Friday, 30 May 2008

Caledonia Investments' Tory donations get Torygraph thumbs up

Now this is odd. This is a business commentator arguing that companies should spend investors' money funding political parties that their shareholders may not support, or whose policies they oppose. He specifically backs Caledonia Investments decision to fund the Tories, although as I pointed out recently their donations authorized at the 2007 AGM don't appear on the Electoral Commission website yet. Notably they aren't included in the Commission's list of late donations in respect of Q1 2008 either.

Caledonia is seeking authority to make a further £75,000 of donations from shareholders' funds this year, on top of the £60,000 last year. Funnily enough most of the investors whose voting records I have found do not support Caledonia's stance (only Insight Investment voted in favour in the sample I have so far). But two fingers to the shareholders eh?

Trustees should find out whether they have any money in Caledonia and if so make sure they know how their votes are going to be cast. If you don't want your money spent funding the Tories then vote against it. Don't assume your fund manager will do the right thing.

A little more regulation, a little less action

Apparently part of the reason for the present financial mess is a lack of regulation, and we might need more of it in future. Who said this? Pascal Lamy, the director-general of WTO.

The boss of one of the world's most important economic organisations has said the lack of regulation in world markets was the root cause of the financial crisis which has hit world economic growth.

Pascal Lamy, the director-general of the World Trade Organisation (WTO), told the BBC that "a little more prudential regulation" could have helped prevent the banking crisis that has engulfed the US and Europe.

Mr Lamy said that the fundamental problem was that here was no international consensus on how to regulate the rapidly changing world financial markets or who should be the regulator.

The WTO boss also said that workers hurt by globalisation should receive more help from their governments.

Mr Lamy's remarks put him at odds with the so-called "Washington consensus" that liberalisation, privatisation, and open markets are the only way to bring about economic growth.

More evidence of a significant shift in thinking?

Thinking more broadly, doesn't it look increasingly odd that the governance of financial regulation contains no stakeholder representation? Given the damage that has been done, and the significant role of finance in society more generally, perhaps a push on this is in order, and winnable?

Thursday, 29 May 2008

Standpoint magazine

Last night saw the launch of a new political magazine called Standpoint. It pitches itself as as celebrating/defending Western civilisation, and some of the hype around it suggests that this transcends the 'old' Left/Right divide. Notably it has been compared to Encounter, suggesting that people think the enemies of Western civilisation are as powerful as the old USSR. It's worth noting that it includes Frank Field on the editorial board, and Nick Cohen as a contributor. The Hitch is likely to appear too. But aren't they the 'usual suspects' in terms of lefties to get on board?

Anyway, due to the fact that Mrs Tom is massively talented I managed to get an invite to the launch party and went along last night. Both Nick Cohen and Frank Field were there (Frank actually did a short speech) but mostly the audience was drawn from the Dark Side. The editor Daniel Johnson drew a comparison with the launch of Prospect, which happened a couple of years ahead of 1997. And he suggested that we are in a similar period now, because Nu Labor is dead.

A couple of things struck me though. First, Michael Gove was the only Tory big beast there as far as I could see, and he's going to be quite a good fit with a 'muscular liberal' mag isn't he? (It doesn't look like it's mentioned on either Iain Dale's blog or COnservative Home either). If Standpoint really wants to be Prospect for the Right that is surprising. That might suggest that either they don't have good political contacts yet, or that the Cameroons are a bit wary content wise. Which leads me onto my second thought (yes, I had two). The pitch of celebrating Western civilisation obviously points to the magazine being defined against (perceived) threats, so expect to see a lot of articles about muslims in there. So here comes a brief rant...

There was some self-congratulatory guff last night about how this was a 'noble' enterprise, defending liberal values and all that. But as much as I am supportive of liberal values, and as much as I dislike religious fanaticism, I can't see anything particularly noble about this. I don't accept that the threat from political Islam is comparable to the Cold War, and it's not like every Right-winger in the world isn't already banging on about scary muslims. It's not noble, in my opinion, to beat the drums in a more upmarket way. What's noble about the wealthy majority defining itself against a minority?

Ideas are important, but so is the way that people behave. Quite obviously people can extol very liberal ideals and still behave in an illiberal way. The constant banging on about muslims from the the Right comes across far more like previous examples of stigmatising minorities than it does as a genuine expression of liberalism. It often comes across like the herd turning on the 'other' even though the herd is mouthing liberal slogans.

UPDATE: Actually Iain Dale has blogged about the mag here.

Tuesday, 27 May 2008

Polly Toynbee on pay

Oooeerr... this piece from last Friday has a few holes in it.
I think she's aiming at a legitimate target, but missing it because of misunderstanding a) what shareholders can do and b) who the shareholders are.

A shareholder revolt this week at Shell's annual meeting shocked the City. The protest was against a new kind of bonus creeping into boardroom pay - rewarding executives with €1m each (£800,000) just to stay in their jobs. It was yet another reward for failure, since the three executives due these windfalls had failed to get the top job. Presumably entire boards will now apply in future, if this is the reward. The revolt against executive remuneration didn't succeed, of course - only one ever has, back in 2003 - but this time it got close enough to cause a frisson of panic after 49.5% of Shell's shareholders refused to support the bonus payment. Rebellions are difficult, since Labour refused to give shareholders the direct right to vote down remuneration schemes: instead they have to vote down an entire annual report.

First up we have to be careful not to conflate different types of votes. The Shell vote was on a resolution on its Restricted Share Plan, under which the retention awards were being made. The vote at Glaxo in 2003 was on the remuneration report. So the Shell revolt was arguably more targeted than that at GSK.

Secondly not many companies (maybe a dozen?) have failed to win a majority of votes on their rem report since 2003 when it became mandatory to put it to the vote, but it's definitely more than just Glaxo.

Thirdly Labour did give shareholders an advisory vote on remuneration reports which wasn't there before. Yes it could have been binding, though that would presumably technically only require companies to resubmit the report, it wouldn't affect the underlying rem arrangements.

Fourthly I'm pretty sure the vote on the report and accounts isn't binding either, so voting that down is no more effective than voting down a rem report.

I think it's time we had a reassessment of what the vote on pay has achieved. Arguably it isn't focused enough to get at the things stroppy shareholders really want to get at. But equally maybe we don't have the right 'shareholders' to make them the arbiters of what is and isn't reasonable.

Polly claims that "shareholders are mainly pension funds". The reality is that pension funds are probably less significant as direct owners than they were 10 years ago. This is partly due to asset allocation (mature/closed schemes selling off equities) and partly due to the greater delegation of ownership taking place under the DB to DC shift. And in any case in practice most pension funds delegate voting to their fund managers, who are the 'shareholders' companies deal with.

There are a number of factors that blunt fund managers' ability to police pay effectively (conflicts of interest, cultural background etc) which should make us query whether they should play that role. In any case do we really want to limit discussion of executive pay to whether fund managers think it is OK or not?

Notably Heather Connon on The Observer wrote a rather more informed piece a couple of weeks earlier which argues that shareholder activism on pay was failing. And even fund managers acknowledge the problem:

One leading fund manager said that, while the vote on remuneration reports had succeeded in linking pay more closely to performance, 'the quantum being paid has got much higher'. That means more regulation or legislation may be 'the only way to deal with the problem'.

Monday, 26 May 2008

Arbitrage snippet

This paper (PDF) is a useful basic intro to behavioural economics, and has a nice short bit on abritrage. I never get tired of reading this kind of stuff:

[E]conomists now realize that even in financial markets there are important limits to the workings of arbitrage. First, in the face of irrational traders, the arbitrageur may privately benefit more from trading that helps push prices in the wrong direction than from trading that pushes prices in the right direction. Put another way, it may often pay “smart money” to follow “dumb money” rather than to lean against it (Haltiwanger and Waldman, 1985; Russell and Thaler 1985). For example, an extremely smart arbitrageur near the beginning of the tulip mania would have profited more from buying tulips and further destabilizing prices than by shorting them. Second, and slightly related, arbitrage is inherently risky activity and consequently the supply of arbitrage will be inherently limited (De Long, Shleifer, Summers and Waldman, 1990). Arbitrageurs who did decide to short tulips early would probably have been wiped out by the time their bets were proven to be “right”. Add to this the fact that in practice most arbitrageurs are managing other people’s money and, therefore judged periodically, and one sees the short horizons that an arbitrageur will be forced to take on. This point was made forcefully by Shleifer and Vishny (1997) who essentially foresaw the scenario that ended up closing Long Term Capital Management.

One could also point to Tony Dye (then at PDFM) as someone who didn't have time to be proven right.

Sunday, 25 May 2008

Quick link

Just spotted this under the list of Taxpayers Alliance business supporters:

Tim Ingram, Chief Executive, Caledonia Investments

Caledonia Investments of course is a Conservative Party donor too. Notably there are a couple of people from fund management houses in the TPA business fan club too - Investec, New Star etc. Would be interesting to see if these managers run any more for the local govt pension funds the TPA is so keen to scrap?

Sunday's news

There are a few interesting bits of bobs in the papers today. Over on the front page of the Torygraph there is news that despite the credit crunch, the City is still living high on hog. According to this report bonuses are going to hit almost £13bn this year.

Still on pay, The Observer reports that HSBC is facing a shareholder revolt over pay, with the ABI amber-topping the company. That's not actually a big deal (they can red-top them if they really don't like what is going on). But as the Observer says, this is in the wake of Shell's near miss (just under 50% didn't back the rem report) and signs that, for the first time in a few years, fund managers are getting a little bit more stroppy about pay.

Two other bits from The Observer are worth pointing out, for the wrong reasons. Check out this news story from page 3. Are you any wiser about anything after reading it? I can only assume it has been heavily edited, because all it says is "some things that should be working aren't working". I have no idea what the hedging strategies are, why they aren't working, or what the direct consequences are. It rather fails as a news story therefore!

Meanwhile in the main paper check out the line below, in this piece by Catherine Bennett.

Events in Crewe and Nantwich illustrate the difficulties of politicians intent on doing anything, such as carbon-taxing to avert catastrophe since a) no one really believes it's coming, b) they'll be dead anyway, c) the recession has left them much too fearful and poor to care, and d) they won't vote for anyone who tries to make them.

It's point c) I'm bothered about. Errr... we aren't in a recession. Not yet anyway. It may well happen to the UK, as Mr Soros predicted last week, but we aren't there yet, and surely we shouldn't chuck these terms around lightly. Just because you can't fill the car up for the same price as before, or your gas bill has gone up does not equal a recession. That requires negative growth. I guess the fact that people think we are in a recession because bill are going up shows you how much we have taken for granted in recent years. It's also more evidence that we are talking ourselves into a very negative view of how things are.

Friday, 23 May 2008

Odds & sods

I don't have much to add to the general panic inflicted by the by-election. The one thing that really troubles me is that the Lib Dem vote went down too. Does that suggest that we starting to see the emergence of tactical anti-Labour voting? If so we may disappear down the plughole even quicker than we imagine. I still can't quite see why we are taking such a kicking from the electorate, but it certainly does seem that the momentum is against us now.

I also hugely disagree with some of the defeatism amongst lefties that suggests that the Tories wouldn't be much different. For one, we really don't know what they stand for because they have been so light on detail so far, but a lot of what has been said - for example about public sector workers pensions, union rights etc - should set the alarms bells ringing. Secondly the Tories have not undergone the sort of transformation that Labour did. It's a huge gamble to assume that they won't return to their instinctive prejudices against organised labour.

Back on the worky front, I've already quoted from the Howard Davies/David Green book Global Financial Regulation: The Essential Guide and I can recommend it do anyone trying to get to grips with what the various regulatory bodies do and the challenges that face them. You can get it off Amazon for £15. Observer economics geezer William Keegan says in the blurb on that gack that it makes regulation "interesting". I wouldn't go that far! But it's a useful resource, particularly for anyone considering a bit of regulatory engagement.

Finally a quick aside for Charlie. I've just read this shortie on Gramsci, which was less interesting than I thought. I was kind of underwhelmed by the decription of the concept of hegemony, and didn't come away with a very clear idea of how it really works, or how to develop counter-hegemonies, though I picked up some interesting ideas for further reading. Maybe I chose the wrong book?

Thursday, 22 May 2008

Capitalists and pay

A quick plug for Capitalists @ Work which is a blog I've only just come across and looks worth keeping an eye on. Like my fave private equity blog Going Private there probably isn't a lot of common ground politically, but there is a lot of well-written interesting stuff to be found.

Capitalists @ Work also reminded me that I haven't been keeping up with Robert Peston over the last couple of weeks. Although this piece they flag up is well worth a read generally, I admit to being drawn to the bit at the bottom about Hector Sants' comments on pay:

Last night's remarks by Sants indicate the FSA would be prepared to be more interventionist in re-introducing common sense into bankers' remuneration structures than he originally indicated he wanted to do.

Only a few months ago, he told me that he hoped banks' shareholders would put pressure on banks' executives to bring an end to the madness of bankers being paid huge bonuses on the basis of the notional profits they generate, rather than after years have elapsed to genuinely assess whether their respective deals make sense.

It appears he's having doubts that the banks' owners will sort this out without a little nudge.

Thankfully it looks like Sants hasn't fallen for the Ruth Lea line that institutional shareholders can/will sort out the pay issue. The overwhelming bulk of investors don't play any 'ownership' role beyond selling companies they think are losers. Fund managers simply aren't incentivised (either directly or by clients via specific mandates) to do so. If pension funds and others start structuring mandates in a way that does prompt managers to engage more this may change. But in the meantime expecting 'shareholders' to do the job is the wrong answer (unless you don't want the job to get done).

Fidelity bungs the Tories another £30k

I am so glad we moved our ISA...‘Generally non-partisan’ fund manager Fidelity gave the Conservative Party another £30,000 this March, just in time for the elections. That takes the bung-o-meter up to £465,500 since 2004. It would be interesting to see if any Labour or Lib Dem councillors that lost their seats recently represented areas whose pension funds employ Fidelity.

As usual search under ‘Fidelity’ on this page:

Just as a reminder, Fidelity told me (when we were still Fidelity customers) that these donations are part of their political engagement. But they only make donations to the Tories. Plus they host the Tory business liasion group the Enterprise Forum, and employ a Tory MP as a consultant on financial services.

They still haven't disclosed how they voted at the Caledonia Investments AGM last year where the company sought authority to make donations of up to £60k to the Tories. Given Fidelity's partisan stance, if I were a betting man I would put a few quid on them having given the resolution the thumbs up.

Network for Sustainable Financial Markets

Here's another interesting initiative aimed at capital market reform - the Network for Sustainable Financial Markets. Here's how they pitch themselves in their guiding principles:

The Network seeks to focus research and debate on the underlying causes of financial market instability and on development of fundamental reforms. To that end, we set forth the following principles to guide our participation in the reform process:

I. The Economic and Social Purpose of Markets is to Create Long-Term, Sustainable Value, which Requires the Efficient Allocation of Capital towards that Goal

This is the primary goal against which market practices and regulatory approaches should be justified. Too much financial market activity over recent years has had too little real economic and social benefit. Greater attention needs to be paid to how sustainable, long-term value is created, and market and regulatory reforms directed towards creating such value.

II. Sustainable Value Creation Requires that Hidden Risks and Rewards be Identified and Valued

Companies’ ability to create both negative and positive externalities is rarely accounted for in the marketplace. All too often, companies offload hidden costs onto society, while capturing benefits for their private gain. Similarly, companies that invest in the creation of long-term value for society are rarely rewarded. Better recognition and valuation of intangibles is a necessary prerequisite to sustainable value creation. Capital cannot be efficiently allocated without assessing all risks, costs and benefits, including those items not currently reflected on balance sheets.

III. Balance Between Short-Term and Long-Term Views is Needed

Numerous tax, legal, accounting, regulatory, social and compensation incentives pressure financial market participants to focus on short-term gains, often at the expense of greater future value creation. These pressures need to be better understood so that regulatory and governance reforms reward long-term, sustainable value creation.

IV. Market Participants Must Take Responsibility for Their Actions

A shift in business models throughout the financial services industry has led to widespread offloading of financial risks away from those who create them, while compensation systems do not account for the systemic risks thus created. Market and regulatory mechanisms are needed that encourage originators to ‘eat some of their own cooking’. These mechanisms should not absolve other market participants, such as investors and intermediaries, from the responsibility of understanding the risks they choose to accept.

V. Governance at All Financial Institutions Should be Improved

Better governance and risk management practices are needed throughout the industry. Independent directors have proven to be ineffective. Narrow interpretations of fiduciary duty have encouraged institutional investors to blindly mimic each other, accept risks they did not understand and resist governance improvements. Governance issues like these exacerbate financial crises and undermine the efficient allocation of capital and therefore need immediate and determined attention.

VI. Better Alignment of Financial Interests is Needed to Reduce Agency Costs

Conflicts of interest, asymmetric access to information and misaligned financial interests are rife throughout the financial services industry. This has encouraged profiteering by agents and intermediaries at the expense of investors and society. This problem is of particular concern when it has resulted in mismatches between portfolio investments and plan liabilities for the long-term security of pension beneficiaries. Measures to better align the short-term activities of financial companies with the longer-term interests of their customers are necessary.

VII. A Coordinated Global Approach is Needed to Better Protect the Financial Markets

In an increasingly global marketplace, oversight bodies must evaluate aggregated cross-border risks to protect market stability. However, market participants should not be forced to rely on a single market regulator. The presence of alternative enforcement mechanisms is necessary to limit damage when a previously effective regulator becomes neutralised. In addition, global institutional investors should play a bigger role. Their cross-border and long-term focus on meeting liabilities gives them a unique perspective which should inform regulatory decisions. They also have an incentive to help maintain international standards of quality and protect against regulatory capture.

Hat tip: Peter C

Wednesday, 21 May 2008

Capital stewardship job

A quick plug for this Change To Win post:

The CtW Investment Group, part of the Change to Win federation of seven unions representing nearly six million workers in the United States, Canada and Puerto Rico, seeks an experienced Corporate Governance/Investor Accountability Coordinator to work as part of a Change to Win team in Amsterdam.

The CtW Investment Group supports efforts by trustees and their pension funds to be responsible active owners. The CtW Investment Group supports regulatory and investor initiatives to ensure independent and accountable directors, reasonable executive compensation and sound environmental, human resource and other business practices. Members of CtW affiliated unions participate in public and private multi-employer pension funds with approximately $1.5 trillion in assets.

Competitive salary; excellent benefits. Send resume, a writing sample and list of references by email to: Richard Clayton at Richard.Clayton(AT)

Unite plans investor campaign at Marks and Spencers

This is a very welcome development in the capital stewardship world. The UK's biggest union is planning to file a shareholder resolution at the M&S AGM calling on the company to deal with discrimination against agency workers in its supply chain. Any trustees reading might want to have a look, and prepare to ask your fund managers what they think about the issue. I'll post more on this as it develops. Release here.

Unite warns M&S of significant reputational risk

On the day M&S announces £1 billion in profit, Unite, Britain's biggest union, warns that it faces significant reputational risks as it continues to fail to address, what the union believes, is a pattern of structural discrimination in its UK and Irish supply chain.

The union intends to table a resolution at M&S's forthcoming AGM, calling on M&S to engage in a meaningful process involving all affected stakeholders to deliver equal treatment to all workers in the British and Irish supply chain.

The union also has concerns over the governance of M&S, as it believes the concentration of power within the hands of Sir Stuart Rose as chairman and CEO fails to conform to best practice, and may leave the company without adequate checks on Sir Stuart's influence. The union has already held meetings with other investors that share concerns about the company's corporate governance and ethical standards.

While M&S trumpets its commitment to sustainable and responsible investment, Unite has received complaints from employees of discrimination in the meat supply chain. A permanent two tier workforce amongst many suppliers has been created, which often leads to conflict between migrant and indigenous workers and causes community disharmony.

Unite joint general secretary, Tony Woodley, said: "M&S have made enormous profits, while we have had complaints from some workers in its supply chain who feel they are being forced to accept unequal treatment and discrimination. Sir Stuart Rose now faces the likelihood of a resolution being brought to the floor of M&S' forthcoming AGM which calls on the company to protect its brand by remedying the situation.

"Our belief is that there is a structural pattern of discrimination in the M&S supply chain and this is not only ethically wrong but also presents a significant reputational risk to the brand of M&S.

"We have raised this issue time and time again with M&S but the company is failing to take effective action. We are calling for an urgent meeting with Sir Stuart Rose to discuss the union's concerns. Unless this issue is addressed it could to do significant damage to the company's reputation with both investors and customers. "

Unite the union gave its evidence to M&S and the other major retailers more than a year ago. Despite talks and independent research which backed many of the workers' claims, M&S has failed to take effective action. Unite believes supermarkets should face up to their responsibilities to workers and communities. M&S should put its warm words into action, and start putting people first.

Monday, 19 May 2008

Corporate governance and productivity

A friend pointed me in the direction of this paper that BERR issued back in February. The chapter that caught my attention was the one on governance, and there's plenty of stuff in there about the role good governance plays in reducing costs. Notably a lot depends on good old-fashioned regulation:

The interaction of frameworks and regulatory requirements can also help reduce the cost of equity capital. Hail & Leuz (2005) and Leuz (2006) attempt to understand and analyse the complexity of the influences of legal institutions, securities regulation and the level of integration of a nation’s capital markets. Emphasising the inherent caveats, they find some empirical support for the claim that firms from countries with more extensive disclosure requirements, stronger securities regulation and stricter enforcement mechanisms (as enabled by a high quality legal infrastructure) have significantly lower cost of equity capital than those that do not rate as highly on these parameters.

And look at the table on page 20 to see how well Japan does on this score. I'm sure many people would be surprised to see them top the table for lowest cost of capital.

It does rather suggest that whatever economic benefits stem from good governance, they are better achieved with the credible threat of enforcement. I'm not sure that a country like the UK meets that requirement. Here the enforcement role often falls into the hands of fund managers who a) may not be convinced that governance adds value and/or b) may not have a sufficiently long timescale to tackle governance issues that might take time to play out and/or c) may be too conflicted to play the role effectively.

On that cheery thought I am (probably) logging off for a day or so as my rock and roll lifestyle requires my appearance at a pensions conference in Sutton Coldfield. However if I have internet access and have something to post I will.

Sunday, 18 May 2008

Bubble trouble

Here's a nice snippet from Irrational Exuberance on stockmarket volatility:

“The valuation of the stockmarket is an important national – and international – issue. All of our plans for the future, as individuals and as a society, hinge on our perceived wealth, and plans can be thrown into disarray if much of that wealth evaporates tomorrow. The tendency for speculative bubbles to grow and then contract can make for very uneven distribution of wealth. It may even cause many of us, at times, to question the very viability of our capitalist and free market institutions. It is for such reasons that we must be clear on the prospect for such contractions and on what should be our individual and national policy regarding this prospect.”

Saturday, 17 May 2008

Financialisation and culture

A few weeks back Mervyn King had a bit of a pop at pay in the banking sector, and the sort of incentives it provided. Notably he also made the following comment about how the high rewards in the City appealed to graduates:

“I do think it is rather unattractive that so many young people, when contemplating careers, look at the compensation packages available in the City and think that these dominate almost any other type of career.”

I think he is right, and that this is a problem. The biggest (economic) rewards are clearly to be found in the financial sector. We shouldn't be surprised therefore if many of the brightest minds end up working there. The financial sector also benefits from huge economies of scale. Getting a small bet right on a huge amount of money can make you very wealthy. In addition the sheer scale of the payoff will likely reinforce the idea of brlliance at work. If I call a coin toss correctly you'd correctly see it as luck. But imagine I call a market move correctly and make £100m, doesn't that pull you towards the view that I must know what I am doing?

This must form a self-reinforcing circle of belief. Very well-paid people taking decisions that generate enormous amounts of money (albeit off the back of even more enormous sums of money) make us more likely to view their pay as being deserved. (Amazingly some on the Right regard this as 'wealth creation', but that's another story.) People who question who question the level of skill when the cash is pouring in are likely to be given short shrift.

Meanwhile working in the place where the ideas and opportunities are generated is also far more appealing to many than working at trying to ensure that the whole system functions effectively - the regulators. Regulators inevitably get left behind by the financial sector and are constantly playing catch-up. Not only are they unable to match the salaries of those they regulate, and hence must use other means to attract staff, but also they will always be reacting to innovation (and less positive developments) in the financial sector.

In addition the cyclical nature of crises, and responses to them, mean that regulators will tend to be either seen as over-prespecriptive or off the pace, depending on where in the cycle we are. Here's what Howard Davies and David Green say about it in their new book:

"There will be some kind of damaging incident which leads to demands for regulation to be tightened. Inevitably, this takes time to agree and implement. By this stage, the circumstances that led to the change in regime will have faded in the collective memory and the new rules may come to be seen as excessively bureaucratic and damaging to business efficiency. There will then be regulatory liberlization, which may well just be implemented when the next crisis hits. As a generality, regulation will be permenently out of alignment with public opinion."

The outcome of all this is, as King suggested, that the City looks like an exciting place to work, with potentially huge rewards on offer. In contrast regulators end up being portrayed as killjoys who don't quite 'get' what the smart people in the City are really up to. And more broadly, let's be honest about this, the labour movement is even further behind in understanding what goes on in the City, and how to respond to it. As such we are cast as dinosaurs, and rarely even feature in debates. When we do appear unfortunately it is often to make moral arguments dressed up as policy responses.

This suggests to me that the process of financialisation is likely having significant cultural impact as well as an economic one. As the financial sector has emerged as a significant force in British society, for businesses and the rest of us, with it may have come certain ideas. For example, is a lack of financial knowledge/awareness becoming seen as a personal failing, a lack of responsibility akin to not taking care our physical sselves? And are we becoming more in awe of those who manage to make money from money?

This keeps leading me back to the same point - we need to develop an effective capacity on the Left to respond. The financial world can be complex and it can be slow, boring work finding out how it operates. But unless we take the trouble to do this we will remain irrelevant, and our impact non-existent. And more broadly we will allow the financial sector to shape culture in a way that celebrates its success (above other occupations and activity), whilst 'critiques' from the labour movement will continue to read like sermons from another age.

Friday, 16 May 2008

Union trustees vs global capitalism

Hopefully that has got your attention. This is a quick plug for the CWC's annual global meeting of trade union trustees, taking place in London this year. If you are union member who is a pension fund trustee (and particularly if you are interested in capital stewardship) this is well worth making the time for. This event pulls together the most knowledgable and most activist union trustees from around the globe. It's always very enlightening hearing what has worked (or not) in other countries.

International union trustee meeting

The fourth international meeting of lead union trustees will take place in London on 8th-10th July. The event is being organized by the Global Unions Committee on Workers' Capital (CWC - to facilitate international dialogue and information exchange between union trustees.

Key themes for discussion include the UN Principles for Responsible Investment, Burma, private equity, labour issues in an investment context, and capital stewardship campaigns. The July 9 meeting will be chaired by John Maitland (ACTU, Australia) and hosted by the TUC. On July 10, trustees will be meeting with a number of London-based campaigning, corporate social responsibility and investment organisations.

If you would like to attend, please let the CWC Secretariat know by emailing Attendance is free, but please note that CWC is unable to assist with travel or accommodation costs for the meeting.

Thursday, 15 May 2008

The trivialisation of politics

This is a news story apparently -

Obama sorry for 'sweetie' comment

Barack Obama, candidate for the Democratic Party's nomination to run for US president, has apologised to a reporter for calling her "sweetie".

Reporter Peggy Agar, of the WXYZ television network in Michigan, had shouted a question as Mr Obama toured a Chrysler car plant in Detroit.

Mr Obama said: "Hold on one second, sweetie" and did not answer.

He later left a message for Ms Agar saying it was a "bad habit" and he "meant no disrespect".

Ms Agar told the Detroit News: "I've been called worse."

Fair Tips campaign

A shameless plug for Unite's campaign, which is well worth supporting. It's always worth checking when paying a bill in a restaurant whether the staff would rather have the tip separate (because some employers snaffle some of it for themselves).

Unite and Daily Mirror launch fair tips campaign

Unite the union and Daily Mirror newspaper are today (Thursday 15th May) launching a campaign to urge restaurants and hotels to sign a fair tips charter.

The campaign is calling on the hospitality industry to support the Unite and Daily Mirror ‘Fair Tips Charter’ to demonstrate their commitment to ensuring tips and services charges are distributed fairly among staff.

Tony Woodley, Unite Joint General Secretary said: "Customers want to see that the tips they leave are going to the hard-working staff who serve them. Our ‘Fair Tips Charter’ will enable people to tip with confidence.

"Employers in the hospitality industry must ensure that all employees receive a decent living wage with 100% of tips added on top. We welcome the commitment by Pizza Hut and TGI Friday’s to take a lead on this issue by signing the charter. The union now wants others within the sector to demonstrate their commitment to a fair and transparent tipping system."

Richard Wallace, Editor Daily Mirror said: "I'm sure many of our readers were astonished to find that it's perfectly legal to pay restaurant staff less than the minimum wage and then make up the difference with tips. This is a loophole that the Government must close.

"It's equally wrong for companies to take a cut of staff tips. A tip is a reward for good service and it should go directly to the people who earned it. The Daily Mirror is proud to support this campaign and I urge all responsible restaurant and hotel bosses to sign up."

Responsible investment - are pension funds getting the message?

The report below from Professional Pensions really nails one of the myths in the investment world - that (most) fund managers properly consider environmental, social and governance (ESG) issues. I've personally been involved in this bit of the world for over 6 years now and progress has been pretty sluggish in my view. One of the problems has been that trustees take at face value what fund managers report back to them about ESG issues, without interrogating the info properly.

I don't think fund managers are necessarily at fault here. If trustees only demand that there are a few paras in the quarterly report about ESG issues, and don't ask questions about them, why would a fund management house consider they really need to get a handle on them? At present the exchange is basically this. Trustees ask: are you doing anything on ESG? Fund managers reply: yes we are. And this is (currently) sufficient for funds who want/need to brush off stroppy scheme members or NGO campaigns - we ask our fund managers to assess ESG factors and report back to us. I think only in a small number of funds does anything significant really happen, and many of the funds where this does happen have a unique focus for one reason or another (Environment Agency, USS< local authorities etc).

I really hope that initiatives like RI Metrics will make trustees aware of how limited a lot of ESG reserach and engagement really is. I don't expect this tochange the world - some funds may never take these things seriously. But at least putting some quantitative info in trustees' hands will give those who do want to do things a much clear idea of how things stand presently.

RImetrics report reveals ‘significant variations’ in ESG practices
Kelly Gregor

THE fund management industry is a "long way" from best practice over environmental, social and corporate governance issues, research by RImetrics shows.

The ESG data provider’s research – among global asset managers representing over $12trn of assets and including over half of the world biggest 20 managers –showed that although many fund managers had improved their understanding of the issues involved competencies and practices varying greatly from manager to manager.

The report found the integration of ESG knowledge and research into the investment process posed the greatest challenge for the majority of asset managers – also warning that there were also significant variations in voting practices.

And it found that, while the majority of asset managers had a responsible investment strategy, few had consulted their clients on its development

RImetrics chief executive Jonathan Horton said there was a shift towards "a greater acceptance" of ESC in relation to investment performance and client demand.

"With this has come a greater demand for credible, independent and reliable responsible investment data and information.

He added: "It is clear that the maxim ‘if you can’t measure it, you can’t manage it’ applies in this field just as much as in any other."

Commenting on the report, BT Pension Fund trustee Bill McClory said: "This is a wake-up call to those managers who do not demonstrate good practice."

Responsible Investment co-head of Universities Superannuation Scheme David Russell added: "This report is further evidence that fund managers are struggling to integrate extra financial factors into their investment processes to the extent many trustees would like to see.

"The analysis provides us and other pension funds with a valuable benchmark by which to evaluate manager performance in this important area."

Tuesday, 13 May 2008

Block voting and executive pay

I met a friend who works for a fund management company for breakast on the way into work this morning and we got talking about executive pay. Notably they said that their house seemed to be voting against or abstaining on more remuneration reports than last season. One of their principal gripes was incentive schemes that pay out for median performance. You heard - you get an extra slug for being nothing special, just bang in the middle. What's more, they said, in the bigger companies some of these schemes can pay out pretty serious multiples of salary at the median (up to 250%).

Personally I'm not shocked, because I know this bit of the world, but I'm surprised how few people realise this kind of thing goes on and that their savings are being used to support it. But more on that later.

We also talked about the impact of the shareholder vote on pay which the Government institued in 2003. Broadly we agreed that it had led to more engagement over pay, but had not dealt at all with the scale of rewards. They were also sceptical that, as some claim, there was now more linkage to performance. For one the example of big payouts for median performance suggests otherwise. In addition they said that since the vote has been in place we have had largely benign market conditions (2003 was the bottom of the post TMT bubble bear market). A rising tide not only floats all boats, it also inflates all pay packages. They said that we would need to see a prolonged period of poor returns across the market to see just how performance-related rewards were.

This then led on to a broader discussion of what the pay vote was intended to a achieve. Was it simply to provide accountability to shareholders (ultimately in practice this means fund managers) or was it also meant to rein awards in? If it was the latter I think we can conclude that it has failed. A more cynical argument I have heard is that it was a clever bit of policy intended to take the heat out of the executive pay issue by appearing to offer a market solution. Obviously it could be all three, as different groups involved in devising and delivering the policy had different objectives.

More broadly it did bring me back to my previously stated view that shareholder voting on executive pay - as it stands now at least - has the unhelpful effect of legitimising high rewards with unchallenging targets. It suggests that the problem is at the margin - those very few companies that lose the vote, or see a significant level of opposition. Why would a company that gets a 90% plus vote in favour of their policy conclude they need to change anything? And how do journalists with little knowledge of exec pay interpret such figures?

This is why I strongly believe that the delegation of voting by pension funds and others to fund managers is a serious mistake. It means that an important political issue is dealt with by block voting by the City. So next time you see directors get away with trousering millions where the company has been poorly run, ask yourself what you have actually done to address the problem. If you have a company pension, or an ISA, somewhere along the line your slug of shares are being voted on these pay policies. Do you know how they are being used and are you putting any pressure on your fund manager? If not do you really have any grounds to complain?

Capital market dysfunction

This place looks like it is asking the right questions -

The Paul Woolley Centre for the Study of Capital Market Dysfunctionality

The Paul Woolley Centre for the Study of Capital Market Dysfunctionality is established at the Financial Markets Group of the London School of Economics, with the generous support of Dr. Paul Woolley and under the directorship of Professor Dimitri Vayanos.

The main objective of The Paul Woolley Centre is to produce and disseminate high-quality research relating to understanding the workings of capital markets and the social efficiency of allocations achieved in these markets.

in June looks interesting too:

The First Annual Conference of The Paul Woolley Centre for the Study of Capital Market Dysfunctionality will be held on 12-13 June, 2008 at the London School of Economics.

The conference will comprise of four sessions:

1. Behavioural Finance
2. Incentives of Fund Managers and Pricing Implications
3. Collateral Constraints and Asset Pricing
4. Asset Pricing and Macro

Hat tip: Sheetal

Monday, 12 May 2008

ATM locations

A while back I blogged about the painful experience of drawing money out from ATMs that charge you per transaction. I thought I would hunt around a bit more and as a result I found the report (PDF) of the ATM Working Group, chaired my John McFall, which was published at the end of 2006. This was proiduced because of concerns about the spread of charging machines, and the effect this might have in low-income areas.

Vrey broadly the report for no great conspiracy, and accepted that charging machines were a legitimate business model (although look at the tiny number of transactions given how many such machines there are). It did recommend putting more free machines in certain areas though. Below are a couple of quick excerpts, I'll try and do more on this another time.

Some interesting general stats from the report:

There were 33,250 free cash machines in the UK at end-June 2006, compared to 25,500 charging machines.
There was no firm evidence that the aggregate number of free cash machines was likely to decrease.
The average number of transactions per charging machine has fallen from more than 17 per day in 2002 to around 13 per day in June 2006.
Around 4% of cash withdrawal transactions were at charging machines in the first six months of 2006.

And some commentary about the distribution of cash machines:

"Most low-income areas were relatively well-served by free cash machines, tending to have more free cash machines than more prosperous areas. One explanation for this could be the relative proximity of many relatively deprived areas to town centres. But 1,701 areas within the most deprived quartile (around 16%) had neither a free cash machine within the area, nor a free cash machine within 1 kilometre of the centre of the area. About 4% of the UK population live in such areas."

Optimism, fund managers and DC choices

Thinking through this question of optimism a bit more, I'm sure it will have some relevance in pensions policy, but I'll get on to that a bit later. In explaining the difference between an optimistic and pessimistic explanatory style, Seligman identifies three types of charectistics used to view a given situation - permanence, pervasiveness and personalisation. Optimists and pessimists divide in their assessment of each of these.

For example in relation to permanence, an optimist will see a bad situation as temporary ('I'm really tired today') whilst a pessimist will tend to see it as a permanent trend ('I have no energy'). Looking at pervasiveness, an optimist will again see a bad experience as specific ('This book is a waste of time') whereas pessimists will tend to a universal interpretation ('Books are a waste of time'). And finally with respect to personalisation, the optimist will blame bad events on external factors ('I have no luck at poker') whereas the pessimist will internalise the problem ('I am no good at poker').

In addition each of these trends can be seen working in reverse too. So again on the personalisation point, an optimist will see a positive event as resulting from their involvement, whereas the pessimist sees it as resulting from external factors.

So far so interesting. But what struck me is how much this reminded me of the recent Lucy Kellaway column I raved about. I bet if you studied the fund manager who thinks active management is a myth and the respondent who says he knows it is possible because he has outperformed you would get very different scores on an optimism/pessimism test. We don't know if the guy who wrote the letter out or underperformed, but we know the respondent who did outperform thinks it is because of his own skill - an optimistic explanatory style.

Looking more broadly, I bet if we tested the small minority of individuals who choose to make active investment decisions in DC schemes they would tend to be optimists - convinced both of the value of changing from the default, and of their own skill in making investment decisions. It might also be the case that this applies in other decisions - whether to change electricity supplier etc.

Notably the point of Seligman's book is that we can train ourselves to develop an optimistic approach. He argues that that will benefit us both in our personal lives (more enjoyment, improved health) and work (improved performance). I wonder if also affects our ability to make financial decisions?

One final bit. He also makes the point that pessimism has its place - for example sometimes we need to acknowledge blame rather than seeking to externalise it. But what is really interesting/depressing (depending on your optimistic/pessimistic nature no doubt...) is the finding that pessimists tend to be more realistic, and to make more accurate assessments.

I'm not even halfway through the book yet, so I'm sure I'll be posting more as I go along. Definitely worth a read from what I can tell so far.

Sunday, 11 May 2008

Styles of thinking

Sitting around at home in the sun today I started reading one of the books I took a punt on in my latest Amazon order - Learned Optimism by Dr Martin Seligman. I'm already gripped by it, not least because just a few chapters in he alreadys gets onto something I've been pondering recently - styles of thinking. It also ties in with my interest in narratives. In this specific case he talks about how some people react to certain situations with 'helplessness' (pessimism) whilst others have a more positive approach. This is concerned with the explanations people provide for events and situations (attribution theory in the lingo).

"[W]e were interested in habits of explanation, not just the single explanation a person makes for a single failure. We claimed there was such a thing as a style of explanation: We all had a style of seeing causes, and given a chance we'd impose this habit on the world."

Obviously in this case he is specifically concerned with optimistic or pessimistic views - which are in effect differing explanations. But it strikes me there are probably other explanatory styles out there too - why are some people more drawn to a conspiratorial view of events than others for example? I'm sure that styles of explanation (and styles of thinking) play a significant role in our taste for different kinds of ideas. Whilst we might think that we are convinced by the logical case for a proposition, perhaps we are more influenced by the form?

It also makes me realise that I'm only really be scratching the surface of how narratives really work in respect of political movements, and ought to read more about this kind of thing. It must work on a much more complex level than simply, for example, that the voters' current narrative about politics is that Brown is a poor leader and the Government is failing. That's a kind of meta-narrative (not using the term precisely), there must be smaller narratives that feed into it.

One for another day...

Friday, 9 May 2008

Yesterday's mistake is today's news...

Oh dear. I've been publicly named and shamed in the Evening Standard! Yesterday I made the tiny mistake of sending a draft document not yet ready for public consumption out to press contacts, and as a result today I've been savaged, savaged no less, by the Standard's City Spy column. If you have a copy of today's paper (though I guess a lot of people have decided never to buy it again because of its mayoral election 'coverage') check out the first story on page 31 and wince! Oh well, at least I can feel some kind of 'monstered by the Standard' solidarity with Ken.

Where is Caledonia's £60k Tory donation?

Last year the investment trust Caledonia Investments sought shareholder approval at its AGM in July to make donations of up to £60,000 to the Conservative Party. You can read the rationale for it in a previous post here. The odd thing is that no donations from Caledonia to the Tories appear on the Electoral Commission website - I've tried searching for both Caledonia and Caledonia Investments.

As the text of the resolution stated last year, the authority sought would only last "until 1 January 2009 or, if earlier, the conclusion of the next annual general meeting of the Company". As the company's AGM should be coming up in July, that means that if donations haven't been made they only have about two months to make them (and disclose them...).

Given that the company is quite blatant in its support for the Tories, in contrast to the unconvincing excuses trotted out by another fund manager that also loves the Tories, I can't imagine that embarrassment is an issue, so what's going on. Have the donations simply not been disclosed? Anyone got any bright ideas?

Also I've managed to find another voting decision on the resolution. Barclays Global Investors (BGI) also voted AGAINST. See page 25 (as numbered) of their Q3 report.

So the scores on the doors are:

Baillie Gifford - AGAINST
Co-operative Insurance - AGAINST
Hermes - AGAINST
Insight Investment - FOR
Newton - AGAINST

Thursday, 8 May 2008

Books, bands and a bad day at the office

I've had a pretty bad day at work today, which I'll cover another time once I can laugh about it (10 years or so). In the meantime I thought I'd do an amalgam post bringing together a few disparate bits and pieces that might be of interest to people and also cheer me up.

First up, there are a number of books that I've read over the past couple of years that have really contributed to the way I look at the world. I've never really tried listing these before so it's quite revelatory to me. Looking over the list I obviously go for books with a sceptical outlook. Because I think everything we experience is refracted through our personalities I can only conclude I must have a taste for this kind of thing. I am certainly am put off by books that are groundlessly idealistic. Anyway, here's the list...

Irrational Exuberance - Robert Shiller
I've done a fair bit of reading about stockmarkets, fund management, pension fund investment etc, and this is probably one of my faves. It has an interesting explanation of stockmarket bubbles (naturally occuring pyramid schemes) and contributed to my already low opinion of the ability of markets to allocate capital efficiently.

Capitalism Unleashed - Andrew Glyn

Although I'm a moderate lefty, and not an enemy of markets, my politics are rooted in the labour movement, rather than left liberalism (which is why I worked for the unions rather than an NGO). Ultimately I do think the economic interests of employees and managers conflict and this book really reminded me how these things have played out since free market capitalism has triumphed.

Having Their Cake - Don Young and Pat Scott
Not one many people know, but it's basically a report from the front line of managing a business, focusing on the way the finance sector has become increasingly influential. You could characterise it as a critique of financialisation from the perspective of companies.

The Paradox Of Choice - Barry Schwarz
I think this book is great - although a friend whose opinion I take seriously and who is a policy dude described it as jumping on the bandwagon! Basically it takes apart the idea that choice is necessarily good for us (not the same as saying it is bad). I had a load of ideas about 'choice' running round my head, I read this and realised there was already quite a bit of academic evidence about how it really works. One of the books that stimulated my interest in behavioural economics.

The Halo Effect - Phil Rosenzweig

Ace book about what we might call the myth of management. Forget business books that tell you there is a fool-proof formula to running businesses, it's way more randon than that, and we misinterpret the data we do have repeatedly. Brilliant stuff too about the narrative nature of business reporting.

Fooled By Randomness - Nassim Nicholas Taleb
Lots of people hate this guy, and his writing style but I liked it. If you know much about statistics you'll probably read it and think 'eh? so what?'. But for a doofus like me it was very interesting. Again, not one to boost your faith in professional investors.

How We Know What Isn't So - Thomas Gilovich
If you are at all interested in cognitive biases (which feed into behavioural economics in a big way) this is a killer book. Again for it was useful for providing weight to ideas I already had about the way we process information, but it has loads of useful information in there. I can honestly say it has prevented one or two arguments at home too!

So onto music. I downloaded a few bits and bobs lately, with various results. For example, right now I am listening to Entertainment by Gang Of Four. So far I can't see what all the fuss is about, although I really like Anthrax. Maybe a) it will grow on me and/or b) I am too used to bands that have a sound that is derived from them (Fugazi?).

Other new bits - Crystal Castles, again a bit so what. But I'm liking 1000 Things by Autokratz. I also downloaded Weight by the Rollins Band recently, which has some decent angry man ranting over rawk guitars type stuff going on that is good for the gym. And I am waiting for the new Whitey album to come out. The first one is genius and the track Non-Stop is currently on that advert where the bloke has to run to get to his wedding, getting dressed etc on the way (can't even remember what company it is for?).

Not sure why I've gone a bit guitar-y lately, I'm normally mr electro. Still, that IDJ2 is looking pretty appealing...

Narratives etc

Hopi Sen has posted an interesting piece about one of my favourite subjects - narratives.

Just a few random thoughts on this. First, I think narratives are hard to shift once people have internalised them. This is in part because the reason why we like narratives, in my view, is that they offer an easy way to understand and/or filter information, and it's an effort to replace one with another.

As I have mentioned previously I aware of an example where a well-known business journo has faced information that conflicts with a narrative they are used to communicating. The result was not that they revised their narrative, but rather they cast doubt on the information. This is not unusual when you think about how you yourself respond to 'difficult' information. It does demonstrate how attached we are to our own narratives.

It's interesting/annoying that the Danny Finkelstein piece to which Hopi links refers to Dan Ariely's book. This is the second time - at least - that he has mentioned the book. I'm not confident he actually really gets the profound nature of some the insights from behavioural economics, as in a previous piece he definitely got the wrong end of the stick about something. However it is notable that he is reading/writing about this area - are any left-of-centre columnists? We risk leaving this ground to the Right unless we make a concerted effort to camp on it.

Notably the Finkster talks about the example of reactions to Coke, which I agree is one of the most interesting findings in the book. It does suggest that we prime ourselves to expect a certain outcome - in this case enjoyment - and that this priming can affect our perception of the experience, and arguably therefore the experience itself. Again think that one through and I am sure you can think of plenty of examples from your own experience.

This demonstrates how people's perceptions can be easily manipulated if you do the right groundwork. It's also why push polling is such an evil tactic, and only a scumbag would use it.

Cabinet Office on social investment returns

Here's the release about Phil Hope's speech on Tuesday.

Plan for standard measure of social return on investment
6 May 2008

Phil Hope, Minister for the Third Sector, speaking at a groundbreaking social investment conference, has today announced a new programme of work to help standardise and improve how social return on investment (SROI) is measured. The Government is to carry out a project that will bring together the public sector, independent investors and social enterprises to agree a standard methodology for SROI measurement that places a financial value on social benefit.

The research aims to be an important driver of the rapidly developing social investment market and is designed to help third sector organisations, including charities and social enterprises, access more sustainable funding and finance. This is an exciting and developing field that may soon see the introduction of a social stock exchange and a social investment wholesaler.

It is estimated that ethical business in the UK is worth around £30bn. Increasingly, investors are looking at the impact of their investments on society and the environment. Consistent measurement of social return has the potential to enable investors to put a financial value on the social and environmental benefits derived from their investment. It could also help commissioners of public services take better account of the social value of a service when tendering for a contract.

Phil Hope, Minister for the Third Sector said:

“I am pleased to announce that the Office of the Third Sector will undertake fundamental development work on Social Return on Investment. Social enterprises and other third sector organisations play hugely important role in improving peoples' lives as well as the environment. Like any businesses they need access to finance. This will enable them to demonstrate their impact to investors and public services and help them attract funding.”

The Office of the Third Sector in the Cabinet Office, in partnership with NESTA, is presenting Good Deals, the first national social investment conference, sponsored by the RBS Group and organised by Social Enterprise magazine. This reflects the UK Government's position at the forefront of social investment.

Notes to Editors

Social enterprises are defined as “businesses with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or community, rather than being driven by the need to maximise profit for shareholders and owners”.

The Ethical Purchasing Index (EPI) valued the ethical sector in the UK in 2005 at £29.3 billion.

The Good Deals conference is presented by the Office of the Third Sector in partnership with NESTA. It is sponsored by the RBS Group and organised by Social Enterprise magazine. This is the first of its kind, reflecting the UK's position at the forefront of innovative policy development and thought leadership in the field of social investment. For further information please see: Good Deals! Social investment conference on May 6th.

A social investment bank was recommended by the Commission on Unclaimed Assets. If resources permit, and subject to clarifying and addressing any state aid implications, the Government would like to see a proportion of unclaimed assets in England used to support social investment in third sector organisations, by strengthening existing finance providers. Legislation is being introduced to enable this to happen. For further information please see: [External website].

Independently of government, The Rockefeller Foundation is working closely with stakeholders within the social enterprise and financial sectors to explore the feasibility of a social stock exchange.

Wednesday, 7 May 2008

A few quick thoughts on The New Financial Order

I won't go into too much detail or I will spend my whole lunch break writing this, and I can't do it any justice unless I write a really long review. But anyhow I've finished the book, and as is probably clear from my various posts as I've reading it I am really impressed. The subtitle is 'Risk in the 21st century' which is what the book is all about really.

Broadly Shiller's argument is for the extension of financial risk management into areas where it currently has no role (he calls this the democratization of finance). He suggests the introduction a range of new policies that are intended to help people share actual or potential risks. These include livelihood (income) insurance, income-linked loans and inequality insurance (really re-framing tax so that inequality does not increase further) plus his previously-developed idea of macro markets.

Some of the ideas are pretty radical. The proposal of income-linked loan is a good example. As it suggests, the amount to be paid back could be reduced if the borrower experienced a drop in salary. Similarly they could take out insurance against this eventuality. Clearly people will immediately think "Moral hazard" but a) I wonder how strong the peverse incentives would actually be and b) they can be mitigated with a bit of thinking. In fact some of these ideas have already been implemented, albeit in a limited way (even income-linked loans).

One challenge for ideas in the book is getting one of the central concepts - global risk information databases (GRIDs) - off the ground. These would be necessary in order for some of the ideas to work, yet you can imagine the reluctance to implement such systems.

As I have posted previously, one of the things I really like about the book is his emphasis on the importance of framing policy in a way that will contribute to its success. As just one example he notes that people do seem to genuinley consider national insurance contributions as contributions - rather than a tax - and as such they are more palatable. This immediately made me think of the argument a few years ago that compulsion to save into a pension would be seen as a tax. In retrospect I think we shouldn't have worried about this argument at all (and we didin't worry about it much) since I think it has even less purchase if your contributions can be seen in your own pension pot.

The final thing I take away from the book is further reinforcement of the idea that financial innovation has the potential to do a lot of good (not a popular message in the current environment I'm sure!). If the Left is going to continue to be relevant it needs to keep up to speed with how the economy is changing and how we might adapt our responses. There are ideas here we can definitely work with if we are prepared to be a bit open-minded.

For loads more info: The New Financial Order

TUC trustee conference - 27th June

Blimey it's that time of year already - the TUC's annual conference for trustees is coming up on 27th June. This year's speakers include James Purnell, the Beeb's Robert Peston, and Brendan Barber. PDF flyer here, blurb below:

Taking the long view - Effective pension trusteeship in uncertain times
TUC Member Trustee Network annual conference - Friday 27 June 2008, Congress House, London

The conference will be followed by a drinks reception

Global economic turbulence, increasing regulatory and legal burdens, greater longevity and legislative change: these are uncertain times in the pensions world. The role of member trustees is critical in stewarding pensions, protecting members' benefits and taking a long-term view in the face of these challenges.

This conference aims to help trustees to navigate the current terrain and look to the future on pensions policy, regulatory and investment issues.

Keynote addresses from James Purnell, Secretary of State for Work and Pensions; Robert Peston, BBC Business Editor; and Brendan Barber, TUC General Secretary, will look at the UK and global context.

Workshop sessions will provide an opportunity for more detailed discussion of key issues, including scheme funding, DC governance, responsible investment and alternative investment strategies.

The conference is also a valuable networking opportunity to meet fellow trustees, trade unionists and pensions experts to share knowledge and experience.

Page 123

I've nicked this from Tom Freeman:

1. Pick up the nearest book
2. Open to page 123
3. Find the fifth sentence
4. Post the next three sentences
5. Tag five people and acknowledge who tagged you

I've just finished The New Financial Order, which I'll bung up some thoughts on later. But anyway, here's page 123:

If livelihood insurers in countries all over the world do just this sort of risk management with macro markets, then the markets can function well, with both a steady supply of issuers of the securities representing every country and a steady demand for them. This kind of risk management for insurance companies may sound complicated and technical but it is well known in financial circles. What is missing is the macro markets.

I can't be bothered to tag five people so I'll just do John G and John W.

Major responsible investment report

A quick plug for the interesting report by Responsible Investor on... err... responsible investment which you can download here (PDF). Lots of useful info in there. One very quick excerpt that I thought was on the money from Axa's Raj Thamotheram:

For us, one of the points of enlightenment was a proposal for a definition that came from an academic in the Netherlands. It proposed categorising RI activity under three headings: ‘values‑based’, ‘alpha‑enhancing’ and ‘beta‑securing’. I have slightly modified that, but broadly those were the three categories. The values‑based activity I think is where we have all come from historically in the Anglo‑Saxon community such as ethical, normative or the Scandinavian international norms exclusion approach. I would also say that ‘best-in-class’ is a values‑based proposition. There is no evidence that it adds to performance and there is no evidence that it decreases performance. It is a value that you would like your money to be allocated to as some kind of good corporate citizen.

Then you have the newer categories around better risk‑adjusted returns and here I think there is growing evidence that SRI does add to performance in a risk‑adjusted sense and certainly where you can look at particular issues in particular markets, such as corporate governance.

Then you have beta‑securing activity, the idea that you are exposed to a large market index and your ability to match your liabilities is related to that.

Now, I think the interesting thing about this classification is that it allows you to have a discussion with your clients about which balance you might want. For example, with a large institutional asset owner you might want quite a lot of beta‑type RI activity, whereas for the retail community you might want a very
high values‑based proposition. I think part of our struggle is to have a more sophisticated approach internalised within fund managers.

That makes a lot of sense to me, and I think it also points up the need for unions to think carefully about how they respond to the responsible investment world. Since unions are typically in the game of increasing labour costs (let's be honest!) it's not always an easy sell to get investors - even those that claim to be responsible investors - to take labour issues seriously if we only argue them in terms of long-term shareholder value, or enhanced analytics. Sometimes I think we are better off with a forceful values-driven argument, and most likely to get traction with investors with a values-driven approach to SRI.

Tuesday, 6 May 2008

Calculating social returns

According to the FT this morning the Government is going to have a crack at developing a way of measuring social returns. Cabinet Office minister Phil Hope is unveiling the idea in a speech today at this conference. As of now there is nothing on the Cabinet Office website, but I'll post it up when there is. Notably the FT piece (on page 2, I can't link to it currently for techie reasons) makes the link with SRI. But I'm not clear if this is a way of measuring the benefits of social investing in a broader sense, rather than providing more data for SRI folks.

Monday, 5 May 2008

To top off a rubbish week...

Ipswich Town failed to sneak into the play-offs despite beating Hull. It was only an outside chance, but you always hope don't you. As well as being a thoroughly depressing period politically this has been a pretty disappointing season on the football front. Time to regroup...

Back in the real world I see that Warren Buffett reckons that the worst is over in terms of the credit crisis, though there is stil pain to come for some homeowners. That follows the Bank of England suggesting last week that the fallout might not be as bad as predicted. I still feel like the crisis is a bit of a phoney war so far. Although there are obvious knock-on effects such as it being harder to get mortgages or other forms of credit, it doesn't seem like serious economic damage is being done. For example I've just read Anatole Kaletsky's piece in the Times where he seems to have reversed himself again. First he suggested the credit crisis was no big deal, then it was very serious, now it is not so bad again. Despite the phoney war Labour is taking a shoeing currently. We could be in the situation in a couple of years where the economy has picked up again, but Labour is still turfed out.

I'd better wash my mouth out after I've said this, but I guess this all about - my favourite - narratives. In the clear abscene of the Government developing its own, external events and the opposition have built one for it and pretty it ain't. As I have bleated on about many times before, once a narrative is in place we typically interpret new information through it, meaning we can put a very different spin on the same information (ie Marcus Bent not converting a chance). I think people have a very gloomy conception of the economic situation because the narrative of a failing government enables them to read any economic news in a very (overly?) negative way.

This is problematic because narratives seem to be pretty sticky. It's an effort for us to revise our interpretive frameworks so we will often seek to ignore or minimise any information that might cause us to do so, and focus on information that confirms our standpoint. Just look at the way that people will often query the veracity of official stats that tell a story that doesn't fit with their own narrative (ie falling crime). I think that means that Labour would need sustained good news to counter the negtive narrative in many voters' heads.

The one plus point is that I still feel that the Tories' resurgence nationally may have pretty flimsly foundations as I don't think people know what they are voting for. I am still not convinced they will give the Tories a go just because they are fed up with Labour without having any clear conception of what the Dark Side might actually do with power. But the longer this goes on the less that might matter.

Saturday, 3 May 2008

LSE events on financial regulation and markets

I managed to make it along to the event on financial regulation I posted about previously. I also managed to pick the book up for a tenner, which is a few quid cheaper than on Amazon. I spotted Paul Myners in the audience, and Virginia Bottomley was a couple of seats away from me!

The event itself actually wasn't as interesting as I was expecting, as the focus of the first to presentations was more on regulatory structures than current themes. One interesting point made was that attempts to create a single market in Europe for financial services had hit problems because you don't actully get much benefit if the frameworks are similar but not the same. The point was made a couple of times that you don't get IT benefits unless systems are the same.

One notable comment from Howard Davies was his surprise that countries like the UK tolerated off-shore tax avoidance. And one point I definitely didn't agree with came from Steve Robson who argued that tax competition gave countries very little room for manouvre and that the Government didn't seem to have grasped this. Basically it's another version of don't kill the goose that laid the golden egg.

John McFall was pretty good. He's one of the few Labour MPs who can talk with some sense about financial markets.

Anyway the book looks fairly good. Meanwhile there is another LSE event in a couple of weeks that I am very keen to get along to:

The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means

Date: Wednesday 21 May 2008
Time: 5-6pm
Venue: Old Theatre, Old Building
Speakers: George Soros and Howard

I'm actually pretty impressed with Soros. His theory of reflexivity is interesting (to me anyway). This event is another book launch, so another one to add to my stack of reading.

Thoughts on the elections

First the good news - I don't think there is any. In pure numbers terms apart some small local gains (retaking Slough etc) this was a very bad set of results for Labour, worse than I was expecting. There is nothing positive at all in losing well over 300 councillors plus, of course, losing London to Boris. By the same score it was a very good night for the Tories. Worringly they did well in Wales and bits of the North. It does look like they are on a roll. The people have spoken, the bastards.

The strange thing about it is that you don't detect any particular enthusiasm for the Tories, people just don't want to vote for Labour. I do find this rather surprising given that the country is actually doing pretty well. When the Tories were doing this badly we had experienced two recessions, high unemployment and interest rates, negative equity etc. The situation is clearly much better now, despite the less rosy economic environment currently. But obviously people still feel they are not doing well and as such want to try an alternative. My own view is that we have become rather spoilt by the benign environment we've had in recent years. So much so that even the idea of difficult times is enough to make people angry.

I am not sure that people actually know (yet) what they are voting for when they vote Tory. I think that makes the current situation rather different to pre 1997, although the feeling of momentum is clearly similar. Labour under Blair pre 1997 were accused of being light on policy detail, but the Tories under Cameron have taken this to a new level. Whilst this is a very sensible, and successful, strategy for the Tories it does worry me (not just as a Labour supporter) that people don't really know what they are mandating.

I am not at all convinced that the Tories have significantly changed since the 1990s. They certainly haven't undergone the sort of introspection and transformation that Labour did in the 80s and 90s, since the modernising trend in the Tories has only been dominant for a couple of years. That does make me think that the Cameron makeover is simply a veneer job.

I have never had any doubt that there are significant policy differences between the parties. Just because Labour got pulled in some stupid directions by populist but relatively unimportant issues such as inheritance tax should not obscure the fact that in a range of policy areas they have tried to do progressive things whilst the Tories have been irrelevant or obstructive. In the areas I am familiar with because of work the Tories have tended to be obstructive and often been content to parrot the views of industry interests. Many also clearly still have an inherent distrust/dislike of unions.

The elections also demonstrate the irrelevance of the far left in electoral politics. Both wings of Respect did poorly, the SWP front the Left List particularly badly. It was quite interesting reading some of the commentary from the far left about Ken's relationship with the RMT. Some people were seriously arguing that Ken would lose support from working class voters because he wasn't supportive of RMT strike action. Only if your politics come out of marxist text books can you possibly come to that conclusion. Like it or not, most Londoners are more likely to react to a tube strike with anger than a desire to show solidarity with Bob Crow. I have to say that the utter failure of the far left when up for election does also make me question why they are so over-represented within trade unions. Aside from the fact that I don't agree with their analysis of society and the tactics that derive from it, I think the grandstanding they do in the unions also make us a much easier target for the Right.

More broadly the failure of the far left also demonstrates how volatile the political situation is. Look at the reverses suffered by UKIP in London. It does show you how hard it is to put down real roots in the electorate if you are a new party, especially if your pitch is primarily tied to a single issue. What can look like a serious emerging trend can quickly evapourate. I will be surprised if either bit of Respect has a real future as Iraq continues to recede as an issue.

Personally while I am glad its all over as I don't enjoy doing the practical stuff (though all I do is leaflet a few streets) this election has made me realise I really ought to do more stuff for Labour. We are thin on the ground these days and as many have said the party's structures have become hollowed out. The only way this can be changed is by more active participation by members, and I guess that means me.

Mayoral election - important information!

To anyone outside London - don't blame me, I voted for Ken.

Friday, 2 May 2008

Pitt Watson not taking GS job...

From ePolitix:

The Labour Party has confirmed that David Pitt-Watson will not take the post of general secretary as expected.

Labour had announced in March that the 51-year-old City fund manager would replace Peter Watt, who resigned in the row over donations.

But the party confirmed on Friday that this would not be possible "without significant further delay in the post being filled".

It said the National Executive Committee (NEC) would take immediate steps to appoint a permanent general secretary, with Chris Lennie holding the position for the time being.

NEC chairman Dianne Hayter said: "It is unfortunate that the necessary arrangements for David to join the Labour Party as general secretary could not be completed and we are grateful for the exhaustive efforts made by him and others to this end.

"The NEC will now start the process to make a new appointment and getting a permanent general secretary in post as quickly as possible."

OECD on auto-enrolment, fund choices etc

Just a couple of snippets I picked up from this story on IPE. This OECD paper sets out some principles about financial education and pensions, most notably suggesting that people ought to be auto-enrolled into a scheme if they aren't offered a pension:

In the absence of other pension schemes and adequate levels of financial education and without limiting the freedom to contract, automatic enrolment in voluntary pension plans with appropriate default mechanisms and transparent opt-out procedures for contributions rates and for investment allocation should be considered.

Which is of course the Personal Accounts model. Obviously what the UK is up to on pension reform is being watched closely by other countries.

And here's what the OECD says about fund choices:

Where employees or members are offered a range of investment options, plan sponsors should consider limiting, in a well-structured fashion, the number of investment choices available (or provide a 'two tier' choice between a basic system and a system offering more sophisticated investment choices) and should provide a suitably structured default option in order to help employees or members make optimal pension investment decisions.

This is obviously informed by the widely observered trend that the more choices you offer in pension funds the less people are likely to make a choice. The OECD has actually produced some interesting stuff on this which I've blogged about previously here.

Funnily enough though I've just read a bit in the Robert Shiller book (still only about 2/3rds of the way through!) where he is quite critical of the idea of individual accounts(though this is in the broadfer context of social security reform). I'll try and post a chunk of this up later.

Thursday, 1 May 2008

Mervyn King on pay

I should have covered this a couple of days ago, but comments from Mervyn King about the side effects of high pay that incentivises risk-taking must surely contribute to the growing sense that something's got to change in the financial system.

What he said was not particularly insightful, and has been said by many others recently:

Banks have come to realise in the recent crisis that they are paying the price for having designed compensation packages which provide incentives that are not, in the long run, in the interests of the banks themselves, and I would like to think that would change.

But it's the fact that such comments are coming from so far up the food chain these days that makes me think that something is up. The Governor's comments come shortly after Swiss giant UBS admitted that pay was part of the problem as it got burnt in the sub-prime related market. Its report to shareholders said that remuneration contributed to incentivising carry trades, provided asymetric risk/reward, and made employees focus on the short-term regardless of the long-term impact.

This is significant stuff as it really cuts away at the idea that the way to get people to do their best is to dump a big pile of cash in front of them. What the experience of the banks shows is that smart people will find a way to get the cash, even if it means damaging the organisation offering it. But if that's tha case in the financial sector, why do we assume that such an approach doesn't have similar effects in other boardrooms?

Even as comments like King's are being made, the attitude of most shareholders (read: fund managers) seems to be that any level of pay is OK, provided some effort is made to show some linkage to performance. As investors we delegate such authority to our appointed fund managers and let them get on with it, so we bear some responsibility for sending out precisely the wrong signals.

More broadly, what I really don't get is why the left - and Labour specifically - doesn't make more of this. Some sort of intervention of pay is both overdue and would help rally the troops. At at time when many people are having trouble distinguishing Labour from the Tories this could also help reinforce the dividing lines. We aren't talking about clobbering aspiring working families here, this is looking at people at the top who have been responsible for a lot of financial damage. What's the problem?

Design Anarchy

Here's the Design Anarchy cover I was on about.