Thursday, 26 February 2015

The richest decide the pay of the richest

There is a great bit of research out today from the TUC on the pay of FTSE100 remuneration committee members. It won't be any surprise to most people that the executives of FTSE100 companies are amongst the richest in the UK and indeed the world. But what hasn't been looked at before is how much those that set their pay - the members of FTSE100 remuneration committees - take home.

According to the TUC the average total pay of a FTSE100 rem comm member is £441,383, and this is probably a conservative estimate. That is more than 16 times full-time average earnings. This seems likely to have an influence on rem comm decision-making. If an individual is earning £441k themselves, deciding to increase an executive's salary by £27,000 (if they are on, say, £500,000) probably looks uncontroversial. To someone on £27,000 a year it it will look incredible.

The cognitive bias of anchoring may be relevant here. This seems to have a pretty strong effect even when the information is irrelevant. But what about when the first available info (the rem comm member's own earnings) is directly relevant? If rem comms are composed primarily or solely of those with very earnings themselves, should we really be surprised if they make decisions that those on more modest earnings find indefensible? It ties in quite well with the current political row over MPs with outside earnings. I suspect people like Malcolm Rifkind seem otherworldly when the complain about having to scrape by on £67,000.

Needless to say, I completely agree with the TUC that this strengthens the case for worker representation on remuneration committees, and that this needs to be more than a single rep. Again thinking about the psychology of decision-making, it's going to be easier for people to challenge the super-rich consensus if they aren't a lone voice.

Finally, the TUC also has a list  in the report of the current highest-paid rem comms in the FTSE100. Probably worth keeping an eye on that group to see if they make any particularly bad decisions. Note that Burberry is the second highest paid rem comm in the list.

Monday, 23 February 2015

The Future of Private Enterprise

One of the more interesting books I read in the past couple of years is the Future of Private Enterprise by George Goyder. It's interesting for various reasons. For one, it's a reminder that when it was published (1954) mainstream views about the nature of the firm were very different.

For example, Goyder quotes from the 1944 Riddell Lecture given by the Conservative Lord Eustace Percy as follows:

"The human association which in fact produces and distributes wealth, the association of workmen, managers, technicians and directors, is not an association recognised by the law. The association which the law does recognise - the association of shareholder-creditors and directors - is incapable of production or distribution and is not expected by the law to perform those functions. We have to give law to the real association, and to withdraw meaningless privilege from the imaginary one."

Goyder's own conception of future model of the company was broadly what we would now call a stakeholder one, balancing the interests of workers, shareholders, consumers and local community. In passing he was also critical of limited liability which he described as a "principle of evil".

Finally, it's also interesting to read a business-oriented book that draws on a wide range of sources to inform its argument. There are references to Kropotkin and R. H. Tawney in there but actually one of the quotations that I like the most is from a novel - Brensham Village by John Moore. How about this?

1.     “I think one of the most horrible and dangerous modern tendencies is this growth of what I’ll call anonymous tyrannies… In the old days, if a factory owner sweated his workpeople, sooner or later, if things got bad enough they stoned his carriage or booed him in the street. If a farmer was a wicked employer they burnt his ricks. And if a landlord was cruel enough and oppressive enough, they could break his windows, or at any rate march up to his house and caterwaul outside his front door. They knew who the industrialist was, who the farmer was, who the landlord was. Those people had names and faces, and it was common knowledge where they lived… But this new tyranny is quite different. You don’t know where the head of the combine lives, even if you happen to know his name.”

Thursday, 19 February 2015

Fidelity, the Tory-friendly fund manager

As the latest info from the Electoral Commission reveals, Fidelity is still funding the Tories. £25,000 donated in November took their total for 2014 up to £120,000.

They are also still paying Tory MP Sir John Stanley for advice on "business opportunities and risks" at the rate of £1,800 a month (so around £20K a year). As I've noted before his constituency is where Fidelity is based, so will be interesting to see if they continue this relationship with Sir John's  successor as he stands down at this election. It's a very safe seat so will return another Tory.

For those new to this story, it's worth noting that Fidelity have also - 

Voted in favour of political donations to the Tories by PLCs in which they are a shareholder

Sponsored meetings of the Tory business liaison group the Enterprise Forum

Donated £50,000 to the No campaign in the AV referendum

So, if you don't want to fund the Tories by accident you might want to check out if you have any savings managed by them and see if you can switch. I shifted our family savings away from Fidelity several years ago because of this. I continue to try and make non-Tories, including pension fund trustees, aware of this link between Fidelity and the Tories. It's up to individuals to decide if they are happy with it, or if they think it constitutes any kind of conflict, but they should at least be aware of it. 

Sunday, 8 February 2015

Pension funds giving up on hedge funds is just the start

One of the more inexplicable aspects of pension fund behaviour in recent years has been their tolerance for high fees, particularly in relation to alternatives. To state the obvious, high fees - especially where the manager takes a slice of your return - inevitably make it harder to deliver the returns you need in order to fund retirement benefits. What is more, the amount that leaks out of our pension system in fees has increased in recent years as funds have stuck more into alternatives - mainly private equity and hedge funds.

If you read some of the commentary from industry insiders you get a sense that they can hardly believe that clients put up with the fee levels. For example, Simon Lack has written a whole book basically arguing that hedge funds returns aren't worth the cost and that the industry is much better at making the managers rich than the clients, and Guy Fraser-Sampson's book expresses surprise at the lack of pressure on fees in private equity, see comments here.

But perhaps things are starting to change. In the last few months there have been several high-profile moves by pension funds to cut their alternatives allocation. CalPERS has closed it hedge fund programme, blaming costs, complexity and lack of scale. PFZW (PGGM) is pulling out of hedge funds, citing complexity and costs as a reason. In the UK, Railpen is cutting its hedge fund allocation significantly because of what is says is a poor cost/return trade-off, West Midlands is pulling out and LPFA criticised the industry's '2 and 20' fee structure. CalPERS is now also planning to cut the number of its private equity managers. Again, cost reduction is a driver.

These are small moves to be sure. The fee structure for alternatives is a rip-off, but there is plenty of leakage via 'traditional' asset management too. So there is a much bigger problem to tackle. But it is encouraging that pension funds are starting to challenge at least some of the most obviously wasteful investment activity out there.

I've thought for a long time that fees/costs in the pension system are an obvious place for the Left to intervene (only we can do it - the Right relies far too heavily on finance as a source of political and financial support to be able to act effectively). Since then there has been great work done on pension costs by Labour in opposition, and also on fund management fees by Unison. But this is just the beginning.

This is surely an issue where trade union reps in the governance of pension funds can be key. There is a great opportunity to reduce the costs that cut our pensions and, in doing so, challenge "socially useless" finance. It is a challenge we should embrace.

Friday, 6 February 2015

Chevron challenged by unions over Gorgon claims

Chevron is telling analysts that everything is under control on the Gorgon LNG projects, despite costs ballooning and it being late. The ITF and MUA have challenged the company to come clean.

ITF: ‘Time For an Honest Conversation from Chevron’

The International Transport Workers’ Federation (ITF) and Maritime Union of Australia (MUA) are urging Chevron to have an honest conversation with workers, shareholders and consumers on the state of the Gorgon project located off the coast of Western Australia.

This week, Chevron reported to its shareholders that the multi-billion dollar gas project was “just fine”.
The Australian Financial Review reported that: “Chevron chief executive John Watson has voiced confidence in the economics of the severely over-budget Gorgon ­liquefied natural gas project.”

ITF president Paddy Crumlin said this insistence by Chevron management that the project was ‘fine’ was misleading.

“The ITF has evidence to suggest that the Gorgon project is far from fine,” Mr Crumlin said.

“In fact, published research by University of Sydney Business School Professor Bradon Ellem contends that the Gorgon Project has been the subject of severe mismanagement.

“The union movement is very keen for there to be future investment in Australia’s oil and gas industry because it creates jobs for our members. 

“To ensure that investment continues we need to have an honest conversation about where things are currently going wrong.

“We’ve been inundated with so much information challenging Chevron’s position from those who have worked closely with the Gorgon Project that we’ve had to set up a dedicated website for people to submit Chevron’s stuff ups.”

The website - - is a joint project of the International Transport Workers’ Federation (ITF) and the Maritime Union of Australia (MUA). 

It is a part of an ongoing global campaign to build awareness of management errors that have caused delays and cost overruns on Gorgon.

Local Chevron management and industry group, the Australian Mines and Metals Association (AMMA), have unfairly blamed the MUA for problems on the Gorgon project, as the union has sought to negotiate a new Enterprise Bargaining Agreement for maritime workers working in the offshore oil and gas sector.

MUA WA branch secretary Christy Cain said maritime workers had been used as scapegoats by Chevron Australia.

“Research undertaken by BIS Shrapnel found that the wages of maritime workers make up less than one percent of the US$54 billion cost of building Gorgon,” Mr Cain said.

“Despite the negligible impact of maritime wages on the total construction cost of Gorgon, the MUA and our members are portrayed by the industry and their henchmen as being responsible for all of the problems facing the Gorgon project and the LNG sector as a whole.
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