A Knightian aside

Stumbled across the following in Risk, Uncertainty and Profit and rather liked it.

"We find ourselves compelled to strive after things which in a "cool, calm hour" we admit we do not want, at least not in fullness and perfection. Perhaps it is the manifest impossibility of reaching the end which makes it interesting to strive after it."

For your reading pleasure

1. Paul Myners' latest speech. I like this line - "To say that the compensation practices in the City are ‘necessary’ is simply not the case; they are ‘culturally embedded’ in an industry that now needs to reform."

2. Another enjoyable post from Will at Potlatch.

3. Commentary on the TUC response to Walker here. Unison also has a response on the Walker submissions site, but I can't link directly to it.

Governance reform - issues to watch for

Given that in the next couple of months we will see both the final Walker Review recommendations (and the govt's response to them) and the results of the FRC's latest review of the Combined Code, it could be quite a significant period for governance reform.

Personally, I don't think that Walker will shift much ground from his original recommendations though there may be changes in some areas. Arguably the Code will go through some sizeable changes (in part because of what Walker says). So in the spirit of a sort of "4 Tests for Walker" type preview here are a few areas where I hope the Walker, the FRC and the govt keep their nerve or even go a bit further.

1. A new 'Stewardship code' for institutional investors, and a new role for the FRC in respect of it. I think this is almost certain to go ahead, and this will also mean that the Combined Code loses the section on shareholders. The important question is who has responsibility for it. Obviously I don't think it should be the ISC, so let's hope Walker sticks to his guns and gives it to the FRC.

2. Voting disclosure. It's time to make this mandatory, surely? The arguments against it simply don't stack up. The principle is accepted by most of the market, so making in mandatory would simply vastly improve execution. Standardised, market-wide info is what is required, the voluntary approach hasn't delivered it after several years of trying, so logically it's time for coercion.

3. Annual election of directors. Walker has only gone for annual election of BOFI chairs, so even the ISC takes a more radical position (annual election of committee chairs). I genuinely think investor consensus on this is now shifting to favour annual elections, so I'm hoping that Walker and the FRC recognise this and push a more forward-looking position.

4. Directors' pensions. The recommendation in Walker on directors' pensions is a missed opportunity. There are a number of other issues that can and should be caught by tweaking this recommendation (see the TUC's annual PensionsWatch report for details) and the Code review could also pick them up. This is long overdue and, given the Fred Goodwin experience, surely one the govt would like to crack too.

Now, I'm not being particularly ambitious with my list. We're a long way from the idea of employee or stakeholder representation on boards, for example. But I would have thought that if we can get most of these boxes ticked, or close to it, at least some progress - within the current framework - will have been made.

Ireland to implement statutory governance?

This is very interesting. From the looks of it the Irish government is planning to put key provisions of its Combined Code on Corporate Governance into legislation. This will cover the following issues:

· Board composition and independence
· Segregation of CEO and Chair
· Clear definition of executive and non-executive responsibilities.
· Audit committee composition, independence, role and function
· Responsibilities and composition of board committees
· Segregation of committee chairs
· Risk management
· Selection of non-executive directors
· Sanctions for non-compliance

That's a pretty full list - though nothing there about remuneration - and on the face of it this is a shift away from a purely market-driven approach to corp gov. Effectively the state will be defining best practice in terms of board structure etc.

Snippet

Via Duncan, I came across the following para in this article.

A transaction tax on financial instruments is very likely. This will raise revenue for governments and make shareholders behave more like owners. Shareholder failure to police risky management activities was largely due to the very short holding periods for equities. A suitably high transaction tax would force investors to hold shares for much longer periods and to engage management to control risk. This would reduce the need for governments to police risk-taking in corporations. What could be more laudable than a tax that turned everybody into Warren Buffett?

A couple of points. Firstly, is it 'very likely'? I don't detect much of a groundswell of opinion behind this idea, right or wrong. But secondly, I do think if the 'shareholder as owner' thing is going to be effective then we probably do need to think about the financial incentives for staying put. The steady drumbeat from the mainstream institutional investor leadership is 'don't make us do this stuff'. And I don't actually see much point in mandating such behaviour (you might as well put your effort into regulating the companies, rather than forcing investors to provide oversight). But we could tilt the playing field a bit so that there was a bit more reason why shareholders might try and engage. And as I said t'other day, my own preference would be to positively incentivise holding for the long-term.

UKSIF policy submissions

Some good stuff here. Some of the commentary in the Walker submission in particular is interesting, and I'm glad that someone is saying things like this -

Management literature has long suggested that remuneration is a “hygiene factor” rather than a “motivator”, ie. talent may be de-motivated by what is perceived as insufficient remuneration but only transiently motivated positively by remuneration. Other motivators are more effective for delivering high quality sustained performance. The remuneration debate to date has largely failed to reflect this insight.