UKFI investment mandate

Can be found here (PDF). Just a snippet:

UKFI will (amongst other things):

(i) (on behalf of HM Treasury) vote all the shares wherever practicable to do so;

(ii) inform the relevant Listed Investee Company in advance of its voting intentions; and

(iii) disclose how it has voted.

NAPF's odd comments part 2

The outgoing NAPF chair has repeated what he wrote to The Guardian at their annual conf it seems.

He said: "I am fed up with government ministers and regulators pointing the finger of blame at pension funds and pension fund trustees for the banking crisis. There are others far more culpable and they must shoulder their responsibility and look to put their own houses in order first."
Hitchen added schemes take their responsibility as corporate owners seriously.
However, he added: "Our job is to pay pensions, not to run the banks. And our influence is limited - today, we own just 13% of the UK stock market. It is ironic that as more and more DB pension funds enter run-off, driven in no small part by government and regulator-driven policies, we are now expected to come to the rescue of capitalism."

I just don't get what the issue is here. I don't think anyone is particularly blaming pension funds, and by that I mean two things. First, it is very clear that the principal focus of Walker etc is on the boards of companies themselves. Second, though there is (rightly) also a focus on the role of shareholders as owners, it's mainly aimed at asset managers isn't it?

Also I don't get the false choice that is suggested between taking ownership seriously and paying pensions. Again, if you read the Walker Review the focus on shareholder engagement is entirely based on the idea that this is in shareholders' financial self-interest. And this is corp gov basics, separation of ownership and control and all that. According to this way of thinking, surely, the existence of well-run companies (ie the survival of an important aspect of capitalism) directly contributes to the payment of pensions. That's why pension funds should be interested.

Finally, it is true that pension funds' influence is limited, and they account for a declining share of equity ownership. But let's be honest - most pension funds have never really tried to exert the influence that they do have. Ask any asset manager how many questions they get from clients about corporate governance etc. The client pressure on them to act like owners barely exists, whereas a perceived focus on short-term return does (I say perceived because pension funds claim they don't put such pressure on). If you feel that keeping your job has more to do with short-term returns than long-term ownership, what are you going to prioritise?

Unfortunately the language used above, which I am sure will have many an NAPF member nodding in favour, only reinforces the idea that corporate governance and ownership activity have no overlap with financial self-interest. If you want an example of why we have this ownership problem, this is it.

Exit, voice and loyalty (dividends)

The more I think about it, the more I think I like the idea of loyalty dividends. Basically the idea is that long-term shareholders are entitled to an extra bit of dividend once they have held their shares in a company for a set period. It exists in a few places, but hasn't really taken off, but has been floated by ex-Hermes man Peter Butler in the past as a way to incentivise 'ownership' (see page 4 of this PDF).

In essence it's no different to any other type of customer loyalty scheme, and in that sense the advantage (as I see it) is that it tips the balance marginally in favour of voice as opposed to exit. So investors may actually have a grumble to management rather than simply flogging their shares to another investor, and thus may encourage the board to address issues of concern.

Investors can of course still flog their shares if they want to, but by marginally tilting the balance in favour of holding this would hopefully address the problem of asset managers generally choosing the exit option when they don't like management, leaving the problem unaddressed. Also it would be up to each company decide whether such a scheme was valuable, rather than the approach of a Tobin Tax - to make exit less attractive, rather than voice more attractive - which would hit everyone. So there could be a bit of experimentation and if it doesn't work it's easy enough to scrap.

I'm sure there are some obvious problems - so what are they?

A bit more on representative bodies

I realised that I missed this speech by Paul Myners last week, which includes a great bit on the ISC:

[I]n 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.

PS. I am picking up a fair few hits from people looking for various speeches he has given, so I'm creating a 'Paul Myners' label for any of you wanting to pick up previous speeches. I'll go backl and label all previous posts. Of course, you can also get them on the HMT website here.

Myners in the FT

Paul Myners has an article in todays FT on ownership that is worth a read. A couple of bit particularly caught my eye. For example this bit:

Investors' emphasis on short-term return communicates itself to business leaders who feel obliged to think and act short-term; take on more risk, which the fund manager reduces through diversification - an option not open to employees.

This is very much in line with the point raised by Margaret Blair, that employees make a firm-specific investment. Some good stuff here too about why fund managers end up focusing on the short term (what signals are their clients sending them?)

And this bit:

I am struck by the absence of a body in the UK that speaks on behalf of institutional investors without a commercial or trade association interest. Creating an independent Council for Institutional Investors would be a step forward.

I reckon some sort of UK version of the CII is long overdue. As I've blogged a bit before, it's a bit of a problem that collaborative engagement gets funneled through trade bodies which lobby on several fronts (ie ABI represents insurers as PLCs as well as shareholders), rather than through a body that only represents investors as investors (and the real investors - not the investment agents - too).

Exactly

If investors won't play the ownership role, policymakers will look to other alternatives.

It is partly the failure of institutional investors such as pension funds to voice concern or to pressure banks into better behaviour that has persuaded ministers to opt for the big stick of regulation. By behaving like neglectful absentee landlords (© Lord Myners), pension funds have encouraged policymakers to choose more onerous supervision.

The rhetoric of reaction

This is a rather enjoyable little book, and just the thing to keep your progressive politics warm this winter, with the black cloud of a Tory government on the horizon.

To simplify, Hirschman identifies three recurring (and somewhat contradictory) types of conservative/reactionary arguments.

1. Perversity - a proposed reform will actually have the opposite effect to that intended, or make the problem worse.

2. Futility - the proposed reform will have no real effect.

3. Jeopardy - the idea that a reform will result in the loss of something else (ie a previous reform).

It's a pretty simple classification, but it does capture the shape of recurring reactionary arguments. As I've blogged a bit before, I think sometimes people are attracted more by the structure/shape of an argument rather than its content (or whether it is actually accurate). Hirschman makes the point that some of the arguments that fall into his categories seem to have roots in much older myths.

Just how common these types of arguments are can be demonstrated by a quick dip into one of my favourite issues - mandatory disclosure of shareholder voting records. And just to keep things bang up to date, the following excerpts are taken from the IMA's submission to Walker (PDF). I think they manage to cover all three bases:

A “one- size-fits-all” requirement would undermine progress. As well as looking at the number of managers that disclose, the survey analysed voting details published on web-sites. This showed a wide variation in the matters reported, indicating the complexity of this matter and the difficulty of introducing regulations that would require uniform disclosure. In effect, imposing a “one-size-fits-all” legislative requirement would undermine the progress made to date.

(jeopardy)

The voting process could be undermined. Public disclosure could undermine and generally “dumb down” the voting process due to the sensitivity of the issues and the confidentiality necessary.

(perversity)

Mechanistic, meaningless reporting would result. Requiring disclosure would result in pages of statistics and tables, which could be meaningless without further analysis.

(futility)

Now my point - on this occasion - is not that the arguments are wrong, but rather that they do fit pretty well into Hirschman's taxonomy. They are simply reactionary arguments of a classic type.

Final point - obviously conservatives are sometimes reformers, and 'progressives' deploy these types of arguments against them in turn to defend the status quo. So they are not intrinsically Left or Right. Having said that one side does tend to use them a lot more than the other - inevitably since conservatives tend to think the status quo is acceptable/natural and a concerned by the ramifications of moving away from it.

Anyway, a great little book.