Wednesday, 28 October 2009
Tuesday, 27 October 2009
“Voting powers should be exercised, fund managers and other institutional investors should disclose their voting record, and their policies in respect of voting should be described in statements on their websites or in other publicly accessible form.”Effectively it just restates best practice, since the ISC has already said (just about) that public disclosure is desirable. But the lack of detail in support of this recommendation does seem to leave the door open to making it mandatory, which obviously I support.
Anyway, I had a trawl through the submissions and found that actually of those that comment specifically on this recommendation, a majority are supportive (and a fair few explicitly call for mandatory public disclosure). A handful appear openly hostile - not surprisingly the IMA and AIC are not supportive - with a few more ambivalent (the ABI and L&G suggest it's a waste of time). So the debate seems to have shifted failry decisively in favour of public disclosure.
A final point. I think we do need to tackle this 'no-one is interested in the data' argument head on. In my opinion, as one of the handful of voting data geeks out there, the amount of legwork involved for an ordinary punter to find out anything useful is the problem. Voting data can be hard to locate - it isn't always where even someone like me would expect to find it.
The format it is disclosed in can also make it very difficult to understand - I've just been looking at one manager's disclosure and it doesn't even tell you what the resolutions are, so unless you have the AGM agenda to hand all you know is that they voted against 'resolution 10' and for the rest. Not exactly illuminating.
And, most importantly, if you really want to take an informed view you need to compared your manager's voting against the rest of the industry. In other words you need to repeat the search for data perhaps dozens of times. Only a handful of sad people are going to bother :-)
If we make disclosure mandatory, and define the format of disclosure, it will be much easier to carry out comparative analysis. Someone geeky like me can go and get all the data and bung it in a survey for you. Or put it on a website, a sort of Confused.com for voting.
At the moment voting data is disclosed in a way that suits asset managers, rather than the punters, and it requires a large amount of effort to make sense of it. But if we make it easier for people to interpret the data I'm confident the interest will grow.
Monday, 26 October 2009
It's interesting to note in passing that Robert Shiller gets a bit of a slap. This was pre-Irrational Exuberance, when he was more interested in volatility, though with hindsight you can understand why he ended up where he did. Anyway, here's Marsh's put-down:
[S]ome researchers have moved away from a fcous on trading rules, and instead have devised tests for "excessive volitility". The best-known work here is by Shiller (1981) who claimed that stock market prices were far more volatile than could be justified by the much lower volatility of dividends. Subsequent researchers, notably Marsh and Merton (1986), have shown that Shiller's analysis is fundamentally flawed, since it ignores what we know about the way that managers decide on dividends, namely that they try to "smooth" them out over time.
I think that's fighting talk!
Separately, I thought I would flag up a bit I disagree with, which is this:
Faced with the demand for better short-term performance, the fund manager... cannot sell the future short. The only way he or she can outperform is to identify undervalued shares and buy them, and/or overvalued shares and sell them. This, however, can be achieved only through careful investment analysis of a company's short and longer-term prospects - something widely held to be a good thing.
I don't disagree that this is what ought to happen, rather I think that in certain circumstances short-term pressures may lead to "careful investment analysis" getting skewed to result in the picking of stocks that seem to be heading up regardless - see the TMT bubble.
Notably Marsh's report, which - as should be obvious - I like, was commissioned by IFMA (the old name for fund management industry's trade body). Post the TMT bubble EAMA (the European equivalent) commissioned a series of essays on what just happened. Compare and contrast this excerpt from one of the pieces in it:
When Vodafone acquired Mannesman, many investment managers took the view that it made sense to increase their holding even though they believed the shares to be expensive and likely, eventually, to fall in value. The same managers became ever more likely to invest in TMT stocks the more expensive they became. Why? Because to be underweight in these investments without the certainty of being proved right, created significant business risks if the impact on short-term relative performance was serious and if the Principal took a dim view of the way his funds were being managed. Failing conventionally when managing a portfolio can sometimes lead to an acceptable outcome for an investment manager’s business.
If you're interested the piece is by Chris Cheetham, former chief investment officer at Axa, now at HSBC I think. The collection of essays is called Boom and Bust: The equity market crisis - lessons for asset managers and their clients.
Personally I think that some of the concerns that lie behind the growth of the BNP are similarly bollox. Therefore the last thing that mainstream parties ought to be doing is legitiming concerns that may not have much basis in fact (ie the threat of Islamification, immigrants getting priority for council housing etc). The problem is, of course, that even when politicians do hold the line against misconceptions, these concerns persist, and there is always someone on hand to keep stoking the fire.
Flipping forward, the more people that start to accept the BNP view of immigration, the more likely they are to end up talking to others that share their view. And, if we accept Cass Sunstein's argument, this is likely to lead to reinforcement and a tendency to even more extreme positions.
To me it looks like the political equivalent of a speculative bubble. And unfortunately I suspect our ability to detect and try and deflate bubbles is likely to be as successful in politics as it is in economics. At some point the bubble will burst, and those caught up in the mania will look back on it with regret, but at the moment to many in the midst of it it must seem like it must be well-founded because look at all the others who agree.
Friday, 23 October 2009
Griffin made some bad howlers - why not simply state 'I accept that the Holocaust happened' and distance himself from the KKK? Those and the rant late on about the far-left BBC must have made him come across as a bit of nutter to genuinely unaligned people. Unfortunately I suspect he will learn from this and trim his sails for his inevitable next appearance. Perhaps 'exposing' the BNP to debate will simply make them craft their message even more carefully?
As for the UAF demo, whilst I'm glad there was a demo, I think it was stupid to try and break into the studio, and the people shown on telly getting literally dragged out of Television Centre looked ridiculous. However I have no idea what Iain Dale is on about claiming that they used 'fascist' tactics because there was a vaguely threatening chant. a) It's a (rubbish) chant used on about every anti-fascist demo I've ever been on b) it's usually initiated by a perpetually outraged teenage Swuppie who is extremely unlikely to put it into practice c) I can't believe that a West Ham supporter hasn't heard much worse than this ;-) To argue that an aggressive chant on a demo is 'fascist tactics' is to further devalue a word that has already lost much of its meaning.
Thursday, 22 October 2009
"We find ourselves compelled to strive after things which in a "cool, calm hour" we admit we do not want, at least not in fullness and perfection. Perhaps it is the manifest impossibility of reaching the end which makes it interesting to strive after it."
2. Another enjoyable post from Will at Potlatch.
3. Commentary on the TUC response to Walker here. Unison also has a response on the Walker submissions site, but I can't link directly to it.
Wednesday, 21 October 2009
Monday, 19 October 2009
· Board composition and independence
· Segregation of CEO and Chair
· Clear definition of executive and non-executive responsibilities.
· Audit committee composition, independence, role and function
· Responsibilities and composition of board committees
· Segregation of committee chairs
· Risk management
· Selection of non-executive directors
· Sanctions for non-compliance
That's a pretty full list - though nothing there about remuneration - and on the face of it this is a shift away from a purely market-driven approach to corp gov. Effectively the state will be defining best practice in terms of board structure etc.
Saturday, 17 October 2009
A transaction tax on financial instruments is very likely. This will raise revenue for governments and make shareholders behave more like owners. Shareholder failure to police risky management activities was largely due to the very short holding periods for equities. A suitably high transaction tax would force investors to hold shares for much longer periods and to engage management to control risk. This would reduce the need for governments to police risk-taking in corporations. What could be more laudable than a tax that turned everybody into Warren Buffett?
Management literature has long suggested that remuneration is a “hygiene factor” rather than a “motivator”, ie. talent may be de-motivated by what is perceived as insufficient remuneration but only transiently motivated positively by remuneration. Other motivators are more effective for delivering high quality sustained performance. The remuneration debate to date has largely failed to reflect this insight.
UKFI will (amongst other things):
(i) (on behalf of HM Treasury) vote all the shares wherever practicable to do so;
(ii) inform the relevant Listed Investee Company in advance of its voting intentions; and
(iii) disclose how it has voted.
Friday, 16 October 2009
He said: "I am fed up with government ministers and regulators pointing the finger of blame at pension funds and pension fund trustees for the banking crisis. There are others far more culpable and they must shoulder their responsibility and look to put their own houses in order first."
Hitchen added schemes take their responsibility as corporate owners seriously.
However, he added: "Our job is to pay pensions, not to run the banks. And our influence is limited - today, we own just 13% of the UK stock market. It is ironic that as more and more DB pension funds enter run-off, driven in no small part by government and regulator-driven policies, we are now expected to come to the rescue of capitalism."
I just don't get what the issue is here. I don't think anyone is particularly blaming pension funds, and by that I mean two things. First, it is very clear that the principal focus of Walker etc is on the boards of companies themselves. Second, though there is (rightly) also a focus on the role of shareholders as owners, it's mainly aimed at asset managers isn't it?
Also I don't get the false choice that is suggested between taking ownership seriously and paying pensions. Again, if you read the Walker Review the focus on shareholder engagement is entirely based on the idea that this is in shareholders' financial self-interest. And this is corp gov basics, separation of ownership and control and all that. According to this way of thinking, surely, the existence of well-run companies (ie the survival of an important aspect of capitalism) directly contributes to the payment of pensions. That's why pension funds should be interested.
Finally, it is true that pension funds' influence is limited, and they account for a declining share of equity ownership. But let's be honest - most pension funds have never really tried to exert the influence that they do have. Ask any asset manager how many questions they get from clients about corporate governance etc. The client pressure on them to act like owners barely exists, whereas a perceived focus on short-term return does (I say perceived because pension funds claim they don't put such pressure on). If you feel that keeping your job has more to do with short-term returns than long-term ownership, what are you going to prioritise?
Unfortunately the language used above, which I am sure will have many an NAPF member nodding in favour, only reinforces the idea that corporate governance and ownership activity have no overlap with financial self-interest. If you want an example of why we have this ownership problem, this is it.
Wednesday, 14 October 2009
[I]n practical terms the ISC has struggled to deliver tangible results.
This should not come as a surprise.
The forum is a coordinating mechanism for trade bodies who themselves operate primarily to promote the interests of their own industries – there is no one organisation in the UK that speaks solely and exclusively on behalf of institutional investors without commercial benefit as an overriding goal. This, in my view, is a deficiency.
To compound this disconnect, the ISC is a loose collection of trade associations rather than member firms, and as such is two degrees removed from the operational nexus of the industry.
The committee has rarely met and has not evolved. It is controlled by industry trade bodies; it has no budget or permanent secretariat.
Trade bodies clearly and correctly operate primarily in the interests of their own fee-paying members. This may or may not accord with the interests of end investors but it is a fact of life that parties selling services to others for gain are not necessarily always going to have entirely shared interests with their clients.
Monday, 12 October 2009
Investors' emphasis on short-term return communicates itself to business leaders who feel obliged to think and act short-term; take on more risk, which the fund manager reduces through diversification - an option not open to employees.
This is very much in line with the point raised by Margaret Blair, that employees make a firm-specific investment. Some good stuff here too about why fund managers end up focusing on the short term (what signals are their clients sending them?)
And this bit:
I am struck by the absence of a body in the UK that speaks on behalf of institutional investors without a commercial or trade association interest. Creating an independent Council for Institutional Investors would be a step forward.
I reckon some sort of UK version of the CII is long overdue. As I've blogged a bit before, it's a bit of a problem that collaborative engagement gets funneled through trade bodies which lobby on several fronts (ie ABI represents insurers as PLCs as well as shareholders), rather than through a body that only represents investors as investors (and the real investors - not the investment agents - too).
It is partly the failure of institutional investors such as pension funds to voice concern or to pressure banks into better behaviour that has persuaded ministers to opt for the big stick of regulation. By behaving like neglectful absentee landlords (© Lord Myners), pension funds have encouraged policymakers to choose more onerous supervision.
Sunday, 11 October 2009
A “one- size-fits-all” requirement would undermine progress. As well as looking at the number of managers that disclose, the survey analysed voting details published on web-sites. This showed a wide variation in the matters reported, indicating the complexity of this matter and the difficulty of introducing regulations that would require uniform disclosure. In effect, imposing a “one-size-fits-all” legislative requirement would undermine the progress made to date.
The voting process could be undermined. Public disclosure could undermine and generally “dumb down” the voting process due to the sensitivity of the issues and the confidentiality necessary.
Mechanistic, meaningless reporting would result. Requiring disclosure would result in pages of statistics and tables, which could be meaningless without further analysis.
Now my point - on this occasion - is not that the arguments are wrong, but rather that they do fit pretty well into Hirschman's taxonomy. They are simply reactionary arguments of a classic type.
Final point - obviously conservatives are sometimes reformers, and 'progressives' deploy these types of arguments against them in turn to defend the status quo. So they are not intrinsically Left or Right. Having said that one side does tend to use them a lot more than the other - inevitably since conservatives tend to think the status quo is acceptable/natural and a concerned by the ramifications of moving away from it.
Anyway, a great little book.
Saturday, 10 October 2009
Friday, 9 October 2009
Thursday, 8 October 2009
Amongst the favourite suggestions are disenfranchising shareholders who have held their shares for less than, say, a year...
A recurring theme in the current UK debate (!) is that the problems of short-termism, whether they be perceptions or reality, would be greatly ameliorated if shareholders acted more like "owners".
[E]ven in an ideal world of excellent communications and dialogue between companies and institutions, it would still be very difficult for fund managers to have the detailed knowledge required to intervene successfully in a firm's affairs.
2. Greg Wallace has added another string to his bow in this series. In addition to being required to perform his traditional ' dessert gurn', he is also employed as a professional echo for Michel Roux Jnr.
First up, what is the policy meant to achieve? It cannot, for example, repair the damage done to defined benefit schemes, finance directors will not suddenly re-open them because they have a bit more investment income. It will therefore marginally increase the funding position of these schemes. This is clearly not a bad thing, but not a particularly exciting objective.
Equally it will provide a bit more income for the many more people who are now in DC schemes. That may or may not make a difference. A bit more dividend income certainly won't offset the sort of falls we saw in share prices in recent years. Again obviously better to have than not, but not really a big contribution to the pensions problem IMO.
Secondly, who is going to benefit? If pension funds get a few extra quid, it benefits the members of these schemes. But the stats out there suggest that membership is skewed towards full-time male employees (and union members...!). Until Personal Accounts kick in this will remain the case, and the effect will therefore be to give a bit more money to those people already in pension schemes over those that are not. Is this really a sensible use of money if we want to spend more on pensions? Would it not be better to simply spend a bit more on the state pension, since we know everyone will get it?
Wednesday, 7 October 2009
"Annual re-elections are potentially distracting to the board, (and) create instability and additional work for the shareholders without any material benefit. So it's not a good idea," said Colin Melvin, chief executive of Hermes Equity Ownership Services.
Eh? But some companies already have annual election of directors, just a few off the top of my head - BP, Pearson, Vodafone, Unilever. Are all these companies 'unstable' because of it? The benefit of annual elections is that if there is a problem at a company that arises in the short-term, you use your vote to express concern at a particular director's role, or even ultimately vote them out. That is not possible when they are on a three-year cycle - see for example the current ITV debacle. It is no extra work for shareholders (unless you consider voting 'work'), but it does mean that you can hold directors accountable immediately if necessary. In practice I think it would be very rarely exercised, but it should be there.
Now you could argue that the vote isn't that important, and that actually shareholders can remove directors without resorting to voting them out. True but a) it is not always the case that director will just roll over and b) follow this through logically - what is the point of voting rights in the first place then?
My personal view is that opposition to what seems to be a perfectly reasonable reform stems from an unfortunate direction the institutional share-owner culture has taken in recent years. In the understandable desire to avoid being seen as 'radical', 'political' or 'gadflies' some shareholders bend over backwards to demonstrate their support for management. I understand this - we shouldn't start from the position that companies are 'wrong' and that shareholders need to 'do something'. But I think this tendency has now gone too far in the other direction.
This can be seen in the utterly unimpressive voting record of most big institutions on remuneration - even though they know claim it is obvious that pay policies were flawed, and can tell you exactly what the flaws were. Well why didn't you use your voting rights to challenge them then? And don't claim that you were active behind the scenes, because we all know that we have failed to tackle executive pay inflation.
It can also be seen in their default position of management support when a union or NGO takes an issue to shareholders (again check out the voting records on shareholder resolutions raised by such groups). Now once again you can make the case that this is the 'responsible' thing to do - not supporting a challenge to management. But I personally fundamentally disagree, and I believe that institutions that routinely oppose shareholder resolutions effectively legitimise management complacency on some important issues. And having been involved in several such campaigns, I can tell you that from the proponent's point of view it simply feels like you have been stabbed in the back - especially when it's an institution that talks a lot about ESG issues (and there are several guilty parties here).
Tuesday, 6 October 2009
Monday, 5 October 2009
"[T]he owners of passive property, by surrendering control and responsibility over the active property, have surrendered the right that the corporation should be operated in their sole interest, -they have released the community from the obligation to protect them to the full extent implied in the doctrine of strict property rights."
By the mid 2000s venture capital survived not as a practice but as a rhetorical label which had been appropriated by the BVCA trade association which was defending leveraged private equity.
This is very different from the City of London’s version of “ethical investment” which means more fastidiousness about the coupons which your fund manager buys.
Saturday, 3 October 2009
Friday, 2 October 2009
Your interview (Too many UK firms fall into foreign hands, September 24), reports that City minister Lord Myners would "summon" the National Association of Pension Funds (NAPF) to a meeting to discuss what he perceives to be a lack of resources – and therefore commitment – on the part of occupational pension funds to raise standards of corporate governance. We are always happy to discuss matters withMyners and will be happy to do so again.
The NAPF is, and always has been, an "active driver of effective ownership", as the minister is aware – we actively engage with investee companies and our corporate governance guidelines are used by a leading voting agency. We see this as an integral part of building value for, and providing pensions to, scheme members, which is, after all, what pension funds are there to do.
Pension funds' priority is to ensure that they are able to pay pensions to their members. This alone presents many challenging issues, especially in the current environment. Government policies have forced pension schemes to close and they grapple with ever-growing deficits out of UK equities – to the extent that pension schemes now own less than 15% of the UK market. It is ironic indeed, then, that government now wants to call on pension schemes to be the saviours of capitalism.
Constructive comment – not unwarranted criticism – is what is needed from government.
First thing, I'm not sure what the message is. If (ok - a big if) ownership activity is in funds' financial self-interest, as implied in para 2, how come it then appears to be contrasted with the 'proper job' of paying pensions, dealing with deficits etc in para 3?
Second, let's be absolutely clear about this - most private sector pension funds do diddley squat in this area. You can count the funds that make a serious go of it on the fingers of one hand just about. Anyone with any knowledge of the limited ownership activity by shareholders in the UK would tell you that the utter passivity of most pension funds is a big reason why more does not get done. If you think shareholders should act like owners, then arguably criticism of pension funds is actually pretty reasonable.
Thursday, 1 October 2009
As a new book, This Time is Different, by the economists Carmen Reinhart and Ken Rogoff, proves in devastating detail, humans have succumbed to financial crises for century after century, ever since the Middle Ages. They are a product of the fact that human life exists in a state of flux between rationality and emotion. This was something John Maynard Keynes understood, but that moderneconomists conveniently forgot.Sounds like something I would like. And I like the title, which is a reference to the truism that the four most dangerous words in finance are 'this time is different'. So off I go to Amazon to look it up. If you search by that title, there's the book as the top search result, but it also pulls up this corker: