Tuesday, 28 September 2010

GMB mythbuster on the LGPS


Inaccurate information and misleading statements about the Local Government Pension Scheme (LGPS) are rife in the media. This guide highlights the most prevalent and erroneous of these myths and sets out the realities of the LGPS.

MYTH: Workers in the private sector have to pay for the LGPS while local government workers reap the benefits

REALITY: Everyone pays for everyone else’s pension. Companies with occupational pension provision for their employees include pension costs when pricing their goods and services. All taxpayers pay for the cost of inadequate pension saving (increasingly prevalent in the private sector) through the tax and national insurance spent on increased take up of state benefits and demand on NHS and council care services.

MYTH: 25% of council tax is spent on the LGPS

REALITY: This misrepresentation deliberately ignores the fact that 75% of local authority income comes from sources other than council tax. The true figure as reflected by the Society of County Treasurers is around 5% (£65 a year for the average council taxpayer).

MYTH: LGPS costs are soaring and the scheme is unsustainable

REALITY: The cost of the LGPS to employers for service from April 2008 (2009 in Scotland and Northern Ireland) was reduced during the reforms to the scheme that included changed benefits and higher average member contributions. Member contributions on average increased by 0.5% and have continued to rise since, now approaching 0.7% above the old scheme’s member contribution rates. The introduction of cost sharing in the new scheme is designed to manage future funding volatility. Costs associated with service before the new scheme was introduced should have been funded by employers in the past. These costs cannot be reduced by changing the scheme for current or future members.

MYTH: The employer contribution rate in the LGPS is too high

REALITY: There is not one employer contribution rate in the LGPS. There are over 7,000 participating employers in the scheme and each has their contribution set by the private sector actuary employed by the relevant one of the 100 funds in Great Britain. Current employer contribution rates range from 14% to 25% with an average of 18%. Given the level of past underfunding that remains to be contributed by many employers to the scheme this is a reasonable level. At the 2010 valuation the level may change because the future service cost has dropped as a result of the 2008 reforms but the legacy of past underfunding by employers remains in many, although not all, funds.

MYTH: Local government pensions are paid directly by the taxpayer

REALITY: The LGPS, like all private sector defined benefit schemes, is a funded scheme with real investments in UK and overseas business and tangible assets such as property all generating returns to the 101 funds that make up the Local Government Pension Scheme in the UK. The taxpayer funds a proportion of the employer contribution to the funds through local and national taxation.

MYTH: The LGPS is only nominally funded

REALITY: The LGPS has more than £100bn in real assets: property, investments in UK and overseas businesses, cash and government bonds. Four out of the largest 20 pension funds in the UK measured by asset level are Local Government Pension Funds [Hewitt 2010]. Total income to the scheme exceeds expenditure by £4-5bn every year [CLG 2009], even in the current climate of poor economic performance. Even in the depths of the recession LGPS investments provided nearly £3 billion for the LGPS in England alone, accounting for 27% of that scheme's income. Another factor contributing to the ongoing viability of the scheme to this is the increase in member contributions. Yield from employees increased by 15% in the last year as a result of the new contribution rates in the 2008 Scheme [CLG 2009].

MYTH: Scheme members retire on gold-plated pensions, protected for life

REALITY: Around half of LGPS pensions in payment are below £3,000 a year [Audit Commission 2010]. The mean average pension is £4,033 with the average for women only £2,600 [CLG 2009]. As with any pension scheme member’s accrued rights, it was generally held that pensions already paid for were protected for life, however, the unilateral cut in the indexation of pensions from RPI to CPI has brought this into question for both public and private sector pensions. As a result of the Tory-Lib Dem budget LGPS members are likely to lose a quarter of the value of their pensions over the next 25 years pushing many more on to means tested benefits.

MYTH: High earners in the LGPS receive unreasonably high pensions

REALITY: In local government highly paid employees are in the same pension scheme as the workers near the minimum wage. In the private sector many company directors and senior managers set up their own exclusive defined benefit schemes on extremely generous terms while their employees have only a low value defined contribution scheme. The average accrued pension for a director in the private sector is £227,726pa, 56 times higher than the average LGPS pension [TUC PensionsWatch 2010]. Some members of the LGPS retire on very high pensions as a result of receiving very high salaries (236 local government employees earn more than £142,500pa), not as a result of an over-generous pension scheme.

MYTH: Local government workers have a job for life and better pay than everyone else

REALITY: The average length of membership in the pension scheme is only six years in stark contrast to the vision of a job for life. Existing jobs are often part time and low paid with minimal opportunity for overtime and other mechanisms common in the private sector to boost income. When comparing full time workers who are saving for retirement through an occupational pension scheme, public sector workers actually earn £22 per week less than their private sector comparators. The 'total reward figure', which is gross pay and employers' pension contributions, in the private sector is £666 and in the public sector is £644 per week [ONS 2010]. Local government pay is also low in the public sector context with two thirds of local government workers earning less than £21,000 a year.

MYTH: To make pensions fair public sector provision must be reduced to the level common in the private sector

REALITY: This would increase the number of older people forced to live in poverty which in turn will increase the cost to the taxpayer of state benefits, health and care services. It is never the right solution to inequality to stoop to the level of the lowest common denominator. In education the solution to problem of good schools and bad schools is not to worsen the good schools so all children are poorly educated. In pensions the solution is not to worsen the good schemes but to raise the standard of the inadequate schemes. In fact defined benefit pension provision in the private sector attracts a future service employer contribution of 15.6% [DWP Pension Trends] compared with less than 14% in the LGPS.

MYTH: LGPS benefits need to be cut or member contributions increased because of deficits in the funds

REALITY: The LGPS is estimated to be at least 75% funded with sufficient assets to pay all pensions due for the next 20 years without any further contributions [Audit Commission 2010]. Where deficits exist they relate to past service and underfunding by employers. One reason for current deficits is that LGPS funds were between 1990 and 1993 encouraged by the then Conservative government to fund only to 75% so the pension scheme could fund lower poll tax bills. Now deficits are measured against a 100% funding requirement, the cost of this historic underfunding is clear. Changes to benefits would only affect the future service cost which, as set out above, is already below the private sector average for defined benefit provision.

MYTH: The current economic situation means member contributions to the LGPS need to be increased

REALITY: Benefits already earned by members have to be paid, whatever changes are made to the scheme. There are no short term cost savings to be made from making radical benefit cuts. Increases to member contribution rates would not aid the Treasury’s finances unless the government introduced a specific tax on LGPS members (which would be contrary to their stated commitment to encourage pension saving). Instead any increase would be transferred into LGPS funds which have already been valued, without going through a valuation revision an increase in member contributions is unlikely to have any impact on employer contributions for at least three years.
Members are currently subject to a three year pay freeze, without the protection for the lowest earners that exists in other parts of the public sector. Some members of the LGPS earn only 37p an hour above the minimum wage and many lower earning potential LGPS members opt out of the scheme on grounds of affordability. This trend is particularly common among part time workers (the vast majority of whom are women), in Greater Manchester, one of the larger funds, only 10% of full time staff opt out of the LGPS compared with 30% of part time staff.

MYTH: LGPS members retire at 60 and get a pension for nothing

REALITY: The normal retirement age in the LGPS is 65 and has been for many years. Members of the scheme contribute between 5.5% and 7.5% of earnings depending on salary, averaging over 6.4% overall. This is more than double the amount the average member of a defined contribution scheme contributes.

MYTH: The new LGPS only affects new starters while existing members have their own preferential scheme

REALITY: Reforms to the LGPS affected all contributing scheme members, existing and new. The LGPS is not a two tier scheme, the LGPS 2008 is the scheme for any one of the two million people working in LGPS covered employment whether they started ten years ago, ten minutes ago or are due to start tomorrow. Existing members sacrificed benefits and increased their contributions in order to keep the scheme sustainable. The LGPS is the largest pension scheme in the country with more than 1.7m contributing members, 1m deferred members and a further 1m pensioner members.

Monday, 27 September 2010

Labour back in front

Means v little, obviously, but a good morale booster.

Sunday, 26 September 2010

Labour and remuneration committee reform

Ed Miliband mentioned in his Andrew Marr interview today the idea of employee representation on remuneration committees. I've written about this previously, and support the idea. I think it's a decent reform proposal as a) it's not too radical and b) there's some evidence from Cass Sunstein about why it might actually make a difference.

It has dangers for Ed as an idea. The first is that it could be characterised as throwing a bone to the unions, though that assumes that it would be a union person on the committee. The second that is that business would paint it as a slippery slope to co-determination type governance. A third is that some shareholders might argue that it's prioritising stakeholders over owners.

I don't think any of these arguments are really compelling, and could easily be counterposed with the the clubby nature of rem comms at present, and the poor decision-making they frequently exhibit. More importantly employee representation can be argued from the perspective of group dynamics (and the need to challenge reinforcing behaviour) rather one of the right of representation for social partners (I know some people won't like this).

I as I said previously, I am really pleased that Ed mentioned corporate governance. There are sensible reforms that could be enacted here, and the proposed high pay commission could do a useful job tackling some issues that the governance industry doesn't touch currently. I'll try and come up with some more ideas over the coming weeks and months...

Random thoughts on the leadership

1. Just watched Ed on Andrew Marr. It was a very solid performance, and included some very explicit messages about sticking to the centre ground. Mrs P is (as always) the person I listen to most and she thought he was very good, which I take as a good sign. My only criticism is that he was perhaps too moderate! But certainly not the neo-marxist union puppet you can read about elsewhere.

2. I texted a mate this morning to say the press would give him a fair crack of the whip and objectively analyse his positions on issues. This was a joke. We both knew that the idea that the right-wing press would do what it is notionally there to do (report what is broadly objectively true) is laughable. The coverage this morning tells you all you need to know - they will seek to impose a lefty/union puppet label on him from day one, and this was the obvious danger in electing him as leader.

3. BUT - let's not make the major error of assuming that the right-wing press and commentariat know what the hell they are talking about. It makes me smile to see them try and portray Ed as the IDS-style choice (much as I respect him, surely that was the other Ed in this race), especially when some of these same people backed IDS being leader!

The Right still don't really get that they didn't actually win the last election, and they assume that their view is the majority one. Because they are (understandably) puffed up by being in power they are hubristic, and I suspect this will cause them problems later on. Too many of them swallowed the line that there were easy cuts in the public sector - a view they are rapidly being disabused of. Similarly they swallowed the TPA line on public sector pensions- an area where Labour could make some mischief (a subject for a later post). I think they may have just talked themselves into believing that Ed will veer wildly to the Left and as such underestimated him to a large degree. Beware commentators saying this is a 'win' for the Tories - they may be principally trying to convince themselves.

4. Bloody hell, Ed just mentioned corporate governance and, more specifically, remuneration committees on Andrew Marr. This makes me happy.

5. I am genuinely optimistic about Labour's chances this morning. Let's get to it.

Saturday, 25 September 2010

A New Hope...

Now let's get behind him and proceed to insert light sabre in Empire/Coalition backside.

Friday, 24 September 2010

Nausea part 2

Peter Oborne this time:
Born to rule, trained like a racehorse for the job from an early age, very few prime ministers have ever been so naturally at ease in 10 Downing Street.
I thank the Torygraph for making patently clear how thin they think this Big Society veneer is. It's really all about breeding, chaps.

Interesting snippet from Martin Kettle

In his proposed acceptance speech for the newly appointed Labour leader:
We must transform corporate governance, giving employees partnership rights and a consultative role in company management, on German lines.
Where did that come from??? Perhaps I haven't been paying attention, but have any of the leadership candidates proposed adopting co-determination? If so which one, and is this line a whisper in the ear from them/their team?

Thursday, 23 September 2010

Voting disclosure

I voted for David Miliband as first preference. That is all.

Wednesday, 22 September 2010

BIS review of short-termism etc

Apologies for lack of recent posts, due to being ill and being at the Lib Dem conf (not connected).

Well, didn't I say that left-leaning Lib Dems ought to keep an eye on BIS? Vince Cable has got stuck into... err.... capitalism today in a way that will no doubt rouse the Lib Dem faithful. Interesting stuff and, surprise, the actual proposals are somewhat more modest than the language employed today might lead you to expect.
The Government will launch a comprehensive consultation in the autumn. Areas it may cover include:

What drives market short-termism?
Do boards set out their long-term objectives sufficiently clearly?
How can we encourage shareholders to become more engaged in the company’s future?
Do shareholders have sufficient opportunity to vote on takeover bids?
Do target boards do enough to consider whether the bid represents value for their shareholders in the long-term?
Does the way in which directors are paid unduly encourage takeover activity?

Saturday, 18 September 2010


From Charles Moore:
[Cameron] has a natural and hereditary confidence about running the country
The dumbass end of conservatism in a nutshell - innate 'character' = natural order.

Friday, 17 September 2010

Conservative thinking on corp gov

Here's a snippet from Jesse Norman's book Compassionate Economics. It's worth a quick read and perhaps not surprisingly for a Cameroon very much in the 'traditional economics has big flaws' mindset that is so popular these days. But the corp gov policy proposals, despite the preceding analysis being sound, are quite US-tastic:
“The key is to promote the exercise of independent ownership: by institutional shareholders, by corporate directors, and by trustees in corporate pension funds. Here are four simple suggestions for how to do so. The first is vigorously to enforce the trust law of ownership on financial institutions. A share’s vote is part of its value, and the trustees or directors of investment trusts, pension and hedge funds and other investing institutions should be made clearly legally accountable for its proper exercise. The second is to make it easier for shareholders to nominate entirely independent non-executive directors of their own choosing to corporate boards. This would create an independent link between the shareholders and the board, and break many currently cosy arrangements whereby non-executive directors are too close to the chief executive.”

“Our third suggestion is for non-executive directors alone to choose remuneration consultants and auditors, via the relevant board committees. Again, this would introduce greater accountability and transparency, especially on the ratchet on pay that comes from benchmarking senior executive compensation. And the fourth is for pension fund trustees, many of who are also corporate employees, to be explicitly required to act solely in the long-term interests of their beneficiaries, and to be protected in law when they do so. This would limit the power of boards to control corporate pension funds, and help to make them more genuinely independent financial institutions.”
Proxy access and a legal duty to use your voting rights sensibly? No wonder Mr Monks is listed in the 'thanks for advice' section...

Thursday, 16 September 2010

Voting disclosure - not working

Here's what Ed Davey said to the ABI conference yesterday about the Stewardship Code:
Crucially, the Code also encourages public disclosure of shareholders’ voting activities. Voting at company meetings is one of the most effective ways of providing long-term stewardship – I believe it is therefore important that all institutional investors disclose their voting records.

Placing these decisions on the public record boosts transparency and aids scrutiny. These in turn are the bedrock of effective corporate governance.

No surprise that I agree with the position. I also think this is an easy target for the Coalition (alright, I really mean the Lib Dems) if they want to demonatrate they take this ownership stuff seriously.

Voluntary disclosure is not working. At work we did a sweep of publicly disclosed voting data fairly recently to try an identify some trends at a certain group of companies. We looked at dozens of asset managers but less than half of them disclosed any data at all (even the most basic headline stats).

More important for the user, obviously, is the ability to compare voting decisions. That requires the disclosure of... err... actual voting decisions. Of those voting decisions we sought, we were able to find less than 25%.

In the US, where disclosure is mandatory, there are loads of reports on trends in fund manager voting. In the UK similar analysis is simply not possible. The TUC does the only comparative analysis and this is hampered by the fact that most fund managers don't participate.

But there is that reserve power sitting in the Companies Act - why not use it?

Public opinion on strike action against cuts

YouGov stats here:
45% of the public would oppose trade unions taking strike action against job cuts in the public sector, compared to the 35% who would support strike action, and a further 20% who are undecided.
Could obviously change when the cuts start to bite, but also suggests other tactics are needed.

Tuesday, 14 September 2010

Structures won't save us

I went along to the Treasury select committee hearing today on financial regulation. It's the first time I've been to one for some time and I thought I'd go a) because the topic is interesting b) I was interested to see how the new committee is working (some new MPs on there) and c) because Paul Myners is always good value.

The Guardian has already run a piece on the session here which focuses on one aspect, but for me the most interesting thing was the clear consensus between Myners and Professor Goodhart (who was also giving evidence) that the new regime, with the Bank getting more responsibility, would make little difference in terms of preventing future crises. Perhaps I'm being unfair, after all Goodhart said that the new regime would make a future crisis 'marginally less likely'. But the overall message I got was a very simple one - it doesn't matter what offices people sit in, or what committees they are members of. Rather the real need is to focus on behaviour and competence.

Both Myners and Goodhart were not convinced that the new structures would make much difference, and even suggested that there might be new problems, as the Guardian piece point out, and the committee members didn't challenge this view either. Someone (don't remember who) said that basically a suboptimal structure operated well can do a better job than an optimal structure operated badly.

This is, of course, very similar to the argument that companies put forward (with some justification) about governance issues - good structures and policies don't make good managers. I would make the further point that it also applies to ownership structures. Private equity - in theory - provides a better model because the agent-principal relationship is much closer. But as Guy Hands has demonstrated at EMI once again structure can't eliminate poor decisions (and it really is amazing to see someone like him reduced to arguing that he was tricked into buying a lemon!).

One final point of interest was the argument around responsibility. Conservative committee member Andrea Leadsom said that when she was lobbied by banks they often sought to blame regulators. She wondered whether the focus on regulatory responses, rather allowing competition to rip, made banks more likely to think like this. Myners made the point that ultimately whatever failing there were on the part of the FSA, Bank and Treasury, it was primarily the responsibility of the boards of those banks - and their shareholders - to ensure that the institution was run in a way that was sustainable. I am obviously on the same page. But interestingly, Goodhart made the comment that actually one of the problems during the crisis was an unwillingness to say that on occasion regulators do know better than banks.

I personally think banks blaming the regulators is largely a buck-passing exercise, but it did remind me that Bruno Frey, in his excellent little book on motivation, argues that regulation can 'crowd out' a propensity to behave well. So maybe there is something worth thinking about there. And I am intrigued by the proposition that regulators may be in a better place to judge sometimes. If this is true, doesn't it raise a question about why bankers are more highly remunerated than those that monitor them?

Monday, 13 September 2010

A slightly revised position on trade unions

Iain Dale 2008 -
'TUC conference: trade unions need David Cameron as much as he needs them'

Iain Dale 2010 -
And to listen to Brendan Barber and Bob Crow this morning you'd think we were back in the 1970s with talk of constant strikes and civil disobedience. Crow and his ilk need to be crushed. There's no compromise to be had with them.

In other words unions are ok when then are nice and fluffy NGO-ish voluntarist bits of civil society, but when they seek to fulfil their core function of protecting their members we stamp on them.

Great paper on short-termism

Via Corporate Law and Governance

Sunday, 12 September 2010

If I were a left-leaning Lib Dem..

...and I was going to stick with the party, having accepted the Coalition for better or worse, I think I'd be most interested in BIS as a government department. First up it's a Lib Dem powerbase in the govt - after all this is where St Vince is secretary of state, plus Ed Davey as a minister with responsibility for quite interesting stuff (for me anyway) like company law.

Given that the Coalition has pledged to bring back the OFR, though in reality looking at the consultation on narrative reporting it looks like it will be the Business Review v2, you can see that there is a bit of interest in this field. But there is arguably scope to do more, and it won't cost much money if it's done within the framework of the ownership agenda.

Just a few random ideas -

1. review the effects of the advisory vote on remuneration. a proper review of in particular how it has been used could a ) provide some really interesting info (my view is that the vote hasn't been used effectively, but let's see some data b) provide the justification for further action on high pay, if desired
2. look again at rem disclosure regulations - the narrative reporting consultation includes questions on this but it could go much further. what about directors' pensions? what about the pay gap? - now to be disclosed in the US btw?
3. what about a Myners' style review of ownership/stewardship? the UK has already started heading down an interesting path with the Stewardship Code which is attracting much interest elsewhere. why not broaden this out and turn it into a policy theme?
4. tidy stuff up. why not bring together the bits of the framework dealing with directors' duties with those dealing with investor responsibility? they would be the two sides of the 'stewardship' agenda. this could be kicked off alongside the changes to the architecture underway in the HMT consultation.

And a couple of caveats -

1. it requires committing to the idea that something useful can be done in the area - ie that ownership matters
2. this only has legs as long as BIS does. more cynical people than I believe there's a reason why Lib Dems have been given a seat of power in BIS. so it needs protecting.

It strikes me that many Lib Dem members will be at least as interested is business responsibility issues as people like me in Labour, but to date they don't seem to have grasped the opportunity they potentially have at BIS. Or am I missing something?

Thursday, 9 September 2010

Diamond-studded, platinum-plated pensions

The TUC's annual report on directors' pensions is out today. Here are the headline stats-

The TUC's eighth annual PensionsWatch survey, which analyses the pension arrangements of 329 directors from 102 of the UK's top companies, shows that the average transfer value for a director's pension is £3.8 million, an increase of £400,000 since last year, providing an average annual pension of £227,726.
The highest paid directors in each company have pension pots worth £5.26 million, providing an average annual pension of £298,503. The largest pension pot in this year's survey is worth over £21million and would pay out an annual pension worth over £1.3million.
PensionsWatch shows that the average director's pension is now 26 times the average occupational pension (£8,736) - a fall on last year but still higher than the pre-recession gap.
The survey shows that despite companies continuing to move away from defined benefit (DB) schemes for ordinary staff, the majority (54 per cent) of top directors are still in DB schemes and many directors are in more than one scheme. Nearly two third of companies (63.5 per cent) provide DB schemes for at least some directors. The most common accrual rate was 1/30th - far more generous than the 1/60th to 1/80th typical for the majority of ordinary scheme members.
For directors in defined contribution (DC) schemes, the average company contribution was £134,760 and the average contribution rate was 19 per cent, around three times the rates normally available to employees (6.7 per cent).
Many directors not participating in company schemes receive cash payments instead. Nearly one in three directors (31 per cent) received cash payments either in place of participation in a company scheme or as top-ups. The average cash payment was £120,906 and the highest in the survey was £420,000.
A further 25 directors also received payments into personal pensions plans, worth an average of £181,072.
While ordinary workers are facing the prospect of working longer, with the Government planning to raise the state retirement age to 66 in 2016, most directors in DB schemes have a pension age of 60.

Wednesday, 8 September 2010

Interesting votes

1. Creston. The rather bland RNS announcement might make you think nothing of note happened, but one resolution wasn't proposed or voted one. It turns out that resolution was seeking authority to amend an LTIP. Looks like they pulled it because they were going to lose.

2. Ashtead. Big vote against the rem report, and if you add in abstains it's a pretty small majority vote in favour.

3. Quintain. Big vote against the rem report and a bigger one the rem committee chair (who oddly was elected as both a director AND chair of the rem committee, with the vote against the latter position much larger). Also interesting to note our old chums Caledonia have a big stake (10%) and a seat on the board.

Sunday, 5 September 2010

Co-ops and family history

I've had my dad and his other half down to stay this weekend, and found out some fairly interesting family history. My Dad is a big advocate of the Co-op and basically does as much of his shopping through it as possible (including online) as well as banking with them. This is basically because a) he likes the co-operative idea and b) he likes the fact that they try to behave ethically. This was all news to me, but interesting nonetheless.

What I did remember was that he worked for a co-op for a long period, an outfit called Eastern Counties Farmers. Agricultural co-ops are still pretty common in a lot of places, including the US (Ocean Spray for example). These sorts of co-ops are much less about the lefty idea of shared ownership (though there's definitely a tinge of that spirit about some of them) and more about economies of scale. They are usually ways to either buy or sell produce/equipment/etc collectively, in order to get the best price for the members. My dad worked in the bit of ECF that bulk bought farm machinery to flog on to members.

Unusually it seems that ECF was involved in both buying and selling, and having had a quick google it seems like it had its fingers in all kinds of farming activity. My dad said that at one point it had a sausage-making business that had a major contract supplying M&S. Interesting for me, having grown up in East Anglia, that there was this big co-operative business on our doorstep that employed my dad. It also had some buildings down on the Ipswich dockside. All gone now though - it went belly-up in the 1980s, after an existence of about 80 years I think.

When we were talking about this, my dad mentioned that he also came across something interesting in my gran's possessions. He found an old note book that belonged to another family member that my gran had borrowed to make notes at a meeting she attended. The meeting was to set up a co-op to supply cheap food etc to working class families in Leicester (where my Dad's family are from). Apparently the notes say that the co-op was being established in opposition to a cartel operated by a store called The International, which was a chain I think (if anyone has heard of this I'd love to hear about it). He's going to scan in the relevant documents and send them to me - I'll post them up when he does.

So we've got a fair bit of co-op history in our family, and funnily enough I now work in a building owned by the Co-op, the building further away in this pic.

Friday, 3 September 2010

Codes, ownership and control

I've said this before, but in one sense I find the development of the Stewardship Code (and equivalents elsewhere) a bit odd. Because what they are trying to do is make behaviour that is assumed/argued to be in shareholders' financial self-interest into best practice. Get that? It's a bit like having a best practice code for going shopping, because there is a public policy concern that poor consumer choices are distorting the market. (Incidentally, I would make a similar point about trying to redraw fidicuary duty, which is effectively to answer the question 'why should we do this?' with 'because you must').

The other peculiar feature of this approach is that it's going to be done under a 'comply or explain' regime. So an institutional investor could say 'we don't think that stewardship adds value, and thus don't seek to apply the Code'. In practice I think we're going to see a mixture of a small number of very positive disclosures (F&C, Hermes etc), a large block of investors saying 'we do this but it's not central' and a small number of non-compliant investors.

My gut feeling (and it is just that) is that we are probably going to see a reaction like that after the July 2000 amendment to the Pensions Act. It will principally be asset managers, rather than asset owners, who increase resource, and the mood music will become much more supportive of shareholder engagement (probably on the company side too).

What actual changes in behaviour result is impossible to tell. In the period I've been involved in this stuff (almost 9 years) the numbers of people involved on the investor side have grown, as has the level of activity. The UNPRI has had a really significant impact too, especially since the introduction of its clearinghouse (a topic for many a future dissertation no doubt). But you can't escape the feeling that a lot of this activity doesn't achieve a lot.

A couple of examples. In my corner of the world, corporate governance, which really ought to be quite a political concern, has become a numbers game (% of independent of NEDs, years on the board etc). While the formalisation of the process has probably increased the professionalism involved, it has also led to an abstraction of the ideas behind it. The level of abstraction is sometimes truly overwhelming, as again we try to institute best practice into organisations for their own good, because they're too stupid to see ut for themselves...

And what about pay? I am, as is obvious, hugely sceptical about the value of performance-related pay, yet discussions over performance linkage are probably the dominant issues in engagement over remuneration, which is itself the dominant engagement issue. As I've posted many times, I think this is built on challengeable ideas about the effcets of incentives on complex decisions, yet these assumptions are not only taken 100% for granted, but form the basis on which so much 'ownership' activity is based.

Turning back to the Code, there is also a danger with 'comply or explain' that 'engagement' or 'stewardship' becomes defined as a niche activity, or service. It will be very interesting in this regard to see how the big asset managers, and their representative bodies, respond to this agenda. If they don't get onboard, the impact will be limited and it will open up the argument further about whether shareholders are really best placed to deal with these issues.

Which brings me to Will's post here, which has really set me thinking. When I first started working in this field, I saw shareholder engagement as an alternative way for the labour movement to exercise influence within (rather than control over) public companies. I thought, and still do to a lesser extent, that this had merit in a situation where the opportunity for a more fundamental shift in governance - towards a more stakeholder model, co-determination, whatever - was not open.

Again, since I've been involved I've seen a wave of people from civil society, and bright young folks who want to do something worthwhile, drawn into this area. So a significant degree of human capital has been committed that could have been deployed elsewhere. This has, arguably, therefore cemented the shift away from a stakeholder model. Put it this way, if we had taken Hutton's advice in 1997 the unions would have had to think about how to respond, and, if involved some sort of formal role in corporate governance, train people up to be effective in those roles. And by now we'd have a decade's worth of experience of the system, how to work it and how to take it forward.

Instead a lot of effort (more from NGOs than unions, maybe, in the UK) has gone into trying to make a market-based conception of governance and onwership both fucntion properly and have a more socially responsible (bleurgh..) tinge. The alternative is much, much further away now. What's more, by shoe-horning ourselves into the shareholder-owner model we also sought to ape the language emplyed there. Thankfully tortuous attempts to make 'business case' arguments for social responsibility (usually linked very loosely to share price) are for less common these days. But damage has been done.

(Another aside - the very limited interest in employment issues amongst even SRI teams is particularly interesting in this regard. Union issues are almost always seen as 'political' in way that environmental ones are not. It comes across sometimes as almost a subconscious recognition that TU issues are about power and conflict. But that's a thought for another day.)

Where this all leaves us is a bit unclear as now. On the one hand there will surely be some sort of upsurge 'ownerhship' activity as a result of the Stewardship Code, but its force may well be pushed down existing channels, which may not be a great step forward. More consultations over performance criteria for incentive schemes wouldn't be a big win for me, but perhaps I'm being too cynical about what will actually occur.

But I think the possibility of a turn to a more regulated approach to governance is there, perhaps even in the UK. Stakeholder is off the table. Market-driven governance changes take time to work through (even 'say on pay' has had to be put in place by the state in the two most shareholder-oriented markets). And many asset managers may not want to do the ownership stuff. Where would you turn?

Thursday, 2 September 2010

Dunno how I missed this

Committee on Workers' Capital report (PDF) on engagement over forced labour.

Wednesday, 1 September 2010

Blairism vs statism

T Blair makes an interesting point, doesn't he?
"I think the single biggest danger with the financial crisis was a view that gripped a lot of progressive politicians that somehow people were going to want the state to come back in fashion," he says in his interview. "I didn't think that and don't think that. I personally think – and that's why I am still an advocate of third way politics – that there is a concept of the state that is strategic and empowering that is actually the right idea.

"I'm not in favour of the big state and not in favour of the minimal state. I think there is a concept of a reformed and reinvented government that is where myself and Bill Clinton were in the early 21st century that I still think is the right idea.

"Let me ask this question: look round the world today and how many progressive parties are succeeding at the moment? I mean in Europe or what's just happened in Australia it's a challenge, and it's a challenge partly because the progressive forces in politics are in danger of misreading the financial crisis as meaning people want the state back.

"They don't. They are perfectly capable of distinguishing between the state coming in to stabilise the situation and the state coming in and acting as a principal actor in the economy. And in my view they won't vote for that."

I think he's right to say that some folks on the Left have mistaken the acceptance of the state's role in stabilising the economy with a desire to see the state to take a more active role in society in general. Massive qualifications needed (ie individual experiences of/attitudes to state provision must vary by class?) but it's a decent point.