Tuesday, 31 March 2009

UKFI will vote against RBS remuneration report

It's confirmed via the UKFI website, and here's the official line:
John Kingman, chief executive of UKFI, said: “UK Financial Investments fully supports the approach the present RBS board is taking to remuneration matters, including in relation to the remuneration arrangements for the present chairman and chief executive. “Nevertheless, UKFI has decided that it cannot formally vote in favour of the resolution to approve the Remuneration Report. This is for one reason only. The Remuneration Report discloses, as a matter of record, the decision of former members of the RBS board to treat Sir Fred Goodwin and Johnny Cameron as retiring early at the request of RBS, so enabling them to take undiscounted pensions. That decision was taken in the past. Nevertheless, UKFI is not satisfied that it was in the company’s interest – and therefore UKFI’s as a value-oriented shareholder. UKFI therefore cannot vote in favour of it.”

Interesting - and welcome - that they have announced their voting intentions ahead of the meeting, which is more than any other UK investor does. Also, this will be the first time that a UK bank (maybe any bank?) has lost the vote on its remuneration report, and it took a state-sponsored investor to do it. Will be interesting to see if any fund managers actually voted for the rem report - I really wouldn't be surprised if they had given what a soft line most of them take on pay.

The next question is Tom McKillop. Given that he was chair at a company responsible for both arguably the worst corporate deal in UK history and certainly the worst example of rewards for failure surely his position on the remuneration committee at BP is untenable, and as a director in general. If we can't say this bloke isn't a good director, where do we draw the line?

BT pension fund halts all stock-lending

According to a report on Thomson Investment Management News. Here's the key section:
The BT Pension Scheme (BTPS) has suspended all stock lending on concerns that short-sellers using the shares could further hurt market sentiment, two sources close to the pension scheme said.

The BTPS, Britain's largest pension scheme, in September placed some 20 British and global financial companies on its list of stocks it had barred from lending, but has now widened the ban.

"The BT Pension Scheme stopped all stock lending not just on financial stocks some months ago. Cannot say if the (decision) is permanent but it is still considered to be prudent at this time," one of the sources said.

This, I would suggest, is a pretty big deal, as BT is the biggest pension fund in the UK. Some of the feedback you get from in-house staff at funds is that such moves are driven by trustees, and it's sometimes an ill-informed decision. But the BT trustees are a pretty competent bunch, and surely recipients of much more specialist and expert advice than many others out there. So this must be quite a significant decision.

It may also suggest that the theoretical assumptions around stock-lending and shorting are beginning to shift and part of a wider reassessment of views about how markets work - something that came up in the Turner Review. The Turner Review of course asked whether decisions about shorting should take into account the dangers of market irrationality - suggesting a rather broader conception of how financial markets operate. Could BT's decision suggestion something similar developing in relation to stock-lending?

I'll briefly restate my own views here. I'm not particularly bothered by shorting in principle - because I think that it's just a set of trades so no better or worse than any other - but nor do I buy the argument that it plays as positive function as it enables negative sentiment to be expressed. A (sort of) comparable argument would be that borrowing money to buy shares is a good for markets as it allows vakuable positive sentiment to be properly expressed. And all that extra trading must be (in aggregate) a cost to someone, somewhere.

Stock-lending does provide an income for long-term investors, but it also confuses the ownership question. First, you may lend to someone who shorts the company - is that in your long-term interest? Second, you may lose the voting rights, meaning that the oversight of corporate governance is reduced. So I think there are questions for investors to ask (and some may conclude that actually the lending income is worth more).

These are by no means straightforward issues, but it does seem that sentiment is turning away from the simple mantra that shorting and stock-lending are good for liquidity and market efficiency.

Monday, 30 March 2009

Engaging with the banks

There's an interesting interview in FTFM today with Mark Burgess of Legal & General. L&G are one of the big index-tracking managers in the UK market, so typically account for a few percent on the share register of most UK companies. He makes the argument that at least some shareholders were engaging with the banks before the current crisis, but that the banks weren't receptive -
“Dealing with the banks has been the most extraordinary and extreme experience,” he says. He cannot suggest a reason why banks proved so difficult to deal with, but observes: “It is unusual for companies not to listen to the extent the banks didn’t listen. The majority of corporate UK listens to the views of its largest shareholders.”

There's also some stuff about what reform might be necessary -
In Mr Burgess’ view, it is the way boards work that needs to be revisited rather than asking shareholders to be more demanding or revising the Combined Code. He says non-executive directors need to be better informed about the companies they work with and should hold fewer positions. He suggests two to three would be sensible rather than four to six.

This is all reasonable stuff. No-one (I assume) thinks that the Code is an end in itself, rather it's an attempt to put in structures that promote independence and oversight. And what we are all really aiming at in corporate governance is better behaviours and better functioning boards.

But as such (removes hobby horse from cupboard under the stairs and saddles up) wouldn't it be even better to see shareholders fund some behavioural research into how boards actually work? After all behavioural finance already has some traction in fund management. It's not a big leap to think in terms of behavioural governance, is it? There's even the odd book out there that might spur some fresh thinking.

Sunday, 29 March 2009


Is UKFI going to vote against or abstain on the RBS remuneration report? That's the suggestion in some press reports today. Interesting development if it does happen for a number of reasons. First, it will disrupt the argument that somehow the Government was responsible for Fred Goodwin's pension. Second, it will demonstrate that UKFI won't just be supporting everything that the boards of the banks in which it has a stake suggest - that in turn will make fund managers who take a softer line look well out of line. Thirdly, it will surely raise some broader questions about shareholder engagement over pay. The vote is only advisory, so will this example lead to calls that it should be binding?

What's the Tory link to The Times' Myners obsession?

Even though most of the press seems to have concluded that The Times coverage what Paul Myners did before being apointed City minister is a non-story, The Thunderer has ploughed on alone. But there's a dangling thread in today's story about the Ermitage hedge fund that someone should pull at. Look at this:

A spokesman for Caledonia Investments, which owns 40% of Ermitage, said Myners’s shares had been sold since January.

This should set alarm bells ringing straight away if you know anything about the Tory-City interface. Caledonia Investments - an investment trust - is one of the last remaining public companies to ignore best practice and spend shareholders' money on partisan political donations. At its last two AGM it has passed resolutions (easily doable because there is a controlling shareholder) seeking authority to give shareholders' money to the Tories. I mean directly to the Tories, not even via a think-tank or front organisation. And its AGM circulars for the past two years have included a rant about the need to cut the level of public spending.

And then have a look over at the list of Higher Rate Taxpayers' Alliance business supporters -
Tim Ingram, Chief Executive, Caledonia Investments

Given this background, what do you think Caledonia's view might be on clamping down on tax havens?

Anyone want to take a guess at who might be feeding The Times info for their stories? And is there any enterprising journo out there willing to have a dig around?

P.S. I've covered Caledonia a bit in the past. Click on the label to pull up previous (s)tories.

Thursday, 26 March 2009

Platinum-plated, diamond-encrusted pensions

There's been quite a lot of comment in the press lately about public sector pension schemes, which are 'gold-plated' apparently. Your typical local government worker can expect to kick back in style on a mouth-watering £4,000 a year for instance.

Just to balance the commentary a bit, here are some stats from Watson Wyatt about provision for directors of UK public companies -
36 per cent of FTSE350 executives currently receive a cash allowance in lieu of accruing further pension provision in respect of their future service. For chief executives in FTSE100 companies, the median allowance is around 25 per cent of basic salary. While 25 per cent allowances are fairly standard across the FTSE100, there is much more variation in FTSE250 companies. Here, the median allowance for CEOs is a little over 15 per cent of salary, but allowances of anything between 10 per cent and 30 per cent are not uncommon.

13 per cent of senior executives have no benefits explicitly linked to retirement provision and may have negotiated a higher basic salary to implicitly compensate for this.

24 per cent of senior executives do continue to receive pension benefits under a defined contribution arrangement from their present employer.

27 per cent of senior executives are accruing only defined benefit pension benefits. A further 23% have defined benefit pensions in relation to past service only but which continue to be linked to future salary growth.

What they don't mention is that where directors have DB schemes often the accrual rate is better (1/30ths not uncommon) and in DC schemes the contribution rate is also more generous (sometimes 2 or 3 times more). Payments in lieu of pension are a relatively new wheeze, and again not applicable to the average prole. Imagine trying to argue that you should get a 25% rise if you decide not to join your staff pension scheme...

So if £4,000 a year is 'gold-plated' what should directors' pensions be described as? This pensions feudalism (I'm trying to outdo the TPA!) must stop.

9 months is a long time

Sorry to be all obsessive, but I was very disappointed by this speech last summer. But just look how far behind it has been left by events.
"We will resist the calls that have been made for direct regulation of executive pay," Ms Ussher will say in her speech. "Of course, remuneration packages should be strongly linked to effective performance, and incentives should be aligned with the long-term interests of the business and shareholders, and we don't support rewards for failure."

But she adds: "I'm clear that executive pay is a matter for boards and shareholders, not for governments and regulators."

Wednesday, 25 March 2009

Common sense breaks out

Great leader in the FT today which really ought to be read as a critique of the rubbish The Times in particular has been running of late.
We cannot have it both ways. Either government makes use of the expertise that former bankers and other financiers can bring to bear, or it draws only on professional politicians and paragons. Expressing outrage at the legitimate activities of those appointed for their financial expertise risks undermining those who take up such posts and deterring others from putting their talents at public disposal.

Hiring poachers to become gamekeepers means picking candidates with rabbits and pheasants in their past – otherwise there is no point in employing them. But they must then be defended if and when their previous careers cause controversy.

FT Westminster blog also on the mark.

Update: Thanks to Jim for pointing out I had referred to the wrong FT blog, now amended.

Tuesday, 24 March 2009

GMB pensions myth-buster

GMB pensions supremo (!) Naomi has produced this rather good list of myths about pension reform.

Myth 1: The world is ending and we’re all doomed
It is undeniably difficult to hold on to a decent occupational pension scheme when redundancies are occurring every ten minutes with other cut backs eating away at overtime, pay deals etc. However, companies who decide to hit the nuclear button when it comes to their remaining defined benefit pension schemes aren’t going to solve all their financial problems overnight by destroying workers’ retirement incomes. All pension funds, defined benefit or defined contribution, are reliant on investment returns (generally this means shares). At the moment share prices are extremely low but not even the worst pessimist thinks this will last for ever and when the recovery does happen, many of the problems will abate. Investment returns and dividends go up and down, the trick, obviously, is to be canny enough with the investments to make a profit and profits can be generated even with a stock market that appears to be in freefall.
The alternative is to invest entirely in predictable things like bonds and cash. The problem with that is the likelihood of generating a profit out of these sufficient to match the increase in living costs and the cost of buying an annuity is slim. That’s why pensions should and do have a mixture of safe and riskier investments to generate higher returns. As an individual gets closer to retiring, their pension pot should move more into safe investments. Those of you in default or lifestyled defined contribution arrangements should find this happening automatically. This means that the nose dive in share values should affect you less than the press would lead you to believe.

Myth 2: The pensions industry is an innocent victim of economic circumstance
Given some of the commentary, you would be forgiven for thinking that no one involved in running pension schemes had any role to play in the current problems. So investment managers aren’t responsible for the performance of investments they choose, actuaries aren’t responsible for the assumptions they make about the cost of paying out pensions and no one is responsible for scrutinising fund activities. If they’re all so innocent it does rather make you wonder what it is they do to justify their rather significant salaries.
In fact the culpability of the pension industry goes further than the unlucky or ill-judged investment strategies of individual pension schemes. Among the biggest shareholders in banks and therefore those with the greatest opportunity to block senior executives’ remuneration packages (and pension arrangements) are pension funds – your pension funds. Whether you are in the LGPS, a private sector defined benefit scheme or a money purchase/defined contribution scheme, the money you contribute and that contributed by your employer is invested and I would bet a banker’s pension on it being a fact that a proportion of that money is or was invested in UK banks.

Myth 3: Immediate changes to the law are needed to save final salary pensions
Final salary and other defined benefit schemes need more ‘quick fix’ reform ideas like Fred Goodwin needs a Pension Credit application form. Almost without exception, any proposal to make schemes more attractive to employers means making it less valuable for members. The catalogue of changes that have been pushed through including reducing indexation and allowing employers to reduce benefits and walk away from good quality schemes have only succeeded in reducing the amount workers have saved for retirement, no one can point to any employer that has held on to a scheme because of these changes. Pensions are a long term concept; the objective is for schemes to have a lifetime spanning many, many decades. Crisis management is not only ineffectual in the pensions world, it’s counter productive.

Myth 4: The Local Government Pension Scheme is unaffordable and will cause a massive increase in Council Tax
As I may have mentioned last time the LGPS is not unaffordable. Like all schemes the general fall in investment returns has an effect on the funding level of the scheme’s 100 funds. However, unlike some private sector scheme sponsors, even the worst doom and gloom merchants don’t believe that local government is in danger of going financially bankrupt anytime soon. The deficits being decried from broadcasting studios around the country are based on a view that funds should be 100% funded. Well that’s a nice idea but not really the be all and end all. It’s not as if all the four million scheme members are going to demand all their benefits tomorrow.
Properly managed there is no need for councillors (the people responsible for LGPS funds) to add excessively to Council Tax because of the LGPS. The 100% is a medium term target not an immediate necessity. Most councils should appreciate this, the Tory government in the late 1980s set a target of 75% funding in order to keep the Poll Tax down. Many would argue that has more to do with the current deficit than stock market problems but it does indicate that the world doesn’t end if the LGPS isn’t always 100% funded.

Myth 5: No one can afford occupational pensions at the moment; the money should be spent elsewhere
There are a number of understandable reasons why some individuals and companies decide not to spend money on pensions (the need to pay off debt, genuine financial precariousness of a company). However, these circumstances are rare and in many cases are temporary. The truth of the matter is that we, as individuals and as a nation, can’t afford NOT to have occupational pensions. State pension benefits are already inadequate and with an ever increasing number of people claiming (the ageing population issue) the pressure on the taxpayer will increase. Oh and there won’t be as many taxpayers in the future (for the same reason) even with people working well into their late 60s and beyond so the pressure will be even worse. The extra pressure on the NHS and local authority care services wont help the strain on the public purse either (see the last Q&A for more on this point).

That’s it from me, usual wave in the direction of the website… www.gmb.org.uk/pensions

Just a thought

Cicero says:
"men decide far more problems by hate, or love, or lust, or rage, or sorrow, or joy, or hope, or fear, or illusion, or some other inward emotion, than by reality, or authority, or any any legal standard, or judicial precedent, or statute."

Monday, 23 March 2009

In defence of Myners

City minister Paul Myners has been taking a bit of flak from parts of the press of late. As I’ve blogged previously, I really don’t think he has much of a case to answer in respect of the Fred Goodwin pension issue, and there are other culprits much more worthy of criticism. For example, I sincerely hope that investors have the spine to vote against Tom McKillop’s re-election at BP (where he chairs the remuneration committee) given his direct role in this.

But more broadly the meejah hysteria (much of it clearly motivated by political considerations) has managed to completely overlook his role in… err… the survival of the banking system, instead focusing on the pension issue or what he did before becoming a minister. Notably the breakingviews.com slot in the Telegraph recognizes this today.

It would be helpful if more Labour supporters (and lefties in general) got a handle on what Myners is doing. IMO he has a much clearer appreciation of the lay of the land in terms of the whole capital markets/shareholders/governance/politics mash-up that this blog is principally concerned with than any other politico, and in his work for the Government (both before and after being appointed as a minister) has been willing on numerous occasions to challenge the City. And that might not be un-adjacent to why he is taking fire from some quarters currently. Therefore he deserves our support, to put it mildly.

Pay again

This is from the Turner Review and is pretty close to what I was saying yesterday:
Excessive risk taking, at least at the top management level, may be driven more by broad behavioural and cultural factors than by a rational consideration of the precise incentives inherent within remuneration contracts: dominant executive personalities have a strong tendency to believe in their own strategies.

Sunday, 22 March 2009

Pay as evidence

I'm quite skeptical about the link between reward and behaviour in terms of executive remuneration. This is for a number of reasons. First, it seems unlikely that someone who is already very well-paid (an exec director of a FTSE100 company I mean here) is incentivised in a material way by even more money. They don't need it.

Second, it is very obvious that there is little linkage between what they get paid and their own performance. Usually bonuses, options etc are tied to some pretty basic share-based metrics. Yet clearly one individual cannot be held responsible for the performance of an entire business, there's no way they have control all the various factors that contribute to it. And I'm even less convinced that share price tells us anything useful about how well the board is doing.

Finally, I think most executive directors are pretty sure of themselves. I suspect that they are more prone than the man on the Clapham omnibus to personalise success ('what a great decision I made') and externalise failure ('it's a difficult trading environment for everyone'). Therefore they might also downplay the reason for not getting a bonus, rather than linking it to their own poor performance. (incidentally this might also explain why the 'apologies' provided by bank execs to the select committee hearings seemed so feeble - because they still can't personalise the failure, to them it's still the result of forces beyond their control).

As a result of all this, I'm not sold on the idea that remuneration was a driver of behaviour in this crisis in the way that is commonly thought. I'm not denying that bankers were aware they were going to make out like bandits in the short term and were already planning how to spend the money, but I'm less convinced that these incentives drove what they did in a straightforward 'billiard ball' model of causation.

Instead I wonder if performance-based pay served as a reinforcement mechanism. Bankers developed the internal narrative that they were in control of events, that they were uniquely talented, that they knew what they were doing. Each time they received a hefty bonus this was further evidence to confirm their personal narrative, and encourage their belief in their own rightness. And arguably this may have actually made the situation more dangerous than simple greed would have done, as the bankers became increasingly hubristic about their abilities, leading to excessive risk-taking. The reward didn't drive the behaviour, it appeared to confirm that the behaviour was right.

Friday, 20 March 2009

FSA reading list

Just a quicky on the Turner report. The footnotes to the 'fundamental theoretical issues' section actually provide a pretty good reading list for understanding why things may have gone wrong. Many of them are quite easy reading (I found Stablising an Unstable Economy required quite a bit of concentration, but maybe that's just me), which means that it shouldn't be too much of a challenge for any interested lefties to get up to speed pretty quickly. And obviously I think more of us ought to be doing this.

Here's the list -

John Maynard Keynes - General Theory (1936).
Hyman Minsky - Stabilising an Unstable Economy (1986).
Charles Kindelberger - Manias, panics and markets (1978).
Robert Shiller - Irrational Exuberance (2000)
An institutional theory of momentum and reversal - Vayanos and Woolley LSE, (November 2008).
George Soros - The new paradigm for financial markets (2008)
Kahneman, Slovic and Tversky - Judgment under uncertainty: heuristics and bias(1982)
The Great Contraction in Friedman and Schwartz - A monetary history of the United States 1867-1960 (1963).
Benoit Mandelbrot - The Misbehaviour of Markets(2004)
Nassim Nicholas Taleb - The Black Swan: the Impact of the Highly Improbable (2007)
Andrew Haldane - Why banks failed the stress test (February 2009)
Frank Knight - Risk, Uncertainty,and Profit (1921)
Adair Turner - Uncertainty and Risk: reflections on a turbulent year
Daniel Tarullo - Banking on Basel (2008)

Thursday, 19 March 2009

Ownership and speculation

Duncan raises the idea of increasing the stamp duty on share purchases as a sort of equity Tobin tax to limit speculation and promote ownership. The idea would be to create a disincentive for managers to trade as much, and hopefully encourage them to act more like owners. This is the opposite of Tory policy, which is to scrap stamp duty on shares because, they argue, this is a tax on savers.

It's an interesting question. From the other side of the argument, some research commissioned by the ABI (which favours scrapping stamp duty) suggested that one effect of the current regime was to push investors into contracts-for-difference, thus giving them an exposure without the tax. The report argued that this was a negative for corporate governance, and you can see the logic of the argument even if you don't accept it.

But we are now in Big Crisis Land where speculation is EVIL, and it would be relatively straightforward to portray Tory policy as being a sop to the investment industry and the 'spivs and speculators'. I would also question whether it would actually benefit savers, since it might simply result in more trading, adding frictional costs which offset the abolished tax. So it strikes me that perhaps Labour ought to have a serious attack on Tory policy here.

Whether actually upping stamp duty would affect behaviour as we would like I'm not so sure. It may not lead fund managers to trade less, as they might simply pass on the new cost to clients unless it was set at a level which really stings. And at such a level would that actually help/hurt the right people? An alternative idea that has been floated a few times is providing an increased dividend for investors who hold a company's shares for a given period of time. This ought to provide a small incentive to think more long term. Fund managers have been hostile to this idea when I've run it by them in the past, but again we're in new territory now. However again is the incentive strong enough to change behaviour?

Duncan's other point - that actually fund managers' clients put pressure (intentionally or otherwise) on them for short-term performance - is key here. Unless various actors in the system collectively acknowledge that in aggregate the increased turnover of equities is both a) a cost rather than a benefit and b) bad news for governance not much may result from financial incentives or penalties in respect of trading. So, what are the trustees of your pension fund up to on this score?

As an afterthought this paper came out a few years ago and really blows a hole in the idea that either companies or shareholders really think of the relationship as an ownership one. Here's a chunk:
both managers and investors seem to accept that shareholders in general are in some sense owners of the firm, with concomitant rights and responsibilities. Managers accept that they have a general duty to manage their companies for the benefit of their shareholders, and that shareholders as a body can legitimately expect them to engage in a constructive discussion as to what that duty might entail. Investors for their part recognize that the shareholders of a company have a duty to watch over it and to ensure that it is competently managed. For both sides, however, these rights and duties seem to reflect general, almost theoretical features of the capitalist system as operated in America and Britain, and to refer to shareholders in the abstract. They are not apparently conceived as duties owed by or to any particular shareholders, either individually or collectively. The owner-fiduciary model, in other words, acts as an ideal description of the system but not as a real description of the situation with which the actors are in practice faced. In conceptualizing this real world of day-to-day practice, neither managers nor investors cast the latter as owners.

Wednesday, 18 March 2009

It’s FSA day

Not only do we have the Turner Review (PDF) to enjoy, but the regulator has also issued a consultation paper (PDF) on remuneration.

I’ll give the Turner Review a proper read over the next few days, but I have had a quick skim of the ‘what went wrong’ section. Not surprisingly I was drawn to the commentary on the rationality (or otherwise) of financial markets, which is explored as part of the discussion of whether the assumptions underlying the previous regulatory regime were sound. This bit is well worth a read, and it is not overly techie reading. Robert Shiller’s work on markets rightly gets a few plugs.

Here’s the core:
In the face of the worst financial crisis for a century, however, the assumptions of efficient market theory have been subject to increasingly effective criticism, drawing on both theoretical and empirical arguments. These criticisms include that:

• Market efficiency does not imply market rationality. There is nothing in empirical tests of market efficiency narrowly defined (i.e. tests of the non-existence of chartist patterns) which illustrates market rationality. The fact that prices move as random walks and cannot be predicted from prior movements in no way denies the possibility of self-reinforcing herd effects and of prices overshooting rational equilibrium levels.

• Individual rationality does not ensure collective rationality. There are good theoretical and mathematically modellable reasons for believing that, even if individuals are rationally self interested, their actions can, if determined in conditions of imperfect information and/or determined by particular relationships between end investors and their asset manager agents, result in market price movements characterised by self-reinforcing momentum.

• Individual behaviour is not entirely rational. There are moreover insights from behavioural economics, cognitive psychology and neuroscience, which reveal that people often do not make decisions in the rational front of brain way assumed in neoclassical economics, but make decisions which are rooted in the instinctive part of the brain, and which at the collective level are bound to produce herd effects and thus irrational momentum swings.

• Allocative efficiency benefits have limits. Beyond a certain degree of liquidity and market completion, the additional allocative efficiency benefits of further liquidity and market completion may be relatively slight, and therefore easily outweighed by additional instability risks which increasing liquidity or complexity might itself create. It is for instance arguable that the allocative efficiency benefits of the creation of markets for many complex structured credit securities (e.g. CDO-squareds) would have been at most trivial even if they had not played a role in creating financial instability.

• Empirical evidence illustrates large scale herd effects and market overshoots. Economists such as Robert Shiller have argued persuasively that empirical evidence proves that financial market prices can diverge substantially and for long periods of time from estimated economic values, with the calculated divergences at times so large that policymakers can reasonably conclude that market prices have become irrational.
Music to my ears, and no surprise that the FSA concludes that:
the acceptance that financial markets are inherently susceptible to irrational momentum effects does imply that regulatory approaches should be based on striking a balance between the benefits of market completion and market liquidity and the potential disadvantages which may arise from inherent instabilities in liquid markets.

And skipping forward a bit, there are some interesting comments about the failure of market discipline to sound the alarm about problem companies –
• Bank CDS prices before the crash of 2007 did not provide forewarning of the scale of problems ahead. They were moderately successful in indicating the relative riskiness of different institutions – e.g. suggesting that Northern Rock was more risky than other banks. But their overall sector wide level suggested that risks were at historically low not historically high levels.

• Bank share prices similarly failed to indicate that risks were increasing, but rather delivered strong market price reinforcement to management’s convictions that their aggressive growth strategies were value creative.

Obviously I’ve just focused on a couple of sections of the report that interested me. I may post up some further comments once I’ve had a proper look.

Turning to the remuneration consultation doc, early on the FSA (rightly in my view) makes clear that you can’t draw a causal link between rem policy and inappropriate risk-taking behaviour, but...:
there is widespread consensus that remuneration practices may have been a contributory factor to the market crisis. Practices in common use during the period leading up to the crisis, mainly but not exclusively in investment banking, tended to reward short-term revenue and profit targets. These gave staff incentives to pursue unduly risky practices, for example by undertaking higher risk investments or activities which provided higher income in the short run despite exposing the institution to higher potential losses in the longer run.

Again I went hunting for the section I'm most interested in, this time the role of shareholders. It turns out there is actually some discussion of the short-termism of shareholders, and how this can result in inappropriate remuneration arrangements being adopted. Get a load of this:
The interests of shareholders with a focus on short-term profits are not aligned with those of long-term shareholders. They are further not aligned with the interests of society as a whole, as they do not take into account the wider consequences of excessive risk-taking. Shareholders with a focus on short term profits can include employees of the firm who are participants in share incentive schemes, which often mature in a relatively short period of time. Pressure from shareholders with short-term perspectives is one factor why remuneration packages geared towards the short-term and leading to excessive risk-taking are offered to employees in the banking industry.

So they say:
Regulation of remuneration structures is a countervailing power to the influence of shareholders with a short-term focus and reduces the negative impacts of shareholder short-termism. It removes the power of shareholders with a short-term focus to impose remuneration structures which are in their interest, but not in the interest of long-term shareholders and society.

Again, I have to say I’m greatly encouraged by the direction in which things are turning. I’m almost feeling… optimistic.

RBS rumble ripples out

Given Tom MacKillop's role in the Fred Goodwin pension deal, it's not surprising to see that investors are querying his role on the remuneration committee at BP. If directors are going to have any kind of accountability, surely a vote in favour is called for here?

It's also worth noting that Myners has stuck the boot into shareholder advisers (amongst others) who gave the RBS remuneration report the thumbs up last year. As I pointed out previously, the ABI's support is especially surprising given their guidance on early retirement provisions.

Tuesday, 17 March 2009

Thought for the day

There’s an old adage that if you have a hammer, every problem looks like a nail. One of the problems I have with a lot of the attempts at reform in the little bit of the world that I inhabit is the recurring demand for more, or better, disclosure (usually by companies). This seems to rest on the assumption that better informed economic agents would make better decisions, and therefore lead to better aggregate outcomes. It's a very market-focused mindset.

However, despite having called for better disclosure plenty of times myself, I’m much less confident these days of its ability to bring about change. Surely in the current crisis there was plenty of information flying about, but lots of people chose to do things like ignoring information that told them things they didn’t want to hear, and piling into things without properly seeking to understand the information available. So provision of information alone can often be a weak policy tool, as recognised by this report. Yet the demand for disclosure continues to pop up as a reform demand.

So perhaps a (rather laboured) version of the line above should be: ‘If you work with a ‘market’ mindset, every problem looks like a lack of information.’

Telling it like it isn't

Janet Daley says of the Employee Free Choice Act:
The Act would effectively abolish the right of trade union members to secret ballots.

Only if you use the word ‘effectively’ in the sense of ‘not’. It doesn’t get rid of it, and employees can still demand it if they want it. Look here.

She goes on:
In other words, it would give American union bosses the kind of power to intimidate their membership into strike action that used to belong to British union leaders before the Thatcherite reforms.

Only if you mean ‘in other words’ to mean ‘according to the most paranoid interpretation possible’.

The EFCA will be a rebalancing of the machinery around union recognition that will favour unions. But, and it’s a BIG BUT, it will only result in higher union density if that’s what employees want. And members will (as always) determine what kind of representation they get. So to argue that the EFCA will lead to unaccountable unions browbeating members into strike action is simply paranoid gibbering. It says a lot about the deeply-ingrained hostility of the modern-day Right to trade unions, especially given the low density in the US, that they resort to this sort of scare-mongering.

For your reading pleasure

1. More on Fred's pension. Two local authority pension funds (not fund managers you notice) have decided to see if they can take legal action to claw the pension back. Meanwhile Myners has done a decent job defending himself in front of the Treasury select committee, and was asked about legal action. He said it might target the RBS board.

2. Some interesting historical parallels in terms of stockmarket movements over at Socialist Economic Bulletin.

3. Barclays still looks like it's having problems according to lots of people. iShares is up for sale, what about BGI? And why would a financial institution apparently sound need to raise cash by flogging off the family silver?

4. Another great post looking at the real nature of the TPA. Look at how often the TPA is getting (critically) blogged about now (including by me, obvously!). Why is it that the mainstream media fail to acknowledge the ideological alignment of the TPA?

Monday, 16 March 2009

Another bit of Veblen

"Freedom and facility of readjustment, that is to say capacity for growth in social structure, ...depends in great measure on the degree of freedom with which the situation at any given time acts on the individual members of the community - the degree of exposure of the individual members to the constraining forces of the environment. If any portion or class of society is sheltered from the action of the environment in any essential respect, that portion of the community , or that class, will adapt its views and its scheme of life more tardily to the altered situation... And it may be said that the forces which make for readjustment of institutions, especially in the case of a modern industrial community, are, in the last analysis, almost entirely of an economic nature."

He's actually having a pop at the tendency of the rich to be conservatives, but I wonder if you could also argue that the radical change in ideas going on in the financial world stems from their closeness to the action. Strangely, to date the general public seems less radical - or questioning of fundamental assumptions about the recent economic orthodoxy - than corporate and financial leaders (for want of a better word).

Latest entry to the sacred cow abattoir...

... is the shareholder value movement. According to Jack Welch, who used to be rather keen on the concept, shareholder value is "the dumbest idea in the world", and companies should be more concerned with their customers and employees. The FT has a good leader on the topic today, arguing that making shareholder value an operational goal is self-destructive. And certainly we can all make the case that focusing undue attention on short-term results, or share prices, at the expense of the long-term health of the business and its 'human capital' (I hate that term, but...) can do a lot of damage.

But by 'we' I meant lefties, NGOs, advocates of a more stakeholder-style approach to governance. We've been making this type of argument for years, only to be told that shareholder value - very literally and narrowly interpreted - was a vital discipline for company management, to stop them peeing shareholders' money away on CSR initiatives for example. Now it turns out that even corporate leaders are less sure that this is such a great idea.

I am actually surprised at the rapid deterioration of ideas that used to be so central to the debates about companies and markets, especially when the recanting is being done by people who used to extol the ideas now being trashed. Some day soon someone on the corporate side is surely going to come out with something that I think it is a bit too radical ;-)

Friday, 13 March 2009

Myners speech to NAPF

Is here and worth a read. Short excerpt below that provides an idea of what the Walker review might cover:
This review will raise very fundamental questions about the operation and effectiveness of the boards of our major banks. Some of the areas which I hope Sir David will consider exploring include:

Whether professional investors should have a legal responsibility to seek to enhance the quality of investment and governance to promote value creation – based on the United States’ ERISA model

Placing an additional legal obligation on bank directors and senior executives to have regard to the need to promote and maintain systemic financial stability through actions

Whether the Director of Risk should have a separate and independent reporting line to the Board

Whether non-executive directors should be required to have professional qualifications relating to banking.

Whether there is a case for NEDs having dedicated support to help them assert their responsibilities when appropriate and commission reports independent of management

The case for appointing an independent adviser to its audit committee whose role could include engaging with external auditors, developing agendas, providing technical briefing and recommending when a second opinion should be obtained

How much time non-executive directors should be expected to spend performing their role and what rewards are necessary to ensure good performance. Is there an inconsistency here between the high expectations in terms of time and expertise we have of NEDs, yet at the same time drawing them from the executive community

And whether the statutory reporting of remuneration should be extended to cover non-board positions, providing greater insight into group wide remuneration – the culture and behaviours the group seeks to promote. The recognition of internal comparators would counter the insidious effect of external comparators.

A couple of bits

1. Charlie is surely right about the radical reassessment of economic ideas going on at present:
What's truly mind-boggling about this, at least for a 'once-upon-a-time-but-now-ex-ish' Marxist like myself, is that none of it is being discussed because of social pressure from below. The left is as weak and irrelevant as it was at the start of the crisis. These ideas are not being debated because of class struggle: they are being aired because the basic Anglo-American market driven, finance-dominated model of running an economy has fallen apart both practically and intellectually.

2. Interesting new blog alert!

Workers in the boardroom

There's an interesting headline in the Torygraph today - 'Unions could be given say in boardroom pay, says Lord Myners'. This is their take on Myners' speech to the NAPF investment conference yesterday. The speech isn't on HMT website yet as far as I can see, so this exceprt is taken from the newspaper report:
He said remuneration committees needed to be more open to a wide range of views. "Should they, for instance, consider formally seeking views from investors, employees and their representatives?"

It's an interesting suggestion, and one (not surprisingly) I would definitely support. What's more I think in the current climate it may be hard to argue against. Just a year ago if you had suggested something like this, the inevitable reply would be that remuneration was an issue for boards and shareholders. But, as the stats I posted yesterday demonstrate, shareholders (which can basically be taken to be fund managers) haven't used their voting rights to rein in pay effectively. I'm sceptical that fund managers are ever likely to do so, because they are culturally desensitised to high pay. If there is any hope in making shareholder oversight work, it must lie in getting pension funds to take more responsibility, and delegate less to fund managers. (Incidentally there's an academic called Paul Cox who has done some interesting work on this which should be coming out this year. He thinks many fund managers would rather get shot of ownership responsibilities if they could).

But back on the pay question if, like me, you're sceptical of the current ability of shareholders to provide a restraining influence, and you think that reform is needed, then something along these lines of what Myners suggets is worth exploring. Remuneration committees are made up of people who are directors of other companies who are therefore a) also desensitised to high pay and b) used to the system as it is (including reliance on remuneration consultants). Employee involvement in remuneration committees might mean that companies finally pay attention to the widely ignored bit in the Combined Code that says they should be sensitive to pay and conditions elsewhere in the company. Do you think a TU rep would have agreed to Fred Goodwin's unreduced early pension?

Presumably this kind of proposal will be picked up under David Walker's review of governance. I hope the investor trade bodies don't lobby against it. And if they do, let's hope proponents ask the question about at remuneration at the banks in the run-up to the crisis - where were the shareholders?

Finally, I have to say that am I quite upbeat about the type of discussion that has occured this week. I think Myners and Hector Sants are absolutely correct to turn the spotlight on the role of investors. Funnily enough some of the ideas now being talked about are things we argued for at the TUC a few years back (I'm not claiming originality here, other organisations also made similar suggestions) but felt quite radical because of the conservatism prevalent at the time. Let's hope we have the chance to get some of these things through now.

Thursday, 12 March 2009

Off topic

My other current project.

Voting on UK bank remuneration resolutions

Below is an analysis we have done at work on voting on remuneration-related resolutions at UK-listed banks in recent years. The % is the vote in favour. I think it tells its own story.

Alliance & Leicester
2008 'Approve the Remuneration Report' 97.2%
2006 'Approve Alliance & Leicester 2006 Restricted Share Plan' 98.5%
2006 'Amend rules of the Share Incentive Plan' 98.7%
2006 'Approve the remuneration report' 97.0%
2006 'Approve Alliance & Leicester 2006 Deferred Bonus Plan' 98.4%
2006 'Approve Alliance & Leicester 2006 Share Option Scheme' 95.4%

2008 'Approve the Remuneration Report' 90.5%
2007 'Remuneration Report' 94.2%
2006 'Approve the remuneration report' 94.1%

Bradford & Bingley
2008 'To approve the Directors' Remuneration report' 95.9%
2008 'To approve the increase to the EIP maximum amount to be applied in the acquisition of deferred shares ' 85.4%
2006 'Approve the remuneration report' 86.6%

2008 'Approve the Remuneration Report' 82.9%
2007 'Remuneration Report' 96.9%
2006 'Approve the remuneration report' 98.5%
2006 'Approve the Extended Short Term Incentive Plan' 95.6%

2008 'Approve the Remuneration Report' 81.8%
2008 'Amend the rules of the HSBC Share Plan' 84.2%
2006 'Approve the remuneration report' 95.2%

Lloyds TSB
2008 'Approve the Remuneration Report' 89.6%
2006 'Approve the directors' remuneration report' 93.9%
2006 'Approve the new long-term incentive plan' 95.2%

Northern Rock
2006 'Approve the remuneration report' 89.2%

2008 'Approve the Remuneration Report' 88.8%
2006 'Approve the remuneration report' 92.4%

Standard Chartered
2008 'Approve the Remuneration Report' 89.4%
2006 'Approve the remuneration report' 93.8%
2006 'Approve amendments to 2001 Performance Share Plan' 94.4%
2006 'Approve the 2006 Restricted Share Scheme' 96.5%

Sants highlights investors' role in the crisis

Interesting intervention fro the FSA chief exec. This may be the thin end of the wedge.
FSA chief executive Hector Sants has said pension funds must shoulder some of the blame for the financial crisis and will play a crucial role in any recovery.

Speaking at the National Association of Pension Funds investment conference in Edinburgh, Sants called on pension funds to help avoid future financial crisis by taking a far greater role in checking on management performance and risk in companies they owned.

He said: "I have questioned whether, if there had been more effective and collective shareholder intervention whether the financial crisis we are witnessing today would be as severe."

He also said investors had, in future, to make sure they understood what they were investing in.

"You have a major role in addressing the issues arising from this financial crisis," he told delegates.

"As owners we would encourage you to focus on the issues of governance, risk management, business strategy, and the issue of compensation."

He said in order to do that pension funds would have to engage more actively with senior management and non executive directors, but that ultimately funds had to organise themselves more effectively for collective action.

One audience member described Sants suggestion that pension funds should be at least partly blamed for the financial crisis as "staggering" and asked Sants whether the regulator should have done a better job in ensuring the information coming from companies was of a better quality.

Sants agreed that more could have been done in this area, and said the FSA had already accepted it had been partially at fault. However he said there had been a "laziness in the system in the use of credit ratings agencies" suggesting that investors had become too reliant on them.

NAPF chairman Chris Hitchen commented: "It is not our job to manage companies. We can only set a framework about what we expect from the companies we own."

He added: "In the future executives of companies will have to wait longer for remuneration, which will bring them in closer alignment with with the owners."

From Professional Pensions

Wednesday, 11 March 2009

Rebuilding unions in the US

There's a bit of a battle going in the US over the Employee Free Choice Act. If passed, this should make it easier for American workers to unionise - it will tilt the scales back in favour of labour after a long period of an incredibly hostile environment for organised labour.

This paper (pdf) provides a good summary in favour of the EFCA. Here's a snippet:
The current economic crisis is not a result of unforeseen market forces, but of decades of failed policies that led to an unsustainable low-wage, high consumption economy. From 1947-1973, both productivity and median family income roughly doubled—a result of policies designed to promote income equality.1 However, since the 1970s, workers’ wages have failed to keep up with the continuous increase in productivity. From 2000 to 2007, income for the median working-age household actually dropped by $2,000 after inflation.2

Though average workers failed to reap the benefits of decades of economic growth, those at the top have done quite well. In 1965, CEOs earned 24 times as much as the average worker; in 2007, they earned 275 times as much as the average worker.3 The top 1% of wage earners now hold 23% of all income—the highest inequality in income since 1928.4 This stagnation of median wages despite the rise in productivity is linked in large part to the decline in union density.5 In 1960, private sector union membership was 30%;6 by 2007, it had dropped to 7.5%.7 As unions declined, both union and non-union workers lost the economic benefits of collective bargaining. More than half of the decline in the average wage of workers with no more than a high school education is attributed to the decline in union density.8 As collective bargaining declines, the distribution of income widens9—but unions help reduce income inequality and provide clear economic benefits.

On average, union members earn 30% more than non-union workers.10 When controlling for factors such as education, occupation, and experience, union members still earn 14% higher wages than non-union employees.11 The difference is even greater for Latinos, with a union wage advantage of 18%, and for low-wage workers, where union membership raises wages by 21%.12 Unions also raise the wages of African American members by 12%,13 and for women union members by 11%.14

Of course there is lobbying against the EFCA by the business community and the Right. In addition an organisation called the Financial Services Roundtable (which includes representatives of UK-listed banks) has also been lobbying against. Surely this is something that responsible investors ought to have a look at?

Hat-tip: Michael L

Capping bankers' pensions

Ann Clwyd is having a go, apparently. From Professional Pensions.
Labour MP introduces Bill to cap bankers pensions

Labour MP Ann Clwyd is to introduce a Bill aimed at limiting pensions of bankers working for institutions bailed out by the government.

Clywd will present the Bankers Pensions (Limits) Bill following the Private Member Bill procedure under the 10-minute rule, which is a procedure for backbenchers to introduce a Bill to parliament.

A spokesman confirmed the Bill would "make provision for the pension of board members of banks that are wholly or partly in public ownership to be limited in certain circumstances".

Tuesday, 10 March 2009

Heffer's Law

This is hands down the most 'political' and most stupid thing I have seen written about the dissident republican attacks in Norn Iron.
It is, as usual, the British Government with blood on its hands following the deaths of these three brave men.

Pardon my French, but what a knob jockey.

Two snippets

1. Via Corporate Governance I came across this fascinating paper. Not sure I agree with the conclusions, but it's a strong argument. Here's the abstract:
In recent years there has been significant ongoing academic debate over the expansion of public shareholders' participation rights in corporate governance. The debate has accompanied a dramatic increase in institutional shareholder and hedge fund activism attempting to influence the conduct of corporate affairs.

The legitimacy of shareholder participation rights depends upon the actual role public shareholders play in contributing to the corporation's function of providing goods and services and, ultimately, to economic growth and social welfare. Nobody in the debate has stopped to examine this question. This paper presents original empirical evidence that demonstrates that public shareholders do not, on net, contribute capital to finance industrial production, and in fact are net consumers of corporate equity. Moreover, their investment incentives significantly distort the behavior of corporate managers who place strong emphasis on stock price at the expense of long-term business health, a fact that has played some role in the current global financial debacle. The logical conclusion is that public shareholders' rights should, ideally, be eliminated, and certainly not expanded or enhanced.

2. Look what the ABI's guidelines on remuneration say about exec pensions:
Pensions paid on early retirement should be subject to abatement.

And here's what RBS made public in its remuneration report last year:
"All UK based directors, with the exception of Guy Whittaker, are members of The Royal Bank of Scotland Group Pension Fund (‘the RBS Fund’) and are contractually entitled to receive all pension benefits in accordance with its terms. The RBS Fund rules allow all members who retire early at the request of their employer to receive a pension based on accrued service with no discount applied for early retirement."

So presumably investors following ABI guidelines challenged it???

Things fall apart

I know it's a bit of a cliche to compare the impact of the current economic crisis on free market ideology with the collapse of communism, and to some extent I think it's over-blown. But there a few bits and pieces of commentary that just beg to be classified in this way. Take this quote from a US academic:
"If you bound the arms and legs of gold-medal swimmer Michael Phelps, weighed him down with chains, threw him in a pool and he sank, you wouldn't call it a 'failure of swimming'. So, when markets have been weighted down by inept and excessive regulation, why call this a 'failure of capitalism'?"

This, I reckon, is the sort of mirror image of all those arguments you used to hear from Trots about why the rather unpleasant nature of 'actually existing socialism' in no way discredited the communist ideal in general. Those Russians/Chinese/Cubans etc just weren't applying the rules right. Of course if you apply socialism in one country it won't work. And anyway if we'd had the right bloke in charge it would all have been very different.

Similarly it wouldn't be surprising to see a wave of commentary now about how the 'real' problem in terms of the economic crisis is that markets haven't been properly established, didn't go far enough etc. Also it will be blamed by those seeking to avoid a review of the ideology as the fault of a handful of individuals who didn't apply the rules right, even though they too apparently believed in the ideology.

All this suggests to me that we actually have a pretty weak grasp on truth. Clearly debates on the rights and wrongs of different economic approaches are complex, and a small number of people understand them in great detail and can attack or defend a given position very eloquently. But for most of us we understand what is going on through some simple narratives (and I'm sure more complex versions underlie some of the arguments of experts too). Once the ground shifts, ideological frameworks whose explanatory power once sounded legitimate suddenly sound wildly and and obviously wrong. These frameworks are paper tigers compared with a good story. Hence now the popular narrative about capitalism is (once again) that it is inherently and dangerously unstable, the arguments of proponents of neo-liberalism sound a bit barking.

At the time that Yugoslavia was starting to crumble I read an article with some throwaway reference to some institution there that had been studying the nature of social property. A few things struck me about it. First, you could sort of see what the thinking was - how was property different (if at all) when not privately owned? It is a question worth asking. Secondly, it made you realise that right until the end there were people in the 'socialist' countries who genuinely thought they were in a new kind of society and were committed to the ruling ideology. But thirdly, and most importantly, it seemed so obviously out of place in the contemporary evironment, a representative example of a system and way of thinking that was about to be swept away by the changing tide. The quote at the start of this post really reminded me of it.

Monday, 9 March 2009

Quote of the Day

From The Theory of the Leisure Class:
"The thief or swindler who has gained great wealth by his delinquency has a better chance than the small thief of escaping the rigorous penalty of the law; and some good repute accrues to him from his increased wealth and from his spending the irregularly acquired possessions in a seemly manner. A well-bred expenditure of his booty especially appeals with great effect to persons of a cultivated sense of the proprieties, and goes far to mitigate the sense of moral turpitude with with his dereliction is viewed by them."

Bits n bobs

Martin Wolf says today: "Another ideological god has failed. The assumptions that ruled policy and politics over three decades suddenly look as outdated as revolutionary socialism."

Also in the FT is Robert Shiller (can't link to it at present, go and have a look for it).

Whilst I'm not a fan of Scargill I'm not quite of the same view as Nick on unions in the 70s and 80s, but the conclusion of his post is spot on.

Shortish review of Animal Spirits

I've been looking forward to this book for a while. For one, it strikes me that we are at a bit of a turning point in terms of economic ideas, and a more behaviourally-informed view of the world looks likely to become more prominent. Secondly, I'm a bit of a fan of Robert Shiller, with Irrational Exuberance being a big influence on the way I think about stockmarkets. The book also is also very of the moment as it is pitched as in part sketching out a behaviourally-informed Keynesianism (the term 'animal spirits' being used in the General Theory).

The book is basically split into two parts - the first section runs though some key concepts that affect behaviour, and the second applies these concepts to a number of issues. The concepts that the authors highlight are confidence, fairness, corruption and bad faith, money illusion and stories. All of these are important factors as they show how human decision-making is not necessarily rational and self-maximising, as is often assumed in economics (I’m obviously simplifying massively here).

Just to take a couple of examples from this list, Akerlof has been involved in some very interesting research into how conceptions of ‘fairness’ affect market behaviour. Although it might be assumed that we are only motivated by our own interests, and fairness doesn’t really matter to us, actually ‘unfair’ behaviour can make (some of) us want to negatively reciprocate (retaliate), and willing to sacrifice our own potential gains in order to punish those acting unfairly. This has obvious implications (as Akerlof has argued previously) in terms of employment relations.

As someone who bangs on about narratives a fair bit, I was also very interested to see stories as one of the factors that they identify. This is a key part of Shiller’s analysis of bubble psychology too (the stories we tell each other about what is going on act as positive reinforcement/feedback). As a contemporary example of a story that has given validity to a certain type of activity, think about the number of people using the argument ‘my house is my pension’ as a way of explaining/justifying their punt on property investment. Actually this section of the book is pretty short, which is a shame as I think there’s a lot more in this issue.

Turning to applications, Akerlof and Shiller look at a number of policy areas where a behaviourally-informed view of economics might shed some light. Whilst often behavioural economics has appeared to have most to say about individual activity, Akerlof and Shiller are much more ambitious here, and tackle some big issues - why do economies fall into depression, why can't some people find a job, why are market prices and company investments so volatile, why do we get property bubbles etc?

So, for example, the section looking at depressions they not surprisingly put a lot of emphasis on the collapse of confidence. Confidence and the lack of it something that is, of course, widely talked about in terms of economic performance, but hard to quantify. However a review of press reports at the time of the Great Depression illustrates how common a theme it was (especially the need to boost confidence). Akerlof and Shiller also make the point that 'confidence' itself is a 'multiplier', having a reinforcing effect both when it is positive and negative.

The chapter on the volatility on financial prices is one of the ones that interested me most, as it brings together a number of strands explored earlier in the book. Obviously during an asset price bubble you can see a number of factors at play. As prices go up more people are drawn in, pushing prices up further. People then rationalise the bubble through stories (the internet has changed everything, there's a shortage of building land etc), they also get taken in by money illusion when hearing about appreciation in, say, house prices (something those involved in flogging houses are not keen to puncture). In all this to me provides a much more believable explanation of what goes on in terms of asset prices than much professional market commentary.

It's worth making the point here that Akerlof and Shiller are really calling for a bit of a new direction in economics, paying more attention to these kinds of social/psychological factors. This doesn't (need to) require junking existing approaches, as some of this stuff could be grafted on, however they seem to favour quite a shift. Whether there is enough in behavioural economics to bear the weight of such a transformation is a bit of an open question I guess. As I blogged previously, Chris Dillow has gone into much more of the proper detail.

Finally a bit about the style. In general, the chapters are fairly short and overall it has a very non-academic feel. Whilst that’s a plus point in general, you do wonder whether this might make it seem a bit flaky (which it isn’t) to some readers. Sometimes it does feel as if they could have gone into more detail. Hopefully the accessible style won't lead people to assume the ideas expressed are lightweight. This is definitly well worth a read.

Saturday, 7 March 2009

The TPA and 'pensions dictatorship'

The TPA report on pensions also includes a section on employer contribution rates. It says that employer contributions went up by 7% over the past year. In the intro to the report no context is given for this figure, which is described as 'inflation-busting', so the impression is given that councils are just chucking more money at pensions.

The thing is, the LGPS is a DB scheme. The employer contributions don't have any direct link to pensions that are paid. Pensions aren't going up by 7%. The increase in contributions reflects a number of factors - poor investment returns, improved longevity, etc - that affect the funding of the scheme. The contributions are agreed with the actuary with a long-term view of how to return the scheme to a reasonable funding level. Put simply, the cost of providing pensions (any pensions - public or private sector) has been pushed up by these factors. So to attack councils for increasing pension contributions in the current environment is a bit like blaming them for spending more money on fuel when the price of petrol increases. And again if you look at private sector DB schemes you will see exactly the same thing happening.

One final thought, the TPA is - like the Tories - using the term 'pensions apartheid' to describe the difference between public and private sector provision. Leaving aside the numerous obvious flaws in such a poor analogy (for example to work this would mean that in South Africa there was a class of super-rich black South Africans who had even more rights than white South Africans) doesn't that make the TPA's own position a bit odd? What I mean by this is that the end of apartheid involved granting proper rights to black South Africans, rather than taking away the rights of white South Africans. The TPA in contrast want to force worse pensions on more people through national government. So the TPA seem to be advocating, to extend the analogy, a sort of pensions dictatorship, where everyone's pensions are diminished by national government to the lowest common denominator.

Now I'm joking, because I recognise that chucking about such loaded terms in respect of pension rights is over the top. But the TPA think it's quite OK to invoke the struggle against apartheid in support of their own shabby attempts to strip decent pensions from people. It's the sort of thing that reinforces my already low opinion of them.

Change To Win target Bank of America chief

From the CTW Investment Group website:
CtW Investment Group Calls On Bank Of America Board To Remove Lewis Or Face Ouster Vote
Thursday, March 5, 2009

CONTACT: Rich Clayton, 202-255-6433

WASHINGTON, D.C. -- In a letter to Bank of America (NYSE:BAC) Lead Director O. Temple Sloan, the CtW Investment Group called on BAC's board to remove Ken Lewis as Chairman and CEO in light of his disastrous missteps. Since the September 15, 2008 announcement of the merger with Merrill Lynch, BAC has:

Suffered a 90% drop in share price
Allowed Merrill to pay out $3.6 billion in bonuses, even as the firm was hemorrhaging money
Denied any active role in determining the size of Merrill bonuses, a claim subsequently contradicted by documents that have emerged in the NY Attorney General’s investigation
Failed to timely disclose over $20 billion in pre-tax losses at Merrill
Failed to invoke the Material Adverse Effects clause of the merger agreement to protect BAC shareholders from these losses
Removing Mr. Lewis is now a necessary prerequisite to restoring BAC’s credibility with shareholders, regulators and the public. If the board refuses to remove Mr. Lewis, CtW will call on shareholders at Bank of America’s Annual Meeting in April to vote against the re-election of Mr. Lewis, Lead Director Sloan and Corporate Governance Committee Chairman Thomas Ryan.

Dumbest TPA claim of the week

There's a great quote in the latest TPA 'research' on council pensions. The report says "it is possible for certain council employees to retire at age 55 and immediately draw on a pension as if they had retired at age 60". But it goes on to claim that "this level of generosity would be almost unimaginable in the private sector".

Er... Fred Goodwin? That didn't take much imagining did it? And it's actually... err... MORE generous (unreduced at 50). Perhaps the TPA should go and check out the RBS remuneration committee report to get a clearer idea of exactly how private sector DB schemes work. And RBS is hardly alone. It actually demonstrates how little the TPA know about pensions (except that public sector workers shouldn't be able to have decent ones) that they come out with this type of guff.

I don't care tired of saying this so here we go again. Public sector DB pension provision is not overly generous - it is comparable to what private sector workers could expect until a few years ago. And lots of private sector schemes (like RBS) would have similar discretion to provide an unreduced pension early. The problem is that private sector provision has been weakened, public sector provision has not got more generous. Therefore anyone genuinely interested in pensions policy ought to be focusing attention there primarily. All the TPA advocate is mindless levelling down.

Friday, 6 March 2009

A few snippets

First up, Myners comes out fighting. He says: "It is interesting that as far as I am aware not a single institutional shareholder has raised a single question about Sir Fred’s pension."

He's got a point. Actually the offer of an unreduced pension if you got the heave-ho is actually set out in the RBS remuneration report from last year. If it's such a terrible policy (and I think it is) how come shareholders didn't challenge it before?

Secondly, a bit old this, but the Personal Accounts Delivery Authority has published a report (PDF) on individual investment behaviour in terms of savings. Some familiar stuff here - more choices result in less choosing, many savers adopt naive diversification strategies that are heavily influenced by the available choice, few savers switch funds. I'm most interested in the findings in respect of information provision -
• Evidence from the US suggests that information provision and financial education has a limited impact on individual behaviour in relation to making investment fund choices (section 4.2) and fund switching (section 4.4).
• In Sweden, however, the communications strategy adopted by the mandatory pension scheme seems to have had a considerable impact on levels of active decision making (section 4.5).

This is surely worth more exploration. I'm sceptical about the ability of information provision to have a big impact on certain decisions, but it looks like sometimes it can be effective.

Finally there's a really interesting post from Willem Buiter here that is well worth a read. Here's a very short snippet:
The [effeicient markets hypothesis] is surely the most notable empirical fatality of the financial crisis. By implication, the complete markets macroeconomics of Lucas, Woodford et. al. is the most prominent theoretical fatality. The future surely belongs to behavioural approaches relying on empirical studies on how market participants learn, form views about the future and change these views in response to changes in their environment, peer group effects etc.

Thursday, 5 March 2009

A bit more on UKFI

This is all from the framework doc:
[W]e will operate like any other active, engaged shareholder to protect and create value, operating on a commercial basis and at arm’s length from Government.

In order to ensure we meet this standard we will follow in full the Institutional Shareholders’ Committee’s Statement of Principles. This includes:

Monitoring performance. We will maintain an active and regular dialogue with our investee companies’ boards and senior management. We will seek to satisfy ourselves that the boards are operating effectively, and that the companies’ strategies protect and enhance shareholder value.

Intervening when necessary. Should we have concerns, for instance about strategy, operational performance or acquisitions/disposals, we will intervene with the board.

Voting. We will vote all our shares wherever practicable to do so; we will inform the company in advance of our intentions and rationale; and we will disclose how we have voted.

Evaluating and reporting. We will provide regular updates to our client – the Treasury – on the performance of our investments and the effectiveness of our engagement with investee companies.

Much of our focus will be on formulating and implementing a strategy for selling down our holdings over time in an orderly way, consistent with the Government’s firm view that it has no wish to be a permanent investor in UK financial institutions.
We will also engage robustly with banks’ boards and management, holding both strategy and financial performance to account, and taking a strong interest in getting the incentives structures right on the board and beyond – accounting properly for risk and avoiding inefficient rewards for failure.

We will also need to understand the views of and, where appropriate, consult with other investors.

Although we will engage actively as a shareholder, we will respect the principal responsibility which directors – not shareholders – have for deciding their companies’ strategies. In doing this we expect directors to take account of our views, within the overall context set by the Companies Act that directors have a duty to promote the success of the company for the benefit of its shareholders as a whole, including consideration of the need to act fairly between those shareholders. We will not cut across the fundamental legal duty of boards to manage their companies in the interests of all their shareholders.

And from the appendix:
7. Preservation of Investe Company Independence

7.1 The Company will manage the Investments on a commercial basis and will not intervene in day-to-day management decisions of the Investee Companies (including with respect to individual lending or remuneration decisions).

The Investee Companies will continue to be separate economic units with independent powers of decision and, in particular, will continue to have their own independent boards and management teams, determining their own strategies and commercial policies (including business plans and budgets).

7.2 The nature of the Company’s engagement with the Investee Companies will be proportionate to HM Treasury’s ownership interest:

(A) Wholly-Owned Investee Companies: For these financial institutions, the board of the Investee Company will report to the Company, which will actively engage with the Wholly-Owned Investee Company in a manner similar to that in which a financial sponsor would engage with a wholly-owned portfolio company. The Company will, in addition to the rights attaching to the Investments in these companies, exercise all rights and discretions conferred on HM Treasury under the framework documents which apply to these companies, subject to the provisions of this Framework Document.

(B) Listed Investee Companies: For these financial institutions, the Company will engage actively with the Investee Company in accordance with best institutional shareholder practice. The Company will (subject to the other provisions of this Framework Document) exercise the rights attaching to HM Treasury’s Investments in these companies, including voting rights.

Wednesday, 4 March 2009

TUC guide on investor engagement

This looks like it could be a very helpful guide for TU members who are pension fund trustees, or who have an interest in capital stewardship.

UKFI snippet

I imagine most people will have seen this already but UKFI has set out its stall in a framework doument published on Monday and which is now available on the website. My own area of geeky interest - how it deals with the 'ownership' side of things - is explained in a section on page 9 of the doc. It says that UKFI will intervene in there are concerns about strategy, performance or acquisitions (!) or disposals. It also says that UKFI will vote its shares, tell the investee companies in advance how it will vote its shares, and disclose how it has voted. It will also report ton HMT on the effectiveness of its engagement. The doc also talks about consulting with other shareholders where necesssary.

There's more detail in the appendix, which I'll probably post a bit more about when back at work.

Monday, 2 March 2009

Punditry means never having to say you were wrong

Janet Daley, March 2009:
Big Government is roaring back with a hubris and moral self-righteousness that would have seemed inconceivable even a year ago.

Janet Daley, June 2008
The notion that Big Government (whether in the central or the local form) could solve all social problems, and through its interventions achieve absolute justice and harmony, is collapsing. And in its last moments, in its disbelief and agony at its own failure, it is lashing out in every direction...