Kay, Myners & Standard Life

From Lord Myners' evidence to the BIS committee on the Kay Review (and specifically the investor forum idea): 

Lord Myners: I will be very interested, Chair, to read the transcript from when you interview people who are supposedly establishing this investor forum, and to see how successful they are in convincing you that they are going to set up something that is really meaningful. My suspicion is that you will have significant doubt. I would then suggest to you that, if they cannot do it alone in this country, it is going to be almost impossible to do it globally. 

From Responsible Investor today:   

Standard Life Investments has said it is “debatable” whether the proposed investor forum – one of the key ideas of the recent UK government-backed Kay Review – will achieve results.
....
Now Standard Life, one of the leading fund managers in the UK with £163.4bn (euro) under management, has poured further cold water on Kay’s idea, saying: “While there will always be room for improvement, it is debatable whether this particular proposal will achieve the desired results.”

And they are far from the only asset manager saying this

Myners vs the Kay Review

The BIS select committee is currently holding an inquiry into the Kay Review. Last week saw Lord Myners give evidence to the committee, and the transcript has just been published. It is really worth a read. I suspect many people's impression of Kay is "good analysis, weak recommendations". In addition, there is a fear that the usual vested interests will smother the Review's already modest ambitions.

If that's where you sit, you'll find a lot to reinvigorate you in this transcript. I think he hits all the right targets. Labour folks reading this should also bear in mind that he's been a fund manager, he's been on the boards of major companies (like chairing M&S), and served as a Treasury minister. Very few people (especially Labour people) have tried to crack the issues around ownership at a senior level from all those perspectives. So when, for example, he talks about the way that reviews like Kay get stifled,he's talking from experience. (In fact I suspect one reason that BIS set up Kay, despite having already done a civil servants-driven consultation into the same issues, was because Myners criticised the idea of a review into such important issues not being independent of govt.)

There's a lot of info in here. The opening statement alone covers a lot of ground, but the core point is that Myners doesn't expect the Kay Review to have a significant impact. In fact, he expects it to have barely any impact at all.

Some interesting further points - he is very critical of Kay for failing to come out with any recommendation on M&A (where I think Kay essentially says govt should keep a watching brief), and instead argues for the Business Secretary to have a more interventionist role (including a public interest test). As he points out the weakness of the Review on M&A seems to be quite out of step with the rhetoric used by Vince Cable way back at the September 2010 Lib Dem conference. If Cable thinks there's a problem with M&A he will now have to over-ride Kay (which is what Myners argues is exactly what he should do).

He also backs a financial transactions tax - which was a genuine surprise to me - and from a policy perspective rather than a revenue raising one. As you might expect, a theme running through the evidence is the erosion of any notion of ownership, exacerbated since the rise of HFT but also a long-running consequence of the nature of the asset management industry. You can sense Myners' frustration that another chance to grapple with these issues has been missed, especially as Kay clearly does understand what a lot of the problems with the asset management industry are.

And the stuff on the way that lobby groups will stifle reform (especially if they get their hands on the 'investor forum') is.... well... exactly what I think too!

A point that Myners makes several times is that Cable could still get a grip of this. Again, I struggle to disagree. The longer I have worked in this area the more convinced I have become that only strong political intervention can sort some of these issues out. There will always be people telling you "now is not the best time" or that "working with the industry" is the best way to go. We have seen the weak results of such an approach.

I think it's probably almost too late for Cable. He has fluffed this process twice as far as I am concerned - once by doing the first mini-review, which wasted a year, then by not ensuring that Kay went as far as he wanted. That means the next big round of reform will (fingers crossed) be under the next Labour government in 2015. I hope we make sure we get Myners involved when we do it.

Anyway, I would recommend Labour and TU people who share my interest in these things read the whole transcript. There aren't many people on our side of the fence who can deliver this kind of thing. Below are a couple of the funnier excerpts.

On the Good Practice Statements: 

Q98 Ann McKechin: It is constant effort. Professor Kay has published a new set of principles, called "Good Practice Statements". The Government has, again, taken a rather hands-off approach, saying that they should prompt market participants to consider their current progress and inform industry-led standards of good practice. How long would you recommend that we wait to see if that approach works, or would you say that we should have moved a lot quicker?

Lord Myners: I think we could probably wait until this afternoon.

And on the idea of 'solving' the remuneration problem by requiring execs to hold shares for a much longer period:

Lord Myners: It is rather romantic. You can say that you cannot realise these shares until your retirement, but the fact is that most of us are not in wealth-accumulation mode when we get to retirement; we are in wealth distribution mode. It would be odd to live on a modest income until the age of 60, and then suddenly have wealth beyond the dreams of avarice dumped on you as the reward for 40 years of loyal service. I somehow do not think that would work.

A blast from the past

Paul Myners, October 2009:

I question the absence of an organisation in the UK that speaks solely on behalf of institutional investors without a commercial interest, as opposed to a tangential activity of trade associations.
The most appropriate arena for this to take place would surely be an industry-wide institute operating with close ties to the academic institutions also engaging in the debate. I have in mind something similar to the Council of Institutional Investors. But no such organisation exists in the UK.
Such a body would focus exclusively on promoting understanding and best practices in stewardship and good governance, unfettered by any other loyalties or priorities.
To date the only significant effort to address this challenge was the creation of the Institutional Shareholders Committee Forum.
This is composed of various constituent member bodies including the ABI, AIC, IMA and NAPF.
The terms of reference for the ISC are to provide a conduit through which members can share views and, where appropriate, co-ordinate activities on any matter likely to affect the interests of investing institutions in their role as investors.
However, in practical terms the ISC has struggled to deliver tangible results.
This should not come as a surprise.
The forum is a coordinating mechanism for trade bodies who themselves operate primarily to promote the interests of their own industries – there is no one organisation in the UK that speaks solely and exclusively on behalf of institutional investors without commercial benefit as an overriding goal. This, in my view, is a deficiency.
To compound this disconnect, the ISC is a loose collection of trade associations rather than member firms, and as such is two degrees removed from the operational nexus of the industry.
The committee has rarely met and has not evolved. It is controlled by industry trade bodies; it has no budget or permanent secretariat.
Trade bodies clearly and correctly operate primarily in the interests of their own fee-paying members. This may or may not accord with the interests of end investors but it is a fact of life that parties selling services to others for gain are not necessarily always going to have entirely shared interests with their clients.

Chuka Umunna develops Labour policy on corporate governance

Chuka Umunna gave an interesting speech today on executive pay. In fact content-wise it's the best speech by a senior Labour politico I've read since Paul Myners was City minister. The content of it is important for a number of reasons.

First, it acknowledges that the issue is not simply one of "rewards for failure". Everyone can agree that the odd Fred Goodwin type case is A Bad Thing, and so it's easy enough for politicians to say that they disgree with them. It has, until recently, not been agreed that high executive pay is in itself a problem, and widespread one. By talking about "excessive pay and rewards for failure", a small but important shift has taken place, and that means a potentially more radical approach from Labour in the future.

This point is seemingly confirmed by the second thing I liked - the defence of political interest in executive pay. It's easy to forget how quickly the framing of this issue has shifted, even within Labour, so the easiest thing is a direct comparison. Here's Kitty Ussher in June 2008 when she was a Treasury minister:

[W]e will also resist the calls that have been made for direct regulation of executive pay.

Of course, remuneration packages should be strongly linked to effective performance, and incentives should be aligned with the long-term interests of the business and of shareholders – and we don’t support ‘rewards for failure’. [see what I mean!]

And over the last ten years, we have taken steps to improve transparency, and to encourage shareholders to improve accountability.

But I’m clear that executive pay is a matter for Boards and shareholders – not for Governments.

In contrast, here's Chuka Umunna in January 2012 (!):

There are some who say it is no business of government - no business of politicians - to be commenting on these matters. We have no right to interfere in the affairs of privately owned companies is their refrain. I could not disagree more strongly with that statement.

At the heart of my politics is the belief that we are all mutually dependent. This notion is deeply embedded in the values of the Labour Party. Better together. Stronger together.

So to argue that politicians and society at large, should not take an interest in these matters, is to feed the idea that society is here and business is over in the corner there which is dangerous.

That's a big change in tone.

Thirdly, this is the first speech I can remember from a politician covering the corporate governance brief where the motivational value of financial incentives for directors has been questioned. This may, in part, be because Labour has agreed to implement all the High Pay Commission's recommendations, and the Commission's full report is a bit sceptical about incentives. Still, it is really valuable that someone with political power is saying stuff like this:

This demonstrates what psychologists have already found – that the relationship between financial incentives and performance is far from simple, and is not even reliably positive.

At the same time, the heavy focus on the alignment of high powered incentives risks crowding out other, more rounded but equally powerful intrinsic motivations of executives that are just as relevant to the company’s success – the satisfaction of doing a good job, the pride in leading and growing a great company, of winning in the market place, of having the respect of peers, of creating a legacy of sustained and sustainable success.

We are not opposed to performance related pay but it does make you wonder: if a company is so concerned that an executive paid only their salary won’t be motivated to work hard in the best interests of the company, then maybe they have the wrong person in the job?

This is broadly what I think, so would be supportive anyway, but it is really encouraging to see a politician willing to at least entertain the idea that there might be more to reform of the structure of exec pay than better carrot design.

And that leads on to the last point I would make - that there are a few ideas in here. The suggestion for Swedish-style shareholder representation on nomination committees is pretty radical stuff in terms of willingness to entertain a quite different approach to current UK practice (I think I detect the hand of Paul Myners, as he has pushed this idea). I know it's easier to float radical ideas when you are in opposition and don't have to put them into practice, but nonetheless this speech does seem to indicate that in a pretty important area of policy Labour is willing to do some thinking.

Shareholders and nominations committees

Here is the key proposal Lord Myners floated in his speech at the ABI today. Interested to hear from investor types if they think this is desirable and/or workable. Nils Pratley likes the idea.

We simply need to recognise that the principal failure [in relation to executive pay], if there has been failure, is one of agents and to rectify this by putting responsibility back into the hands of or closer to principals or owners. This could be simply achieved by shareholders becoming members of the board Nomination Committee. This should not strike us as odd. After all company law makes it very clear that shareholders have ultimate responsibility for board membership. And yet most boards are significantly self-perpetuating with the chairman playing a very significant role. I doubt that it comes as a surprise to many in this room if I suggest, from my experience, that many chairmen seek out candidates who will “fit in well” rather than candidates who will be powerful advocates of shareholder value or willing to “take a stand” on executive remuneration. There is a natural bias in the appointment process towards conformity.

I am not suggesting that the chairman be taken out of the process of board appointment but I am proposing that we give serious consideration to adding to the Nominations Committee three or four owner representatives. The Nominations Committee would take primary responsibility for selecting non-executive candidates to be placed before shareholders for vote and would also oversee the review of board and committee effectiveness – including the effectiveness of the Remuneration Committee.

This would seem to me to address one of the key anxieties in this space – can investors trust boards and committees to make wise and sensible decisions as agents and to put the interest of the company and its owners before all others?

Shareholder representatives on the Committee would be named and would expected to sit on the Committee for a number of years provided the firm they represented remained a significant shareholder. I have no hard and fast views on how these people should be chosen although there may be a role here for the Institutional Investor Council, with the Financial Reporting Council acting as a standard setter, reviewer and back stop on corralling participants. Such a move is entirely consistent with the underlying ethos of the Stewardship Code – I am simply taking it further. I would start with FTSE100 companies and all significant banks and financial firms. I would review progress after five years to establish whether a case existed for wider application.

Shareholder representatives would be paid for their work on the Nominations Committee, just as the chairman and other members of the current committee are currently paid. Appropriate “Chinese Walls” would need to be set in place to ensure that price sensitive information would not be used inappropriately. Fund managers may need to re-skill their organisation to ensure that they employ or have access to the right people for this task.

He was also lukewarm on Ed Miliband's ideas on exec pay (pay ratio disclosure, employees on rem comms), though this section of the speech caught my eye...

Employees may have more “skin in the game” in respect of their dependence on the with employer than many shareholders have as an owner of the company but there seems to me to be little constitutional case for employee membership of the Remuneration Committee (although I think it would make good sense in many cases for the Committee to seek workforce input as one of the multiple sources used to inform the thinking of the Committee and dilute the influence of the benefit consultant).

Personally I'm in favour of employee involvement in remuneration policy, for various reasons. I think initially it will be a challenge (are there enough people willing/able to do the job well?) but I think that over time a network could develop, a bit like the the trustees network run by the TUC. Would be interesting to see how unions with co-determination network their people.

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.

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?

A regulatory turn?

I thought I'd try and pull together a few bits and pieces that I've briefly blogged about already that I think point to a potential shift in governance, perhaps towards a more regulated approach. First, up let's return to what Stephen Haddrill of the FRC said last week about the potential for investors to be stripped of their rights. Here's a slightly longer excerpt from his speech:

In the wake of the crisis, Governments and the public at large expect [the] responsible, benign and moderating influence [of shareholders] to be maintained and intensified. Market pressures may point in the other direction; fund managers may argue that they have no mandate for engagement; pension funds may argue their members’ money should only be spent on stock picking skills; traders may see only the vital need to enhance the technology to push ownership periods below ten seconds. All are points with some validity. But if shareholders do not lift their eyes and see thatas a result of such views stewardship is weakening and needs to be strengthened, then Governments will conclude that governance must become based on law – and that is not good news for shareholders investing in companies that need flexibility to win in global markets – and the public will conclude that shareholders do not deserve their rights. That the deal is off.

As I posted previously, I think this is absolutely right and I don't think that UK institutions have really taken the point onboard as yet.

This is odd, as the warning signs are already there. I mentioned Paul Myners latest speech yesterday. Here's something he said early on that is worth flagging:

The European Commission’s Green Paper last month on corporate governance of financial institutions, an important document which raises a series of challenging questions and presages a report and proposals which are likely to shape governance thinking and practice across Europe, points to doubts about corporate governance processes based on the presumption of effective control by shareholders of listed companies. The EU Commission intends, inter alia, to review methods for strengthening shareholder co-operation, monitoring adherence to stewardship codes, addressing conflicts of interest and disclosure by end investors of the remuneration of the intermediaries. Over the last 12 months many in the UK have been wrestling with the EU Commission’s proposed Directive on hedge funds and private equity, a Directive which starts from a basic scepticism about market efficiency and agent accountability. The EU Commission’s Green Paper on Governance uses words more subtle than the original hedge fund Directive but the underlying message is very similar. The Commission is not convinced that the existing model is working and is inclined towards the need for more regulation, extended duties of care and wider stakeholder accountabilities for directors and corporate officers and a role for supervisors “to check the correct functioning and effectiveness of the board”. We have been placed on notice!

Again, very true. The EC paper (PDF) is not an explicit attack on the shareholder-focused model of governance, but there are plenty of digs, like this:

The financial crisis has shown that confidence in the model of the shareholder-owner who contributes to the company's long-term viability has been severely shaken, to say the least.

This:

The Commission is aware that this problem does not affect only financial institutions. More generally, it raises questions about the effectiveness of corporate governance rules based on the presumption of effective control by shareholders.

And this:

The Commission is also considering whether, in addition to shareholders' interests, which are essential in the traditional view of corporate governance, financial institutions also need to take better account of other stakeholders' interests.

That seems to suggest a policy shift away from a shareholder-focused model, doesn't it? And let's be honest, in political terms the UK probably isn't in the strongest position to argue in Europe that its model of public company governance is superior. As such there may will be quite a receptive audience for the Green Paper's message.

And just to finish joining the dots of this particular picture, let's have a look at what our own financial regulator in chief has to say about in whose interests the directors of companies should work. Shareholders? Err... not exactly...

I would strongly advocate intervention in the UK through changing the Companies Act framework for directors, for example. The current requirement for directors is to promote the success of the company. This is often interpreted in terms of shareholder value. Whilst this does include the need, for example, to ‘have regard to’ the impact on the community, I do not believe that is sufficient. There must be a stronger and more explicit obligation to wider society. There must be clear recognition of the need for institutions to contribute to the common good.

Once again, it's a signal of a turn away from the shareholder-as-owner model isn't it? And if directors have a wider duty to consider other stakeholders (the 'common good' would need to be narrowed down a bit) surely some people are going to start asking why only shareholders are granted legal rights to hold boards accountable in respect of those duties.

What this emerging picture means will depend on your viewpoint on company ownership generally. As a pro-market lefty I'm inclined to want to try and make progress with the initiatives we have underway like the Stewardship Code etc. I still think there are opportunities for the Left to play a bigger role here. And if we were really going to turn away from our existing model, I'd be more interested in issues like employee representation in governance rather than simply shifting to more regulation. Nonetheless the potential turn away from a market approach could be very significant, and I'm surprised that the warning signs haven't attracted more attention as yet.

Finally the silence of the Tories (both blue and yellow varieties) on these issues is surprising. It's indicative of a general lack of attention paid to governance I guess, and maybe there's also a desire not to legitimise any of Labour's work in this field. But oddly it means that the effect could again be to make it more likely that regulators gain power relative to owners in the ConDem Nation.

Another Myners speech...

Paul Myners is still giving speeches that are well worth a read for anyone interested in the sorts of issues I cover on this blog. Last week he spoke at the Yale School of Management governance conference. There's a report in Financial News here (but you may need a sub).

Lots of stuff in there about investor stewardship and I have the full speech if anyone wants it (email me). Here's what he had to say about exec pay:

1. First, it is striking that there is almost no evidence to support the view that paying senior executives ever higher multiples of average earnings produces superior outcomes,
2. Second, there is no logical economic explanation for the fact that senior executive remuneration has become so detached from the rewards of others – I am aware of no fundamental change in the demand for leadership and execution or the supply of talent,
3. Three, we appear to have allowed senior executive reward to have been driven almost solely by reference to external comparators. This may suit those who benefit and those who own the data but it is culturally dangerous to disregard internal comparators and the case for perceived fairness in promoting the cause of the corporation and the interests of owners,
4. Finally, are we right to believe that giving senior executives an ever increasing proportion of their compensation in equity aligns interest and represents value for money? On the former, put simply, how much is enough to achieve enough alignment? Where is the evidence that confirms recent trends and assumed behavioural benefits? On the latter, surely we have gone beyond the point where for the executive the marginal utility or value of yet another share in the corporation is less than the market value of that share because of the lower value that the executive would place on the last share awarded in what will already be a very poorly diversified portfolio from the executive’s perspective.
Again, to put it simply, are companies awarding compensation which has a cost to the corporation of one dollar but a value for the recipient of much less? Perhaps more use should be made of deeply subordinated or even zero coupon debt?

Myners update

Since I last posted Paul Myners has been continuing to stir things up. He gave a very interesting speech to the ICGN which I recommend giving a proper read. Notably he told (well, reminded...) investors that that it's entirely within their own power to tackle investment banking fees. It's interesting that the investment industry is very good at warning about the unintended consequences of state intervention, or regulation over self-regulation, when it affects them, but are quite keen on using the state when a different part of the system is in question.

The Treasury has also published all the responses Myners received to his letter out to institutional investors to ask them what they were doing about remuneration at the banks. These are less interesting than I expected, though some people do seem to be thinking a bit differently. I think F&C's response is worth a read (well, they do have quite a big corp gov/SRI team), but I also thought Royal London provided an interesting reply. Wooden spoon must go to Lazards (PDF) - check out the hand-scrawled whinge at the bottom. Financial Muse blog (part of Financial News, the best financial trade mag by far IMO) has already given it a bit of a piss-taking.

Finally, Myners is also quoted in this piece in the Grauniad calling on the FSA to have a look at shareholder engagement. Amen to that. I get the impression that this idea has dawned on a few people of late - where is the corp gov function in the FSA? It really does need some kind of internal resource for these kinds of issues.

In fact the Grauniad article is worth a read as a few interesting comments. Even the one right at the end, which I disagree with, but does at least restate the conventional wisdom:

"The value of a company is directly linked to the performance of managers, whether high or low. If the share price is languishing, that surely tells you that management aren't doing a good job."

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.

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.

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.

Standard Life replies to Myners

Reuters reports that Standard Life has made its response to Paul Myners' call to action public, and you can download the letter on their website here. Reuters picks up on the fact that they disagree with UKFI about the use of share price targets in long-term incentives. Notably they also encourage Myners to get stuck into investment banking fees, particularly in respect of capital-raising.

2 snippets

1. Interesting para at the end of this piece (presume it's from tomorrow's FTFM):

There is an underlying question in all this about whether the public ownership model for companies still makes sense. Lord Myners was asked at the NAPF event whether voting rights should be transferred to employees. He replied mutual ownership was an interesting idea, as there were some real disadvantages of the public company model.

2. Quite liked this bit from 'On the fetish character in music and the regression of listing' by Theodor Adorno:

"If one seeks to find out who 'likes' a commercial piece [of music], one cannot avoid the suspicion that liking and disliking are inappropriate to the situation, even if the person in question clothes his reactions in those words. The familiarity of a piece is a surrogate for the quality ascribed to it. To like it is almost the same thing as to recognise it. An approach in terms of value judgements has become a fiction for the person who finds himself hemmed in by standardised musical goods."

I don't think I buy the general approach, but he certainly hits a few targets. I also think familiarity has an important influence of the popularity & legitimacy of ideas.

Latest Myners speech

Some good stuff in this.

Myners plans to write to CIOs over remuneration

Paul Myners is keeping up the pressure on institutional investors to take remuneration reform seriously. Below is from an exchange in the Lords yesterday:

Lord Dykes: My Lords, I thank the Minister and HMG for their commendable efforts to try to get a much more civilised regime here. We are now armed with a much more robust and alert FSA. We have the Walker proposals. We have the EU getting stuck in with its wider framework. We have Stephen Green of the HSBC and BBA with his interesting revelations on dodgy practices to have artificially structured bonuses. Then along comes Goldman Sachs with around 300 £1 million snouts in the trough-that is just the leading partners and leaves aside the traders and what they will get-completely undermining the official effort to get civilisation in this whole regime, and other bankers now, privately and with their cronies, the traders, once again quietly preparing to unleash excessive bonuses when the time comes-

Noble Lords: Question!

Lord Dykes: This is a very important matter. I know the Tories have different views. It is a complete free-for-all. They do not mind at all. Can the Government at long last persuade the big institutions in this country really to insist on proper behaviour?

Lord Myners: I am grateful to the noble Lord, Lord Dykes, for his pertinent and correct observations about many aspects of the culture of bonus payments in banks. I, too, was very struck by the comments of Stephen Green, the chairman of HSBC and the British Bankers' Association. He described inflated and distorted structures of bonuses and argued for lower and more rationally calculated figures in the future. The Government's perspective is that bonuses must, first, be a matter for the shareholders, subject to the banks being adequately capitalised. Secondly, the bonus system should not contribute to unmanageable risk. Then it falls to the shareholders. I am afraid that the shareholders, notwithstanding the comments from their trade associations, appear to have been less than fully engaged with that matter.

I intend to write to the chief investment officers of the major UK institutions in the next few days, asking them to share with me the actions they have taken to ensure that boards of directors are aware of their position on the payment of bonuses. It seems extraordinary that, over 10 years, an investor in UK banks will not have had a positive return at all. Clearly, the traders and senior executives of these banks have earned huge amounts. This is a distortion of the consequences of trade to the employees, away from the owners. The owners need to be more concerned and the pension funds need to ask their fund managers, "What are you doing to stop this process?"

Would be interesting to see what kind of replies he gets. Will they be made public, or is an FOI request in order?

Shareholders need to act on pay now

Paul Myners gave another speech this week calling on shareholders to start grappling with remuneration, and quickly. As he said if they don't start getting stuck in, pressure will build for Government and/or regulators to have another go.

Failure by those in positions to affect change – Board directors, remuneration committee members and, importantly, shareholders – and show leadership towards a new culture of fairness and just reward will inevitably lead to calls for more intervention by Government and regulators.

Taxpayers feel entitled to have a view on this matter – particularly if they perceive directors are unable to strike the right balance in determining sensible remuneration practices that are calibrated to risk; or shareholders who do not appear willing or able to hold directors to account.

In a year in which all major banks have draw on and benefited from taxpayer and central bank support – some of them very significantly – public attention will focus on the decisions that boards make about bonuses.

Many banks have earned large profits this year from remarkably benign conditions, conditions created through the interventions by governments across the world, profits that owe very little to the talents and skills of individual traders or investment bankers.

These profits must surely be retained by shareholders in the business as capital to support the credit needs of customers and the economy.

I expect our major institutional investors, insurers and pension funds, to be forthright in making these points to all bank remuneration committees, and to exercise their votes if their views are disregarded.

It would be good if they made their views on this public, sooner rather than later. I would expect the clients of fund managers – pension funds trustees and others – to hold their fund managers’ feet to the fire; insisting on accountable, fair and just practice.

On this last point, if you are a trustee here's a simple proposal. Why not request that all your fund managers prepare a report on how they voted on remuneration at the banks over the past 2 or 3 seasons? And if you don't like what you see, do something about it.

Fund manager sell-outs

A snippet from Paul Myners' latest speech:

In 1990, the Economist compared shareholding to gambling.

The writer said that shares were little more than betting slips, bought at a low price, with the hope that the bet will come good. Shareholders studied the markets much like a gambler might study a form guide, they backed what they hoped would be the winner, then simply sought to extract their ‘winnings’ as quickly as possible.

The author observed that the notion that a shareholder owns part of a company “makes as much sense to a shareholder as it would to the average gambler to imagine that he owns part of Lady Luck, running in the 2.30 tomorrow afternoon” .

Nowhere is this more evident than when fund managers accept the bounce in a share price that comes with a takeover, rather than saying to their clients “we rejected that bid; we know that the share price will fall when the offer lapses, but we take a long-term view and we believe in the company, its strategy and its future. It is always hard to find good companies in which to invest and we don’t intend to sell out of this one simply because an opportunistic bidder appeared. We know that you, our clients, have chosen us to manage your fund for this reason and we know that your interests are focussed on long-term returns rather than a single quarter’s performance”.

I wager that few fund managers feel comfortable in speaking in such a way to their clients.

Absolutely. If only there were a test case to see if asset mangers were willing to change their approach. Like a bid for a big name UK-listed company that they could challenge for example. Hmmm.....

Spot on

"To date, institutional investors have said little about the lessons they have learnt over the last two years. Put simply, they have not produced satisfactory answers to the question ‘what were the owners of these banks doing?’ Remember that shareholders approved value-destroying transactions, and remuneration practices that now appear to have been poorly aligned with corporate health and shareholder wealth. I expect institutional investors, on behalf of their clients, to be much more challenging in the future than they have in the past, but I wonder whether their clients have similar increased expectation and have reflected this in their manager dispositions and incentives."

"The unitary board and Combined Code assume that shareholders will act as informed and value-pursuing investors. A failure by fund managers to act in this way, or to be required to do so by their clients, raises questions about the underlying foundations of the unitary board and Combined Code. Sir David Walker will need to give this careful consideration."

Source.