighting your corner?

For marketing purposes I thought I'd try and give this post a better title than my original idea - 'Principals and agents in investment management' - but the original one is what I'm really going to cover. This is something I've been thinking about quite a bit lately and I was prompted to write about it after a financial journo mate of mine recently sent me a really interesting report. It is from Watson Wyatt's investment consulting practice and is entitled "Sales, stewardship and agency issues - Improving the alignment of principals and agents".

The report begins by explaining agency problems - broadly the point that the service providers (agents) that we (principals) appoint don't always act in our best interests. It goes on to question why pension funds have apparently put so little pressure on fund managers to shift away from fees which are a % of assets under management to those based on performance. It points out that the former financially incentivise the fund manager to win more business, rather than actually generate a return (although returns obviously also grow the assets) and mean that they can pick up money for simply rising with the market.

It argues that one reason for this might be found in the relative bargaining power of principal and agent (and bear this in mind for later on):

"The game theory branch of economics can shed some light on the situation. Game theory is essentially the study of bargaining processes – when there is a cake to divide, do people get their fair share, or do some walk away with more than they should? Simplistically it comes down to relative power, or ‘threat power’, with the implication being that the investment agent holds more power than the principal (having gone through a process to find the very best manager, why threaten a fledgling relationship with hard fee negotiations, especially when the prospective
outperformance makes the process look like penny-pinching)."

What is more, Watsons point out, pension funds don't employ only one group of agents. In addition to fund managers they hire consultants, custodians, legal advisers, performance measurers and so on. And some of these agents have their own agents - fund managers employ brokers for example. Finally they argue that we can even see trustees as agents - of the beneficiaries primarily.

With this is mind the report argues that trustees need to focus their attention on the agents that are least 'client-centred'. They provide the results of a survey of fund managers who were asked to rank agents in order of client-centredness. The results, in descending order, were - investment consultants, fund managers, fund of funds, hedge funds, investment banks. Two points - first, you wonder whether fund managers feel compelled to rate consultants most highly because of their 'gatekeeper' role. Second it's worth pointing out that even consultants didn't do that well. Fund managers were asked to score each group on a scale of 1 to 10 with 1 being highest for client-centredness. Consultants managed about 4.

Funnily enough they see a negative correlation between high margins and client-centredness:

"From observation, we would contend that there is a relationship between client-centredness and the profitability of the agent (with high client-centredness associated with lower margins). There is, therefore, a gravitational pull away from high client-centredness towards higher margins."

It's the next bit that is important. Watsons argues that one way that trustees can overcome the principal-agent problem is through mandate design. They argue, rightly in my view, that traditional mandates don't deal with 'ownership issues':

"The ownership of large quoted companies has become increasingly fragmented. Arguably, it is this that has allowed the ‘egregious’ compensation packages of senior executives, the non-accounting for stock options and other examples of questionable corporate behaviour. Essentially the managers of traditional mandates, whether active or passive, have not exercised sufficient control over the corporate agents (and the fiduciaries have not exercised sufficient control over the investment managers)."

But they go on to suggest that private equity might be part of the answer:

"An alternative mandate design is private equity which restores some of the link between ownership and control. Here, company management are incentivised by ownership stakes and the private equity manager (the ‘general partner’ (GP)) exerts
considerable effort to retain as much control as possible. The principals (limited partners (LPs)) should benefit accordingly."

This is one area where I think Watsons actually get it a bit wrong. If you follow the logic they develop in the paper, and take account of what actually happens in the real world, I think you can only come to the conclusion that pension funds are actually more disenfranchised when they invest in private equity.

I base this assertion primarily on the attitudes of people from the PE industry themselves. In discussions with a number of them I have found they are frequently very dismissive of potential and actual limited partners (LPs). These days it would be unthinkable for a mainstream fund manager to be so openly critical of clients, but general partners (GPs) in PE firms can get away with it. There is no doubt on their part about who has the bargaining power. For example, in an admirably straight explanation of PE of an asset class, industry insider Guy Fraser-Sampson makes the following point about an individual LP's position:

"[T]he LP’s only sanction when faced with what may be deemed an unacceptable situation is not to invest, but invest elsewhere. The fund, if it is a quality fund, will be potentially oversubscribed almost immediately. It therefore matters not one jot to the GP whether the LP invests or not; if that particular LP does not proceed, there are others who will… [A]s long as there are new investors waiting to crowd into a fund if existing ones fail to take up their offered entitlement, then GPS will be able to call the shots… [N]ot only is the situation not going to improve, but if anything it is going to get even worse given the large amounts of extra capital which will be seeking a home in the asset class in future."

(From Private Equity As An Asset Class.)

Isn't this exactly the situation that Watsons describe in the first excerpt?

However the PE point aside in conclusion Watsons do suggest that trustees could consider other types of mandate such as long-termist ones, activist ones and so on. They also suggest trustees monitor the potential principal-agent conflicts.

Finally they also suggest collaborative to increase pension funds' leverage with agents. Here I wholeheartedly agree, and indeed in the shareholder engagement world it is already a standard approach on some issues such as climate change. But surely there is much more scope that is yet to be properly explored. Not least relationships private equity firms, and I'll finish with another extract from Guy Fraser-Sampson's book:

"Perhaps surprisingly, there is little attempt made by LPs to get together and negotiate terms collectively, nor to agree ‘industry standard’ terms amongst themselves and say they will only invest on this basis, although common sense would appear to commend both these courses of action."

If the PE industry is openly wondering why we don't work collectively, surely it is time to give it a try?

Thursday, 22 November 2007

Football, business, exec pay and the Pope

Nice to see that our esteemed now former England manager Steve "tufty" McClaren is getting a £2.5m parting gift for his 18-month reign of error. Of course it's due to his contract, but can you think of a better example of rewards for failure?

Even with his newly whitened teeth, McClaren never really won any fans, so it's not surprising to see him used as a scapegoat. Companies like Sports Direct and JJB Sports have seen their shares slide today on the basis that England's failure to qualify means less sales of shirts, St George's flags and all that other embarrassing Ingerlund 'fan' paraphernalia. Don't be surprised to see sports retailers blame McClaren for poor financial results for quite a bit.

Finally, back on the issue of pay there is a great story on the Beeb website today about the Vatican introducing a performance-related pay system. According to the Beeb:

it will take into account issues such as "dedication, professionalism, productivity and correctitude" when awarding a pay rise.

I will resist taking the mickey too much. I'm sure this is more intended as a little bonus, rather than the Vatican deciding that financial incentives are necessary to encourage moral behaviour. (And yea they did smite the options scheme, for its targets were not sufficiently challenging!) But you do have to wonder about perverse incentives...

Wednesday, 21 November 2007

Financial pollution

I've been reading some of the business commentary around the Northern Rock collapse with an increasing sense of recent history being rewritten. On the same theme I have also had two or three discussions lately with people who clearly seem to think that was has happened to NR was a) obviously going to happen and b) therefore the fault of the FSA and/or BoE and/or the Government.

In response to point a) I would refer people back to what the company itself was saying even back in the summer. On 25th July it issued this interim results statement based on the six months to the end of June. Although it warned about the tightening credit situation, it was a very upbeat assessment, and even talked about a planned share buyback (would be a pretty cheap exercise now eh?!).

The final line of commentary from the chief exec Adam Applegarth was pretty clear:

"The medium term outlook for the Company is very positive."

In response to point b) whilst I accept that the type and speed of the interventions of various parties may have changed the nature of the NR crisis, there would still be a crisis because the company's business model will still have come unstuck. Unless someone does a serious counterfactual analysis of the NR crisis we can't really say how different it could have been (and in any case such an analysis might support the regulators). But in any case to suggest that the crisis is somehow primarily the fault of the authorities for failing to prevent the implosion is, in my view, massively mistaken.

The best comparable example I can think of is blaming the Environment Agency because a company has been responsible for massive pollution. Clearly the Agency has a responsibility for trying to stop companies from polluting, particularly because serious examples (like in the case of NR) affect the environment that everyone else has to inhabit, and we all end up paying for the clean-up work. But in no sense does this absolve the primary responsibility of the company and its directors.

I'll finish with a quote from Howard Davis in a review of Alan Greenspan's recent book Age of Turbulence:

"[Greenspan’s] vision is a useful corrective to the prevailing view that if a financial firm runs into trouble as a result of a flawed strategy it is the regulators and the central bank who are primarily responsible, and must be held to account, rather than the management and counterparties who devised and facilitated the strategy."

Walker Review - engagement opportunities?

Yesterday Sir David Walker published his report on transparency in the private equity industry. You can download it here. Very broadly it makes recommendations for voluntary reporting in respect of private equity houses, their portfolio companies and the industry trade body the BVCA.

For example, portfolio companies above a certain size (1,000 employees with at least 50% of revenues in the UK) would have to disclose info such as the identity of the private equity fund or funds that own the company, the senior managers or advisers who have oversight of the fund or funds, and detail on the composition of its board. They also have to provide an annual report including a business review - like that required of public companies - to include information on the company’s employees, environmental matters and social and community issues.

Not surprisingly, the unions have given the report a bit of a kicking. See the TUC reaction here and the GMB statement here. At the risk of being a bit off-message I don't think Walker was ever going to address the issues around PE that really bother unions, so I'm not totally convinced of the merits of trashing the report.

Personally I wonder if the report actually throws open some opportunities. First, because the framework is voluntary, surely this will provide campaign targets if some firms don't sign up. If unions put pressure on firms that don't play ball those firms will no doubt also come under pressure from the industry ityself. (Incidentally I've always thought the same approach should be taken to fund managers that don't disclose voting records now that the ISC has grudgingly endorsed disclosure). Unions could also put pressure on via the limited partners - ie the pension funds investing with those PE firms.

Secondly, as I understand it the review avoided obliging PE firms to provide 'attribution analysis' which would have shown how fund performance is generated. That would split out operating improvements from the impact of gearing. In other words it would show how the funds really make their money. In the cases on some recent big buyouts surely this would show how important debt has been? So why not campaign for the industry to disclose the information so that everyone can see whether performance is primarily about efficieny or gearing?

Finally, the fact that the BVCA has been urged to produce better data is surely another way in. Having read a fair bit about the impact of PE on employment I would be surprised to see any serious work back up the assertions made by the industry. Could be useful ammo.

Tuesday, 20 November 2007

Fidelity gives the Tories another £25,000

"generally non-partisan" fund manager Fidelity gave the Tories another £25K in July this year. To check it out search for Fidelity under 'donor name' on the Electoral Commission website below.

That makes it £95,000 they have given the Tories this year alone.

Monday, 19 November 2007

Private equity update

A couple of bits of news from the private equity world that are worth a look. First up is this bit from the Telegraph, seeking to 'expose' unions for having money in PE as an asset class. As far as I am aware no-one from the TU side has actually ever said don't invest in private equity, the argument has been understand what you are getting into.

But now that the issue of investment in PE is out in the open surely it is time that unions developed an investor-oriented strategy? Why not start building some social responsbility requirements into any future investments? Some of the bigger pension funds could surely put a bit of pressure on via this route. Personally, though it's not an exciting idea to many activists I'm sure, I think going in on the fees angle could be the most productive because there are genuine questions to be answered. Even people in the PE industry are surprised they don't get more pressure from investors over fees. If unions could get in the lead of this argument it could put them in a powerful position for the future. Just an idea...

Separately, this bit in today's FT is a little pre-reaction from the BVCA to the Walker Review report coming out tomorrow. Although there is the now obligatory threat of overseas relocation, it is a fair point (isn't it?) that the sort of transparency being planned in the UK is something of a world first.

Political Power & Corporate Control

A very brief plug for a book I'm currently reading - Political Power & Corporate Control - The New Global Politics of Corporate Governance. I think this could become quite a big deal as a governance book as it stresses the primacy of politics in emergence of governance systems in various countries, rather than accepting the idea that their is an 'optimal' governance framework that all firms will ultimately move towards.

Interestingly it suggests that the three main actors in the tussle over governance are company managers, owners (as in shareholders) and workers. Given that most discussions of governance in the investment world in the UK tend to ignore the role of workers (even though they are clearly play such a big role in systems such as co-determination) this is very welcome indeed. The books suggests that in different countries different coalitions form. It's not always managers and owners versus workers.

From a quick skim I would suggest that the analysis points up the need for labour in the Anglo-Saxon economies to a) work with owners (though I would argue that they are often the same people ultimately) and b) properly understand corporate governance as a political battle over the nature of the firm.

One minor criticism - the stuff on the UK looks a bit thin and doesn't seem to refer to the role played by local government funds in pushing for governance reforms, although it does mention their US counterparts like CalPERS. But's that a minor gripe so far.

I will post up a full review once I have finished it, but I think it might be a good xmas gift for capital stewards!

Friday, 16 November 2007

I'm shorting Jeff Randall

As is probably clear, I'm not a massive fan of business journo Jeff Randall. He's one of the best/worst examples of people who tell a story to fit the facts. Today he is typically rubbish, having a pop at Gordo over the Northern Rock collapse. He goes through the motions of saying that the directors of the bank are to blame for the failure, before going on to explain why the Government have made the situation that much worse.

I just want to focus on one particularly stupid bit:

If either regulators or ministers were caught napping by the speed of the Rock's demise, they should not have been. At the start of the year, the stock market began signalling that the company was in trouble: from a peak of £12.50, its share price halved and then halved again. Short of setting off an air-raid siren, it's hard to see what more the City could have done.

First up, he's being quite dishonest here. It's true that NR's share prices was falling from February onwards, you can see a graph of its movements over the past 6 months here. As you can see it's a slow but steady decline until mid-Sept when the BoE bailout news was broken, at which point the share price understandably went through the floor. So while it is true that "its share price halved and then halved again", the second bit of this happened AFTER the BoE stepped in.

But secondly what about this line?

it's hard to see what more the City could have done

Err.. all the City did was buy and sell shares at various points, which resulted in downwards trend in the share price. Given that the City is supposed to be pretty good at this finance stuff maybe they could have a) spotted the flaws in NR's strategy a lot earlier than the point at which they found out the BoE was involved or b) put out sell recommendations on the stock as a result of concerns or c) used the AGM in April as an opportunity to grill the company or d) warned the regulators that they had concerns.

More broadly, share prices get buffeted around by all kinds of meaningless stuff often with little to do with underlying reality. As someone once said about markets over and under-shooting:

"if you’re too high half the time and too low half the time, I would say that the market is always getting it wrong."

But Jeff has a bit of form here. He is clearly for some inexplicable reason in thrall to analaysts. Here's another anti-Brown bit from a month or so back.

If Brown were a business, City analysts would be issuing "sell" recommendations. He's one to short.

If ever one needed an endorsement of Brown surely this is it? Here, for example, is what one analyst wrote about Northern Rock just before the news broke about its request to the BoE for funding. (It's a "buy" recommendation I think?)

"load up on Northern Rock for your children, your mum, your goldfish"

Finally, the most important issue, which Jeff fails to address, is what else could have been done. Yes the NR situation is very messy. It will be very interesting to see what comes out of the bids for the business, but I suspect the taxpayer is going to be down a few quid. But what was the alternative? Let NR simply fail? His implication is that things could have been handled differently, but what would have the major difference in outcome? The BoE might have acted quicker, but NR would still be a basket case. Which demostrates why he's such a dishonest commentator.

Personal Accounts - the bad is good

There are a couple of interesting news reports about the Personal Accounts scheme floating around, both of which superficially look like 'bad' news, but on reflection reinforce the value of a national quasi-compulsory scheme.

First up is this report, where the chief exec of the Personal Accounts Delivery Authority (PADA), says that the scheme may involve annual management charges of up to 0.5%, rather than the 0.3% envisaged by the Pensions Commission.

"When the Pensions Commission came up with that figure they had not really factored in start-up costs. From work I have seen so far it is unlikely that we could start at [0.3%]."

He added: "Around 0.5pc could be an aspiration for somewhere to start from."

The first thing to note is that he is talking about the level of charges at the outset. I still think the likelihood is that charges will fall over time as economies of scale are achieved.

But the more important thing to remember is that 0.5% is still much much lower than the insurance industry has been able to deliver despite having years to service the low paid. Let's remember the insurers convinced the Government to increase the charge cap on stakeholder pensions from 1% to 1.5% because they could not do the business at 1%. This to me is more confirmation of why the Pensions Commission, and the Government, have been absolutely right to go for the One Big Scheme model with auto-enrolment. It's the only way to make it work in a cost-effective way.

The second story is this one. It's the usual 'Pensions industry moans abour regulation' type story, but again almost by accident it makes the case for Personal Accounts.

The consultant says that SMEs will decide they are better off providing staff with a pension via Personal Accounts than via their own contract-based arrangement. And the problem is?

If anything this will be a case of levelling up. Contract-based DC schemes typically have no governance structure comparable with a trustee board, so there is no oversight of investments or benefits on behalf of members. In addition the charges in small contracct-based DC schemes are going to be higher - for employer and employee.

So the employer loses the admin hassle and pays lower costs. And the the individual is enrolled into a scheme with proper independent oversight and lower annual management charges. It's a win-win surely?

Amish politics

Like many reactionary enemies of the working class in the Labour Party, I am primarily following the Respect split for its comedy value. Partly this is straight up schadenfreude. Respect is a pain and an electoral challenge for Labour in some areas. And its splitting of the Left vote has helped a Tory win a council by-election recently, something Respect actually crowed about on its website.

But more so it's the kind of discussion you see on the far left about the split. I have seen the main protaganists be compared to people the Bolshevik/Menshevik split, or to Rosa Luxemburg and Karl Liebknecht, without a trace of irony. It's a tiny corner of the UK where you can go and watch people talk about whether the USSR was state capitalist or a degenerated workers state as if their lives depend on it. And such factional issues are far more important to members of this community than current issues. It's telling that on the (actually rather good) Trot blog Socialist Unity, posts about the Respect split have recently often attracted more than 100 comments. Yet an article by Martin Wicks on the same blog about private equity - which you might think has been a rather important issue for the labour movement this year - has just one comment. And that's mine!

I realised the other day that what it actually reminds me of is the Amish community in the film Witness. Like the Amish, the far left has cut itself off from the rest of society and refuses to live in the modern world. It's an inward-looking community that has its own arcane language that no-one else uses. Members talk about 'layers of activists' and 'recomposition' and use the word 'bourgeois' a lot. This is terminology that leaves me, as a lefty, feeling cold and I share a little bit of common ground with them. My other half, who is a 24 carat prole from a council estate in Northern Ireland, and as such presumably the sort of person they ought to be appealing to, just thinks they are loonies.

Equally they have built giant belief systems on top of premises that the rest of society no longer shares. Whereas for the Amish this was the existence of God and strict religious rules, for the far left it's Marxist mumbo jumbo that has predicted 15 of the last death throes of the capitalist order. For both groups the fact that the rest of society shows no interest in their belief system does not demonstrate that they are wrong, it shows that the rest of society doesn't 'get it', primarily because they haven't read the right books.

Part of me has some grudging respect for their decision to stick so firmly to their principles, like the Amish sticking to non-violence despite provocation. But, like with insular religious groupings, my overwhelming reaction is that it's a community I have no desire to ever be a part of.

Thursday, 15 November 2007

CalPERS news & investor representation

Two bits of news from the giant US public sector pension fund CalPERS. Firstly, and unsurprisingly, the fund has weighed in on the side of proxy access in the US market. More interesting to me, the fund has also unveiled a set of principles that guide its 'engagement' with regulators and federal lawmakers.

Here's the blurb:

The new policy guidelines include provisions to:
• Support the independent investment authority of CalPERS trustees and administrators, and oppose federal restrictions on investments except those determined by the government to be against the U.S. national interest;
• Sustain policies for a healthy, accessible and transparent global marketplace; and oppose those that might limit its health, transparency, or sustainability;
• Back up actions and policies aligned with goals of the Sarbanes-Oxley Act, which addresses corporate accounting misdeeds; and policies enhancing greater communication and transparency between companies and investors;
• Support efforts to better align shareowners and corporate directors; give shareowners an effective way to nominate qualified directors; afford them input on executive compensation entailing enhanced transparency on design of compensation policies, stronger linkage of performance and compensation, and the opportunity to review compensation policies; and policies that encourage implementation of majority vote election procedures for directors; and
• Endorse policies for improved transparency and timely disclosure of environmental risks; the development of a clear, predictable national climate change policy and more energy efficient economy; and energy and transportation policies that nurture competitiveness and innovation leading to meaningful greenhouse gas reductions.

This is the first time I am aware of a pension fund doing anything like this but I think it is a really sensible idea. It's not just in the US that individual pension funds are responding to official consultations or regulatory proposals, and setting out a frame of reference for doing so is a useful initiative. It allows people to see whether you live up to the position you claim to take...

There is a broader point here too about investor representation. Trade bodies and collective organisations claiming to speak on behalf shareholders sometimes have their own organisational priorities, and who do they really represent? For example, when the ABI responds to proposals on governance reform is it representing insurers as large listed companies which are subject to governance rules, or as large institutional investors seeking high standards in investee businesses? I don't mean that particularly as a dig at the ABI. They are often better on governance issues than some others (!), and other organisations have similar conflicts.

Looking much further ahead, is there a way to represent the real shareholders - pension scheme beneficiaries - somewhere in the institutional architecture, or to network those with a TU affiliation? Now that many union members are in DC schemes I would argue that there is an even greater need to do this. A post for another day I think.

Investment concerns intensify in Burma

A shameless lift from the SHARE website:

The violent military crackdown on recent democracy protests in Burma have once again raised concerns for investors about social and financial risks associated with investments in Burma.

Foreign companies play a pivotal role in maintaining a steady flow of capital to the military dictatorship, and by extension, in upholding military rule and brutal repression in the country. Companies with ties to Burma face significant financial, reputational and legal risks operating in the country, which has been condemned internationally for its use of slave labour, forced displacement, and repression of ethnic minorities.

The recent violence has put the spotlight on companies operating in Burma’s oil and gas industries. The sale of natural gas is the single largest source of revenue for the military government, accounting for half its exports in 2006.

French company Total - the world’s fourth largest oil company – is the single biggest foreign investor in Burma, acting as the operating partner of the offshore Yadana gas field and pipeline. US oil company Chevron is a 28% owner of Yadana as a result of its 2005 purchase of UNOCAL, and remains in Burma under a grandfathering clause despite the US sanction regime. Construction of the 63-kilometer pipeline last decade was closely associated with serious human rights abuses - including forced labour, forced relocation, beatings, torture, and rape. Today, it is estimated that the Yadana consortium contributes US$250-450 million in royalties annually to the military regime. It is also estimated that the military government allocates over 50% of its total budget to military spending, compared with under one percent to national public health.

Recent shareholder initiatives on Burma have focused on the energy sector. In early October, the international labour movement – through the Global Unions Committee on Workers’ Capital – agreed to push for coordinated shareholder action on Burma. Some investors have responded by divesting their shares in companies that operate in Burma. ATP - the C$80 billion universal Danish labour market fund - announced its divestment from Total and all oil and gas companies dealing directly with the state-owned Myanmar Oil company, including South Korea’s Daewoo, which operates another, smaller offshore gas field. The Dutch trade union movement has recently issued a call to pension fund trustees to review investments in companies with ties to Burma. The Dutch healthcare sector fund PGGM, with C$130 billion under management, announced it was actively engaging companies in its portfolio on Burma, and would divest if necessary.

In the US, a shareholder coalition including trade union funds is engaging Chevron, asking the company to withdraw from countries with systematic violations of human rights. The company’s management has agreed to meet with concerned shareholders later this month to discuss their concerns.

In Scandinavia, Swedish governance group GES Investment Services has announced “enhanced engagement services” due to the increased demand from clients such as the Church of Sweden, Swedish mutual insurance group Folksam, and Norwegian life insurance KLP. The Norwegian Pension Fund Advisory Council on Ethics has determined there are no grounds for excluding companies on the basis of their current presence in Burma. However, the Advisory Council did find that an “imminent danger” of human rights abuses, such as the construction of another pipeline in Burma as envisaged by PetroChina, would be grounds for immediate exclusion of such companies from the fund.

At home, the Canadian Labour Congress (CLC) has written the Canadian Pension Plan Investment Board requesting that it publicly report on its exposure to companies with operations in Burma, actively engage them, and divest unless business ties to the military regime are ended. The CLC also wrote Prime Minister Stephen Harper in October calling for a ban on all new and existing Canadian investment in Burma. The Canadian Government has since announced new sanctions, which include a ban on all exports to and from Burma, and a ban on all new investments. It is expected that the US ban on imports and investments in the countrywill be tightened further, and the European Union has already increased restrictions on Burmese investment, however the EU restrictions glaringly exclude the oil and gas sector.

Canadian companies are not off the hook. BC-based CHC Helicopter operates five helicopters in Burma, providing transportation services for offshore oil and gas exploration and extraction. Until recently Ivanhoe Mines operated the Monywa Copper Mine through a joint venture agreement with a Burmese state-owned company. Ivanhoe has transferred its Monywa assets to an independent Trust, pending the sale of its stake in the mine, and the company has stated that it no longer receives revenues from Monywa. Critics argue however that the details of the Trust’s structure and its financial ties to Ivanhoe are unclear.

Investors should be concerned with the reputational, political and legal risks for companies operating in Burma. With an unstable regulatory framework, endemic corruption and gross violations of human rights, the country is subject to increasingly stringent international sanctions and heightened public and media scrutiny. Trustees, pension activists, and all concerned investors should consider the risk this may pose to the companies in their investment portfolio.

As an example, trustees can ask their investment manager to report on their fund’s exposure to companies with ties to Burma, the risks this may pose to the fund and the manager’s strategy for addressing such risks. To assist in this process, SHARE has created an information site along with an action toolkit.

Wednesday, 14 November 2007

Anti-social investing

A brief moan about the alphabet soup that we have to deal with in the shareholder engagement world these days. When I first got interested in this area, about 8 years ago now, most people used the term 'ethical investment'. That was discarded, rightly in my view, in favour of the less loaded label 'socially responsible investment' and in came the acronym SRI.

Now though SRI is no longer the term of choice, with 'responsible investment' or RI now more common in the UK (presumably because we are 'anti-social'...). And when you do see SRI sometimes it is used to refer to 'sustainable and responsible investing'. More recently some people (I think the Marathon Club started it?) have also used 'long-term responsible investment' or LTRI, to complicate matters further.

Meanwhile the issues we grapple with are environment, social and governance (ESG) ones, sometimes social, environmental and ethical (SEE) ones, and broadly corporate social responsibility (CSR) ones. They can be both 'non-financial' and 'extra-financial', which in practice seem to mean exactly the same thing, but are just different ways of expressing the fact that such factors don't appear in the 'financial' bit of company accounts.

And how do we put it into practice? Some of us are shareholder 'activists', whereas others prefer shareholder 'engagement'. And 'engagement' is so loosely defined that it is apparently something you can both expect your fund managers to already be doing for you, or something you need to pay them more money to do for you via an 'overlay'. Where does voting fit into this? Some suggest that engagement is more important than voting, or that voting is simply part of engagement, whereas others see them as separate.

There is a serious point to my grumble. I have found it hard enough trying to explain to trustees why they should seriously consider developing SRI/RI/LTRI strategies without the needless proliferation of acronyms and ever-changing terminology. When I've done sessions with TU trustees in the past a number have still used the term 'ethical investment' even though no-one in the SRI/RI/LTRI mini-industry does these days. This sometimes leads me to think that new terms and acronyms may have more to do with differentiating products than providing clarity.

I understand that as a still relatively new area the terms we use are going to evolve, but surely we can settle on some widely agreed basics. Otherwise we risk SRI developing like other bits of the investment industry, where 'expert' terminology disenfranchises trustees and makes them less confident to take decisions.

Prejudices and probabilities

This is an oldie, but a good one. You've probably come across it in an IQ test at some point. Consider the following statement:

Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.

Based on the information above, which of the following statements do you think is more likely?

A. Linda is a bank clerk.
B. Linda is a bank clerk and is active in the feminist movement.

If you answered B, you are are wrong but in good company. When this has been tried in experiments in the past something like 80% of those asked went for B. But it is quite obviously wrong, in terms of probability, when you think about it for second. Bank clerks who are feminists are subgroup of bank clerks as a whole. The probability of Linda being both a bank clerk AND a feminist must be lower than the probability of her only being a bank clerk. In real life the best you could hope for (to justify your belief) is that all bank clerks are feminists. In mathematical terms you are simply wrong.

This is something known as the conjuction fallacy. The reason why we get it wrong, the bias in our thinking, is known as the representativeness heuristic. We think that B is more likely because that option seems to 'represent' Linda more, based on the information we have. Notably this has has also been tested in policy circles, and the experts get it wrong too, because they too look for 'representativeness'.

Another example - if you were asked what you think the probability is that the US would invade Saudi Arabia next year, I assume you would give it a fairly low score. But what if I asked you the probability that there was a major terrorist attack on the US linked to the Saudis, and the US subsequently sent in troops? In mathematical terms the former is more likely, but the latter 'feels' more likely doesn't it?

To me this is another reasons to take seriously the central idea of the narrative paradigm that we are primarily engaged in story-telling. A lot of the information we are given is simply a convincing story that fits the facts, but if you try and apply some basic probability assessments to what you are being told you'll find that some explanations are a lot less plausible than they appear on first glance.

I think this is pretty important stuff. In politics we are repeatedly drawn to conspiratorial interpretations of why certian things have happened, and I think that a lot of this is driven by the representativenes heuristsic. It maybe more boring as a way of looking at events, but it strikes me that in probability terms cock-ups are often the real story.

Tuesday, 13 November 2007

15 years of ethical banking

Tonight I went along to a reception celebrating the 15th anniversary of the Co-operative Bank launching its ethical policy. This is still a unique initiative in that the issues it covers are decided by its customers, and to date the bank has turned away hundreds of millions of pounds of business from companies that don't meet its customers ethical criteria.

When ethical investment and ethical banking first appeared many cynics in the City predicted such initiatives would fail, and the Co-op Bank was targeted with legal action by some corporate lobbyists. The bank's chief exec said in his speech tonight that they had even been banned from advertising in Vogue! Anyway, 15 years on some of the stances it took which seemed radical at the time are now very mainstream - climate change, landmines, animal testing and so on.

Personally I find the bank's policy a very inspiring example of what can be done if people make a conscious decision to try and apply some principles to their financial assets. Now if we can just get unions to think seriously about what they are doing about their money...

Private Equity News

I've recently comes across Private Equity News, which is a newsletter produced by the Financial News stable. FN is known as the trade mag for the City, and is usually worth a read, so their private equity offshoot might be worth a subscription for people in the unions who are working on these issues.

Their frontpage headline this week -

Unions plan phase two of assault as buyout firms join the barricades

Monday, 12 November 2007

Greens target pension funds

It looks like the Green Party is having a bit of a mini-campaign around disinvestment from companies doing business with Burma. The push within the Lewisham pension fund was featured on TV a couple of weeks back, but I've just noticed that they are also raising the issue in Waltham Forest. Surely this is the sort if thing Labour should be leading on?

WALTHAM FOREST: Council ‘has invested in the Burmese junta’
By Hannah Crown
Comment | Read Comments (4)
BURMA'S repressive military regime is being supported by Waltham Forest Council, according to campaigners.

Information obtained by the Green Party shows that in the past three months the council has invested an undisclosed portion of its employees' pension fund, which has net assets worth £496m, into oil company Total, Europe's biggest investor in Burma.

It also invests in Chevron, and CNOOC, which are also involved in developing offshore gas fields in regions bordering Burma, and Danish shipping company Maersk, which uses the state-owned railway for exports.

advertisementAll four appear on the Burma Campaign's dirty list' of companies which have a "significant presence" in Burma, whose involvement "indirectly or directly helps keep the military regime in power."

The south Asian country has been the focus of international condemnation after it emerged that peaceful pro-democracy protesters, including Buddhist monks, have been murdered and imprisoned by the ruling military junta.

The council's move has been condemned as "disgraceful" by a spokeswoman for Burma Campaign UK.

Mark Dawes, of the Redbridge and Waltham Forest Green party, said the council had an inconsistent record on ethical investments, as it refused to invest in companies related to the tobacco industry.

He added: "There are now ethical funds that do give a good return on investments without investing in companies that support human rights-abusing regimes."

Exiled leader of the democratic opposition in Burma, Aung San Suu Kyi, has called for a boycott of all foreign investment in the country, while several household names such as Adidas have deliberately pulled out of the area for practical and ethical reasons.

Cabinet member for finance, Cllr Keith Rayner, said: "We have a legal duty to maximise the return to our pension fund and we meet this duty by employing professional fund managers and following their advice.

"While we aim to invest as ethically as possible we are unable to restrict the ability of the fund manager to invest in particular stocks and shares if that would be to the detriment of the fund."

A council spokesman denied Mr Dawes' claims that it had refused to invest in the tobacco industry.

2:45pm Wednesday 31st October 2007

Sunday, 11 November 2007

Political posters

I've always been quite interested in political propaganda, and posters in particular. Apart from the print of a Spanish civil war poster I used to have on the wall, I've also got quite a few books on the the subject ranging from British trade union posters, to Spanish civil war posters (from both sides, or should that be 'all sides'), to murals from Northern Ireland.

So I was interested to see that the Imperial War Museum has an exhibition on currently, entitled Weapons of Mass Communication, featuring dozens of wartime propaganda posters, so we went along today for a look. The exhibition is really just a collection of posters, but it is a very comprehensive one and I was impressed by the range of them, including some Austro-Hungary posters from WW1. Though surprisingly there were no Japanese posters from WWII.

A few things struck me about the posters. First, the American WWII ones looked by far the most modern, in terms of the type of imagery used. Here are a couple of examples that I thought were quite good.

And here's another US propaganda poster that will probably raise a smile.

The British posters were quite sophisticated in terms of design, but they played on quite 'imperial' themes. The soviet posters were also quite traditional. Although the USSR often went a bit Avant Garde in its domestic propaganda, the wartime ones on show here were pretty basic.

Secondly, it was interesting to see how many of the posters had a focus on domestic production and finance in support of the war. There were quite a few posters picturing workers alongside soldiers, or calling for more sacrifice on the home front. There were also loads calling on the public to buy war bonds. It would be interesting to see what similar posters would look like nowadays when so few of us work in industries that actually make things. Being more productive on the home front would have to involve calls to "Make more phone calls" or "Send more emails". Equally bonds are a bit old hat aren't they? These days we would be called upon to "trade war derivatives" or "Arbitrage conflict-based mispricings".

As an aside, the only poster on show I could see with any union affiliation was one issued by the anarcho-syndicalist CNT during the Spanish civil war.

Finally, the exhibition includes some more recent posters, including anti-war ones. In addition to anti Viet Nam war posters there were also some interesting ones from Northern Ireland issued by People's Democracy. And the most recent posters relate to Iraq. Included in this last batch were this rather excellent "Make Tea Not War" poster that I saw on the big anti-war demo back in 2003.

But more interesting was the poster below from Iraq itself. This is one of the few political posters I have seen from Iraq. Most of the posters we tend to see are made by people in the UK, about the actions of the UK government. In contrast, this Iraqi poster calls on the public to report local armed nutters to the authorities.

Given that it comes from the area where the conflict is taking place, it's a far more interesting poster to me. And because of the context it has a much more similar feel to wartime propaganda posters than the anti-war examples.

Anyway, it's an interesting exhibition, and worth a visit.

George Orwell on the Respect split

From the essay Notes On Nationalism:

"As nearly as possible, no nationalist ever thinks, talks, or writes about anything except the superiority of his own power unit. It is difficult if not impossible for any nationalist to conceal his allegiance. The smallest slur upon his own unit, or any implied praise of a rival organization, fills him with uneasiness which he can relieve only by making some sharp retort."


Saturday, 10 November 2007

Has the private equity bubble burst?

Today's Guardian features an interview with John Moulton from Alchemy in which he claims that a number of recent large buyouts are going to struggle as a result of the credit crunch. The worrying bit is where he talks about private equity houses becoming 'forced sellers of assets'. Given that this is in the context of meeting interest payments I presume he is talking about flogging off bits of recently-acquired businesses rather than the entire businesses themselves. I guess this must be the 'aggressive creativity' DIUS minister Ian Pearson was on about recently.

As an aside I have to say that I have some sympathy with Moulton's take on the Walker review of transparency in the private equity industry. Just getting firms to produce more information doesn't achieve anything by itself:

In the wake of unprecedented public concern, leading buyout firms asked Sir David Walker, a veteran City regulator, to look at issues of transparency in private equity businesses. He is due to report his findings this month, but Mr Moulton has already been dismissive of his likely recommendations. "The most likely outcome is some voluntary code for larger companies to write something in their annual accounts that will be read by no one anyway," he said.

Thursday, 8 November 2007

NAPF makes Myners recommendations

The NAPF has released its analysis of pension fund progress in implementing the Myners principles, and recommendations for change, see here. As far as I can see they want a slimmed down approach, but I'll cover in more detail once I've read the doc properly.

They recommend the following principle on 'responsible ownership', which doesn't say anything new really:

(5) Responsible ownership - Trustees should adopt, or ensure that their investment managers adopt, the Institutional Shareholders’ Committee Statement of Principles on the responsibilities of shareholders and agents. A statement of the scheme’s policy on responsible ownership should be included in the Statement of Investment Principles. Trustees should report periodically to members on the discharge of such responsibilities.

Wednesday, 7 November 2007

Ros Altmann lines up with the Tories

Disappointing to see Ros Altmann, who has done a lot to push the the Government to improve the Financial Assistance Scheme, line herself up in the FT letters page today with the Tories and the insurers in the current spat over Personal Accounts.

Whatever issues might need to be dealt with in respect of the Government's pensions reform plans - and there are still some thorny ones - I find it incredible that she can think that a breakdown in consensus is a good thing. This is especially the case given that the Tories are clearly playing politics here, not saying anything new.

Anyway the letter below is from today's FT. The TUC and others also have a letter in there arguing that maintaining the consensus is vital. It's a shame that Ros Altmann is cheering on the destruction of a consensus that unions have worked hard to help establish and keep in place, and needlessly scaremongering about the prospects for those who save into Personal Accounts.

Personal accounts risk bringing misery to millions
Published: November 7 2007 02:00 | Last updated: November 7 2007 02:00

From Dr Ros Altmann.

Sir, At last the political consensus around personal accounts is breaking down (“Tory pensions challenge dismays industry”, November 6). This proposal is a disaster waiting to happen. It must be re-thought.

Previous policies to encourage financially unaware workers to contribute to employer pension schemes have just ruined thousands of lives, when employees trusted official assurances that they were paying into safe pension plans, but then discovered their life savings were worthless.

Rather than rescuing them and admitting their interests had been sacrificed for the greater good of others in company pensions, they were just abandoned. The government knew the inadequate regime could result in workers losing out dreadfully, but decided not to warn them and made no plans to compensate. The same is currently happening with personal accounts.

Even on the government’s own figures, some 600,000 people in future could find their personal account gives them no pension – and these will be the lower earners who can least afford to save. Their pensions will merely replace state benefits. Colleagues who did not contribute to a pension will be better off.

The issue of suitability cannot be brushed aside. The government must be honest with the public and make plans now to look after those who may lose out. Ministers know that personal accounts, as currently conceived, may not be suitable for the millions of low-paid workers potentially being automatically enrolled into them.

Either they must be allowed to have their money back on retirement, or the pension from personal accounts must be disregarded from means-test calculations.

Ploughing ahead with the current plans is irresponsible and risks bringing misery to those who find they were duped into a scheme that delivers little or no value in future.

Ros Altmann,
London School of Economics,
c/o London N3 3EE

Tuesday, 6 November 2007

TUC Member Trustee News

The latest issue of the TUC's newsletter Member Trustee News has just been produced. Contents list - Member trustee network conference, Personal accounts update, Deregulatory review, New TUC contacts, Pensions Champions, PensionsWatch 2007, Private equity guide. You can download it from the TUC site here.

The TUC has also produced a guide for trustees on private equity which can be downloaded here.

Tory pensions challenge dismays industry

As I posted yesterday, the Tories comments on Personal Accounts have threatened to break the consensus over this central plank of the Government's reform programme. The reaction in Today's FT to the Tories' politicking is very interesting.

The insurers seem to be on-side (I suspect that was the point):

The Association of British Insurers, which represents existing insurance-based sellers of pension products, shared Mr Grayling’s concern, saying: “We certainly see a need to reduce the level of means-testing.”

But the employer lobby groups are annoyed:

Joanne Segars, chief executive of the NAPF, said it remained committed to the scheme, which had required compromise all round. “Personal accounts provide an opportunity for millions of people, who will benefit from them, to save for retirement for the first time. It would be a pity to see that damaged by people unnecessarily breaking the consensus.”


David Yeandle, pension specialist with the EEF manufacturing employers’ group, said it was a worry if the Conservatives “are going to do down this route [of voting against]”.

A commitment across the political spectrum was needed if confidence in personal accounts was to be maintained, he said.

Make no mistake about this - the insurers don't like Personal Accounts because it will squeeze them out of quite a big bit of the market (although a bit they have not been very good at servicing). I'm not anti the insurers, there are quite a few Unite members in there, and I think the failure of the industry to extend pension coverage ia partly based on the simple economic reality that getting low-earners into schemes is simply not cost-effective for providers.

But that is exactly why Personal Accounts are needed - because the market response has demonstrably failed. Insurers in future will have to focus on the higher end of the private pensions market. That is the unfortunate (for them) consequence of the Government's desire to ensure that everyone has the chance to build up a decent pension.

The fact that the Tories are willing to pander to the insurance industry over this is interesting, but potentially a mis-step. There has been a very broad consensus over the general shape of the Government's plans. The Tories may find that listening to the doomsayers in the insurance lobby leaves them frozen out by the rest of the pensions industry.

TU investor activism on Burma

A quick plug for SHARE, the excellent labour-aligned shareholder activist body in Canada. It now has a section here on its website dedicated to the Burma issue, which includes a helpful feed of investor news.

This is an issue that unions globally can get behind as investors. It strikes me that it is also a case where it might be legitimate to push both engagement AND screening. Mainstream funds are still going to be wary of disinvestment, but there is no reason why they shouldn't be quizzing their fund managers on the risks to investee companies of doing business with the regime.

On the other hand, given the clear policy position on this issue, it would seem pretty legitimate for TU-aligned funds to ditch any holdings in target companies, particularly if there is an opportunity to generate some publicity for the issue by doing so.

I'm interested in anyone else's view on the engagement vs screening argument with specific reference to Burma...

Monday, 5 November 2007

Tories threaten to break pensions consensus?

This bit from today's FT is interesting. This suggests that the Tories might be willing to play politics with the pension reform process. They could have made the point about the impact of means testing at any point over the past two or three years, so why start saying this kind of thing now? Funnily enough it also echoes some of the commentary from the insurance industry.

It might just be a bit of a slip, but worth keeping an eye on.

Burma disinvestment news

Things are happening, just not in the UK. A number of Danish funds are looking at flogging their holdings in companies linked to Burma. Not only French oil giant Total, but also Chevron in the US and the Chinese business Cinopec.

The excerpt below is from Pensions News:

ATP, PKA and Sampension have all announced plans to sell holdings in French oil company Total and US-based oil and gas firm Chevron, while PenSam is keeping a close eye on developments.

The DKK438bn (€58.75bn) Danish labour market pension fund ATP was the first to move, announcing plans to sell its DKK935m stake in Total and other smaller holdings in oil companies working directly with Myanmar Oil.

Pensionskassernes Administration (PKA), Denmark’s largest occupational pension fund administrator, will sell shares worth DKK65m (€8.65m) in Total and is evaluating its DKK160m holding in Chevron and DKK10m stake in Chinese oil company Cinopec.

Likewise, corporate pension fund Sampension will sell equities worth DKK88m in Chevron and DKK12m in Total having sold its equity investments in various Chinese oil companies which also co-operated with Myanmar Oil earlier this year.

Shareholder voting at Northern Rock's AGM

Quick update to this list as I have managed to find a couple more voting decisions - Baillie Gifford and Hermes. See previous post for the background to this.

Baillie Gifford (page 25 & 26 of report)
Remuneration report - For
Auditor appointment - For

BGI (page 22 of report)
Remuneration report - For
Auditor appointment - For

Co-operative Insurance (this links you to their voting search engine)
Remuneration report - Abstain
Auditor appointment - For

F&C (page 1057 of report)
Remuneration report - For
Auditor appointment - For

Fidelity (page 222 of report)
Remuneration report - For
Auditor appointment - For

Remuneration report - For
Auditor appointment - For
(presumed, as exception-only reporting and no disclosure to the contrary)

Remuneration report - For
Auditor appointment - For

M&G (page 84 of report)
Remuneration report - For
Auditor appointment - For

Royal London (you'll need to download the PDF if you really want to check)
Remuneration report - For
Auditor appointment - For

Standard Life
Remuneration report - For
Auditor appointment - For
(presumed, as exception-only reporting and no disclosure to the contrary)

Sunday, 4 November 2007

Neo-con narratives

I was flicking through the business section of the Sunday Times this morning and decided to read the column written by Irwin Stelzer. For those of you that don't know, Stelzer is linked to the neo-conservative tendency in the US.

I call it a tendency as that is how Stelzer himself describes it in the collection of essays entitled Neo-Conservatism that he edited. I read that book a year or so back and what struck me is how loosely defined it is as a set of ideas. There were even, for example, some commentators identified as 'neo-cons' who were skeptical about the Iraq war. It really isn't the monolithic force some seem to suggest.

Anyway, I was reading Stelzer's piece this morning, trying not to be prejudiced by what I already know about his political ideas, but I couldn't help but notice how partisan someone who is supposed (in this context) to be acting as an economic commentator can be. Take this bit about healthcare policy in the US for example:

There can be no denying that the smoking and food police will extend their reach. In America, that process will accelerate when a Democratic-controlled White House and Congress – almost a certainty – make government an increasingly important player in healthcare markets. When an obese person has to pay for his own gluttony, there is little moral case for denying him the sustenance he feels he needs. When the cost of his care is borne by taxpayers – which would be the case under most of the Democratic plans – society has good reason for inducing him to replace his burgers with salads.

There are plenty of little messages in here. Those who want to try and improve the nation's health are the 'police'. The suggestion is there too that at least a laissez-faire approach means that the individual is responsible for their own predicament, and by implication the alternative approach relieves the individual of responsibility and is an invitation for the state to meddle in our lives. And he goes on to make the following bizarre statement:

So look for a long-term trend toward less satisfying, healthier eating, along with increasing sales of gym equipment and trainers.

I hadn't realised that healthier food was inherently less satisfying, especially since if you are sensible you can eat a wide range of food without damaging your health. Also quite a lot of people find physical exercise quite ...err... satisfying. Also Our Irwin seems to have failed to realise that it's not just the evil intrusive nanny state that might have an interest in making us healthier and fitter. What about Pru-Health offering to pay towards gym membership for policy-holders? I guess that must be OK because it is a market response...

To be honest I don't mind people making these kinds of points, but surely such inane commentary belongs in the Polly Filler type columns rather than the business section? It's surprising that the Times allows such Jeremy Clarkson-esque 'analysis' in its business pages. Surely Stelzer would be more at home with Jeff 'muppet' Randall at the Torygraph?

A final point about the whole 'neo-con' thing. Such people often describe themselves as liberals who have been 'mugged by reality'. The implication being that they would love to be as idealistic as us lefties, but they have seen the world as it really is, rather than as the left would like it to be.

The thing is that how you interpret being 'mugged by reality' will affect how your views develop. The implication that the Left isn't in touch with reality, and how unjust it can be, is misplaced. At a basic level this is stating the obvious. I have been the victim of crime a couple of times, but I am still optimistic about human nature in general, and I am sure that plenty of other people on the Left are in a similar position.

More broadly there is an argument that game theory suggests that those who take a co-operative, rather than a competitive, approach are more likely to apparently see their views disproved. The following quote is from the excellent book How We Know What Isn't So and describes how this process occurs in game theory using the 'prisoner's dilemma' game:

The co-operators and competitors were not equally successful in having their views of the game confirmed. If a co-operator was paired with a co-operator, they quickly began making mutually beneficial, co-operative moves. When paired with a competitor, the co-operator was forced into more competitive actions in order to avoid consistent losses. Competitive players, in contrast, always ended up in a cut-throat game: when paired with another competitor, the game quickly descended into an internecine struggle; when paired with a co-operator, their own actions forced the potential co-operator to become competitive out of self-defence. Thus, because competitive behaviour creates more of a demand for the other person to respond in kind than does co-operation, a competitive person's belief that the world of selfish opportunists will almost always be confirmed, whereas the less gloomy orientation of co-operative individuals will not. Sadly, negative prophecies are often more readily fulfilled.

So unfortunately the optimists amongst us will often be at a disadvantage, which is why the 'everyone for themselves' interpretation of those on Right will often seem to be 'proved'. It's not a pleasant message, but I think a useful one to bear in mind.

Thursday, 1 November 2007

Private equity chief has a pop at the TUC

Just spotted this article on Comment is Free from the head of the private equity trade body the BVCA. After a dig at the TUC it's the same old story from the buyout brigade - you should think yourselves lucky that we pay the tax that we do, and if you start getting uppity we will simply move offshore. I have to say that even as a moderate Labour supporter this sort of tone brings out the class warrior in me. Pay the same tax as everyone else you freeloading gits!

The other thing I find annoying is the way that we are now constantly told that we should give thanks that private equity delivers returns to pension funds:

Next, pension funds, whose returns in the sector are almost 20% per annum over the past 10 years - more than double the FTSE All-Share Index. So tomorrow's pensioners - including many trade unionists - will benefit from today's success.

I mean what kind of argument is it that you should offer those operating in a certain field favourable personal tax treatment just because the asset class they are attached to generates a return? We invest in that asset class BECAUSE it generates a return. Perhaps we should allow ministers to pay lower tax because bonds give us a return, or what about the directors of public companies whose shares we hold? It is an argument that should be killed off.

And if we really want to follow this line of argument then perhaps we ought to look at how much of a return we could make from investments in private equity if those running the business took less of a bite out of the money they make on our money.


Burma disinvestment blog

Quick plug for the Total Out Of Burma blog. Have a guess what they want.

UPDATE: Just got sent the attached...

Innovest announces Burma screen

Innovest Strategic Value Advisors yesterday announced a new screening tool to track the increasing risk for corporate operations in Burma.
Recent events have brought the human rights record of the Burmese government to public attention and this has implications for business.

CSR Wire