Friday, 31 December 2010

Labour's prospects for 2011

There's a good piece on UK Polling Report about this. There's a clear message - there should be lots of positives next year, but there is also a giant flashing sign stating 'DANGER! COMPLACENCY!".

What is really interesting is to see the halo effect clearly in operation in the way voters view us. Just after the election they generally thought we were bad, and bad at everything. Now we have recovered, not only have have the headline poll ratings improved, but also how we are judged on individual issues. We haven't, in truth, really done much to deserve this. It demonstrates that we shouldn't read too much into there things. I say this because I have felt there is a tendency for some - and to me it appears to mainly Blairite/D Miliband supporters* - to put heavy emphasis on how badly we are seen across the board. Whilst complacency is the major danger, we also need to be aware that when people think you are rubbish, they see signs of your rubbishness in everything.

* And I voted for him remember, so no particular axe to grind.

Unions, mutuals, regulation and libertarians

I'm always a bit surprised by the level of dislike towards trade unions expressed by 'libertarians' (at least in their generally right-of-centre, online form we most often see in the UK). It's surprising because a) unions are surely exactly the sort of voluntary association libertarians ought to like b) unions act as a countervailing force to power in the workplace c) unions have often been at the centre of opposition to political tyranny and d) there's a significant history of libertarianism, and even explicitly anarchism (most famously in Spain), within trade unions.

Many libertarians recognise the validity of some or all of these points, yet still end up viewing unions as part of the problem. One of the most common ways I have seen of reaching this conclusion is to argue that unions were alright in the past when there were real injustices at work, but now they have (to a greater or lesser extent) served their function. So now they are the enemy.

Aside from the question of whether all injustices at work have, or ever can be, addresses at work, it does pose a bit of a problem too, surely? After all, many of the issues that unions pushed on, like shorter working weeks, sick pay and paid holidays to name but a handful, are now 'solved' because certain standards have been put into law. The state, in other words, got rid of the problem. But if we are arguing that unions now don't have a positive role that then is surely to accept that a solution to workplace grievances is better achieved through the state mandating it than by self-organisation. That may or may not be true, but it doesn't sit very easily with a libertarian world view. What next? A crowd-sourced campaign if favour of allowing the state to execute those that threaten it's monopoly on the legitimate use of lethal violence... ;-)

There's an interesting parallel here with the relative benefits of mutuals compared to other forms of business organisation. One argument is that mutuals ought to be less risky than say PLCs because the agency problem is reduced. For example a mutual insurer might be less risky than an insurance PLC. But what happens when you regulate the industry to remove risks - do the potential benefits of the mutual form reduce?

According to Henry Hansmann the answer is yes, and this at least in part explains the decline of mutual insurers. Once again it looks like the value of a self-organised approach declines because of state intervention. The state appears to 'crowd out' the self-organised alternative. Yet I'm finding libertarian enthusiasm for reviving mutuals and similar forms of organisation hard to find.

Of course many libertarians would argue that they recognise the need for regulation, they just want to keep it to the minimum. Similarly they accept that in some cases this means that other forms of resolving issues emerge, hence it's ok that the state does what unions used to try to do. But to me it's notable that many libertarians seem more willing to give ground on their principles when there would otherwise be a challenge to power in the workplace either in terms of the rights of employees or the nature of the organisation of the business. Again, I'm sure there are plenty of good counterpoints, but this in part explains why I (and I am sure many others) see much 'libertarianism' as fairly familiar right-wing stuff, albeit with more swearing and drugs.

Thursday, 30 December 2010

NEST and limiting choice

One of the minor grumbles I have about my own side is the tendency of some Labour politicians to be sceptical about behavioural economics, albeit seemingly unwittingly. This is usually expressed in terms of swipes at Cameron about 'nudging', and I expect that in many cases these comments are made with out much understanding of what Nudge was all about.

I find it frustrating for two reasons. First because I think it is strategically stupid to allow the Right in the UK to plant their flag on this stuff in policy terms (though I am yet to be convinced that they are using it as more than fluff in placed articles). Second because actually Labour got there first and has introduced a major policy that is significantly influenced by behavourial economics. In the case of the latter point I mean, of course, NEST.

In fact NEST employs two ideas that are rooted in decision-making research. The first, probably better-known, is the auto-enrolment feature. This requires people to opt out if they don't want to save, rather than than opt in if they do. This has been proven to increase scheme membership dramatically, and is based on the idea that people put off difficult/boring decisions and that not starting saving often isn't an active choice (as non-joiners typically say they know they should be saving). Similarly NEST savers will end up in the default fund if they don't actively choose how to allocate their savings.

The second, and to my mind more interesting, feature of note in NEST is the limitation on fund choices. This is based on research suggesting that increasing the options beyond a certain number often results in less choices being made. I'm currently reading Sheena Iyengar's book The Art of Choosing (which is quite good) which covers this stuff in some detail. Iyengar is quite famous for a study involving jam - simple version: customers bought more of it when the options were fewer. This research, and similar studies, led to some financial service providers reviewing what effects increasing the number of fund choices had on decisions to save. Again there was a clear finding - beyond a certain point the more funds you add the few people you get saving. Too much choice.

Therefore NEST is putting into practice some important theories about how we now think choice actually works (including that there can be too much of it some cases). That ought to be of significant interest to Labour and the wider movement and if it works a) we ought to be pretty proud of it and b) we ought to think about where else this kind of thing could be applied. For instance, if we think too much choice is a bad thing in saving for retirement, what about mortgages?

Monday, 27 December 2010

When a relationship gets serious

You make long-term plans. Would be shocking if you ever thought the Libs were genuinely left of centre, but as we know, there's no future in that.

Friday, 24 December 2010

Obligatory xmas joke

Xmas on the Death Star...

Darth Vader: Skywalker, I know what you're getting for Christmas
Luke: Damn you, Vader, how do you know?
Darth Vader: I have felt your presents

Apologies & I'm taking a brief yuletide blogging break to repent.

Thursday, 23 December 2010

Another knock-on effect of Cable-gate

Isn't it going to make it harder for him to do anything interesting with the short-termism review? I share the view expressed by some others that the nature of the review - ie not being carried out by an external 'big name' - meant it was unlikely it would go off-piste anyway. But he might have got away with something interesting, on the basis that many Tories are pretty ignorant about these issues and so may have assumed it was just dull technical stuff (Nu Dave not exactly known for love of detail I believe).

Now that Cable has outed himself as wanting to cause a bit of trouble (and as someone who likes to be highly thought of) the likelihood of sneaking some radical stuff through must be diminished. If I were a Tory concerned about the Cameroons tacking too far left (ho ho) to placate the Libs, I would be watching Cable like a hawk and finding reasons to oppose anything he put forward that looks even slightly radical.

Off course, this is all predicated on the assumption that the review was likely to go anywhere interesting anyway. I do not share the view that Saint Vince is particularly on the Left. Anyone can slag off bankers and their pay - even Gideon does it now and then. And the gap between Vince's 'anti-capitalist' conference speech and the actual questions in the short-termism review was rather significant. Unfortunately some people would rather take the speech rather than the policy proposals as the indicator of where Cable-ism sits on the spectrum.

I still hope that the review does come out with something interesting, and some of the questions it asks are definitely worth asking. But only if you think such reviews rationally weigh the pros and cons before reaching policy proposals, and are never subject any political interference, would you consider that the likelihood of major reform had not reduced.

Wednesday, 22 December 2010

A different approach to investing?

One of the ideas that has bubbled up as a result of the financial crisis - and the apparent failure of shareholder oversight within it - is to go back to the drawing board in terms of portfolio construction. The argument runs something like this, because institutions have a wide range of equity holdings (in order to diversify risk) there is realistically no way that they can act like an 'owner' of all of them. They also arguably don't really have much of an interest in doing so precisely because they appear to spread their risk, hence they can even just about handle BP tanking because their overall exposure is low. Therefore in a world of widespread portfolios, shareholder oversight is undermined.

So what's emerging instead? Well some argue, and I admit my technical knowledge here is non-existent, that once you get past a certain number of stocks the benefits of diversification (in terms of risk reduction) tail off pretty sharply. Therefore holding several hundred, or even thousand, lines of stock might not do you any good anyway. As as a result I've heard a few people argue recently that a good ownership-oriented portfolio would basically be small in number of holdings, but with big weightings in each stock, and with the plan being to hold for the long term. The institution would make particular efforts to get to know the management and forge decent relationships on the basis of a shared understanding that this was a long-term commitment.

All well and good, but what does that remind you of? To me it looks similar to the private equity governance model, just diluted a bit. Diluted, that is, by the fact that you don't own the company outright, just a sizeable slug of it, and don't have a load of debt focusing your interest. Or to provide a more accurate comparison, isn't this the sort of portfolio an asset manager might have run 15 or 20 years ago?

Monday, 20 December 2010

Another reason why we need mandatory voting disclosure

You just can't do this (PDF) kind of analysis in the UK, because too many asset managers either don't disclose their voting record, or disclose votes in an unhelpful format. As usual, much respect to FundVotes which gathers voting data disclosed under the mandatory regime in the US to enable analysis of voting trends to be undertaken.

I personally don't believe you can really take an informed view of how asset managers do stewardship unless you take a look at their voting (so how do investment consultants deal with this?). Whilst it's a fair point that some see voting as a minor element of their engagement, clients (and potential clients) ought to be able to see this, and see how it compares with other potential providers.

At present in the UK the only way of taking an informed view of asset managers is to have a look at the work done by people like the TUC and Fair Pensions (notably both of which push for mandatory disclosure!). If we have a mandatory regime we could have also sorts of interesting reports on different aspects of voting behaviour.

Friday, 17 December 2010

London united against government cuts

The government is cutting London services through cuts to our local council budgets.

London Labour MPs, council leaders, Assembly members, our candidate for Mayor Ken Livingstone, and London trade unionists today published a joint statement urging the government to think again about the cost to London of cuts to spending.

The full text of the letter is below:

"Following the Local Government Finance Settlement it's clear London has suffered a raw deal, with its councils facing average cuts of 11.25 per cent. The average for the rest of England is 9.93 per cent.

"So much for Conservative Mayor Boris Johnson's claim to have mounted a 'Stalingrad like defence' of funding for London.

"We must be clear - the size and the speed of these cuts are a choice the Conservative-led government is making. Councils in London are being forced into making the heaviest cuts in the next year because of the decisions taken by George Osborne and Eric Pickles, damaging frontline services and putting jobs and the recovery at risk.

"Our first responsibility is to protect the communities we serve, pressing the government to abandon its course and minimising the pain of the government's cuts for residents. However the scale of the cuts in funding for councils is so big that in many cases this will not be enough to protect many vital services.

"There is little doubt that local government cuts of this size, imposed this quickly and frontloaded in the first year will hit many of the important frontline services families and communities rely on. Roads already damaged last winter could go unrepaired this year too. Potholes could go unfixed, pavements unswept. Streetlights will be turned off. Youth clubs will close. Libraries will shut down. As more people than ever need help with social care, fewer will find their local council able to help.

"Whether from local government, Parliament, City Hall, the trade unions or local Labour parties, London Labour's approach will be based on uniting everyone in London opposed to the way the government has handed these cuts to councils and focusing our campaign where it deserves to be focused - on the government.

"We urge the government to carefully reconsider the serious impact of policies on the quality of life of millions of Londoners, rethink the settlement and give the capital a fair deal."

Yours sincerely

Ken Livingstone, Labour's candidate for Mayor of London
Harriet Harman MP, Deputy Leader of the Labour Party
Tessa Jowell MP, Shadow Minister for the Olympics
Jules Pipe, Mayor of Hackney
Linda Perks, UNISON Regional Secretary
Steve Hart, UNITE Regional Secretary London and Eastern
Paul Hayes, GMB London regional secretary
Richard Ascough, GMB Southern regional secretary
Alan Tate, CWU London Regional Political Secretary
Len Duvall AM, Leader of London Assembly Labour Group
Claude Moraes MEP

Nicky Gavron AM
Val Shawcross AM
Murad Qureshi AM
John Biggs AM
Joanne McCartney AM
Navin Shah AM
Jennette Arnold AM

Diane Abbott MP
Heidi Alexander MP
Rushanara Ali MP
Karen Buck MP
Lyn Brown MP
Jon Cruddas MP
John Cryer MP
Jim Dowd MP
Clive Efford MP
Mike Gapes MP
Meg Hillier MP
Jim Fitzpatrick MP
Margaret Hodge MP
David Lammy MP
Siobhan McDonagh MP
Andy Love MP
Stephen Pound MP
Teresa Pearce MP
Nick Raynsford MP
Joan Ruddock MP
Virendra Sharma MP
Andy Slaughter MP
Stephen Timms MP
Gareth Thomas MP
Emily Thornberry MP
Malcolm Wicks MP

Cllr Liam Smith, Leader of Barking and Dagenham Council
Cllr Ann John, Leader of Brent Council
Cllr Nasim Ali, Leader of Camden Council
Cllr Julian Bell, Leader of Ealing Council
Cllr Doug Taylor, Leader of Enfield Council
Cllr Chris Roberts, Leader of Greenwich Council
Cllr Jagdish Sharma, Leader of Hounslow Council
Cllr Claire Kober, Leader of Haringey Council
Cllr Bill Stephenson, Leader of Harrow Council
Cllr Catherine West, Leader of Islington Council
Cllr Steve Reed, Leader of Lambeth Council
Steve Bullock, Mayor of Lewisham
Cllr Stephen Alambritis, Leader of Merton Council
Robin Wales, Mayor of Newham
Cllr Peter John, Leader of Southwark Council
Cllr Chris Robbins, Leader of Waltham Forest Council

Thursday, 16 December 2010

And a bit more on rewards

Just a bit more from the Hidden Costs of Reward. One of the pieces in there from Edward Deci digs a bit further into the different factors that influence the way that rewards affect us. Again this is tied to the idea that incentives/rewards can reduce intrinsic motivation (and performance, creativity...).

He makes the point that the effects depend in part on how we see the reward - is it about controlling/encouraging a certain behaviour, or is it 'informational' (ie a 'well done'). He argues that the latter will have less of a negative impact than the former. Along similar lines, the more salient the contingency of the reward (ie you must hit certain targets to get the bonus) the more potentially damaging. And notably women seem more likely to interpret rewards as controlling rather than informational than men.

Anyhow, once again you get drawn back to the idea that the evolution of performance-related pay in the boardroom tends largely to tick the WRONG boxes when looked at from a psychological perspective. Particularly because of the influence of agency theory, rewards are explicitly designed to direct behaviour (to overcome shirking and/or opportunism). What's more 'reform' of exec pay has focused on more complicated targets - including non-financial ones - which increase the salience of contingency.

One could argue that given that we are presumably dealing with confident individuals they won't read the incentives as controlling/directing, and instead reinterpret them as informational (ie I'm being given this money because I'm uniquely talented). But if that if the case (and I think it maybe in some instances) then incentives only don't do damage because the subjects don't interpret them/respond to them the way they are intended to.

Finally, it does lead you to ponder whether tying rewards to management of non-financials might lead to motivation crowding. Bruno Frey argues that regulation can reduce the desires to do they right thing amongst those that were doing it already, maybe financial incentives for managing ESG issues might do the same.

Wednesday, 15 December 2010

Tuesday, 14 December 2010

Fidelity provides post-election Tory cash

A further £25k donated to the Tories in August. Search under donor name 'FIL' here. Will have a look at sponsored MP John Stanley's consulting fees later.

So, does the Institutional Investor Council really exist?

Slightly provocative question I know, but I don't see many signs of the IIC having an existence of its own beyond the Rights Issue Fees Inquiry (RIFI). The IIC has a web address - - but it seems to be (to date anyway) purely for the RIFI report. There is no info about the IIC membership, structure or anything like that. Notably the copyright for the RIFI report itself is attributed to the ABI and IMA, rather than the IIC. (PS - note that the AIC is missing from the investor trade bodies on the front of the RIFI report too)

We should have heard something about the IIC by now. According to the blurb on the Institutional Shareholders Committee website here, news of progress should have been out several months ago:
The ISC will now proceed to formalise a constitution for the new Council, involving the creation of a Nominations Committee to ensure high calibre, representative membership, and the election of a chair. The ISC will report on progress before the end of August.
If I am being unfair, and this has been reported somewhere, do let me know. But after a number of web trawls I've been unable to find anything about a constitution or any news of who the IIC is.

My assumption is that the IIC initiative was principally a response to Lord Myners' criticisms of the ISC. Now Myners is out of government I assume the momentum has gone, and maybe the Coalition has given the nod to the trade bodies that they won't be any trouble. Hence no need to to deliver on a promise to improve investor collaboration at a senior level that only a few saddoes like me will bother to go back and check on. I am genuinely amazed that not a single journalist appears to have asked any questions about who the IIC actually is and what it has done.

Anyway, all this suggests to me that we might not be hearing much about the IIC going forward. If anyone thinks otherwise do let me know.

Rights Issue Fees Inquiry

Will blog about this later. Quick question - who is actually in/on the IIC?

Dedicated to Nick Clegg and crew

Hypocrisy is the greatest luxury.

Monday, 13 December 2010

Fair Pensions asset manager analysis

Responsible investment campaign group Fair Pensions has released its analysis of the transparency (or otherwise) of asset managers, which is available here and worth a read.

What I like about it, as opposed to say the regular IMA survey, is that it does attempt to rate the quality and depth disclosures, rather than just counting disclosure as good. For example, anyone who has spent any time looking at the issue of voting disclosure will know that simply reporting votes against and abstentions is an inherently flawed model of reporting, as it hugely skews the picture (see the annual TUC survey for the explanation why). The only method of disclosure that is actually any use - to the end user rather than the institution that is - is disclosure of all votes on all resolutions.

Good stuff.

Saturday, 11 December 2010

A bit more on Cadbury

The other interesting thing that Roger Carr mentioned in his LAPFF presentation was the way that the ownership base changed during the course of the Kraft bid. By the end, as I think was fairly well known, hedge funds held something like 30% of Cadbury shares. There are a couple of points to note here. First most these funds piled in during the course of the bid with the aim of making some money quickly from an uplift in the shares. This is what funds like that do, so no big surprise. And they definitely made quick money for their clients as a result. But as I said, according to Carr most of them piled in after the bid had been announced, so they had no great insight into the market, it was a relatively simple bet that the company would get taken out, and as such there was a chance to cash in. Long-term holders may actually have made a lot more money from the deal, though over a longer timescale, obviously.

Secondly, the natural reaction of many (understandably) would be that short-term investors to a large extent determined the fate of the company, and obviously many of the post-bid investors were only looking for a quick return. But how did they get to hold 30%? In reality the hedge funds were only able to build up such a stake because traditional long-only institutions were also cashing in on the rise in the share price resulting from the bid. In a number of cases, according to Carr, they were top-slicing, so were still on the register right till the end, but with a much lower holding. So we should bear in mind, when tempted to stick the boot into hedge funds, that they were only able to have such an influence because traditional institutions allowed them to have it.

None of this is in any way new, nor is the behaviour inconsistent with the mandates given to institutions by their clients (us, and our pension funds). Just a bit of a corrective to the assumption of hedge funds = bad, traditional institutions = good.

Finally, on a separate point, I realise that one of the reasons I found Roger Carr's presentation surprising is that it was a little out of tune with what he had said previously about the deal, see here for example. I think there is a slight element of saying different things to different audiences.

Friday, 10 December 2010

A few thoughts on the LAPFF conference

Last week saw the annual LAPFF conference, as usual down in Bournemouth. Mr Gray has already blogged about it here, here and here (and pics here), but I thought I would post up a few of my own thoughts.

1. Sir John Parker from Anglo=American was very interesting, and definitely forward-thinking when it comes to corporate governance. For example, he really can't see what the fuss is about annual elections (which the board has already instated). But as always I found something to pick on! I'm interested in the metaphors people employ in their speech, as I think this tells you something about how they conceive a given situation. I was struck by the fact that Sir John used several turns of phrase that implied a structure whereby the board is at 'the top' and looks 'down'. For example, when discussing safety (and how great to hear a chair say that it is the first item on the agenda at each board meting) he said that the nature of reports given enabled the board to "see right down" to individual sites. I do not dispute that boards give directions that the organisation must follow, and as George Lakoff has demonstrated spatial metaphors are very common. But it did give a clear sense of a top-down view of the company.

2. Ex-Cadbury chair Roger Carr gave a really interesting presentation, but not actually what I expected. He did not say that a great British company had ben lost, and in fact went to some trouble to make clear how un-British it was pre-Kraft. He also didn't really have a pop at hedge funds, effectively suggesting that under the current regime then they didn't do anything wrong. In fact, the general thrust was similar to much of the business page commentary post-deal - Cadbury shareholders got a good deal, and the board held out for as long as possible, eventually surrendering for a good price. He said that if we weren't happy with what had happened then this implied legislative intervention, but he didn't give much indication that he favoured it. This is markedly different from what I was expecting.

3. Paul Myners was great and as usual got a very positive response from the audience (notably including non-Labour councillors there). One of his lines is that trustees should scrap quarterly meetings with their asset managers and instead use the meetings to discuss their investment beliefs, including what to do about stewardship. Funnily enough this message has already got through, as it was apparently mentioned at a trustee meeting our MD was at this week. More generally he was, rightly I think, sceptical about the extent of real reform in the wake of the crisis. Unfortunately the institutional investor community doesn't appear to have got the message. Just one example - what happened to the Institutional Investor Council, the new investor body announced in the summer? We should hear about the fees inquiry this month apparently, but no announcement has been made about the IIC's membership, remit or activities.

As Myners said at the conference, if real change is going to be achieved then it's going to have to come from the asset owners, not the intermediaries. Public sector funds have been the most active in all markets, but a lot more needs to be done. We also need to properly address the DB to DC shift and how stewardship is addressed in this context. Personally I found this year's LAPFF conference a real shot in the arm, but we need to be clear that the reform wave in the political sphere has broken, as evidenced by the capitulation to the banking lobby over pay disclosure. It's up to investors to take the lead now.

Thursday, 9 December 2010

Say goodbye to saying goodbye to broken promises

Now here's a surprise, if you try to play the clip here it no longer works.

UPDATE: Now it does! Enjoy, especially the very first 'broken promise' you see!

Wednesday, 8 December 2010

Libs, how low can you go?

Down to 8% according to YouGov. Hope they are enjoying being the Tories' human shields.

PS - this actually means that they have lost a third of the support they had in ...err... August.

Category error?

I like this headline from Professional Pensions:
Shift from RPI to CPI spells £76.6bn bonanza for schemes
Well yeah, but can 'schemes' (pension funds) actually enjoy a bonanza? The reality is revealed in the first sentence of the story:
The government has calculated the move from RPI to CPI indexation for occupational schemes could reduce the value of pension rights by as much as £76.6bn over 15 years.
What we're actually talking about this is the value of something (pensions) being reduced, or if you want to be more company-friendly (as most financial media tends to be...) pension costs are being reduced. But it's a bit of a stretch to turn this into a 'bonanza' for institutions whose purpose is to provide/administer the benefits that are being reduced.

Sunday, 5 December 2010

A few more bits on motivation

I'm trying to read a bit further around the area of incentives and how they affect behaviour, so I picked up an old copy of The Hidden Costs of Reward, which was an early compilation of research on the subject. (Once again this has rocketed up in price on Amazon since I got my copy).

There is a stack of interesting stuff in here, including some useful theoretical pieces. But as usual I find myself drawn to some of the experimental findings which include -

Incentives inhibit incidental learning - ie they focus you more on the specific task to the exclusion of other information. Clearly this can be a good thing.

On a related point, they lead people to focus on both on the easiest solution (again this is obviously usually, but not always, good) to a given task, and to choose easier tasks.

Again related, they seem to inhibit creativity in problem solving.

Incentives can be effective at improving performance on 'algorithmic' tasks, but not 'heuristic' ones.

All of this, to me, points in the direction that financial incentives might have a positive effect on performance on the shopfloor, though even this probably needs hedging. But there seems to be a theoretical and empirical black hole if we are seeking to justify their use in the boardroom. Despite this, since the financial crisis hit, all the work on remuneration 'reform' seems to have focused on performance measurement issues. Surely this is a major missed opportunity?

Saturday, 4 December 2010

The Market Experience

I've just finished reading The Market Experience, which I highly recommend to anyone with a month or two of reading time to spare (if you're as slow as me!). Imagine every half-idea you have had about how markets affect individuals - for example whether they make them more selfish, materialistic etc - Lane went and dug out whatever evidence he could find. As a result I found myself repeatedly challenged to re-examine some of my assumptions about markets.

The book is, or should be, challenging to both Left and Right. Lane explores a lot of psychological research, and argues that (above a certain level of income) increases in wealth don't make much difference to happiness, or satisfaction with life. Other things can have a much bigger affect on us. This is challenging for the Left, because it means - if the goal is to increase happiness - a focus on greater economic equality doesn't make a lot of sense (though there are political arguments for this).

Lane provides a really good overview of how experience in the market helps us develop. The ability to make choices and see responses to our actions is important in developing a sense of self-direction. Obviously this development could occur under different systems, but at least on these grounds the market can be seen to at least facilitate development rather than inhibit it.

He also takes issue with the idea that work is something we wouldn't normally undertake were it not for the money we receive in return. In fact many of us derive a great deal of satisfaction from work, especially when we are self-directed and believe we are advancing. Notably he also reviews the literature on the negative impact of rewards and concludes that it is a widespread, if minor, issue. In part contingent rewards are damaging because they frequently undermine the sense of self-direction.

The upshot of the study is that Lane argues that there should be a reorientation away from a consumer economy to a producer economy. This is based on the belief that we achieve more through work than through consumption.

All in all it is a great book, and it has led me off in lots of other directions. It came out in 1990, so much has changed since and there may well be areas where the book might be challenged. But overall it's a fantastic resource for understanding markets and how they affect people.

Tuesday, 30 November 2010

Annual board elections snippets

Hagreaves Lansdown had its AGM last week, and the final resolution on the agenda was to amend its articles to introduce annual board elections. Here's the result (99.9% in favour). It was the same result at smallcap Ricardo a couple of weeks back (even though the change to annual elections was bundled with something else from memory).

So whatever else is going on out there, no-one seems to be voting against companies seeking to introduce annual elections through changes to their articles.

False Economy

Ace new initiative alert! Here's the site.

Sunday, 28 November 2010

Interesting comment from the ABI

On this Walker u-turn business:
Some City investors are concerned that if only RBS and Lloyds were forced into disclosure, they would be placed at a disadvantage to rivals. But the Association of British Insurers, which represents holders of about 15% of shares on the stock market, said it supported industry-wide disclosure.

"We were in favour of more transparency at the time of the Walker review and remain so," an ABI spokesman said.
So we're getting to the situation where the Tories (because it clearly is the blue half of the ConDems driving this) are making it harder for investors to get the information they want. The only reason for this seems to be because that's what the bankers said was best (and David Walker is employed by ...errr... Morgan Stanley).

Saturday, 27 November 2010

Good line on Osborne's capitulation to the banking lobby

From The Grauniad:
This is a government that thinks nothing of revealing how much is paid to which senior civil servant – but will not even demand the vaguest details of City pay.

Thursday, 25 November 2010

Walker Review u-turn

As we all know, the ConDems appear to have gone a bit limp when it comes to remuneration disclosure at the banks. The argument is that the UK can't go it alone although, as I've blogged previously, Sir David Walker didn't seem to think this was necessary. That is not until the government changed and he might need to earn some corn in the ..err... banking industry.

Never mind, our investment industry will surely push the banks to disclose the data anyway. After all, if you go back and look at what institutional investors and their representative bodies said in response to the Walker Review, most of them supported disclosure of 'high end' below-board remuneration at the banks, and they did so without qualification. No mention of the need for international agreement.

In particular presumably we can expect the ABI to lead the charge since they said that the relevant Walker recommendation was already in line with their own guidelines, and they even suggested more info would be required. Here's what they said:
We support disclosure of high earning groups within bands. This is consistent with our existing remuneration guidelines. We do not believe it is necessary for individuals who are not main board directors to be named. The breakdown should include a category comprising other benefits in case there are large benefits in kind or innovative methods are used. It should also cover those who are classified as consultants but whose main individual income derives from work undertaken for the business. Banded reporting, however, should be accompanied some descriptive analysis enabling shareholders to understand the underlying policy and approach, including where appropriate by business segment. In particular, this analysis should include confirmation from the board that remuneration took account of risk and was aligned with the business model.
Individual ABI members also backed the relevant recommendations without qualification, so surely we can assume that they will be pushing for proper disclosure...

Wednesday, 24 November 2010

PC gone mad is PC gone mad

A bit more from Mr Sunstein:
[T]he very phrase 'political correctness', as used by some conservative critics, has an impressive and somewhat pernicious ingenuity. The phrase suggests that certain political commitments are not a product of serious reflection but instead are a form of unthinking dogmatism - just a matter of following the crowd. The phenomenon of left-wing political correctness is real, and it is a real problem. But the use of the phrase to discredit certain thoughts and ideals can be a clever way of imposing informational and reputational pressures. Ironically, many of those who refer to political correctness, and deplore its presence on university campuses, are themselves participants in an insidious form of political correctness. They participate in group polarisation as well, stirring one another into extreme caricatures of contemporary university life; and they do so while congratulating themselves on their independence and bravery.
Spot on.

Monday, 22 November 2010

Conformity and rewards

One of my books currently on the go is Why Societies Need Dissent by Cass Sunstein, which is rather ace. There is a lot of very useful material in there is you're interested in a more behaviourally-informed view of governance. Just a quick excerpt below about one of my favourite subjects - the impact of financial incentives on behaviour. In this instance Sunstein is looking at how incentives affect conformity of opinion.
When people stand to make money if they are right, the rate of conformity is significantly decreased if the task is easy. People are less willing follow group members when they stand to profit from a correct answer. But there is a striking difference when the experiments are changed to make the underlying task difficult. In that event, a financial incentive for correct answers actually increases conformity. When the question is hard, people are more willing to follow the crowd if they stand to profit from a correct answer.
It's just a snippet, and there are plenty of other bits in the books that give pointers to how people can, and do, overcome the pressure to conform. Nonetheless it does seem to provide grounds for another argument against the merits of performance-related pay. Unless we think running a company is a simple task. And maybe it tells us something about benchmark-hugging in the investment world too.

PS. As I thought the book lends a bit of weight to my argument that it would be better if more investors went public with their concerns.

What Walker said last year

The blurb below is from the original July 2009 Walker Review consultation document. Notice that he explicitly acknowledges that 'going it alone' on remuneration disclosure has drawbacks, but he concludes that other concerns - shareholder oversight and public interest - outweigh this. What has changed then to justify a change of policy? Is it just 'business as usual'?
It is then for consideration whether new disclosure provisions should be put in place to cover remuneration in this “high end” category to provide an indication of numbers of executives within it, with detail in specified compensation bands. Possible reasons for reservation about this include the fact that principal shareholder focus is most likely to relate to how interests are best aligned through appropriate incentive structures than to absolute levels of remuneration. There would also be some risk that the signalling influence of such further disclosure could exacerbate upward pressure on remuneration through intensifying the competitive process, in line with the view that disclosure of board level remuneration has probably exerted upward ratcheting influence of this kind.

There can be no question of turning the clock back in this respect, but great care will be needed to assess the likely, in some degree predictable though obviously unintended, consequences of further disclosure in this area. In any event, in this as in other related matters (such as the later discussion in this chapter on the gap between the highest and lowest-paid employees) there would be a proper concern to avoid tilting the playing field against UK-listed entities through requiring a degree of further disclosure going beyond what is likely to be required in their principal competitors.

There is, however, precedent in the US, Australia, Hong Kong and elsewhere for disclosure of the remuneration of a specified number of the most highly remunerated at the top of the “high end” category. And given the recent experience in which
inappropriate remuneration structures contributed to the severity of the crisis phase, there would seem to be legitimate shareholder and wider public interest in disclosure in relation to this “high end” category of executives which have large business and risk-related responsibilities. In this situation, and despite the reservations described above, it would seem justified to seek appropriate but anonymous disclosure of the total remuneration cost for all in this category.

Coalition succumbs to banker lobbying

There's a great bit on Mark Kleinman's blog here about George Osborne giving in to pressure from the banking lobbying and delaying implementation of the Walker Review recommendations in respect of remuneration disclosure. It's also on the front page of the Pink Un.

Here's Kleinman's take on it:
Two months ago, George Osborne’s spokesman could not have been more explicit.

“The chancellor is committed to implementing Walker,” he said in September. “He is not going soft in any way and that includes implementing the pay bands.”

That statement was in response to a newspaper report suggesting that Osborne was losing his nerve on forcing banks to disclose the pay of employees earning more than £1m.

Fast-forward ten weeks and “going soft” is exactly what the Chancellor has done.

He has confirmed this morning that implementing the report by Sir David Walker is best done only in co-operation with international colleagues and that without such co-operation, there is little chance of the Government forcing the disclosure rules upon Britain's banks.

For those not surprised to see the ConDems go weak at the knees (this excludes those people who said there would be no difference in corp gov with a change in government....!) I'd say also have a look at David Walker's bit in the FT comment section. He does rather make Osborne's argument for him, but the more interesting bit is the section where he basically argues that shareholder oversight is ineffective because of the lack of below-board disclosure. Would be interesting to see if any shareholders are pushing for below-board disclosure and, if so, what they think of the u-turn.

Friday, 19 November 2010

Thursday, 18 November 2010

That full George Osborne article on Ireland

It's still available on The Times website here. Some great stuff in it:
The new global economy poses real long-term challenges to Britain, but also real opportunities for us to prosper and succeed. In Ireland they understand this. They have freed their markets, developed the skills of their workforce, encouraged enterprise and innovation and created a dynamic economy. They have much to teach us, if only we are willing to learn.

Wednesday, 17 November 2010

Blaming the EMH or not

I was reading a review on Amazon of the Roger Bootle book I mentioned t'other day. In it one reviewer said that the Madoff scandal was a result of the efficient markets hypothesis (EMH). I was rather taken aback by this, as the EMH is essentially a theory about how markets respond to information and what flows from this in terms of investors' ability to 'generate' superior returns (I prefer 'channel', actually, since it is the underlying companies actually doing the work). Madoff was, quite simply, a giant fraud and I don't see what a theory about how markets assimilate information has to do with that.

I was midway through posting a comment in response to the review when I read it properly and realised the reviewer was making a slightly different point. This was that the implication of the EMH is that other people are already processing the relevant information and/or doing research, and therefore there's no point doing the legwork yourself. This has merit in broad terms as an attitude to investing in developed markets. Unfortunately the reviewer stretches this to cover investors like Bramdean failing to do due diligence on Madoff, which I think is pushing things a bit far. Nonetheless the broad point is that a theory that says you can't beat the market because lots of other people are trying to and thus markets are efficient leads people to take their eye off the ball. I think there's something in that in broad terms.

But in the specific case of Madoff it doesn't really make any sense. Because if you read Nicola Horlick's infamous words about Madoff, one of the things she says is that he was very good at calling the market and therefore delivering sustained returns. Surely a real believer in the EMH would be deeply troubled by such a finding - because it directly contradicts the theory! Sustained outperformance should not be possible because markets are efficient.

In reality I don't think active asset managers (those who aren't shysters) believe in the EMH, at least in strong form, because they believe they can add value. The pitch of the likes of Nicola Horlick is precisely that they can do what the EMH says shouldn't be possible. That lack of belief in the implications of the EMH in turn lead Horlick to stick her clients' money in what she thought was a hedge fund (as I've said before, IMO it was no more a 'hedge fund' than Nigerian email scams are 'investment opportunities').

And if we take the broader point against the EMH seriously - that it leads people to do insufficient checks/research - how widely does this apply? If I buy a dodgy secondhand car because it's solid by what looks like a legit dealer and I assume they have done the legwork is that the fault of the EMH too? If not, why not?

None of this is to defend the EMH as a theory, and I do not underestimate the impact of ideas on behaviour. But it's worth thinking through what precisely the EMH did influence, rather than blaming it for behaviour that may have had other drivers.

How institutional investors vote

It's interesting to note that the only place (as far as I am aware) that you get can any comparative analysis of how UK institutional investors exercise their voting rights is from the labour movement, or more specifically the TUC. If the model of shareholder oversight that we all subscribe to is so important, it's interesting to ponder why it is that only trade unions dig into the data.

I'm glad that's the case in some respects, as it potentially gives the TU movement greater authority to speak on these issues than others. And notably this is also the case in a couple of other markets (US and Canada). Still it's a surprising quirk for a market that is supposed to believe in this model.

That observation aside, what does this year's survey (PDF) tell us? The real story, as the TUC points out, there's a real split in investor voting. Some investors (asset managers, principally) are much more likely to vote in favour of management than others. In the sample some investors voted for 70% plus of all management resolutions, and another group voted for under 40%. That's a pretty sharp divide, especially given that these were 'contentious' resolutions (as evidenced by the voting results companies disclosed).

Needless to say this also reads across types of issues. Those investors most likely to vote in favour of management were more likely to vote in favour of remuneration policies and for directors' re-elections. The names that crop up most regularly on the 'vote with management' side of the graph are the likes of M&G, Hermes, Fidelity and SWIP. One of the things I did was compare this with some analysis we've done on investor voting on shareholder resolutions on ESG issues, and notably the same types of names appear as voting against such resolutions.

In summary this suggests to me a relatively simple conclusion - it's a house style. Some investors pitch themselves as more pro-company in their voting than others. That's all fine and dandy and their choice of course. I suspect some (all?) would probably say that other aspects of engagement are more important. My personal view is that this puts a lot of weight on the ability to get movement from companies just by meeting with them or writing to them. In addition my own experience of engagement is that some of the 'wins' claimed to justify voting with management are pretty meagre. But we can agree to disagree.

There are some important caveats. It's not a big sample of investors, because some asset managers still refuse to take part in the survey. And it's not a particularly large sample of votes. Having done some fairly extensive voting analysis at work, I think that more respondents would have revealed a larger group of asset managers who vote in favour of management a lot. So unfortunately those who do respond are somewhat punished by those who don't!

The final question we ought to ask is whether the TUC could have produced this analysis without asking managers to voluntarily provide the info (ie relying on public disclosure). I spoke to Janet, the TUC's policy officer on this stuff, about this yesterday and she said definitely not. Yet the investment industry still claims that a voluntary approach is working. Ho hum.

Tuesday, 16 November 2010

Pensions geeks & politics

Just a quick reflection on today's TUC trustee conference, where Lib Dem pensions minister Steve Webb spoke. I've been going to this conference in different capacities for years. It was the most hostile (in a typically restrained way) reception I've seen the conference give to any minister to date. This despite the fact that a) it's quite a specialist conference and usually respectful to speakers and b) Steve Webb has a good reputation in the pensions world.

The main issue of contention was - as you might imagine - the CPI/RPI change. To be fair Steve Webb tried to defend his previous statements, and the guy knows what he is talking about. Nonetheless the audience was not sympathetic. And talking to delegates at the end of the conference, it was notable that mention of the Lib Dems generated a more hostile reception than the Tories (who many TU members expect to be b***ards). This is a pensions conference remember.

TUC fund manager voting survey

The TUC's annual survey is out, see here and here. Will try and blog properly later, one of the most notable factoids is that, of all the respondents, Hermes was most supportive of management on the resolutions on which votes were sought.

Monday, 15 November 2010

The value of fund management

I picked up a cheapo second-hand copy of Roger Bootle's The Trouble With Markets recently, and rather good it is too. Definitely one of the better examples of the 'crisis publishing' genre. Here's a nice little snippet about investment management, about whose merits he (like John Kay) is rather sceptical.
Hedge fund investors and other investor do provide some service to society by improving the efficiency of the market. And some of the great investors have been decidedly activist in the management of the companies in which they invested their money, thereby helping to counteract the passivity of the investment institutions. But a huge wedge of investment activity is purely speculative in nature. And the size of rewards does not correlate with the contribution of their activities to society, Such investors belong somewhere close to lottery winners. Meanwhile there is surely a legitimate question about quite how many lotteries a society should have - and indeed how large the prizes should be.

But this I don't mean to suggest that investment success is always down to luck; rather the activity does not add a great deal to society's overall welfare but redistributes it from others to the successful investor. The genius of the great speculative investors is to see what others do not, or to see it earlier. That's all. This is a skill; of that I have no doubt. But so also is the ability to stand on tiptoe, balancing on one leg, while holding a pot of Earl Grey tea above your head, and successfully pouring the contents into a cup that is seven feet below you on the ground, without spilling a drop. I am not convinced, though, of the social worth of such a skill, still less of the wisdom of encouraging the brightest and the best of our society to try to perfect it.

Yet that is what we have done with financial markets. It is commonplace for successful businesspeople to look on the activities of those in the public sector with disdain since what the latter do, they think, is merely redistributing wealth, rather than creating it, thereby imposing a burden on those who do create wealth. This view is not without some justification. However, the irony is that some of the activity that takes place in the public sector is genuinely creative, while the large part of what goes on in financial businesses, owned and managed by the private sector, is completely about distributing wealth - with large parts of the loot going to the practitioners.

A couple of interesting company AGM results

A smallcap called Centamin Egypt had to pull a share scheme ahead of its AGM last week because of the investor backlash (or more specifically the fact that it lost the vote). See, voting against works!

Minerva also failed to pass a special resolution (this is part of the long-running spat with KiFin) and saw a 43.5% vote against its remuneration report.

Thursday, 11 November 2010

Money is not our god

Repeat after me.

Workfare & behavioural insight

Just a thought about the IDS 'work or lose your benefits' approach. Has any of this been run past the famous 'behavioural insight team'?

The reason I ask is over the past couple of years I've become a bit of a geek about work and motivation, which would seem to be a key area where behavioural insight might apply. It seems to be a pretty robust finding that if you give people a degree of discretion about what they do and how they can do it they are much more motivated than if you tell them what to do and are prescriptive about how to do it. This is all that intrinsic motivation/self-determination stuff that Deci etc have been on about since the 1970s.

More broadly the labour market in general seems to work ok (in terms of motivation) in the sense that people have (or believe they have) a choice about what job to do. What that may mean in practice, according to this guy, is that even if you end up in a dull job for low pay, you may well end up convincing yourself that it can't be that bad because a) you are still doing it and b) you chose it. Elimination of cognitive dissonance and all that.

So what happens if you end up forced to do a certain job or face being financially penalised? I can't believe that it's going to be a big plus in terms of a sense of self-determination. The approach IDS is taking seems, from my admittedly superficial lunchtime take on it, to tick the wrong boxes about getting people motivated about work. And that in turn affects general satisfaction with life.

Now people might still argue that it's more just for those on benefits to have to work for them, and that this outweighs any question of whether they are motivated about work or not. That's a political question. And maybe the cognitive dissonance process will lead people (over time) to think 'this isn't so bad'. But surely if you have a 'behavioural insight team' this is exactly the sort of issue you ought to run by them. Wonder if it happened in this case, and if so what they said.

Tuesday, 9 November 2010

Ireland's approach to BOFI governance: comply or get suspended

Major hat-tip to CL&G, though we knew it was coming this is a significant development. Effectively Ireland's version of a Walker Review type process has resulted in a regulated approach to the governance of banks and other financial institutions. BOFIs are told what structures they have to have in place and face sanctions if they don't comply.

Obviously Ireland's approach isn't simply going to be copied by other markets, some of which will feel that a 'comply or explain' approach has much more flexibility that both financial institutions and their owners value. But let's be clear this further undermines the idea that a market-driven approach is the best way to go.

High Pay Commission

Is now up and running. This will be interesting to watch. Some interrogation of how investors have actually used their voting rights would be very useful!

Monday, 8 November 2010

An smallcap pay revolt

Quite a big vote against the remuneration report at Kofax last week, with a bit uder 32% voting against. Definitely one of the bigger ones for some time, but seems to have gone unremarked, presumably because it's a smallcap.

Friday, 5 November 2010

Workers' capital - the blog

Just a quick plug for the blog run by the Committee on Workers' Capital. You can find it here.

Thursday, 4 November 2010

Speaking out

It's a common argument amongst some institutional investors that concerns about investee companies are best expressed privately. This is an argument that has also been deployed against disclosure of voting records. I have always felt that it is self-serving, but I increasingly think it is also just wrong.

By failing to speak out publicly, investors can create the impression that there are no concerns at a given company. It's the self-censorship of dissent and can therefore lead to a public assumption of apparent consensus (I'd almost go as far as to say it's analogous to banning shorting). It's a bit like a bubble in positive sentiment, without publicly expressed concerns it may simply grow bigger.

It's notable that Cass Sunstein has been making the argument for years that it's important to express dissent. And obviously in corporate governance there's a clear consensus that boards need to exhibit the ability to facilitate open challenge. Yet for some reason when it comes to investor dissent it's almost a point of principle of some to not speak out - even where publicly expressed dissent may help others find their voice.

Anyway, I'm going to start this soon. Expect to see a few excerpts appear...

91% of voters don't agree with Nick

Lib Dems down to single figures.

Tuesday, 2 November 2010

Letting the bankers get away with it?

An interesting piece in The Grauniad about the Coalition appearing to draw back from action on bonuses. I'm particularly interested by the implication at the end of the piece that all the Walker Review recommendations might not be implemented. I'm personally not surprised, but I'm not a ConDem supporter, but I do wonder what those folks who told me there would be no great difference in policy if there were a change of government think about it.

FRC rejig

I had previously thought that the cryptic reference to reform of the FRC in the Bonfire of the Quangos list related to the ULKA transfer. Not so. Have a look at this response to a written question from Lord Myners:
Financial Reporting Council
Asked by Lord Myners

To ask Her Majesty's Government what plans they have for the Financial Reporting Council; and what are the implications of those plans for the proposed hosting of the UK Listing Authority. [HL3030]

The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Baroness Wilcox): The Government consultation on the future of financial regulation, which, among other things, included the consideration of whether the UKLA should be merged with the FRC or remain within the CPMA markets division closed on 18 October. The Government are currently considering responses to the consultation, and no decisions have yet been made.

This is quite separate from potential changes to the funding and governance structures of the FRC and its operating bodies to make the FRC even more efficient and flexible, on which the Government will be consulting in due course.

Monday, 1 November 2010

Not quite, Pesto

Via Touchstone I came across Pesto's blog on the IDS and IoD surveys of directors' pay. This bit stuck out:
But it is also probable that what we're witnessing in the pay disparity is another manifestation of the agency problem: irrational decision-making at listed companies which stems from the gap at listed companies between owners and managers.
Actually these days there is a lot of discussion about remuneration between the managers and the owners (shareholders) and many would argue, often for very different reasons, that this takes up too much time. There's a vote every year on pay policy, and often on new incentive schemes too, so shareholders have the tools to make a difference, if they choose to. The reality is that pay rebellions are rare and average oppose votes low - we reckon about 6% against a rem report this season, with the median a bit over 1%, and well under one in five companies registering 20% and up against. Shareholders in general, it seems, do not have a problem with exec pay.

What's more, those eye-popping IDS figures are driven in large part by bonus and incentive schemes. That is the performance-related bit of the package that is there because of fear of agency problems. It's supposed to align the interests of owners and managers. So the very thing that creates the bad headlines has a) been advocated by investors and b) been legitimised repeatedly by shareholders through whopping majority votes in favour of all but a handful of remuneration policies.

So arguably from a shareholder point of view nothing is wrong. But if we do think something is wrong then maybe what we see is not an agency problem - but an agency theory problem. The application of an inaccurate model has resulted in perverse outcomes. Just a thought.

UPDATE: Charlie points out Will has a rather ace post up on the same kind of issues.

Friday, 29 October 2010

Bad language

Bozza has rightly been pulled up for comparing changes to Housing Benefit to what happened in Kosovo. Whatever we might think about the ConDems' policy, it is not reasonable to compare it to ethnic cleansing.

But why then is it considered OK for the ConDems to compare the difference between public and private sector pension provision to apartheid? It's equally inappropriate, innit?

And who used such inflammatory language? Err....
The Tory leader told the Manchester meeting: "My vision over time is to move increasingly towards defined contribution rather than final salary schemes." He added: "We have to end the apartheid in pensions."

Regulation, regulation, regulation

Worth reading this in light of the general direction things are taking (ie a turn towards regulated governance). The speech isn't anything like as dramatic as the new piece suggests, but the tone is probably right in terms of the way thinking has shifted.

Wednesday, 27 October 2010

And another thing... about high pay

I like Tom Harris's blog, and find myself agreeing with quite a lot of what he says. Not sure about this bit in his latest post tho:
3. I oppose a “High Pay Commission”.

And in government, so did the Labour Party, or at least our then (very sensible) Chancellor, Alistair Darling did. Holding an inquiry into the “evils” of high pay sends out the message that we think wealth is A Bad Thing. Get real, comrades: high pay isn’t the problem – low pay is.
There are several things wrong with this. First, there is no need to counterpose low and high pay - there can be problems with both and we can deal with both, in different ways.

Second, in an environment in which the head of the CBI and former chief exec of HSBC are saying that top pay is causing problems I don't think reviewing the issue via a commission sends out the message that wealth is a bad thing. In fact I'd argue the reverse, to not take action looks like a lack of understanding that there is a problem.

Thirdly, and most importantly, the Labour government actually did undertake some useful work in this area which is worth remembering. Aside from the bonus tax, Labour also initiated the Walker Review which in turn resulted in significant reforms to the pay arrangements of amongst the most hightly paid in the UK - people in the City. And this took place whilst Darling was in charge at HMT. In addition Labour had intended to toughen up shareholder oversight of executive pay, perhaps either through a vote on contracts, or making the existing vote binding. And, Lord Myners gave plenty of speeches indicating that he felt there was a market failure in respect of rewards for those at the top.

Going back a bit, Labour of course introduced the shareholder vote on remuneration reports in 2003, and improved the disclosure of exec pay - because of concerns that there was a problem with high pay!

All that a commission on high pay would do differently presumably would be to get experts to advise it. I'm not sure that it would reach hugely different conclusions to those Labour drew in power, or come out with ideas much different to those floated in the leadership election (like employee representation on rem committees, trailed by D Miliband).

To argue against a commission on the grounds that it sends out an anti-aspirtion/anti-wealth signal is, like, soooo pre-crisis.

Tuesday, 26 October 2010

The BIS short-termism review

Is available here. Notable by its abscence is the lack of a discussion of qualifying periods for voting rights, despite Vince Cable trailing it as an idea at t'weekend. The section on takeovers looks like it's had the most work done on it, with the other sections lacking much underpinning evidence (Not that you need to provide a justification for consulting, just we've got a bit used to it with Turner, Walker etc). So I assume that's where the most interest is initially.

Could be interesting, provided the Blue half of the ConDems don't squash it.

Sunday, 24 October 2010

Short-termism review part 3

Keep an eye out for this John Kay quote:
The notion that market prices are the result of a plebiscite on competing estimates of fundamental value is far removed from the reality of frenzied trading in modern financial markets. Most participants are preoccupied, not with long-term economic trends and the competitive advantage of companies, but with evolving market opinion and the ephemeral news that passes across the Bloomberg screen....
Will explain why if it appears tomorrow.

Short-termism review part 2

Mark Kleinman at Sky looks like he's been well briefed on the contents, get a load of this. Some of the questions on his list look suspiciously detailed (unless he spends as much time thinking about this stuff as I do!) so check out the the full list below for hints about what we can expect tomorrow. Note questions on rem committee membership and 'relationship between directors’ pay and employees’ pay' (ie ratios):
1. Does the legal framework sufficiently allow the boards of listed companies to access full and up-to-date information on the beneficial ownership of company shares?
2 What are the implications of the changing nature of UK share ownership for corporate governance and equity markets?
3. Is there sufficient dialogue within investment firms between managers with different functions (i.e. corporate governance and investment teams)?
4. How important is voting as a form of engagement? What are the benefits and costs of institutional shareholders and fund managers disclosing publically how they have voted?
5. What action, if any, should be taken to encourage a long-term focus in UK equity investment decisions? What are the benefits and costs of possible actions to encourage longer holding periods?
6. What would be the benefits and costs of more transparency in the role of fund managers, their mandates and their pay?
7. What would be the effect of widening the membership of the remuneration committee on directors’ remuneration?
8. Are shareholders effective in holding companies to account over pay? Are there further areas of pay, e.g. golden parachutes, it would be beneficial to subject to shareholder approval?
9. What would be impact of greater transparency of directors’ pay in respect of: linkage between pay and meeting corporate objectives; performance criteria for annual bonus schemes; relationship between directors’ pay and employees’ pay?
10. Do boards understand the long-term implications of takeovers, and communicate the long-term implications of bids effectively?
11. Should the shareholders of an acquiring company in all cases be invited to vote on takeover bids, and what would be the benefits and costs of this?

BIS short-termism review

There's a bit of an early sniff of what might be in the short-termism review in the Telegraph today, which suggests that we should hear something from BIS soon. As I blogged previously, the language in the Takeover Panel report that came out last week gives wiggle room for the Code to be adapted to reflect changes in company law. And it looks like Cable is willing to have a look at making changes here:
"The Takeover Panel didn't go for some of the more radical solutions like restricting the voting rights of short-term investors who have just come in to make a quick killing during a takeover bid," he said.
"There does remain a problem that as far as we can see from the objective evidence takeovers tend to reduce value, not increase it.
"We are going to have to look [at it]. I want to take what the Takeover Panel has done – and it is positive – and probably go rather further.

As I've written before, I quite like the idea of qualifying periods for voting rights, and if I remember rightly Myners trailed the idea in one of his speeches on 'ownership'. Cable also makes reference to an idea that Labour had committed to taking a look at - toughening up shareholder powers in respect of remuneration:
"On remuneration there is an issue that certainly over the last decade executive pay has far outstripped shareholder performance.
"It is a tricky issue whether we legislate to give shareholders more voting power. I don't want to rush in to some crass change that has unintended consequences but we do need to acknowledge that there is a real problem here."
So to go back to my brief post summarising what Labour had said/planned in this area, I would say that we could legitimately claim that Vince Cable is nicking some of our ideas. Not a strong argument I know, but I think it is worth making clear where no new ground is being broken (and it may well be the case that the review covers some issue we hadn't touched on).

I think it is also important that Labour puts out some thoughts on where reform could go further - and the idea of employe representation on remuneration committees is one possible, and it's a reform that I think ConDems would find hard to support despite some good arguments in favour. (And hat-tip to James for alerting me to the fact that Lord Ashcroft included this as one of his polling questions and found that the punters like it). I'm interested in whether Labour-friendly business people think it is actually achievable.

Finally, it's interesting to note that the review will look at shareholder behaviour - I hope this includes a proper look at how institutions use their votes. As I have blathered before, I continue to think that shareholder votes on remuneration could be effective - if only more institutions voted against more often. Perhaps exec pay inflation would have been controlled a bit better if more investors had been willing to say no.

Friday, 22 October 2010

Lib Dems vs unions

I understand that people have different views on the merits or otherwise of trade unions. But I always thought that liberals accepted them as a (voluntary and democratic) force for justice at work. I advise any union member who still sees the LDs as on their side or even (chuckle) more progressive than Labour to keep an eye on LibDemVoice, where attitudes towards TIGMOO have become notably chillier post-election.

Part of this is the inevitable Rightwards shift of the Lib Dems (this is partly being forced on them by the Tories, partly being actively pursued by their own Right). But I still find comments like the following on their latest 'scary unions' post rather hard to swallow, particularly given very recent history:
"unions are a special interest group, just like bankers."

"The TUC, The Co-op Bank & The Labour Party are all part of the same thing. The situation has many parallels with that in China or Cuba."
Also check out the comments from LD supporters saying they are quitting unions because the unions are mobilising against those pusing through cuts.

Nick Clegg stoops even lower

Next Left has the details of the Lib Dem leader's latest assault on objective analysis of the Bullingdon Budget.

To any Lib Dem supporters that might happen upon this blog consider this - isn't this exactly the sort of stuff we expect of Fox News? You know, keeping on repeating misrpreresentations until they start to stick. Like all that 'death panels' business. Doesn't this look like Clegg is trying to call the intergrity of the IFS into question so that the average punter doesn't trust their analysis.

You lot were supposed to be above this weren't you?

Or to put it another way... Your leader... was seduced by the Dark Side of the Force. He ceased to be Nick Clegg and became Darth Wibble. When that happened, the good man who was your leader was destroyed.

Thursday, 21 October 2010

My hobby horse

Voting disclosure. It's been the subject of a question in the Lords, look:
Institutional Investors: Voting Records
Asked by Lord Harrison

To ask Her Majesty's Government what is their assessment of (a) the proportion of United Kingdom institutional investors who publicly disclose their voting records, and (b) trends in that figure over the last ten years.[HL1802]

To ask Her Majesty's Government whether they intend to set (a) criteria for judging the success of the Financial Reporting Council's Stewardship Code in encouraging institutional investors publicly to disclose their voting records, and (b) a date to assess the Code's performance against those criteria, with a view to deciding whether to exercise the reserve powers under section 1277 of the Companies Act 2006 to introduce mandatory voting disclosure for institutional investors.[HL1803]

27 Sep 2010 : Column WA491

The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Baroness Wilcox): The proportion of institutional investors who publicly disclose their voting records has increased since 2004. Considered voting at company meetings is one of the ways in which investors can act as effective owners of the companies in which they invest, and it is important that all institutional investors disclose their voting in order to improve transparency in this area.

The Financial Reporting Council's planned approach to assessment is given in its report Implementation of the Stewardship Code published in July 2010. The Investment Management Association will be reviewing disclosure of voting as part of its next engagement survey, which will take place later this year and will include independent oversight.

The Government will comment on this and other related corporate governance issues when they set out their views on the regulation of takeovers in the light of the Takeover Panel's recent consultation.

Takeover Panel review

Response to the consultation from the Panel is now out here (PDF). No action on either threshold for a bid to go through, or qualifying periods for voting rights. But notably the text says:
the Code Committee understands that qualifying periods (or weighted voting rights) could be introduced through changes in company law. If such changes were to be made, the Code Committee considers that it would be logically consistent for the Code to be amended accordingly.
That, one could conclude, might leave the door open for a certain Lib Dem populated government department to muck about. All eyes on BIS then.

Tuesday, 19 October 2010

Labour thinking on ownership issues

I posted back in April about some of the things Labour had proposed in its election manifesto in April. Just a few recaps these included tweaking company law to encourage long-termism, considering greater shareholder powers in respect of remuneration, disclosure of shareholder voting records, reviewing the takeover regime and looking at other issues in respect of company ownership. Arguably quite an ambitious package, but in my opinion a cohesive one, and Labour seemed to have the most thought through policies in this area.

More recently (ie post-election) the idea has been floated within Labour circles of employee representation on remuneration committees, and perhaps disclosure of pay ratios within companies. Both good ideas in my view and worthing seeing if the Coalition nicks any of them.

Thursday, 14 October 2010

That tax exodus

From Financial News:

Not a single trading team from Tullett Prebon, the London-based broker which told employees they cold move abroad for tax reasons in one of the clearest signals of an exodus from London has moved, almost a year after the offer was made. It is the second development in a week that suggests fears over core talent leaving the City were overblown.

In December last year, Tullett said it would "seek to facilitate, where possible and appropriate, relocation to the company’s other offices around the world which will have more certain taxation regimes”. The company, led by City heavyweight Terry Smith, specifically meant offices in Singapore, Switzerland and Bahrain.

A source familiar with the situation said this week that no teams had taken up the offer, which was only available for whole teams. A company spokeswoman confirmed the offer to support those wishing to move still stood.

Tullett Prebon was the first London financial institution to offer support to staff wishing to relocate, following changes to the UK tax regime, in a bid to stop firms based outside the UK from poaching top staff.

FRC rejig on the cards?

Get a load of this from the 'bonfire of the quangos' document (PDF):
Financial Reporting Council
Retain and substantially reform - Remove reliance on Government funding
Wonder how this fits in with the UKLA tranfer proposal?

Wednesday, 13 October 2010

Pay and performance

Just a quickie - Leigh at Knowing and Making has responded to my post from the other day with a great post here. Here's a good bit I hadn't considered:
Companies offer performance-related pay because that lets the good employees select themselves for the job. If you're not willing to be paid per (goal scored/extra penny on the share price/lawsuit won) then maybe you're not so confident in your abilities after all. And who'd know your own abilities better than you?
I also agree with Leigh that a) there isn't a clear answer to this one and b) much of the stuff about the negative impact of rewards is experimental - we definitely need some real-world evidence. This to me makes it all the more surprising that performance-related pay is an ever bigger slice of exec pay - as if its effectiveness had been conclusively proved.

Tuesday, 12 October 2010

Belated plug

For an excellent analysis (PDF) of voting by Canadian mutual funds produced by the excellent SHARE and Fund Votes.

Sunday, 10 October 2010

A bit more on pay and motivation

We recently got hold of James McConvill's The False Promise of Pay for Performance at work. It was rather expensive for what is quite a short book (and I notice the price has gone up significantly further on Amazon since we got it). The subtitle is 'embracing a positive model of the company executive'.

As such I thought that this would be right up my street. And in some respects it is, as a big part of the argument is that agency theory provides a poor model of human motivation and that as such the focus on remuneration that derives from it is mistaken. So far so familiar. But what surprised me is that the section on what really motivates people is much more influenced by so-called Happiness Economics than what I was expecting - motivation crowding.

I was actually very surprised by this as I personally think this is weaker ground from which to develop a critique of what is indeed a false promise of performance-related pay (at least for complex tasks). It led me to dig out my copy of Richard Layard's Happiness (which is frequently referenced) to see what he said about performance-related pay. The answer seems to be not a lot, there are only about three pages on it. So whilst I find the book interesting, this was probably more because it critiques the topic from a different angle, than because I found it particularly convincing.

Again just my personal view, but I think you can develop a better analysis drawing on people like Frederick Herzberg, Douglas MacGregor, Deci & Ryan etc than by straying into the 'happiness' field. And just to push this on a bit further, I think you could probably develop a really powerful critique of performance-related pay for complex tasks by trying to make advocates make explicit the model of decision-making that lies behind it. What I mean by this is surely at the executive level what we are really interested in is directors making good decisions. Yet how is an incentive scheme supposed to achieve this?

To put it in real-life terms, imagine asking a director 'what was your most effective or important decision?' and then 'what role did remuneration play in it?'. I think a lot of people would answer the second question 'not a lot'. At this point you might get the answer back that whilst incentive schemes don't directly influence decision-making in that way they do provide a sort of background incentive to keep the director wanting to do well. But then that starts to sound quite a lot like a hygiene factor, doesn't it?

Thursday, 7 October 2010

Hutton report

Is here. Incisive commentary to follow (much) later.

Actually just read Nigel's post here.

Wednesday, 6 October 2010

Stand up for decent work - belated plug


Across the world Thursday 7 October will be marked by Trade Unions as 'World Day for Decent Work. The campaign's core messages for an economics that put people first couldn't be more timely with the Con-Dem government onslaught on jobs and working conditions.

For the second year running the TUC is working with Philosophy Football on their Stand Up Decent Work event. A night of ideas and entertainment will mix TUC General Secretary Brendan Barber opening the night with the superb comedy of Shappi Khorsandi closing it. Contributions include the performance poetry of Luke Wright, Kat Banyard author of 'The Equality Illusion' and the soulful sounds of East European brass from marching band Fanfara. Adding an international from Bangladesh ZM Kamrul Anam , leader of the country's textile workers trade union, at the cutting edge of the global campaign against sweatshop labour.

Thursday 7 October at TUC Congress Centre, 23-28 Great Russell Street, London WC1. Starts 7pm, Advance booking essential from or call 020 8802 3499

And regulating bonuses

The clues are there -
But [Philip Hampton] also admitted that the bank was "paying a lot of people who aren't worth it" and concluded that the way to solve the bonus conundrum in the City was through regulation.

"My own view is it can probably only be decisively solved through regulation," Hampton said as he highlighted changes that had been made to the structure of bonus deals to avoid rewards for failure.

Regulating culture in financial institutions

It begins.

Hat-tip: CL&G.

Car crash TV

Last night's Newsnight with Theresa May trying to explain the current position on Child Benefit. I actually found it painful to watch as you could almost see the ground disappearing from under her feet as she spoke.

Tuesday, 5 October 2010

My lazer sharp political ears smell an unpleasant message for Cameron

If the jungle drums from the Tory conference are to be believed then the writing is on the wall. In a word: Osborne has guffed. And as Iain Dale eloquently puts it:
David Cameron has an acute pair of political nostrils. And if he is sniffing the wind this morning I think I know what he will smell.
Indeed, that distinctive and unpleasantly eggy aroma in the conference hall is the unmistakable whiff of poorly thought through policy. And Osborne has definitely let one go in this instance. But Cameron can't complain, he was involved in this decision too. To quote Disraeli: he who smelt it, dealt it.

Monday, 4 October 2010


What's going on here then? Look at all the groups listed (LSE, CBI, IoD, NAPF) as opposing moving the UKLA to the FRC. Perhaps it is, as it says on the tin, a grumble about pointless deckchair shuffling (but then that's the HMT White Paper in a nutshell!). But you get the feeling there's more to it. Check out the CBI quote:
"It is not clear what the proposal to merge the UKLA with the FRC is seeking to achieve. UKLA is a real-time markets regulator whereas FRC is a standard-setting regulator."
But in that case I refer the honorable gentleman to the HMT consultation document (which I can't believe he hasn't read!) which states:
"The Government believes that, within the proposed new regulatory architecture, there is a strong case for a powerful companies regulator established with responsibilities for regulating corporate governance, corporate information and its disclosure, and the stewardship of companies by institutional shareholders."
It's explicit that this is intended to be a step towards creating a companies regulator. And my suspicious side leads me to think that is what is being (indirectly) opposed.

Beware a 'nudge' fudge on pensions

According to one report, the Government's response to the review of auto-enrolment may now appear later in the year. As Nigel has posted previously, here are some unpleasant rumours circulating about how the Coalition may undermine the consensus that has been built up around the policy. Of course it would all be pitched in terms of the difficult economic environment - especially exempting smaller businesses.

But this would - of course - be a major retreat from arguably the most high-profile Nudge-inspired policies*. Auto-enrolment as a way to 'nudge' people into saving is given a good bit of coverage in... err.. Nudge. And go back and read through the DWP docs first setting out auto-enrolment and you will see referenced one R Thaler, now an adviser to one D Cameron's Behavioral Insight Team. Therefore if the Coalition does back away, even partially, from auto-enrolment then someone ought to seek out Thaler's views.

* This is also why I find it irritating when Labour supporters take the mick out of the Tories over 'nudging'. a) we got there first and b) we should not surrender this ground to the Right.

Sunday, 3 October 2010

Labour back in front - part 2

A couple of polls today have Labour in the lead, by 2 and 3 points respectively, with one having us behind. So, based on other polling results in the week, there was a bit of a post-conference bounce it seems. But this is clearly fairly meaningless and whilst we have probably hoovered up left-leaning Lib Dems I would be surprised to see a result like this if there were an election today.

Encouraging stuff, provided you don't take it too seriously.

maybe not today, maybe not tomorrow, but soon...

I've posted a couple of times previously about my belief that we are going to see a shift away from a market-focused approach to governance to one in which others (primarily regulators) play a bigger role. Despite the publication of the Stewardship Code, and the apparent desire amongst the key interested parties in the UK to keep a shareholder-centred model, I am increasingly convinced that a regulatory turn is on the cards.


1. I am not convinced that the asset management industry in general is concerned enough to lobby hard in defence of the UK model. IMA research seems to bear out the intuition that most managers think governance matters a bit, but not enough to put real resource behind it. And most clients are not bothered - so where is the commercial incentive? The Stewardship Code may result in some upskilling across the industry as a whole, but I think this will be overwhelmed by other trends.

2. Regulators and/or states have real power to intervene in companies in a very forceful way. They have been reluctant to do so pre-crisis, but the situation is surely reversed now. It is more risky (reputationally) to not intervene. The govt booted out Fred Goodwin, not the shareholders, the FSA barred Johnny Cameron. I don't think that asset managers who are not as a whole even convinced of the intellectual/economic case for activism are going to achieve anything similar. And what matters is what works, I seem to remember someone saying.

3. Pay. Governance isn't well paid, except for a handful, but regulators are belatedly open to the idea that you have to shell out if you want to attract poachers turned gamekeepers. A lot of good people wouldn't think twice about a job in corp gov at an asset manager because it offers neither financial or reputational rewards comparable with those elsewhere. That matters - companies see how much money asset managers put into corp gov too.

4. Europe. The tone of the EC Green Paper looks to me like the direction of travel. It's worth noting that beyond a couple of nods to employee representation and a wider conception of directors' duties, it doesn't herald a turn back to the Rhineland model. It's a regulatory turn, not shift to stakeholder capitalism.

5. Politics. I don't think the restart of the upwards march in exec pay, return of big bonuses etc, can survive another attempt by politicos to kick it into the long grass by saying 'it's a matter for companies, rem comms and their shareholders'. There will be pressure to intervene more directly.

In all of this I am by no means expecting an overnight change. It may take several years to work through and the direction of travel won't always be obvious. But I think the signs are there already, and I struggle to see how an investment industry that is structured around an entirely different conception of what share ownership is about can make stewardship work quickly enough to fend off the inevitable.

It's also worth noting that this is no way a triumph for the Left or other critics of the existing model. As is no doubt obvious given my background, my personal sympathy would be with a model that had a greater employee involvement in governance. The fact that such an alternative is not a realistic option suggests on the one hand that we don't have the capacity to deliver it, but perhaps on the other that we don't have the collective belief to argue for it.