Overdue plug

For this here RSA report (PDF) on pensions reform by David Pitt Watson which covers some topics I regularly bang on about.

Back to the beginning part 2

I'm really glad I went back and read The Modern Corporation and Private Property by Berle and Means. It is a great overview of the rise of the public corporation with dispersed shareholders, it's really well written, and it really does deserve its reputation as a foundation text in corporate governance.

But the other reason I'm glad I went back and read it is because it made me realise what a partial view you get of it from listening to governance people sometimes. Yes, it's central theme is the separation of ownership and control, but the book does not simply advocate the extension of greater rights to shareholders to address this (which is today's 'obvious' answer to the issue). They go further and argue that the separation of ownership and control changes the nature of property - hence the title.

Actually in the final chapter of the book they argue that there's a good case to be made that companies be run in the interests of 'the community'. There's also a bit in this chapter that really made me think of the ownership debate going on currently. Here they are not necessarily talking about the willing surrender of ownership, rather it is the result of wider share-ownership. But actually it reminds me of the stance some in the asset management industry are currently taking in respect of the Government, via the Walker Review, trying to get them to act more like owners:

"[T]he owners of passive property, by surrendering control and responsibility over the active property, have surrendered the right that the corporation should be operated in their sole interest, -they have released the community from the obligation to protect them to the full extent implied in the doctrine of strict property rights."

As I've said before, I think institutions should think carefully when they make the argument that they shouldn't be forced to act like owners. As Berle and Means suggest, this actually starts pulling at a thread that could cause much bigger issues to unravel.

Finally, it was also worth a read to bring to my attention the fact that an Adam Smith quote that is a particular favourite of governance people actually goes on quite a bit longer. The bit I am familiar with is the line about company directors "being the managers rather of other people's money than their own, it cannot be well expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own".

The quote is usually deployed again to strengthen the agency theory critique of public companies, and the need for a focus on shareholder value, and by extension greater shareholder rights. Yet actually in the passage Smith goes on to basically argue that joint stock companies are inherently flawed, and haven't done a great job. And this was long before the dispersed-shareholder version we have today arrived on the scene.

It's just a jump to the Left

There's an enjoyable lefty critique of financial reform here (PDF). There are some great bits of invective in there:

By the mid 2000s venture capital survived not as a practice but as a rhetorical label which had been appropriated by the BVCA trade association which was defending leveraged private equity.

And:

This is very different from the City of London’s version of “ethical investment” which means more fastidiousness about the coupons which your fund manager buys.

So mean, and so true.

Norwegian activism, in the UK

Norges Bank Investment Management is the investment arm of the giant Norwegian pension fund. Yesterday it held a briefing about its plans for stepping up shareholder engagement. There's a release about its plans in respect of some US holding here, and a report about its support for annual election of directors here.

NBIM has made some interesting comments in response to the Walker Review, in addition to their support for annual director elections, they are also interested in how companies address the need to balance remuneration policy between the needs of directors and those of employees. I think they could do something genuinely original here, since most investors don't look at the employee angle. They are also sceptical about 'say on pay' partly because they believe it almost attempts to devolve the issue to shareholders, and thus can act to legitimise high pay.

Why should the UK pay any attention to a Norwegian investor? Well, as I mentioned, it is huge. In fact it estimates it owns about 1.75% of UK equities. That will give it a bigger slug in British companies than many domestic asset managers. And judging by what they are saying they could be much more serious about ownership than some of our homegrown investors.

Odd comments from the NAPF...

In this letter to The Grauniad earlier in the week:

Your interview (Too many UK firms fall into foreign hands, September 24), reports that City minister Lord Myners would "summon" the National Association of Pension Funds (NAPF) to a meeting to discuss what he perceives to be a lack of resources – and therefore commitment – on the part of occupational pension funds to raise standards of corporate governance. We are always happy to discuss matters withMyners and will be happy to do so again.
The NAPF is, and always has been, an "active driver of effective ownership", as the minister is aware – we actively engage with investee companies and our corporate governance guidelines are used by a leading voting agency. We see this as an integral part of building value for, and providing pensions to, scheme members, which is, after all, what pension funds are there to do.
Pension funds' priority is to ensure that they are able to pay pensions to their members. This alone presents many challenging issues, especially in the current environment. Government policies have forced pension schemes to close and they grapple with ever-growing deficits out of UK equities – to the extent that pension schemes now own less than 15% of the UK market. It is ironic indeed, then, that government now wants to call on pension schemes to be the saviours of capitalism.
Constructive comment – not unwarranted criticism – is what is needed from government.
Chris Hitchen

First thing, I'm not sure what the message is. If (ok - a big if) ownership activity is in funds' financial self-interest, as implied in para 2, how come it then appears to be contrasted with the 'proper job' of paying pensions, dealing with deficits etc in para 3?

Second, let's be absolutely clear about this - most private sector pension funds do diddley squat in this area. You can count the funds that make a serious go of it on the fingers of one hand just about. Anyone with any knowledge of the limited ownership activity by shareholders in the UK would tell you that the utter passivity of most pension funds is a big reason why more does not get done. If you think shareholders should act like owners, then arguably criticism of pension funds is actually pretty reasonable.

UPDATE: Nigel pointed out the TUC response here.

This time is different

Just a quickie, but I was trawling the Torygraph's finance section as you do and came across this blog post by the sometimes interesting Edmund Conway. He refers to what sounds like an interesting book on the subject of financial crises:

As a new book, This Time is Different, by the economists Carmen Reinhart and Ken Rogoff, proves in devastating detail, humans have succumbed to financial crises for century after century, ever since the Middle Ages. They are a product of the fact that human life exists in a state of flux between rationality and emotion. This was something John Maynard Keynes understood, but that moderneconomists conveniently forgot.

Sounds like something I would like. And I like the title, which is a reference to the truism that the four most dangerous words in finance are 'this time is different'. So off I go to Amazon to look it up. If you search by that title, there's the book as the top search result, but it also pulls up this corker:

Dow 30,000 by 2008!: Why It's Different This Time

Hehe. I have no idea if the title is meant to be a similar reference, but I think we can say with some certainty that this time it wasn't different, and the prediction contained within the title was a bit off-target.

Work is the blight of the blogging classes

Work and dad-dom are affecting my ability to blog regularly at present. So in the meantime read this (sorry I still haven't replied to you, Nick!), this and this.