Hanging up my keyboard - for now

Due to impending house move, rapid development of Powdrill 2.0 and so on, I think it's time to take a break from blogging. And I'm going to try and go cold turkey, rather than gradually winding down.

I've managed just over three years, which is pretty good I think, and hopefully brought something a bit different to the lefty blogosphere.

Thanks to everyone who has contributed/made comments. See you out there in the real world.

PS. Vote Labour, as if that wasn't absolutely obvious.

Takeovers

Interesting piece on the FT website about takeovers. Dunno about this though:

One of the more radical solutions has been suggested by Lord Myners, who has floated the idea that shareholders get preferential voting rights linked to the time they have held stock in a company.

Critics, including many long-term investors, say the proposal is unworkable and would turn on its head the UK’s long-established tradition of shareholder democracy based on one shareholder, one vote, as well as equal treatment of all shareholders.

I think that second para is basically... err... bollox. I have no doubt it is workable, and it's not overturning one share one vote, it's introducing a qualifying period.

What I find particularly odd about this is the fact that (typically anonymous) "long-term investors" are basically being fundamentalist about a principle that favours exit over voice. I mean if you are a long-term investor what's the problem? I think what this really demonstrates is that some right old guff is talked by some investors. They say all the right things about long-termism and ownership, but they act very differently in practice. This will be a big problem with the Stewardship Code I suspect.

The real issue with introducing a qualifying period is whether it would make any difference - and that isn't even discussed.

Links on unions & pensions

1. John Gray on the Unions 21 event on pensions.
2. Nigel and Calvin on NEST charging.

Good spot

Hopi has a good piece on today's Tory union-bashing. He also provides a link to a piece by Iain Dale (who is toeing the line today) from the dim and distant past of... err... Autumn 2008 when he was saying that Tories needed to 'lure' union members. Union members are too fick to remember what they was told 18 months ago like.

Incidentally Iain's description of Nudge in that Torygraph piece is interesting. I'm not sure he's even read the publisher's blurb, let alone the book itself. Ignoring the fact that it's not an accurate description of the argument what does this even mean?: "[Thaler and Sunstein] suggest how public and private organisations help people make better choices in their daily lives by offering the choice of good behaviour."

Choices made better by the offer of choice? Eh? Well I suppose it does sound like the sort of meaningless blah Cameron might say.

Just a bit more on motivation...

"At the top of the corporate world, pay-for-performance takes forms such as profit sharing and stock options. The rationale behind all these motivational incentives is that 'money talks'. People want money, so if you structure the situation correctly you can get them to do what you want.

The results of [my] studies cast further doubt on the efficacy of these pay-for-performance practices, however. Of course, these practices can motivate people, but in the process, they will likely encourage shortcuts and undermine intrinsic motivation. They will draw people's attention away from the job itself, towards the rewards it can yield, and that without doubt will result in less effective, less creative problem solving."

From Why We Do What We Do by Edward Deci (who seems to be the grand-daddy of much motivation research).

Hair to Blair

Or Dave's personal grooming routine.

Two quick, good reads

I've blogged previously about Identity Economics. It's actually rather short - especially given that it has those annoying publishing tricks of having several blank pages between sections, starting the main text halfway down the page at the start of a new section etc. So it's only about 100 pages long and I managed to read it over the weekend. The main point is to try to bring norms into economic analysis. A reviewer on Amazon says (not unreasonably) that it doesn't take us very far, but it does provide quite a lot of ideas for future research, and it's an interesting perspective on things.

Secondly I can't praise highly enough Not Just For The Money by Bruno Frey. It's basically a run-through of the idea of motivation crowding, applied to a variety of policy issues. It's sensible stuff. He does not dispute that extrinsic motivation (not just money, by the way) has a role to play. In addition he argues that regulation can have a similar impact on intrinsic motivation as tying a lump of cash to an outcome. But he provides quite a few scenarios in which extrinsic motivation is likely to have little or negative effect. It's also got lots of references to other research, so a useful resource too. And again, only about 120 pages, so quick work.

Got to say the more I read of this stuff the more I question some of the ideas taken for granted in my corner of the world. I need to read some counter arguments!

Myners to push for greater pay disclosure

From the FT:

Tens of thousands of investment bankers could be caught by a government proposal that banks should disclose pay details for anyone earning more than £500,000 a year.

Lord Myners , the City minister, said yesterday he would hold consultations on making more draconian the pay disclosure requirements that were recommended last year by Sir David Walker in a bank corporate governance report.

Banks must disclose pay details only for board-level staff. Sir David said banks should also disclose how many people earned above £1m: bankers estimate that a few thousand City workers would be caught by that requirement.

But Lord Myners wants to cut the threshold to £500,000 and require reporting in £500,000 bands above that level. One big investment bank estimated the move would affect 20,000 to 25,000 bankers across the City. The proposal will cause fury among Britain's banks, with most arguing that the disclosure rules merely fuel the politics of envy and have nothing to do with making the industry safer.

Hug a hedgie

There's a good piece by Hugh Hendry in the Torygraph in defence of hedge funds. I don't agree with a number of the arguments. For example:

In short selling, investors borrow shares and sell them, hoping that the price will fall and they can buy the shares later at a lower price, replace them and thereby turn a profit.

Hedge funds are not seeking to dictate economic affairs. Rather we are preoccupied by price. A market-based economy like ours requires a pricing mechanism to allocate resources and ensure that we all prosper. Get it wrong and we endure the calamity of the technology bubble and the sleazy debacle of the American mortgage crisis.

My issue here is that shorting was available as an option during both bubbles, but failed to dent them, so I dunno if it really has the market-wide benefits that are claimed (or implied in this case).

But anyway, it's a decent defence.

Investors and pay

There's an argument from Patrick Gerard, who has written a book on incentive schemes, here (scroll down a bit) about why shareholders can't be relied upon to police exec pay.

The Ownership of Enterprise

Just a quick plug for The Ownership of Enterprise if you're at all interested in patterns in company ownership. It's a very thorough study that looks at why different types of ownership arise in particular industries. As I blogged previously it comes at these issues from a dispassionate perspective, and he makes some interesting points about when employee ownership works and when it doesn't. Basically he argues that it only really works well where the employee-owners are fairly similar. So the theoretical advantages (like the fact that workers may have better information than external investors) don't necessarily matter that much. Also the section on the role of mutuals in banking and insurance is interesting, and he argues that regulation of investor-owned firms has effectively made the mutual model less attractive. Anyway, well worth a read if you want to get into this stuff in more detail.

Another great speech by Myners

To the Smith Institute last night, text is here. Goes quite a bit wider than my usual ownership agenda, and some really good stuff in there:

Beliefs in laws of economics and a view of the field as a quasi-natural science instead of a social discipline allowed for a remarkable proliferation in mathematical modelling and the emergence of a dangerous sense that risk could be predicted accurately – or even eliminated. This confidence in markets also blinded us to the limitations of markets and insensitive to the plight of those for whom markets alone could never deliver good solutions....

We can try very hard to understand the way markets will behave. We can look to the past to try to gain an understanding about the way shares and investments may behave in the future. But investing and speculative activities are never more than well-informed guesswork. The unexpected can and will happen – you cannot plan for every eventuality. Any investor (or regulator) that forgets that does so at his or her own peril.

PS. Pesto has blogged about it here.

What's on TV?

"The psychological mechanisms utilized by television shows and the devices by which they are automatized function only within a small number of given frames of reference operative in television communication, and the socio-psychological effect largely depends on them. We are all familiar with the division of television content into various classes, such as light comedy, westerns, mysteries, so-called sophisticated plays, and others. These types have developed into formulas which, to a certain degree, pre-established the attitudinal pattern of the spectator before he is confronted with any specific content and which largely determine the way in which any specific content is being perceived."

From The Culture Industry.

Union pensions stuff...

1. Latest issue of the TUC's member trustee newsletter here.
2. The GMB takes aim at the Higher Rate Taxpayers Alliance research on the LPGS.

Motivation crowding

There's a fairly well-known paper which summarizes the evidence regarding motivation crowding available to download here. Includes the famous example of introducing fines for parents who picked their kids up late from day care. No prizes for guessing the result...

Latest TPA report on the LGPS

There are some odd figures here (PDF). The deficit has gone up by £11bn, but the assets have fallen by £21bn. Doesn’t that imply that the liabilities have fallen by £10bn? (Yes, I know it's not that simple, but it does make you wonder if the TPA is comparing like with like).

Also the figures don’t justify the TPA’s argument. The fact that assets that local authorities hold have fallen in value (and correspondingly the deficit has risen) doesn’t mean that the LGPS is too generous. All the figures really tell us is that if something falls in value it is worth less. Great. So if you’re using A to balance B, and A falls in value, then the gap between A and B becomes bigger. Amazing stuff.

And finally at the risk of stating the blindingly obvious you could write an identical story about private sector pension schemes. Oh wait, some people without a dumb anti-pension agenda already did (PDF), and the numbers can be portrayed as being even more scary. From a £12bn surplus to a £200bn deficit in a year, clearly this must mean these schemes are far too generous or something....

Incentives vs fiduciary duty

A snippet from Identity Economics, which is in my 'to read' pile:

"The more a CEO's compensation is based on stock options... the greater the incentive to maximise the price at which to cash in. There are at least two ways to do this: one is by increasing the firm's true value; another is by creatively managing the firm's books. recent evidence shows that executives have understood and embraced the second possibility. What can identity economics say about this state of affairs? In our mode, and following Weber, the most important consideration in incentives for executives could be their role as fiduciary. Office holders should fulfill the duties of their office. If jobholders have only monetary rewards and only economic goals, they will game the system insofar as they can get away with it."

Pay and motivation, again

A couple more links that are worth a look. Behavioural economist Dan Ariely had an article in Wired recently that highlights some of the research he has done on the effect of rewards on performance. The story wil be familiar to those who are following this debate - performance-related pay doesn't seem to work, and may make performance worse.

The reader comments a worth a look too as they raise a number of regularly-occuring criticisms, primarily how can we compare these limited experimental results to what actually happens in the real world. Especially to how boards function. This is an important argument (though my own opinion is that the results would be the same) and Ariely is certainly on the lookout for someone to fund him to do some proper research:

I presented our results to a group of banking executives. They listened politely, and then they assured me that their employees' work would not follow this pattern. I said to them that with the right research budget and their participation, we could examine this assertion. They weren't interested.

I suspect someone in the investor community is going to leap on this soon.

Also through the comments I came across this paper. Here's the abstract:

We investigate whether bank performance during the credit crisis of 2008 is related to CEO incentives and share ownership before the crisis and whether CEOs reduced their equity stakes in their banks in anticipation of the crisis. There is no evidence that banks with CEOs whose incentives were better aligned with the interests of their shareholders performed better during the crisis and evidence that these banks actually performed worse both in terms of stock returns and in terms of accounting return on equity (ROE). Further, banks with higher option compensation and with a larger fraction of compensation given in the form of cash bonuses did not have worse performance during the crisis. All these results hold for banks that received TARP assistance as well as other banks that did not. The incentives of non-CEO top executives are unrelated to bank performance during the crisis. Bank CEOs did not reduce their holdings of shares in anticipation of the crisis or during the crisis; there is also no evidence that they hedged their equity exposure. Consequently, they suffered extremely large wealth losses as a result of the crisis.

Again, this does not surprise me, and seems to be more evidence that the link between pay and performance (in that the former drives the latter) isn't there when we're dealing with tasks that aren't easily measurable.

I think one important point in all this is to avoid conflating two separate issues. I have no doubt that some people will work harder (longer hours etc) for more money, but that isn't the same as saying paying someone more money results in good performance. In addition I am deeply sceptical that those people who have jobs that require a lot of time and effort are really driven by how they get paid - you might need to pay them a big salary to get onboard, but once onboard I don't think they are spending a lot of time figuring out what they need to do to trigger their bonus.

Here's the Mandy speech...

Here. Some good stuff in here:

We can entrust our share ownership to intermediaries, which is a good thing, because most of us don’t have the time or expertise to make investment decisions. And we spread our share ownership across hugely diversified, often international, portfolios, which hedges us in most circumstances against market risk.

But the result of intermediation and diversity has been to turn most shareholders into absentee or transient owners of companies. The decisions about what to own and when are made by fund managers whose incentives may require them to deliver returns on short timeframes, even if they manage pensions for people whose key interest lies in the long term.

For companies, the pressure to deliver short-term share price gains too often has to come before any wider considerations. In fact if CEO remuneration is tied to share price movements, simply raising the share price can become a corporate strategy in itself.

Market analysts may be as likely to be involved in a sophisticated game of predicting the next press release and share price movement as they are in assessing the long-term strength or weaknesses of firms.

This risks rewarding clever readers of the market more than industrial innovation, quality management, or entrepreneurial skill. On the face of it, it does not seem a model good at building companies with the patient but engaged ownership required for low carbon innovation or infrastructure investment or manufacturing on the back of new technologies in Britain.

And:

the open secret of the last two decades is that mergers too often fail to create any long term value at all, except perhaps for the advisors and those who arbitrage the share price of a company in play.

A lot of M&A advisors must be sleeping badly in that knowledge. Or maybe not.

And it seems to me that given that a takeover can have huge implications for workforces and communities as well as investors, this is an area where good governance, and active and responsible shareholding, are absolutely critical. I do believe that there is a strong case for throwing some extra grit in the system.

Liquidity fetishism

There's been a right old ding-dong over the Robin Hood Tax on t'internet. As I've blogged previously, I'm not convinced that an approach such as whacking up stamp duty on shares would do anything to counter speculative trading (not least because I don't know how you identify what counts as 'speculation'). But if the point, as is the case with the Robin Hood Tax, is to raise revenue I'm not sure if the fuss is isn't a bit overdone (provided the tax incidence point is acknowledged).

But there's one counter-argument that I don't like which is that such a tax would be bad because it would damage liquidity. Again proponents of a transaction tax need to acknowledge that reducing liquidity could indeed be a bad thing - it could easily make markets more volatile. But set at a low level that need not be the case. And equally opponents should admit that the benefits of liquidity can be over-sold, and that we can't assume that the existing situation is optimal.

Adair Turner gave this speech recently, and there's a section in it addressing precisely this issue titled 'A balanced approach to market liquidity'. Here's an excerpt.

scepticism about the limitless benefits of market liquidity and of the speculation required to make it possible, is justified on two grounds:

First, the fact that the benefits of market liquidity must, as already discussed, be subject to declining marginal utility. The benefits deliverable by the extra liquidity which derives from flash and algorithmic trading, exploiting price divergences present for a fraction of a second, are clearly of minimal value compared with the provision of reasonable liquidity on a day-by-day basis.

And second, the fact that, to a degree which is difficult to predict and unstable over time, greater market liquidity and a greater role for speculators can produce destabilising and harmful herd and momentum effects.

The whole thing is worth a read.

Wot Keynes said.

Another interesting Mandy speech

Here (bizarrely it has disappeared from BIS website despite being there earlier), which has quite alot in it about M&A. Will post up a link to the full thing when it reappears.

Hat-tip: Adam

Most unlikely political rumour of the day

Philip 'Red Tory' Blond used to sell anarcho rag Class War when he was at university. Seriously, I heard someone claim that yesterday.

UPDATE: As I thought, complete cobblers. So says the man himself, see comments.