Read this!

Very interesting report from Demos - Reinventing the firm (PDF) - will try and do a review if I find a bit of time. Loads of good stuff in there about ownership. 

It beats work...

This week's picnic in Ruskin Park.

Pension fund self-interest vs taxes

Chris Dillow has an interesting post up about the Tobin Tax idea, and what the arguments behind it might lead you to think about politics. It got me thinking about what I really think about the proposition. And to be honest, much as I have no sympathy with those 'outraged' by Adair Turner even talking about taxes, I'm not convinced the idea is a great one, at least in my corner of the world. 

Because of my interest in governance/ownership issues I'm thinking about equities here. Share purchases are already subject to stamp duty, yet this hasn't stopped the level of trading gradually increasing and with it the costs for those on whose behalf it is undertaken. And this hasn't gone unnoticed - Warren Buffett talked a few years back about a new law of motion - as motion increases, returns decrease. And as Watson Wyatt put it in its Remapping Our Investment World report that the increase in trading "has enriched the broking community and impoverished the average pension fund".

But would, for example, whacking up stamp duty shares even further actually do any good? It would likely only make a difference if the impact was definitely felt, but felt by who? Most funds obviously delegate investment management to fund managers. But fund managers aren't going to shoulder the cost, they will just pass it on to the client. Thus it would ultimately sting pension funds and others, not the intermediaries who are doing the trading. 

Another not entirely rubbish argument is that if increased taxes made trading in equities prohibitive, this might encourage investors to pile more into derivatives, specifically contracts for difference.

Of course there are good arguments against both of these points. The increased cost of trading is the point of course - it's intended to hurt in order to encourage lower levels of trading. And if trading levels fall far enough, pension funds might actually end up better off. And we're talking about the secondary market here really - as the Berle and Means quote below makes clear, this isn't affecting the allocation of capital to businesses. Similarly if you're bothered by a flight to CFDs then presumably these could be taxed too so that they don't become too relatively attractive.  

But I can't help thinking that if this issue is already well-known to investment consultants, for example, that there must be better ways to address it. Why can't funds put turnover limits on their portfolios, or make other changes to mandate design? Or why not focus trustees' attention more directly on investment costs as a key part of their duties? If Watsons are right and fees have gone up 50% in five years you would think that the funds' self-interest ought to kick in, yet it doesn't seem to.

This does make me wonder sometimes about the relative importance of the principal-agent problem in the trustee-fund manager relationship (and the beneficiary-trustee one) versus the fund manager-company one. The principals in the first case have (most of the time) far more power over the agent than in the second case, yet seem to rarely exercise it effectively. And we seem to spend a lot more time focusing on the second one. 

But if we got trustees, for example, thinking more about the costs they are incurring they could work with their agents to reduce them without the need to turn to tax. It seems at present that (as Gillian Tett suggested in the Prospect interview) the real problem is getting the agents to think about their own financial self-interest and act on it.

Back to the beginning

From the preface to The Modern Corporation and Private Property:

"[S]tockmarkets are no longer places of 'investment' as the word was used by classical economists. Save to a marginal degree, they no longer allocate capital. They are mechanisms for liquidity. The purchaser of stock, save in rare instances, does not buy new issue. The price he pays does not add to capital or assets of the corporation whose shares he buys. Stockmarkets do not exist for, and in general are not used for (in fact are not allowed to be used for), distribution of newly issued shares... The exchanges are institutions in which shares, arising from investment made long ago, are shifted from sellers who cash to buyers who wish stock. Purchases and sales on the New York and other stock markets do not seriously affect the business operations of the companies whose shares are the subject of trading.

"We have yet to digest the social-economic situation resulting from this fact. Immense dollar values of stocks are bought and sold every day, month and year. These dollars - indeed hundreds of billions of dollars - do not, apparently, enter the stream of direct commercial or productive use. That is, they do not become 'capital' devoted to productive use...

"...The purchaser of stock does not contribute savings to an enterprise, thus enabling it to increase its plant or operations. He does not take the 'risk' of a new or increased economic operation; he merely estimates the chances of the corporation's shares increasing in value. The contribution his purchase makes to anyone other than himself is the maintenance of liquidity for other shareholders who may want to convert their holdings into cash..."

That Adair Turner interview

Back on the mainland ;-) after a nice break with the grandparents. Managed to stop myself looking at any emails until today, or doing (much) work-related reading. But I did buy Prospect in the airport yesterday to see what Adair Turner actually said, having only read second-hand accounts. 

Actually although the piece is worth a read, it's considerably less interesting content-wise than I was expecting. And it's actually a roundtable which also includes John Gieve, Paul Woolley (who set up the fantastically-named Centre for the Study of Capital Market Dysfunctionality about which I've blogged occasionally before), and the FT's Gillian Tett. And I'm going to be really superficial here and say that the thing that struck me most reading the article was what appear to be some quite distinct conceptual models at play on the part of those interviewed.

For instance, Turner himself seems quite attached the 'economy as a machine' metaphor, which I find a bit surprising. What do I mean by that? Well how about this:

"There was no definition of the levers to pull if you decided there were problems..."

"...we all recognise we need levers other than macro-prudential ones or other than interest rates alone."

"...to stop the credit bubble of 2015-20 we do need to have levers for tightening liquidity or tightening capital rules" 

Gillian Tett (background in anthropology remember) meanwhile chucks in a religious analogy in respect to some ideas about how markets operate (EMH etc):

"There is a real sense of intellectual confusion. Over the past year I have been speaking to former true believers and they're like a priest who has lost faith in the Bible, but still has to go to church, and the congregation is sitting there but he doesn't know what the Bible is anymore."

Paul Woolley though sticks with economic theory, mentioning the principal-agent issue several times. And in one of these comes one of the most interesting bits of the whole article for me:

WOOLLEY: If we agree that agents in the financial sector are capturing too much of the productive economy's return then surely part of the solution is educating the principals, the pension funds and so on, to make agents deliver longer-term investment strategies with less dealing for the agents' own sake.

TETT: It's a complete pipedream to think that the principals are suddenly going to change their ways... The pension funds are so dumb and fragmented, they're not going to protect their own interests, the FSA is going to have to be interventionist and protect the end interests of the people who supply the money - the pensioners.

I think that's a lot of the stuff I bang on about explained in a few sentences. The pension funds do get ripped off, they do seem to be paying more but getting no better results. But there is a lack of concerted pressure for change. 

Blogging light to moderate

The Family P are off to Norn Iron for our first trip to see the grandparents on their home turf. So I won't be blogging for a few days.

Before signing off, I should say that the book I mentioned a couple of days back is really pretty good. There's a part of me that is a bit sceptical of some of the interpretations that are laid over events/situations etc, but there's a lot of solid stuff in here. And even the stuff that is a bit more speculative is worth a read. 

The chapters on views of investors, financial market impact on governance structures, and networks in governance are all right up my street and have provided some useful info. But the chapter entitled Interpretive Politics at the Federal Reserve has been my favourite so far. It basically analyses conversations at the Fed in terms of the type of framing that was going on by Volcker and others. It might be a chronic case of reading far too much into too little, but it's good fun.

That's all folks.

So if we're going to use the Companies Act...

...what about exercising the reserve power in clause 1277?:

Information as to exercise of voting rights by institutional investors

1277Power to require information about exercise of voting rights

(1)The Treasury or the Secretary of State may make provision by regulations requiring institutions to which this section applies to provide information about the exercise of voting rights attached to shares to which this section applies.

(2)This power is exercisable in accordance with—

• section 1278 (institutions to which information provisions apply),

• section 1279 (shares to which information provisions apply), and

• section 1280 (obligations with respect to provision of information).

(3)In this section and the sections mentioned above—

(a)references to a person acting on behalf of an institution include—

(i)any person to whom authority has been delegated by the institution to take decisions as to any matter relevant to the subject matter of the regulations, and

(ii)such other persons as may be specified; and

(b)“specified” means specified in the regulations.

(4)The obligation imposed by regulations under this section is enforceable by civil proceedings brought by—

(a)any person to whom the information should have been provided, or

(b)a specified regulatory authority.

(5)Regulations under this section may make different provision for different descriptions of institution, different descriptions of shares and for other different circumstances.

(6)Regulations under this section are subject to affirmative resolution procedure.

Apparently the affirmative resolution procedure is pretty speedy, so it wouldn't pose a big hurdle. And it wouldn't be too difficult to develop a coherent disclosure framework setting out the who, what and when.

So why not?