In defence of the Behavioural Insights Team

I've seen something a bit odd on twitter over the past few days - people from various bits of the Left having a dig at the involvement of the Behavioural Insights Team (BIT) in the government's response to the Coronavirus outbreak. I've no dog in this fight, but what I've found particularly odd is the way this criticism has bled into a general attack on using 'behavioural science' to inform policy.

I know zero about epidemiology, so have nothing of value to say whatsoever about whether the BIT should be involved or not (that doesn't seem to stop a lot of people having an opinion though...). But I do bristle a bit when I see people on the Left attack the idea of looking at things like social psychology and behavioural economics when formulating policy. I also find it jarring when people who apparently have no science background describe this as 'pseudoscience'.

To be clear, there are important critiques of a lot of this kind of stuff. There is a big question mark over the replicability of some 'findings'. Stuart Ritchie has a decent thread on this topic here. And I'm happy to defer to people who have the expertise to say that there is no meaningful role for the BIT. But it's a big jump from this to the 'pseudoscience' sort of attack I see on Twitter, and apparent distaste for the BIT on the part of some people on the Left. I think this is a bit mistaken, so I thought I'd set out a few points in defence of this kind of work.

First, one line of attack is that the BIT is a gimmicky outfit that should have died with David Cameron's gimmicky government. But actually behavioural economics had an impact on policy even under Tony Blair. If you go back to the Pensions Commission's first report there's a section on what behavioural economics says that could inform savings design. This had a direct influence on decisions like auto-enrolment.

It also had an impact on the design of NEST. For example, one of the papers on Personal Accounts (what the NEST scheme was called initially) cited various bits of behavioural economics research in the discussion about default design and number of fund choices.

Now some people on the Left don't like auto-enrolment or NEST, so for such people this is irrelevant. But if you think it's a good policy (and one developed and initiated by a Labour government) then you should at least be aware of the role that behavioural economics played in framing it. This stuff is not 'Tory' or 'Cameroon'.

Secondly, on a related point, there seems to be a bit of confusion about what the big idea is. I think that's because there isn't one. FWIW from what I've seen/read I don't really think there is a 'theory' that sits behind the work of the BIT. If you read David Halpern's book on the work of the BIT it boils down to some pretty basic principles, rather than some overarching theory. This is a page from it where he summarises the key ones:

A lot of the work of the BIT seems to be applying these kinds of principles combined with randomised testing. Big wows, as I think the young people say. "Make it easy for people to do things you want them to do" doesn't strike me as a particularly ideological position. If there's a decent attack to be made on this, surely it's more that this is 'common sense' and actually probably just good sales and marketing tricks. I think I'd still take issue with that, but at least I'd feel it at least comes somewhere near the target, as opposed to suggestions that there is some malevolent right-wing anti-regulation agenda at play.

Another reasonable attack on this kind of work is perhaps that it seems to promise technocratic 'solutions' to political problems. I can remember someone making the point when Nudge came out that it was trying to take the politics out of politics, which does feel sorta kinda fair.

But I wonder if that's mixing up policy design/implementation with policy objectives a bit. Take that 'make things easy' point, it could be used to design policy interventions with wildly different political objectives. In terms of savings design it has influenced the decision to change the default from opt in to out out. But you can reverse the point - make things harder if you don't want people to do them. Which is what I thought the Conservatives might have been doing by removing payroll deduction of union subs. (I was wrong, or, at least, my FOI did not return anything!)

Which leads onto my third and main point - I don't really get why the Left would want to attack this kind of stuff anyway? It can be used for purposes we like or don't like, but we could say that about comms, or other elements of policy delivery. But some of it surely reinforces Left positions. I first came across behavioural finance when I started reading more about financial markets (Robert Shiller etc). And it was obvious to me then that this literature was problematic to those who argue that markets are efficient. Similarly behavioural economics suggests lots of ways in which markets do not operate in the way that stylised accounts of them suggest. Going further, it was reading around this kind of stuff that lead me to critiques of performance-related pay - something a lot of people on the Left are uncomfortable with.

This is not to say that behavioural finance / economics is 'left wing'. Richard Thaler and Cass Sunstein used the godawful term 'libertarian paternalism' to describe their approach (though again that tells us something, as they were attacked for using evidence of market inefficiencies as a way to propose paternalistic policies). But I don't see the value in not looking at what we can learn from this stuff.

To establish that when X happens people do Y, and not Z, does not mean you must adopt a certain policy, or that you should rely on non-regulatory interventions. All that it means is that if you have a certain policy objective it's useful to take account of this stuff to design your interventions. I find that basically uncontroversial. It doesn't mean don't look at other information to form decisions, or that you must reject certain types of intervention.

I am sure that some of the interventions that are 'behaviourally informed' will fail, and that some of the 'findings' that underpin them will be disproved. That's all fine. When the facts change and all that. Equally some of it will prove to be robust and simply become 'economics', or whatever else. Some people seem to have forgotten how much has already entered the mainstream. (Let she who is without a copy of Thinking Fast And Slow cast the first diss). I am also sure that people will be able to find things that David Halpern and/or the BIT have said/done that people on the Left (including me) would find objectionable.

I'd just urge some caution. What are we really arguing with? If it's actually the policy objective I think we're missing the point. If it's the science I'm happy to let the academics fight it out and tell me what I should think once they are done. I just fear a baby/bathwater outcome.

Another interesting pay revolt

At Jupiter this time. A 31.5% vote against is a pretty big deal, though it may look a bit tame compared to last year. It's a shame it's them in a way, as Jupiter are certainly amongst the better asset managers when it comes to tackling issues at investee companies. The Grauniad makes the link to Jupiter's opposition to a bonus cap (which they don't have).

Personally I think the most significant point is that it highlights that those that police executive pay at PLCs are quite well paid themselves and sometimes have worse practices. Jupiter isn't the first asset manager to feel the heat over exec pay - it has happened to Aberdeen and, I think, F&C too.

The other point broad I would make is that asset managers generally have views that are towards the extreme end of the range of views on executive pay. They are much more willing to think that in the "war for talent" you have to pay pretty much whatever the execs want in order to secure their services.

So executive pay is set by directors, who are highly paid and, broadly, consider that current levels of executive pay are acceptable. This is then overseen by (mainly) asset managers, who are highly paid and, broadly, consider that current levels of executive pay are acceptable.

There are very few voices suggesting that pay is too high (not just insufficiently linked to performance) either in the pay-setting process at the company, or the approval process amongst institutional shareholders. It's largely an echo chamber. Highly paid people who don't really see the problem talking to each other. And as we know from Cass Sunstein, when people of like minds talk to each other they push their views further to extreme.

Is it any surprise that our current corporate governance model produces the results it does?

Against the business case

One of the things that I find most depressing about the responsible investment movement, if it can be described as such, is the enthusiam for 'business case' arguments to address a particular issue/company/whatever. I understand why this happens, and I recognise that some very smart people have done some great work showing how issues that might have previously been seen as 'soft' are actually financially material.

But, personally, I find it problematic for a number of reasons. First, it's a bit of a lock in. Once you've committed to applying a test of financial materiality to whether or not an issue matters, how do you deal with issues that aren't material but would seem to deserve attention from any investor who considers themself responsible? Being a labour-oriented person, this is a particular concern as essentially I believe the share of wealth generated by a firm that goes to labour has declined too far and this should be reversed. It's difficult to make a business case type argument for this - you can talk about staff morale, turnover etc but most asset managers will just be thinking of increased labour costs.

Secondly, in practice this leads to the kind of decisions that seem inexplicable to ordinary punters. Take the re-election of James Murdoch as a non-exec at BSkyB last year, overwhelmingly supported by most shareholders. I suspect this decision was based on factors such as him having already given up the chair, having useful operational knowledge of the business (though of course this makes him non-independent) and it, basically, noy being worth one more heave to get him off the board. Yet his re-election came after he was criticised by both the parliamentary committee investigating phone-hacking and the broadcasting regulator Ofcom and despite there being obvious questions about his version of events in terms of News International's knowledge of hacking.

I guess what is at the heart of what I don't like is that making business case arguments implies that the merits of whether or not an issue can or should be addressed can be established by running a few models. I think these things are inherently political, and always have been. In contrast, one of the things you often hear in the responsible investment/corporate governance microcosm is that we need to be wary of 'politicising' issues or being seen to 'campaign' on them. (I heard a few asset managers express concern about the NOTW/BSkyB stuff being 'politicised', as if there had never been any political element to News Corp's operations in the UK.) As a tactic, or a presentational concern, I see the point. But as a way of thinking about what we are doing I think it is deeply flawed and cedes far too much ground to existing ways of operating within the financial system.

I do wonder if using business case arguments isn't also a bit 1990s. Given what we have gone through in the past few years, a faith in market-based 'solutions' to questions about how firms are run (both in terms of objectives and governance) has taken a bit of a battering. Will Davies' excellent paper on neo-communitarianism looks at what may be happening to broadly neoliberal ideas at the level of public pubic policy. I think this process may also occur at the micro level of corporate governance reform, with proposals being argued in different ways. Lynn Stout and Cass Sunstein have both argued for certain corporate governance ideas in 'behavioural' terms, for example.

Thinking responsible investment, I would also flag up Rory Sullivan's great article from last year where he argues -   

The critical first step is for us to be much more explicit about the goals and outcomes we wish to see from responsible investment. If responsible investment is not about the delivery of social or environmental purposes (beyond investment returns), then I suggest we retire the term ‘responsible investment’, and return to talking about investment (or, at a stretch, ‘enhanced analysis’) and wait for a new generation to take on the challenge of ensuring that the capital markets make a meaningful contribution to the goals of sustainable development.

That sounds about right to me. Mainstream asset managers used to get criticised by SRI types for asserting that they already factored ESG issues into investment decision-making (even though you couldn't tell from the outside). Yet with all the emphasis on business case argumentation, materiality and integration, isn't the responsible investment in danger of ending up not far away from that, but just with better processes for getting there? If the outcomes aren't much different what has been achieved? Incidentally, notice the same trend is at work looking at the slightly broader question of 'ownership'. After years of stressing the universal owner type model, note the renewed interest in concentrated portfolios with a limited number of stocks. Kind of where the mainstream asset management industry used to be before the rise of indexing, no?

Having said all this, it's important to recognise that business case/financial materiality is probably the dominant approach in the RI world currently, and likely to remain so for some time. But it will be interesting if public policy discussions head off in a different direction, as Will suggests, yet much of the RI sector remains wedded to arguing largely in business case mode alone.

NB. I recognise that the RI community is diverse, and some still do take an explicity ethical appproach. But, IMO, this is a clear minority, and the 'movement' in general is closer to the view I set out.

Two bits worth reading, and a nice quote

1. An ace-a-tronic article by ex-Observer man Simon Caulkin on executive pay. This is great, as it delves a bit into the theory behind pay as currently structured, including the motivational aspects of it. A nice chunk towards the end:

"If after 30 years of tinkering the system still can't be made to work, there's something wrong with the initial premise. It's time to accept that both its central elements are fundamentally flawed. Researchers have been saying for years that pay for performance is a snare and a delusion, because the reasons for high performance can neither be isolated nor realistically linked to actions the CEO should be taking. In the FT, Lambert argued forcefully that the whole project is counterproductive, distorting executive behaviour, undermining intrinsic motivation and inciting risk. 'Is it right to think that senior managers are only driven by money and if they don't get what they want they'll go somewhere else?' he queries. 'I don't think so. And if they are, is that who boards really want to run the company?"

2. Some nice research (PDF) by the High Pay Centre on the make-up of rem comms. We're getting into really interesting territory now with folks like the HPC starting to look in detail at exactly who sits on rem comms. The next obvious step is to consider how this might affect their decision-making, which the HPC flags up:

when the majority of individuals on remuneration committees come from similar backgrounds it is not surprising that critics of remuneration committees have suggested that they fall victim to “groupthink” where individuals are reluctant to challenge the consensus view. It has been demonstrated by Cass Sunstein that group polarisation can occur, and more extreme decisions are reached, when groups are made up of like minded individuals. This may in part explain why we have seen such a gap between public perception of what is an acceptable level of pay and the current norm in executive pay awards.

Great stuff.

3. I like this quote (from here) from a guy at Cavendish Asset Management which illustrates the value of investors going public in their disagreements with companies (a subject which is close to my heart currently):

"The media was key. We didn't have a big enough stake in the company to vote down the move, but the deal looked so poor we had exert a much bigger influence by talking to the press. That influenced other shareholders and meant the deal didn't go ahead."

Rem comm reform

Well, I was there, I heard Ed say we should have employee representation on all company remuneration committees. This goes further, I think, than what he has previously said publicly. Coincidentally, it was also the one policy that two panellists in the fringe meeting I was chairing on corporate governance etc said they would want to hear in the leader's speech.

As I've said previously, I do think this would be a valuable reform, as I believe it could have an impact on actual decision-making. I won't reiterate previous posts, but if you buy the Sunstein argument about dissenting voices breaking up a reinforcing tendency in groups of similar views, this looks like a decent policy proposal. Decent, that is, if you believe that there is a problem with executive pay, which is not necessarily the case for some of the more Blairite end of the party.

The other thing this reform would likely do is open up a wider debate about shareholder primacy in corporate governance. Again, you may or may not think this is a good thing. But it would certainly pose deeper questions which, as is no doubt obvious, I think are worth giving serious thought to.

Two further questions. First, where as this idea come from? I'm fairly familiar with which organisations have championed this reform, and I don't think it's a question of, for example, the TUC simply convincing Ed's team. Maybe I'm wrong. But if not then this suggests that some people around Ed believe it's simply a good idea in it's own right. What we need to do now I think is move on from an argument based on the right of representation to one based on evidence of decision-making and outcomes. Apparently there is some out there.

Second, is there any chance of this becoming real live policy? Well I'm a bit more optimistic now. After all this idea is included in the BIS discussion paper on exec pay. The yellow half of the Coalition may therefore be keen to push this as a left-ish policy win. Therefore if Labour keeps pushing on it we may indeed see some movement.

I an imagine the dread felt by some Labour supporters about proposing 'workers on the board'. But a) I suspect that, like everything, the noise expended attacking it will be massively disproportional to the actual impact on companies and b) if they don't think it's a good idea and they do think there is a problem with exec pay, what are they proposing instead. I think we've given the disclosure+shareholder empowerment+Market oversight approach a decent try now. It doesn't seem to work very well.

Rem comm reform

Ahem

PIRC calls for a ‘nudge’ to remuneration committees

The membership of remuneration committees should be widened to allow employee or shareholder representatives to participate in order to make their operation more effective and facilitate pay restraint, according to Europe’s largest independent proxy agency PIRC.

In its submission to the Department of Business, Innovation and Skills (BIS) consultation on short-termism, PIRC argues that encouraging remuneration committees to hear divergent views could improve decision-making. This might include allowing employee or shareholder representatives to participate. PIRC’s proposal is influenced by research into group decisions by Cass Sunstein, co-author of the book Nudge which has influenced Coalition thinking on designing effective policy.

Alan MacDougall, PIRC’s managing director, said: “Various solutions have been tried over the years to address accelerating executive pay with little success. It is time that we looked properly at the dynamics of remuneration committees. Broadening the membership to include different viewpoints could improve the decisions committee members make, and introduce some restraint where it has clearly been lacking. Given the Coalition’s interest in the policy applications of research into behavioural influences this seems to be an idea whose time has come.”

PIRC also calls for the Government to consider the benefits of putting more ‘sand in the wheels’ in respect of merger and acquisition activity. PIRC suggests that the Government carry out proper analysis of the benefits of introducing a minimum holding period before shareholders can vote on acquisitions, upping the threshold for a deal to be passed, and giving shareholders in the acquirer a vote.

“There are compelling arguments for ensuring that the long-term owners of public companies have the opportunity to have more of a say on proposed acquisitions. It is also interesting to note that under the current legal framework it can be more difficult to change a company’s articles than to decide who owns it. It seems entirely legitimate to question whether this is an appropriate balance.” said MacDougall.

To help embed stewardship responsibilities within pension funds, PIRC suggests that pension fund trustees be required to undertake an annual review of how they have met their responsibilities as owners during the year. PIRC also argues that that the Government should define fiduciary duty as it applies to institutional investors’ stewardship activities.

Open up remuneration committee membership

Interesting piece here from the High Pay Commission:

The problem with remuneration committees is that the directors who sit on them are mostly insiders. They also sit on other boards and are drawn from a small pool of non-execs. Boards seldom take chances with appointments and there is very little diversity within boardrooms.

This morning, Brendan Barber, who heads the TUC, called for employees to be elected to remuneration committees instead of the close-knit group of directors who currently populate them. I agree with Barber: I would like to see representatives from the workforce elected on to the remuneration committee. One or two employees would inject an important dose of realism into committee thinking on pay. They could also help back up maverick directors who fear to speak out in case they upset the rest.

Boards would fiercely resist a break-up in the cosy consensus that exists over pay. But a reform to the way remuneration committees operate would be a small step towards reducing the vast pay gap in Britain and injecting a little “fairness” into the corporate sector.

I agree with this, and it strikes me that this is one of the key issues in the BIS short-termism review (which people are Googling like mad about incidentally, and winding up here - last minute submissions alert!). What's more I think there's evidence in research into group decision-making that supports the idea - Sunstein's work which I have plugged previously most obviously. I also think you probably need two representatives from employees/stakeholders/investors/whoever in order to make it easier for them to 'defect' - much harder if you are a lone voice against 'authority'.

PC gone mad is PC gone mad

A bit more from Mr Sunstein:

[T]he very phrase 'political correctness', as used by some conservative critics, has an impressive and somewhat pernicious ingenuity. The phrase suggests that certain political commitments are not a product of serious reflection but instead are a form of unthinking dogmatism - just a matter of following the crowd. The phenomenon of left-wing political correctness is real, and it is a real problem. But the use of the phrase to discredit certain thoughts and ideals can be a clever way of imposing informational and reputational pressures. Ironically, many of those who refer to political correctness, and deplore its presence on university campuses, are themselves participants in an insidious form of political correctness. They participate in group polarisation as well, stirring one another into extreme caricatures of contemporary university life; and they do so while congratulating themselves on their independence and bravery.

Spot on.

Conformity and rewards

One of my books currently on the go is Why Societies Need Dissent by Cass Sunstein, which is rather ace. There is a lot of very useful material in there is you're interested in a more behaviourally-informed view of governance. Just a quick excerpt below about one of my favourite subjects - the impact of financial incentives on behaviour. In this instance Sunstein is looking at how incentives affect conformity of opinion.

When people stand to make money if they are right, the rate of conformity is significantly decreased if the task is easy. People are less willing follow group members when they stand to profit from a correct answer. But there is a striking difference when the experiments are changed to make the underlying task difficult. In that event, a financial incentive for correct answers actually increases conformity. When the question is hard, people are more willing to follow the crowd if they stand to profit from a correct answer.

It's just a snippet, and there are plenty of other bits in the books that give pointers to how people can, and do, overcome the pressure to conform. Nonetheless it does seem to provide grounds for another argument against the merits of performance-related pay. Unless we think running a company is a simple task. And maybe it tells us something about benchmark-hugging in the investment world too.

PS. As I thought the book lends a bit of weight to my argument that it would be better if more investors went public with their concerns.

Speaking out

It's a common argument amongst some institutional investors that concerns about investee companies are best expressed privately. This is an argument that has also been deployed against disclosure of voting records. I have always felt that it is self-serving, but I increasingly think it is also just wrong.

By failing to speak out publicly, investors can create the impression that there are no concerns at a given company. It's the self-censorship of dissent and can therefore lead to a public assumption of apparent consensus (I'd almost go as far as to say it's analogous to banning shorting). It's a bit like a bubble in positive sentiment, without publicly expressed concerns it may simply grow bigger.

It's notable that Cass Sunstein has been making the argument for years that it's important to express dissent. And obviously in corporate governance there's a clear consensus that boards need to exhibit the ability to facilitate open challenge. Yet for some reason when it comes to investor dissent it's almost a point of principle of some to not speak out - even where publicly expressed dissent may help others find their voice.

Anyway, I'm going to start this soon. Expect to see a few excerpts appear...

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...

Good spot

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

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

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

If you want a vision of the future...

Right, now I've got the attention of George Orwell fans... I've been thinking a bit lately about what direction corporate governance and shareholder engagement is likely to take in the future. I think there are some obvious trends already emerging, along with the re-emergence of older ideas, and a few potential opportunities that don't (yet) seem to have been developed. Bear in mind I'm cutting a few corners and making some big assumptions in all this, and basing my comments purely on the UK, but here you go...

First up, I think that arguably more damage has been done in this crisis to the reputation of institutional shareholders as owners than to the UK's corporate governance regime. Think about it, no-one is seriously arguing that we move away from 'comply or explain' (even though others are), and you can find plenty of statements from companies, investors and others in responses to Walker, the FRC etc boldly stating that the UK's governance is not broken.

In marked contrast there seems to be a fairly solid consensus that institutional shareholders collectively have not covered themselves in glory (and by extension that something needs to change as a result). The reasons given for this vary - shareholders aren't really interested, they are inherently conflicted, clients don't ask them to do it, when they do engage it's at a superficial 'box-ticking' level, the information asymmetry undermines effective engagement, etc - and as a result the point behind the various critiques is often quite different. But a consensus there does seem to be, which is why the outgoing NAPF chair (to my surprise) actually seems to have hit entirely the wrong note, even according the Association's members.

Notably therefore we are very likely to see some sort of formal code for investors themselves to sign up to or explain why not. It also seems very likely that this will fall under the remit of the FRC rather than the ISC (a body which itself has suffered potentially fatal reputational damage as a result of Paul Myners' trenchant criticisms of it). Depending on what finally comes out of the Walker Review there may even be a small role for the FSA here, something which has the fund managers hopping mad.

But, second point, how likely is this process to lead to a change in the level and nature of engagement? This year there has been an uptick in voting - a fairly basic yardstick for measuring activism admittedly, but a vital one IMO - but it has not ben a fundamental shift. I suspect you'll struggle to find an RBS investor who backed the bank's remuneration report, for example. But actually go back just one year - and the annual report which made crystal clear that enhanced pensions were available to directors - and the remuneration report sailed through. In addition, there are fund managers out there who are still voting in favour of god-awful remuneration policies, just not the headline-grabbing ones. Therefore next season will actually tell us a lot more than this about how much things have changed. I have a suspicion that there is a substantial element of, for want of a better word, marketing in some institutions' voting this year.

Which leads on to point three - if we don't see a step-change on the part of institutional shareholders then what happens? In terms of high politics it won't necessarily matter because the Tories will be in power and their policy interest in this area is not obvious. A few examples - the Tories slagged off the FSA remuneration code when it appeared, but didn't talk the FSA about it during the consultation period. They don't seem to have put anything in to the Walker Review or commented on the FRC review of the Code. And their own 'White Paper' on financial reform had I think one or two paragraphs in it on corporate governance, and that said 'we don't know what we think yet'. So I suspect politically savvy fund managers are thinking they only need to make it until May and all this governance stuff will calm down again. (Incidentally, I suspect a change of government is going to be something of a rude awakening for those progressive types in this bit of the world who seem to think there is no real difference between the parties.)

But in public policy generally in this area, a return to pre-crisis behaviour by institutional shareholders could do a lot of damage. As I've banged on regularly in the past, if the owners - for whatever reason - repeatedly show no inclination to act like economic theory would suggest they ought, then people will question a shareholder-focused governance regime. If companies and their investors wish to avoid a situation where there is a greater statutory element to governance they need to recognise this. In a sense then Paul Myners is really giving institutions an opportunity to make the system work on a market basis. Again, I've said this before, but I think fund managers arguing against being encouraged to play the ownership role risk a lot as a result, though I'm not clear that they recognise this.

Which leads me on to point four - what might emerge instead? Well actually re-emerge - a stakeholder approach to governance. And funnily enough this is something that I don't really know much about, as I've always worked within the shareholder-focused governance framework. But it strikes me that if institutional shareholders effectively formally abdicate as owners in a meaningful sense, then other ideas about who is involved in governance come back into play. (And if you go back to Berle and Means they end up asking these sorts of questions - ie in whose interest should the corporation be run - which is part of their legacy that often seems to get forgotten.) For my part I would - no surprise here! - favour some sort of employee involvement. Not only for the Blairist reason that actually employees have a pretty good claim on the company compared to shareholders, but also because I think it could help discourage group think (see the Cass Sunstein point), and because I think it's right in principle.

Obviously this is a battle that is yet to even be fought, and there is no inevitability either about this happening, or that it would be successful. But it does strike me that the policy positioning the fund management industry seems to be adopting makes such a development more likely. Incidentally I'm genuinely not clear whether the position the industry is adopting is well thought out and aware of the possible impact on the governance debate, or simply short-termist arse-covering. Either way though possibilities are opening up.

There are two further potential trends that may emerge from this. First, those institutional investors which do have an interest in social, environmental and governance (ESG) issues may well start thinking much more about other ways to make an impact. If acting like an owner in the public equity market seems ineffective (because too few others will join you and you can't do it alone) I think they will a) start looking at influencing public policy directly and b) start looking at other asset classes (and the UNPRI is already doing a lot around private equity). Second, it's possible that civil society interest in using 'ownership', which has only recently started to emerge in some places, tails off again. Speaking personally, having been involved in shareholder campaigns that were not supported by one or two large asset managers that make a lot of noise about ESG issues has raised some big questions. I can't believe I am alone in this.

This leads on to point five - remuneration. First up a bit of politics. I'm not convinced by the Compass High Pay Commission, but I do think there is an open goal facing them - the failure of shareholders to police executive pay effectively, or link it too performance. I think if they just drew on some of the data already out there they could make a strong case that the current system is not working. Now that could lead you to try and make it work - and that might require a proper focus on how how shareholders look at pay (my next point) - or you could argue that it's inherently flawed, and therefore we need a rethink. I tend to the former because I think shareholders could make a difference, but you can see how a case can be made for latter. But curiously no-one on the Left has really taken a good look at the operation of the existing system (ie how shareholders act) other than just pointing at the outcomes (continual increases in exec pay).

So, point six. It strikes me that there is an opportunity to have a much more interesting debate about pay, and that shareholders are in a position to start this if they choose to. They could be asking questions like is executive pay working for shareholders, does remuneration act as a motivator, is a reasonable proportion being spent on remuneration (investment banks the obvious ones to look at here), and what about the split between execs and other employees in the same businesses? This ought really be simple self-interest. If shareholders aren't convinced that they are getting the return on their investment in remuneration, why don't they do something about it? And this is an area where some think shareholders can contribute something useful.

Point seven - this could also be a way to start thinking about whether stuff from behavioural economics and social psychology can be applied to governance. There seems to be an increasingly strong view that politics can learn something here. It would seem odd if the governance world (where the point is made so often that good structures aren't synonymous with good behaviours) did not do likewise. Again it seems like an opportunity waiting to be exploited if some investors would only show a bit of willing. There are even a few books out there that provide a jumping off point.

And finally - pressure on fees. Surely there must be some sort of backlash from pension funds against the increasing fees they are charged even though they get no better returns as a result. A focus on costs in the investment chain could lead to a) an attempt to reduce the links in the chain b) closer scrutiny of what actually takes place at each stage and c) a re-considering of the merits of long-termism. For whatever reason, pension funds and other institutions appear to be repelled by the idea that they should act like owners because it's a desirable end in its own right. Fair enough. So let's approach from the point of view that it is also costing them money, and an increasing amount. If they still don't bite then we know we have a political problem, rather than a market failure.

The BNP bubble

Staying on the BNP issue for one more post, I really do question the argument that has it that the rise of the far Right is a reflection of the failure of mainstream parties to address legitimate concerns. If that were the case then presumably the problem in the 30s was that mainstream parties weren't addressing legitimate concerns about the Judeo-Bolshevik threat.

Personally I think that some of the concerns that lie behind the growth of the BNP are similarly bollox. Therefore the last thing that mainstream parties ought to be doing is legitiming concerns that may not have much basis in fact (ie the threat of Islamification, immigrants getting priority for council housing etc). The problem is, of course, that even when politicians do hold the line against misconceptions, these concerns persist, and there is always someone on hand to keep stoking the fire.

Flipping forward, the more people that start to accept the BNP view of immigration, the more likely they are to end up talking to others that share their view. And, if we accept Cass Sunstein's argument, this is likely to lead to reinforcement and a tendency to even more extreme positions.

To me it looks like the political equivalent of a speculative bubble. And unfortunately I suspect our ability to detect and try and deflate bubbles is likely to be as successful in politics as it is in economics. At some point the bubble will burst, and those caught up in the mania will look back on it with regret, but at the moment to many in the midst of it it must seem like it must be well-founded because look at all the others who agree.

Scaredy cat

I quite like Danny Finkelstein's stuff, but I had snort derisively or something at this bit in a post about the Cass Sunstein book I've mentioned previously:

Let me tell you about one of the most frightening moments of my life. It came when I was at university, spending a week in Blackpool as a delegate to the National Union of Students conference.

Clearly, if that's one of the most frightening things he has witnessed he needs to get out more. He goes on to compare an NUS meeting seeking to expel a group of Tories to a Nuremberg rally. Yes really.

I have two serious-ish points to make. First, it's worth noting in passing that Sunstein describes Mandela as an extremist in the book - but one with a valid cause. He also talks about 'good extremism'. And obviously the Finkster's terrifying experience with the NUS was directly related to the anti-apartheid cause. I'm not saying that this excuses the behaviour he describes, or that Sunstein provides justification for it either. Just it's a bit odd that he doesn't make this link.

Secondly, though I regard myself as a moderate lefty, I found this bit of his post really annoying:

I believe that the work, and now the life, of Cass Sunstein provide a lesson to political moderates. The views of individuals change when they are part of groups. Certainty becomes greater as theories are corroborated, people gather information that confirms their earlier views, and group members seek approval from others. All this pushes individuals farther in the direction they were already inclined to go. Professor Sunstein calls his book Going to Extremes, but group polarisation means that a mildly centrist group would become more resolutely centrist.

What I don't like about it is the implication that being a centrist is the same as being a moderate. There are two problems with this in my opinion. First, being a centrist (as in somewhere between Left and Right) does not at all mean that you are a moderate. If both Left and Right agree on immigration controls, and you plant your flag between them, that doesn't make you a moderate on the issue in general, it just means you have split the difference between two dominant views. Also what about historical drift? What was the 'moderate' position on a sensible level of public ownership of industry 30 years ago, and what is it now? The moderate if they are a centrist will have just floated on the surface as the tide of this debate shifted.

Secondly, and more importantly, this idea of left/right/centre is generally pretty hopeless because it encourages people to think that these concepts sit on a map with almost measurable distances between them. It is a really unhelpful metaphor. The clustering of sometimes inconsistent political beliefs around the poles of Left and Right should tell us that it is not that simple. Centrists can be extremists too, and not in the sense of extremely moderate.

Tackling extremism on remuneration committees

There's a policy idea that unions have floated a few times in the past and that has come up once or twice in the financial crisis (Paul Myners touched on in it one speech) that I've always liked - putting some sort of employee representation on remuneration committees.

These committees, according to the Combined Code, are supposed to be sensitive to pay and conditions across the company when setting pay, yet many still manage to keep deciding that The Only Way Is Up for directors, even when cutting staff. The idea of having an employee rep on there would be to bring a bit of balance to discussions. Naturally enough, it is the sort of idea that most governance people in the UK would laugh at.

But there might be some evidence that actually it isn't a bad idea. Cass Sunstein's new book Going to Extremes is all about how people's views become more extreme if they are in groups of like-minded people. Groups of Democrats become more liberal when they talk together, Republicans become more conservative. The decisions these groups reach are more extreme than the views of the individuals that make them up had previously. The book details the real world effects of the this - juries reaching very different decisions depending on who is on them etc.

Sunstein says that this has obvious implications for business - particularly where board members reinforce each others' risk-taking mentality. And it does suggest that the notion of having independent non-execs on the board to provide challenge is therefore well-grounded.

But it also made me think of remuneration committees. Although these obviously have independent representation on them as best practice, what would seem to matter more is the committee members' attitudes to remuneration practices. Even if they are notionally independent, if they all share the view that you need to pay serious wedge and not quibble over large demands then surely they are likely to reach 'extreme' decisions on pay? (I mentioned this to a colleague at work and he immediately came up with the Dick Grasso case - the members of the compensation committee all being senior Wall Street figures).

So if we accept this basic line of argument, wouldn't it make sense to get someone from the shopfloor, even a TU rep, at least feeding into the remuneration committee, in order to try and disrupt the potential tendency to reach extreme decisions? (And thinking much further ahead, it would be interesting to research NEDs' views on remuneration, and see what the outcomes have been at rem comms where they sit with others with like minds).

Review of Nudge

Well, I finished Nudge the other day and I have to say I'm fairly impressed by it as a book. I don't know if it's quite as revolutionary as is being made out, but it's a nice and straightforward primer on behavioural economics and some of its applications.

The first section sets the scene for why nudges - policy interventions that encourage rather than mandate certain types of behaviour - may be necessary. So it builds up the argument for why we aren't the rational self-maximizers that economics has tended to assume we are. This section includes a useful run-through of some of the key heuristics and biases that have been identified and what kind of outcomes they result in. This does provide a pretty good overview of some of the major factors like anchoring, availability, representativeness, loss aversion and so on. It also stresses the importance of the design of choice, or choice architecture, and that in many cases there is no option to be 'neutral' - some kind of structure of choices has to be offered.

The second section is about financial issues, so much of this is familiar ground if you know much about recent pension reform. Still the points are worth reiterating. If you auto-enrol people into a pension most tend not to opt-out. Whereas if you don't auto-enrol many don't join. This, combined with what non-savers say themselves, suggests that non-savers aren't making a rational choice not to save. People also adopt naive diversificaton strategies - the equity content of their asset allocation (if they have made an active choice) will be heavily influenced by the allocations of the funds on offer (and what stock are popular at the time) and what's more people don't tend to shift their initial allocation. Also it seems pretty clear less in more in fund choices - too many options puts us off choosing (no really).

The section on health has a bit of a US focus, but there is interesting stuff in there. The example of the Part D prescription drugs system is useful if only to demonstrate why a random choice for non-choosers (like the carousel option proposed by the ABI for Personal Accounts) is a bad idea. Also the section on organ donations is worth a read - I think I still favour the assumed consent approach, but the idea of mandatory choice (ie having to state your position on your driving liscence) is at least worth thinking about. Also in this section are some fairly interesting suggestions for nudging people to reduce energy consumption. These are definitely worth a look since they involve, for example, being able to make peer group comparisons. I think this would work on two levels - firstly simple self-interest, wouldn't you be annoyed to know you are spending more on energy than comparable households? Secondly I think it would give people smug points for being more energy efficient.

The fourth section I probably found the least interesting, as it deals with ideas I'm not that impressed by, such as school vouchers. Having said that the idea of privatising marriage is intriguing, if unlikely to happen. Basically they argue that the state should restrict itself to civil partnerships and the legal rights that flow from them, but that 'marriages' could be arranged by other groups. That way churches could choose whether or not they want to carry out same-sex marriages. Equally other organisations could carry them out anyway. That way, the authors argue, no-one's values get compromised but neither are anyone's rights denied.

The final section sketches out some further ideas for nudges, as well as combatting some of the counter arguments that have been put forward. This latter chapter is well worth a read as the authors do a pretty good job at arguing back at some of the half-decent arguments there are out there that challenge them. Some good pro-nudge points here include the one I've already mentioned that often there isn't a neutral option - so the absence of a nudge is a kind of nudge itself. Also it is important that nudges are made explicit, so there is no sense that Government (or whoever else is doing the nudging) is being underhand.

Thaler and Sunstein argue that their approach offers a real 'third way' since it seeks an alternative to both state mandated paths on the one hand and complete laissez-faire on the other. This they call Libertarian Paternalism. That's obviously an Americanism, since in the UK libertarianism of any stripe is not a strong theme in our political culture, and seems to be (on the Right at least) the preserve of people who think speed cameras are 'Orwellian' and tax morally comparable to robbery. As such I don't expect the label to catch on here. However overall the book does provide quite a few ideas for how we could achieve some beneficial behavioural changes without being too heavy-handed. As I've said before, I think it would be a big mistake for lefties to not engage with these ideas. And if you want to get into behavioural economics this probably isn't a bad place to start.