Monday, 31 August 2009

You read it here first... sort of

It was pure speculation on my part, but I did post a couple of weeks back that...
A tweak to the Companies Act could be used to make further disclosures on remuneration mandatory for example. I doubt it would have much impact in practice, but it does demonstrate that there are things that could be done which would be direct government intervention, and tougher than the FSA's stance so far.
And in today's Telegraph:
The Companies Act is expected to be used to force banks and financial services companies to disclose pay information relating to their high earners, irrespective of whether they sit on a company's board.

Sunday, 30 August 2009

The sociology of financial markets

I took a punt on this book and it looks like it will be rather good. Just read the chapter 'Emotions on the trading floor' which has a lot of interesting stuff in it. No surprise to hear that emotions are a significant element of traders' involvement in markets, and what they enjoy about participation, and that newbies are keen to experience the most extreme market events.

There's a great table with a list of expressions traders use to describe feelings they experience in the market. Alongside the obvious sport/competition and combat/violence metaphors there are quite a lot of sexual ones. And there's a bit of speculation that this might be an expression of disconnection with the underlying economic reality. A good quote from a trader along these lines:
"You can't think about what each trade means financially... if you did you couldn't last."
It also made me wonder what kind of expressions might come up if you talked to institutional investors about ownership activity, and what kind of things they would consider good experiences.

ho hum. will no doubt be posting up a few chunks of text...

Saturday, 29 August 2009

Adair Turner and Tobin tax etc

Shocking news this week that Adair Turner thinks a Tobin tax isn't a completely barking idea. Even more shocking is that he said as much in... errr... 2001 in his book Just Capital:
"[T]here are... at least theoretical attractions in james Tobin's proposal of a tax - levied at a very low rate - on foreign exchange transactions... The key arguments against it are... not theoretical but simply the impracticality of enforcing it and deciding on the division of revenues in a world of multiple nations and governments." (footnote 20 on page 340)
In fact flicking through the book again tonight I found another couple of interesting bits. Like his opinion of the Laffer Curve:
"It is difficult to imagine an equally famous proposition stating a blindingly obvious and in practice useless, insight." (footnote 13, page 246)
And there's some stuff in Chapter 6 where he seems to come out quite strongly in favour of a shareholder value oriented approach to companies, over a more European/stakeholder type model:
"Pressure for high shareholder return and the threat of takeover have... become more important to the attainment of maximum potential productivity. The American system is thus better designed to ensure that companies rapidly seize the productivity potential of information and communications technology." (page 176)

PwC pensions report

Just a quickie, but the PwC report on pensions has got the usual suspects demanding that public sector pensions are scaled back dramatically. I can't find the report on the PwC website, but one stat looked a bit odd to me - 
It estimated that, at current prices, a projected pre-tax final-salary pension for a civi servant born in 1960 would be £28,900 for those in the public sector when they reached 66 years old, but £11,600 for those in the private sector.
It's that £28,900 figure. The civil service pension scheme has an accrual rate of 1/60ths, so aims at a max benefit of 2/3rds of final salary at retirement. So surely the figure above implies that a 'typical' member of the scheme will be earning a bit under £45K when they retire? I'm not an expert on civil service pay grades, but surely those earning £45k are going to be a relatively small number? Just a thought.

Also what are the assumptions for the private sector employee. I was born in 1971 and have two chunks of final salary scheme membership along with DC. I would have thought that many private sector employees born in 1960 have significantly more than I do. 

And finally what about this - 

"A generous final-salary pension is a great draw to talent for a career in public service, but it also has drawbacks in limiting the flow of people between the public and private sectors," said John Hawksworth of PwC.

"People with long civil service careers may be very reluctant to leave the scheme, especially now that it is rare to find anything comparable in the private sector."

True in the sense that anyone who knows what their final salary scheme is worth ought to take this into account - though this is definitely not always the case. But again this also applies to private sector employees who are in final salary schemes. It's not something unique to the public sector.

There are strange implications here too. What's wrong with people not wanting to move if they've got a good job with a good pension? Surely that is the point of employers (public and private sector) offering such benefits in the first place? You can't really blame people for valuing something that is valuable. All seems a bit wrong-headed to me.

But as I say, I haven't seen the report itself so perhaps all these questions are answered...

Friday, 28 August 2009

TUC Member Trustee News

Latest issue is here.

Bankers = Hitler

Sorry for that, it's clearly an incredibly stupid thing to say, demonstrating complete ignorance of political ideas, a lack of perspective and an inability to make a reasonable argument.

A bit like this then:
“It is just illogical to want to shrink one of your most important industries,” said one London banker. “If you want to turn London into a Marxist society, then great.”
What a muppet.

Interesting piece from Hermes

In the Torygraph, here. It's certainly a decent statement of the situation as we find it currently:
However, the simple fact is that most pension funds are currently not equipped to engage actively with the many and diverse companies they own, and, rather unfortunately, neither are the vast majority of the asset managers they employ.

frankly, the real problem is that too few investment institutions can be bothered to undertake engagements in the first place or devote the resources needed to make it work properly.

But I still don't see the answer to the question of how we get this to change. There's an argument for collaboration (or it might be a coded plug for 'appoint Hermes'!):
To access the skills necessary to undertake constructive engagement across their wide and diverse ownership base, pension funds need to find ways of working together, sharing an effective resource and aggregating their assets to achieve
more leverage.

In fact this type of thing already happens through LAPFF. But even that, as a coalition of almost 50 funds, has less assets than many of the big fund managers. It's certainly a step in the right direction, and I've often wondered whether there is scope to get other investors to affiliate to it, but it's currently a small chunk of the market. And even when it does seek to get investors to work together, not everyone wants to pull in the same direction - see the failure of some asset managers to back its resolution at M&S for example.

And the elephant in the room is really the corporate pension funds, whose commitment to engagement is non-existent in most cases, with a few notable exceptions. Hermes is certainly to argue that if there is going to be change it needs to be built on the pension funds:
But the only way this new found enthusiasm is going to actually make a difference is if we are all clear about the need for pension funds to exercise their responsibilities for good corporate governance and by insisting that investment managers demonstrate the necessary commitment to serve them
But how do we convince those funds to take up the challenge? Especially when employer commitment to them is dying off.

Wednesday, 26 August 2009

Companies and shareholders

I had a conversation today with someone who has been doing some research on companies' experiences with investors. To cut a long story short, he said one or two were very positive about engagement with institutional shareholders, but the large majority were very dismissive.

For one, shareholders are actually a pretty diverse lot, with very different perspectives, so there's not one message/request for companies to respond to. Secondly, companies find that a lot of investors - even the large ones - aren't capable of having a particularly well-informed conversation. So basically, most companies aren't that bothered about more shareholder engagement. His conclusion from all this was that talk about ownership was a bit nonsensical.

No big surprises here to any regular readers, but interesting to hear the story from the company perspective, and more evidence that there is still a mountain to climb if the shareholder as owner thing is to be made to work.

Tuesday, 25 August 2009

Best unintentionally hilarious blog comment EVAR

This one here:
As for private education being only open to the “top few” percent of society, it is undoubedly true that very few parents can simply pay for school fees out of freely disposable income. was established to identify how much private education actually costs and to provide savings guidlines for parents to allow them to save in advance for private education. Most users of the site start saving within three years of their children being born and need save less than £1000 a month. I realise this is still a substantial amount but doubt this equates to only being affordable to the “top few”.

£1000 a month? I lose that down the back of the sofa!

What's the point of Janet Daley?

I know it's only a blog, but this reads like she fell asleep in 1997 and has only just woken up.

The people who are most often the victims of crime - who must live with the threat and the consequences of it on a daily basis - are the poor. Most of the gang terror, the stabbings and the assaults that take place in Britain are inflicted by the deprived on the deprived. Which is why the Left-liberal “soft” attitude to crime and punishment is so wickedly irresponsible. In the smug affluent drawing rooms where the hunger for retribution is deplored (or dismissed as “moral panic”) there is almost complete
ignorance of what life is like on the sink council estates whose violence and anti-social behaviour turn the young into criminal apprentices from the outset, and make the elderly prisoners in their own homes.

Monday, 24 August 2009

One share one vote

There's a bit in the Pink 'Un today about Sweden moving closer to the 'one share one vote' approach to shareholder voting rights preferred by many institutional investors. This, of course, comes amid recent debate in the UK about whether there is merit in moving away from such a system, if it encourages greater engagement by shareholders as owners.

A study published in 2007 as part of the EC's push for one share share one vote found a rather complicated picture. There really is no way to sum up this paper in a paragraph because there are so many contradictory findings from the studies that it looks at. But I think it's reasonable to point out that the idea that things like differential voting rights inevitably lead to poor performance (because of entrenched boards pr whatever) is not easily proven.

There's also an interesting section in the middle which I'll post below, where an old quote from Adolph Berle, of Berle and Means fame, arguing that the rise of institutional investors (and therefore intermediation between the ultimate beneficiary and the name on the share register) had arguably already split voting rights from cash flow rights:
Now this stock certificate, carrying a right to receive certain distributions and to vote, begins to split. Once it is bought by a fiduciary institution, be it pension trust, mutual fund or insurance company, that institution becomes the “stockholder,” holds legal title to the stock certificate and to its right to vote. But it has by contract dedicated the dividends or other benefits to distribution among beneficiaries under the pension contract, the fund arrangement, or the insurance policy. The one remaining power by which the recipient of corporate profits might have direct relation to corporate ownership has been divided from the benefit itself.

Friday, 21 August 2009

A debate about the stifling of debate

There's an bit in a post on Iain Dale's blog today that set off my 'dodgy argument' alert. It's a quote from Ann Widdecombe about climate change, someone I don't think I've ever mentioned on this blog before. Anyway, here's what she says:
“There is a deep unease that we are rushing into a theology. Those who asked questions are ‘deniers’. We are rushing into a theology imposed by the equivalent of what has become the mediaeval church and no one’s allowed to question it. And even by questioning it you’re doing the world a massive disservice and bringing it under perdition. A lot of us are very unhappy."

There are a number of things that really bother me about this. First, and most obviously, is the blatant hypocrisy of invoking the parallel with religious intolerance by someone who themself follows religious laws strictly. Just to recap Ann Widdecombe, for example, converted to Roman Catholicism because of her opposition to the ordiantion of women as priests. I presume this was not a position based on an empirical assessment of the performance of female clergy, so presumably it was simply based on a rule and its its strict implemention without questioning.

Second, it's my personal gripe, but I do find it incredibly irritating when someone given a public platform in a media interview argues that they are being prevented from expressing views that they... err... have just expressed. National newspaper columnists frequently bemoan that they aren't able to say the things they just said. The irritating gits. Similarly Ann Widdecombe compares the inability to express scepticism about climate change (a quick Google finds over 3.6 million results for "climate change lies" but don't let that stop you) to the mediaeval church's attitude to heresy. Yet I'm pretty sure if you said "I don't believe in God" under such a regime your prospects were rather worse than telling a Tory blogger you're a global warming sceptic. Does it really need stating that there is absolutely no bar whatsoever to people airing views of any kind about climate change? Sceptical views on the subject are aired all the time in a variety of media.

Which brings me on to what I think such accusations about 'debate stifling' are really about. Isn't is essentially just the expression of frustration at not being able to win an argument? Climate change sceptics might argue that they are subject to ad hominem attacks as fruitcakes, extremists or stooges of the oil industry. But it's also an ad hominem attack to suggest that those who aren't sceptics are zealots who don't question their beliefs (or, another common line, in the pocket of Big Government). Ann Widdecombe has no particular expertise in this area, so if she wants to get have an influence on the debate she has to battle it out on the field of ideas, not moan that other people don't simply accept her arguments. Someone arguing back at you that they think your ideas are wrong/stupid/paid for by someone else is not stifiling you, it is the discussion itself. Unfortunately such is the rough and tumble of debate.

If climate change sceptics want to win this one they need to marshall their evidence, make valid and convincing arguments and, most of all, keep plugging away. But to claim that they are being prevented from expressing their views, or being treated as heretics, doesn't stand much scrutiny. It's just the howl of those who can't accept that other people don't find their arguments convincing.

And most importantly of all, their claims that their views are being stifled effectively stifles the debate that I want to have that debate is not being stifled.

PS. I say next to nothing about climate change because that is a reflection of my knowledge of the subject, so I've no axe to grind.

TUC corporate research manual

This looks likes a pretty valuable resource for TU staff doing research on companies. Notably includes some help on identifying key investors, a mention of the recent Unite campaign at Tesco.

Thursday, 20 August 2009

Business as usual

Why should the fact that you were chair of a financial institution which failed and has had to be recapitalised by the state rule you out of immediately becoming chair of another company? Eh? Richard Burrows' appointment as chair at BAT, having only stood down from the Bank of Ireland a month or so back, seems to be more evidence that it's back to business as usual (At least Andy Hornby waited a few months before getting a new job). I take my hat off to Standard Life for at least querying the appointment.

Wednesday, 19 August 2009

FSA tackles one argument against activism

Just a quickie, but I see the FSA has written to the financial trade body collective the ISC to make clear that it sees nothing in the Walker Review's call for more shareholder engagement that is a regulatory problem. To be honest I've always thought this was a rubbish argument against activism and one that I assume some fund managers deploy to explain away a lack of activity. (A bit like the time a fund manager told me they couldn't disclose voting data publicly because it was legally impossible. They disclose now, strangely). Anyway, if that was the substance of such 'concerns' then the FSA has just shot that particular fox.

So just to be absolutely clear this is what they say:
we do not believe that our regulatory requirements prevent collective engagement by institutional shareholders designed to raise legitimate concerns on particular corporate issues, events or matters of governance with the management of investee companies.
More broadly if a fund manager doesn't want to do all this engagement stuff I don't see why they don't just say so rather than trotting out disingenuous arguments for why it's problematic. Unfortunately there are plenty of clients who aren't interested easier. And those that are bothered can take that bit of the job off you and do it themselves.

Tuesday, 18 August 2009

Rambling about scepticism, pessimism and lefty-ism

Via Dave Osler I came across this article, and in particular this quote:

In 2004, Solnit published a much-praised book, Hope in the Dark: the Untold History of People Power, challenging the instinctive pessimism of many leftists.
"A lot of activists," she wrote, "specialise in disappointment." She adds now: "Despair is a black leather jacket that everyone looks good in. Hope is a frilly pink dress that exposes your knees."

It sounds like an interesting book, and I may well read it, but this, and some of the other quotes in the article, got me thinking about pessimism and the need for it.

I'm frequently quite pessimistic, and am sometimes chided for this by a number of mates who work in a similar area to me. But to be honest I have seen many bad ideas and poorly thought-through plans either fizzle out or crash and burn over the years. As such appeals to immediate action on the grounds that inaction is reprehensible usually leave me cold. My pessimism is, in my opinion, partly an inherent bias in the way I think, but also partly the product of experience.

As such I actually have some sympathy for some instinctively conservative arguments along the lines of 'if it ain't broke don't fix it' and the law of unintended consequences. So this is constantly in confinct with my belief in our ability to overcome social problems and injustices. But I actually think that a dose of this sort of scepticism is absolutely necessary in order to develop ideas that are actually workable and might deliver some positive results. I think it's a mistake to view a willingness to think through possible negative ramifications, or the lack of a positive impact, as somehow unprogressive.

According to my pessimistic view of the world, too often we lefties want to launch into something without thinking like this. Then when things don't turn out how we envisaged we cast around for reasons to explain our failure but often without returning to the assumptions (explicit or otherwise) that led us off in this direction in the first place.

In the bit of the world that I inhabit the financial crisis has made it absolutely clear to me that the broadly leftish/greenish push for 'responsible investment' is in large part economically illiterate. Despite its orientation as a sort of progressive force in finance, there are many unexamined economic assumptions in its approach that are unproven to say the least. It therefore doesn't surprise me that so few people in this microcosm (myself included) had any notion that a major crisis was imminent. There has been far too much well-meaning guff, and far too little concentration on how markets/companies/ownership actually work and what the implications of this are. (This would of course mean some searching questions about fund management in itself, which might partially explain the lack of introspection).

The basic ideas that sit behind a lot of the activity that is undertaken are incredibly simplistic, and the inferences from this about what can or should be achieved are therefore, in my view, inherently flawed (though I don't have a clear idea about the alternatives). And the irony is that a more sceptical and more economocally informed approach might have led to a far more radical perspective. It was the hedge funds, not the SRI funds, who were reading their Minsky.

Compass campaign for a High Pay Commission

Though the Compass initiative is a bit vague in what it's trying to achieve, I really struggle to see a good argument against some sort of review of executive pay, at least to establish some incontrovertible evidence about what the current state of play is. There is however a really bad argument regularly deployed against any such intervention - that this is a matter for shareholders and boards alone. It's an argument I've already seen used against the Compass campaign, but (quite aside from FSA and possible government intervention) it doesn't stand much scrutiny.

For one, 'shareholders' tend to be agents themselves (the 'principals' being pension funds, individual savers etc), and most fund managers not unreasonably interpret their brief from the principals to be to generate returns rather than to police pay (or other governance issues). And in the general scheme of things in most companies (the finance sector being an outlier here) executive pay doesn't represent a big cost. It therefore arguably doesn't make a lot of sense for fund managers to get tough on executive pay if that means they increase their own costs as a result of exercising oversight. In the meantime the cost of executive pay keeps increasing, but because it's happening across the board too it's only really the extreme cases that raise any shareholder concerns - as evidenced by the handful of company defeats over remuneration. The general trend is not challenged, even though - as far as I can see - the link to performance is not there.

Culturally I also think most fund managers buy into the idea that you need to pay people at the top a lot of money, because that's the kind of world that they inhabit (At the same time of course they are keen to see companies 'strip out' other labour costs!). Then add in the fact that lots of large investors diversify so that they can weather a blow-up in one part of their portfolio without it doing too much damage, and the incentive to exercise oversight reduces still further.

The evidence of the lack of shareholder oversight is clear. If flawed remuneration policy was a contributory factor in the financial crisis then we can say pretty safely that shareholders didn't spot this, even though it ought to be in their own self-interest to do so. No bank apart from RBS has faced any serious shareholder pressure over pay. And as I regularly point out, there's no evidence from AGM results this year of a serious general investor revolt over pay (though no doubt there will be higher average votes against this season).

Whether a High Pay Commission is the right way to address the issue of high pay is open to question. Personally I would like to see the Government instigate a review of how the shareholder vote on remuneration reports has worked - both in terms of pre and post-vote trends in remuneration and how shareholders have used the right in practice. But to simply repeat the argument that it's all best left to shareholders - when recent events and longer-term trends that suggest that not enough shareholders want to do the job - suggests to me that people making such arguments are either ignorant of what evidence there is, or are offering a solution that they know won't make any difference.

Monday, 17 August 2009

Teamsters tackle National Express

Interesting release from, the Teamsters. There definitely seem to be a few issues at bubbling away at National Express...


Teamsters Cited Need for Independent and Transparent Review Process

National Express Group PLC [NEX.L] has refused the International Brotherhood of Teamsters’ call that the company’s board establish a special committee of independent directors charged with evaluating potential strategic transactions and reporting back to shareholders.

In an Aug. 3 letter to John Devaney, chairman and acting chief executive of the UK transport company, Teamsters General Secretary-Treasurer C. Thomas Keegel outlined the urgent need to establish an independent and transparent review process. National Express Group PLC’s response that day said that the company "sees no need to change the way in which matters of this kind are dealt with."

Among the Teamsters’ concerns: National Express Group’s £36.6 million loss in the first half of 2009; continuing turmoil over the rail franchises; the need to recruit a new CEO; and an escalating takeover battle that includes a potential bid involving the board’s deputy chairman Jorge Cosmen.

"In light of these troubling developments and apparent conflicts of interest on the board, it is crucial that a special committee of independent directors conduct the review of potential and formal bids using a transparent process that gives shareholders full confidence that the board is acting in our interests," Keegel said in the letter.

Noting that Cosmen is a member of the same Cosmen family that is leading a consortium with CVC Capital Partners that is exploring a potential bid for National Express Group, the letter urged that members of the special committee be fully independent of both National Express Group and the Cosmen family to build investor confidence in the company’s ultimate recommendations and protect Jorge Cosmen from any undue criticism throughout this process.

Welcoming Devaney’s leadership as acting chief executive following former CEO Richard Bowker’s abrupt resignation, the letter also noted Devaney’s statement to investors last week that the search for Bowker’s successor could take up to six months. The letter therefore suggested that shareholders’ interests would be best served by having a fully independent director chair the special committee.

In its response letter, National Express Group confirmed that Cosmen has not been involved in considering the consortium’s approach, nor any other approach that has or may be received by the company. However, National Express Group did not confirm whether Devaney is leading the review process and stated that "the Board that is reviewing any such issues is comprised of a majority"—not an entirety—"of independent directors." The company’s letter did not disclose the process currently being followed and made no commitment to report on such process to shareholders.

National Express Group has recently found itself in the center of a takeover battle, with rival FirstGroup PLC and the consortium approaching the company with preliminary offers. Other potential bidders reportedly include Stagecoach Group PLC and The Go-Ahead Group PLC.

The escalating takeover battle comes on the heels of National Express Group losing its CEO and signaling its intent to relinquish the East Coast rail franchise—its most significant business contract—later this year. The embattled company is now in conflict with the U.K. Department of Transport over the retention of its profitable East Anglia and C2C rail franchises.

"The company’s refusal to adopt a fully independent and transparent process during these turbulent times undermines investor confidence in the board’s leadership on these critical decisions affecting the future of National Express Group," Keegel added.

Founded in 1903, the International Brotherhood of Teamsters represents over 1.4 million hardworking men and women in the United States, Canada and Puerto Rico.

Sunday, 16 August 2009

Bonus bashing

Looks like some sort of government intervention in respect of bonuses could be in the pipeline. Alistair Darling has given an interview to the Sunday Times with some interesting comments. Given last week's leak then back-peddle, it's hard to know exactly how seriously to take this, but given that these are direct quotes from Darling there must be something in it. The key comments appear to be these - 
“If we need to change the law and toughen things up, we can do that. I’m quite clear that some of the problems we have today were caused by the fact that some traders were incentivised to take risks which neither they nor their bosses fully understood,” he said.

Darling said: “The public is rightly concerned because the taxpayer has had to stand behind a number of these banks, and the whole banking system, in effect. So people want to make sure we don’t get ourselves into this situation again. The FSA code is only part of our approach.”

Darling said: “I am not against bonuses where you are rewarding good behaviour and long-term growth. What you can do is make sure you don’t get yourselves into a situation where firms actively have a pay system that results in them being exposed in a way that led to ruin.”

There's not a lot of meat in there but I think we can draw something from this - something in addition to the FSA code is planned, and any intervention is likely to focus on bonuses and ensuring that they are paid over the long-term and/or encourage long-term performance. There's nothing in here about quantum, which is what the public is really annoyed about. That's not to say the Government isn't thinking about that too, but that isn't what Darling has said. 

And in effect, Darling could be 'tougher' than the FSA by taking its code and making it, or reporting on it, mandatory in some way. A tweak to the Companies Act could be used to make further disclosures on remuneration mandatory for example. I doubt it would have much impact in practice, but it does demonstrate that there are things that could be done which would be direct government intervention, and tougher than the FSA's stance so far. (It's worth noting by the by that for all George Osborne's rhetoric about the FSA's code being insufficient, the apparently Tories didn't bother talking to the regulator about what it was doing.) 

One final thought on this stuff. Let's take another look at my favourite quote:
"I'm clear that executive pay is a matter for boards and shareholders, not for governments and regulators."
Well as things stand the regulator is already involved. According to this latest interview the Government may itself intervene directly (and we can safely assume it has been involved behind the scenes in the meantime). The one group that sticks out for its lack of activity/involvement is... errr... the shareholders. If (and I still think it's a big if) remuneration policy did drive behaviour that contributed to the crisis then it must be in the self-interest of at least long-term shareholders to make sure that the problems are sorted. Yet as I pointed out previously, the ISC said nothing at all about remuneration in its response to the crisis. I haven't seen any statements either from the likes of the ABI and NAPF (though to be fair both did respond to the FSA consultation).  

In practical terms too, let's keep a sense of perspective - only four companies have been defeated on remuneration votes this year and only one of them (RBS) was a bank, where UKFI puled the trigger. So to date the only defeat for a bank has been driven by the Government too. The right to vote on remuneration policy was only enshrined in 2003, yet in 2007 and 2008 not a single company was defeated on its remuneration report. (And there are fund managers out there that even now barely vote against anything. I was looking at the voting record of one manager the other day - in the whole of 2008 it opposed management in less than 1% of cases. Such managers, I humbly submit, are part of the problem.)

Is it any wonder then that there is a sense of exasperation at the failure of institutional shareholders - who are very quick to assert and defend their rights - to shoulder any responsibility as owners of companies. The lack of engagement in the deeper issues in the remuneration debate is just another example of how flawed the current system is. 

Friday, 14 August 2009


Daniel Hannan is great isn't he? It doesn't matter that he's only an MEP because of the coverage he's getting and the impression he is generating. I just hope Cameron doesn't discipline him.

What a difference a year makes, or does it?

Back in June 2008 Kitty Ussher, then a Treasury minister, came out with this godawful statement:
"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."

Speculation this morning:
Senior cabinet ministers are so disappointed with the Financial Services Authority’s new pay rules, released this week, they are considering whether legislation may be needed to crack down on bankers’ bonuses.

But later retreat:

U.K. Business Secretary Peter Mandelson Friday said the government isn't considering legislation to toughen bank pay rules.

Speaking to the British Broadcasting Corp., Mandelson was asked if the government is considering legislation because of concerns about the Financial Services Authority's new pay rules.

"No, I don't think legislation is being considered," he said. "The job of the FSA is to provide the regulatory framework within which banks and other financial institutions operate."

Random Alexei Sayle quote

I can’t remember what series this was in, and Mrs Tom is sick of me repeating this (it’s probably funnier in the original Scouse) but for someone reason I’ve always liked it –

When I was a kid an ‘Apple Mac’ was a kind of coat, made out of fruit.

Thursday, 13 August 2009

Cognitive dissonance

I'm in the middle of Paul Mason's book on the crisis. It's written in a nice style, more a bit of reportage than analysis so far though. However one thing that immediately grates is his incorrect use of the term cognitive dissonance. I know I've moaned about this before, but it's quite an important thing to get right.

What it is not: The ability to hold contradictory beliefs, or some variation of this

What it is: The feeling caused by contradictory beliefs

Actually this should be pretty obvious, since the term roughly translates as thinking that isn't in harmony, or is discordant. Unfortunately Mason compounds his error by including a definition of cognitive dissonance in his glossary which is cobblers (though the study mentioned did focus on this subject).

I think what happens is that people jump to stage where the individual/group develops a strategy to reduce/eliminate the dissonance, and think this is cognitive dissonance itself rather than the response to it.

Ho hum.

UPDATE: Actually Pete points out that I haven't quite nailed this one myself! See comments...

Interesting comment from the ABI

In the FT today about the FSA code on remuneration:
"Care needs to be taken to avoid reading across from banks to insurers and asset managers, whose businesses are substantially different and pose much less risk to overall financial stability."

The FSA doc released yesterday shows that the ABI responded to the consultation. But which hat did they wear when writing it - the one representing insurers as companies that might get caught by the FSA code, or the one representing insurers as investors who need to have confidence in the remuneration policies in place at BOFIs? It's not that easy to do both.

The quote suggests that the ABI is thinking about the impact of the code on insurers as insurers. As I blogged yesterday, it doesn't look like any individual asset managers responded to the FSA consultation, but a number of the parent insurers that sit behind them did (Aegon, Standard Life etc). Again it seems that the interests of the insurer as insurer, rather than as institutional investor, get priority. And there's going to be a similar conflict in terms of responses to the Walker Review.

Of course this is all entirely reasonable from one perspective. I obviously wouldn't suggest that the ABI shouldn't lobby on behalf of its members as insurers (and listed companies). But it does point up the conflicts of interest that potentially inhibit more robust shareholder engagement. And to hammer the point home - the ISC, as a collective of trade bodies, has this problem multiplied by four.

Wednesday, 12 August 2009

A snippet on stock-lending

Interesting blog survey on stock-lending levels.

FSA remuneration code

So, it's out. I'll leave the analysis of what the FSA has actually changed to those with a bit more knowledge than me. A few observations of my own though. First up, here's what the FSA says about the role of shareholders in Chapter 2:
Market discipline has not been effective in limiting the adverse effect of poor remuneration practices on risk management, particularly at large systemically relevant institutions. In many cases shareholders have allowed management to introduce compensation policies that in effect subordinate the interests of shareholders to those of employees, particularly senior employees engaged in trading businesses.

This is true, but as we know things have all changed now. This can be seen by the heightened engagement by fund managers with BOFIs over remuneration. Of the list of 17 BOFIs listed by Walker, there have been serious shareholder revolts over remuneration this year at RBS, and.... err.... that's it. And that was primarily driven by the state via UKFI.

Nevertheless we can see the importance accorded by fund managers to getting remuneration policy right by the number of them that seem to have responded to the FSA's consultation (see annex 1):


Forget that. We know that the industry is planning to up its game in this area because of what the ISC - the peak body for institutional shareholders - said specifically about remuneration in its statement issued in response to the crisis:


FSA and pay

Lots of speculation this morning that the FSA is going to take a softer line on remuneration policy at BOFIs than originally planned, though nothing on the website yet. The FSA code is due this week so presumably this is a bit of expectations management by the regulator. The broad argument seems to be that the FSA can't risk taking a tough line elsewhere if other regulators don't as this could lead to 'talent' moving elsewhere.

I'm sympathetic to the FSA's argument, expressed by Hector Sants in the FT today, that remuneration policy was a relatively minor contributory factor in the crisis. But the argument about the risk of taking too tough a regulatory line damaging our competitiveness was one of those that got us into this mess in the first place, wasn't it?

Tuesday, 11 August 2009

Myners still stirring things up....

His latest proposal (floated in one of my fave publications, Financial News, but you'll need a sub to read it there, so FT report here) is that investors' voting rights could be sold. In other words a shareholder who wasn't interested in the right to vote could flog it to one that was.

You can see some potential pitfalls - it could result in cases not different in principle to hedge funds borrowing stock in order to have more firepower at company meetings. But then in that sense why is the investment management industry kicking off about it - this already happens, but not only is the voting right transferred, but the borrowed stock is often bet against the company (shorted). In addition, given the nodding dog nature of a number of fund managers in respect of voting outcomes, I'm not sure why they would be worried about losing the right. And clearly there is no suggestion of being forced to sell voting rights.

The key question is whether it would aid engagement with companies or not. I can't quite see the answer here. You can see that in contentious cases (trying to eject a director, or garner support for a resolution) then the ability to add to your voting clout might be quite an attractive option. If inactive managers were willing to loan out voting rights it might well shake up the market, as well as make clear once and for all who really isn't interested in being an owner. So whilst it's not an initially appealing idea, this is one to think about some more I reckon.

PS. I also agree with Lombard's take on things -
What is useful is the extent to which Preacher Paul's sermonising is stirring things up. It may be the best way of guaranteeing, via Sir David Walker's review of governance, that less radical ideas to promote investor activism make progress. Certainly, elected City ministers of the past - Ed Balls, say - were never this provocative.

Snippet 2

“The FSA feels that the whole rise in prices last year can be explained by market fundamentals and not speculation,” one said. “But they are being pushed very hard by the CFTC and parts of the UK Government to do something.”

From here.


An interesting piece here on why institutional investors need transparency.

Sunday, 9 August 2009

Quote of the day

"Until one is committed, there is hesitancy, the chance to draw back-- Concerning all acts of initiative (and creation), there is one elementary truth that ignorance of which kills countless ideas and splendid plans: that the moment one definitely commits oneself, then Providence moves too. All sorts of things occur to help one that would never otherwise have occurred. A whole stream of events issues from the decision, raising in one's favor all manner of unforeseen incidents and meetings and material assistance, which no man could have dreamed would have come his way. Whatever you can do, or dream you can do, begin it. Boldness has genius, power, and magic in it. Begin it now."

Thursday, 6 August 2009

Odds & sods

1. Best headline and newstory of the day.

2. Most people have probably seen Chris Dillow's piece on Myners and ownership, but if not it's here.

3. In a smilar vein, Hugh at Responsible investor about incentivising long-termism.

4. Meant to link to this post on speculation and oil prices by Nick @ The Capitalists a while back, so here it is. One to keep an eye on (CFTC doesn't seem to have reported yet).

5. An old (2002) but well interesting paper (PDF) on the idea of ownership as applied to companies.

6. A new study has found that most charities don't apply any kind of SRI policy.

7. Something else I meant to link to ages ago - UNPRI docs on socially responsible private equity (no sniggering from GMB members please).

Wednesday, 5 August 2009

Taxpayers Alliance and Tory funders part 2

OK, I've looked at the individual names on the TPA's business supporters list now, and come up with quite a few more Tory donors. Again this data comes from the Electoral Commission -

* Lord Chadlington - £45,700 cash, £3,533 non-cash
* Sir Michael Cobham - £6,500
* Sir Tom Cowie - £661,250
* Sir John Craven - £26,000
* Damon de Laszlo - £15,000
* Patrick Evershed - £136,000
* Michael Heller - £30,000
* John Hoerner - £22,500
* Kambiz “kim” Jabesi - £14,850
* Margot James - £2,500
* Lord Kalms - £557,700 cash, £108,800 non-cash
* Gary Mond - £10,250
* David Ord - £188,000
* A R Tanner - £3,250
* John (Lord) Taylor - £8,600
* Lord Vinson - £2,000
* Gerald Wakefield - £39,500
* Sir Mark Weinberg - £158,750
* Stuart Wheeler - £3.5m plus (switched to UKIP now)


* Gerald Kaye - £85,000
* John Leavesley - £31,000
* Malcolm McAlpine - £4,000

These last three work at companies I included in the first list.

So at least 22 of the people on the list have donated money to the Tories themselves, and at least 15 of the companies they work(ed) for have done. There is an overlap of three, so the total number of links to the Tories on the list is 34. There are 147 people on the list in total which means that there is a direct financial link to the Tories in respect of 23% of them. A pretty high proportion innit? And I may have missed some.

The Taxpayers Alliance and Tory funders

I noticed previously that a couple of the Taxpayers Alliance business supporters are at companies that make donations to the Conservative Party, so I thought I’d spend half an hour cross-referencing the names on their list with bodies making political donations.

In turns out that of the names on the list, 10% work at companies that have donated to the Tories. Below is data on company donations to the Tories taken from the Electoral Commission register.

* JCB (J C Bamford Excavators on the TPA list) - £416,000 in cash, £109,000 in non-cash donations
* Berkeley Burke - £52,000
* Huntsworth - £12,100
* Rocco Forte Ltd - £20,000
* Air Foyle - £26,500
* Caledonia Investments - £53,000
* Helical Bar - £22,000
* Leavesley Group/JT Leavesley - £5,750 (the director named also made personal donations)
* Sir Robert McAlpine - £22,500 (the director named also made personal donations)
* Harris & Sheldon - £91,000 (plus £5,000 to UKIP more recently)
* Savills - £2,000 non-cash donation
* Slough Estates - £106,000
* Dunalistair Estates - £6,900 in cash, £123,000 non-cash
* Midland Chilled Foods - £3,000
* Lowe & Fletcher - £19,000

Note I’ve only listed company donations – not those made by the named individual. When I have a bit of time I’ll go back for a trawl on the individuals. And for the sake of balance it should also be noted that one of those named on the list works for Tesco, which has donated to both Labour and the Lib Dems in recent years.

Also of relevance on the list is an organization called The Front Bench Club which is apparently a Conservative donor club. (There are also right-leaning think tanks/lobby groups like the Bow Group on there but they are not relevant in this instance).

Finally, excuse any errors I may have made in transcribing the data. If anyone spots any howlers please let me know and I will amend.

Why did no-one stop me?

Great para from John Kay's helpful review of the increasing pile of books on the financial crisis:
Widely expressed among financial market participants is the view that we would never have trashed the house if our parents had supervised us properly. But it won’t do. If self-interested behaviour, inadequately restrained by state actions, leads to social and economic disaster it does not follow that the individuals and businesses which engage in the self-interested behaviour escape culpability. We don’t apply that standard to lorry drivers. We expect them to drive safely and professionally and hold them responsible when their failure to do so causes accidents. “I would have had to slow down” is not an excuse. It is not apparent that we should lower our expectations when it comes to the senior executives of banks.

Funnily enough though, John Kay contributed an essay to an IEA report that made precisely the kind of argument he reasonably criticises -
The prevailing view amongst the commentariat (reflected in the recent deliberations of the G20) that the financial crash of 2008 was caused by market failure is both wrong and dangerous. Government failure had a leading role in creating the conditions that led to the crash.

Tuesday, 4 August 2009

Another dodgy Taxpayers Alliance report

Slugger O'Toole finds another example of wobbly TPA "research".

John Varley's barmy army!

Barclays chief exec John Varley has resorted to a tactic I hate in his defence of high pay in the banking industry - comparing it to pay in football. Aside from the fact that I don't think that "they do it too" is a particularly good response to criticism, I'm not sure the analogy really works anyway for a number of reasons.

For one, I am sceptical of the extent to which we can really indentify individual contributions to success in organisations like banks. I accept the common sense point that people who are obviously rubbish will probably get weeded out, but beyond that I have my doubts. Cognitive biases mean that we are likely to view ideas/decisions etc through the prism of what we already know about the person. Add to that the individual's tendency - particularly no doubt amongst those who are very confident/optimistic - to view success or failure in a self-justifying way and we aren't likely to get accurate reports back either. Of course all this happens in football too but a) there is a whole crowd watching who also see what is going on and b) we have stats on what individuals do in games that enable a slightly more objective take on things.

Secondly, the 'market' in football talent does seem to work pretty well, at least at the top clubs. There genuinely is a global competition for the best players. I am sure this is part true at banks too, but does it go as far as in football? In addition, when players lose their sparkle they drop down the scale from top teams to middling teams, from the top division to lower divisions etc. Whilst people can obviously retain there mental ability longer than their athletic ability you don't seem to see the same process at work in the City. And pay in football mirrors this - you earn a lot when you're younger because that is when you can contribute most, but it tails off quickly.

Thirdly, the rules in football are much more clearly defined than in banking. A win is a win is a win. Wins don't subsequently become losses because of events off the field, goals don't turn into own goals. Risk analysis is a lot simpler!

Finally, big names in football can add a lot of value to the club in terms of merchandising. Is there is a comparable effect in terms of 'star' bankers contributing to the share price of those banks who hire them? I'm not sure I would trust an analyst who based his view on the prospects of a bank based on some investment banking hires. But there is quite a bit of evidence that football teams can buy success.

Monday, 3 August 2009


Apparently someone, somewhere has presumably floated the proposal that fund managers should barred from trading -
But he warned: "In what he is saying there is a lot of danger, because if you tell institutions that they can't sell whatever happens, then they are sometimes going to have to hang on and cause their customers and clients - who are savers and pensioners - a loss because they can't sell. You have to retain the right to sell even when you want to engage as a good owner."
Has anyone (Darling, Myners, Walker Review) at any point suggested that fund managers would be precluded from selling shares? In all the stuff I've read over the years about ownership, and how we might address some of the failings there are in the current system, I don't think I have ever heard anyone argue that shareholders should be prevented from selling. What is being discussed is how to incentivise a sense of ownership.

Quite a bit of the recent commentary from the investment industry has (unintentionally or otherwise) conflated incentivising ownership with banning trading. It's a straw man, which is not encouraging in terms of reading how willing the investment industry is to really try and get to grips with ownership.

Saturday, 1 August 2009

An experiment in blogger self-organised research...

Right... inspired by the fact that Lord Myners is still pushing for reform I'm going to try a research experiment via this here blog in respect of ownership activity carried out by the City in the run-up to the crisis. My challenge to anyone reading this is to see if they can find out how the people investing YOUR assets exercised voting rights at the banks in 2008.

To do this you will need to find out which asset manager(s) is responsible for investing your money, be it in a pension fund, ISA or whatever. Once you have got the name of the asset manager you need to look for the section on their website (if they have one!) dealing with corporate governance. Sometimes you'll find this under the 'about us' header, sometimes it will be in a section about 'responsible investment'. 

Once you find the right area you want to look for voting data. Some managers provide one big report for the year, some by quarter, and some by month. And some of course report nothing at all. If the data is produced in a PDF format you should be able to search for the bank names. All the bank AGMs took place in April and May last year so you need to look for those months if it's a monthly disclosure, or Q2 if it's done by quarter. 

I'd suggest looking for Alliance & Leicester (still listed last year), Barclays, HBOS, HSBC, Lloyds and RBS. (You could add Standard Chartered, which is also UK-listed but its business is overseas.) If you want to make it really simple, just note down the resolutions that your manager opposed at the 2008 AGMs (if any). If you want to do a bit more digging you could also try and find out how they voted on the RBS takeover of ABN Amro in 2007, and the AGMs in 2007 in general. And don't forget - if you can't find any data log that as well, because the industry claims that it's done a great job in respect of transparency...

Then post the results of your research on your blog and let me know you have done it by posting a comment on this post. I will aggregate links to all posts put up by bloggers who have done the research, and I'll try and persuade Mrs P (a designer you see) to create little button for everyone who participates (Hero of Financial Research First Class or summat like that).

So to get you started, here's my own initial research.

1. The DC pension scheme I am a member is run by the insurer Axa, and the assets invested by Axa Investment Managers. Actually Axa has some good folks working for it, and has a responsible investment team and a dedicated section on its website. But it only discloses very limited data on voting - headline statistics (PDF). So I am unable to identify to find out from their public reporting how they exercised ownership in respect of the banks. 

2. Some of our ISA is invested with Gartmore (Paul Myners' old mob actually). I can't even find a corporate governance section on their website from a quick trawl, so no data there apparently.

3. A bit more of our ISA is with Black Rock. It has an SRI docs section here, and a statistical breakdown of votes here (PDF). But because it's just headline stats I can't identify how they voted at the banks either. 

So that's 0 out of 3 for the people who invest my money. Can you do any better?

Governance reform: let's have another go

Just when I was losing faith in the Government's sense of direction in respect of financial reform, Paul Myners has stoked things up again. He suggests that Walker hasn't gone far enough (!) and floats the idea that there could be differential voting rights for shareholders, with those in it for the long term having more influence.

This latter argument will be controversial with some investors, who are very attached to the principle of 'one share, one vote'. But the EU looked at this issue and found now evidence that one share one vote leads to better outcomes. And if such a reform did lead to a more long-term approach on the part of least some big investors, maybe it is a principle worth conceding.

He also suggested that Fred Goodwin should do charity work!

Let's hope this means that there is still scope to push the Walker Review in a more reformist direction.

PS - The actual interview on the Beeb is here.