Friday, 12 February 2010

EMI, agency theory and stuff

A few inter-linking points that are swishing around my tiny little mind this Friday evening. First up, a quick thought about EMI. It's a simplistic point, but it does demonstrate that whatever advantages private equity might have as an ownership structure, these surely can't outweigh poor decision-making. Private equity has concentrated ownership, plus, if you buy the Jensen argument, all that debt focuses management minds. But ultimately it's just a different structure. Companies who dislike pressure for corporate governance reform often make the point that good policies and structures don't make good managers, exactly the same is true even when the agency problem is in theory reduced under private equity ownership.

Secondly, what does the continuing growth of executive remuneration - apparently unlinked to performance - tell us about agency theory? One could argue that the problem agency theory would lead us to expect in respect of remuneration - managers making out like bandits because they can - has actually got worse since we have actively tried to deal with it. For all the apparent pressure for performance-related rewards, the amounts involved have surged.

Does this mean that we've misapplied agency theory? Possibly (and I would certainly question - for different reasons - whether performance-related rewards actually deliver for the notional 'principals') but perhaps it has ben poorly applied mainly in the sense that we've been looking in the wrong place. After all, fund managers are agents too. And they are both a) judged on short-term timescales themselves and b) paid highly. So wouldn't executive remuneration arrangements that reinforce the idea that high rewards are necessary and encourage a focus on short-term results be what we expect them to promote? Just asking, like.

Finally, in a similar vein, recent events lead me to query the theoretical framework I was previously quite impressed by which is laid out in Political Power and Corporate Control. The argument is broadly that there are three core constituencies in governance - investors, managers and employees - and depending on their relative strengths they will tend to ally in certain combinations. So in a country like Germany where employees have to some extent shared interests with management because of the governance structures, they will tend to ally against investors. Whereas in a country like the US where both employees an investors are shut out of power in governance they ally against management (think of the extent of union involvement in shareholder activism there).

So far so good, but then in these terms the UK ought to develop along the same lines as the US. Yet in reality examples like Cadbury demonstrate that actually management and employees often seem to find common cause against investors (though it didn't come to much in that case). Perhaps it's partly because labour still has some residual strength within companies. Perhaps I'm simplifying too much, and labour is beginning to see the possibility of allying with investors. Or maybe the framework needs to be applied a bit differently. But it doesn't seem to quite fit the UK in my opinion.

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