Bela Lugosi's Red

Interesting factoid that I discovered via a documentary today - in addition to being a trade union activist, Bela Lugosi was actually involved with the 1919 communist revolution in Hungary, led by another Bela - Bela Kun. He was heavily involved in the Hungarian actors' union and it appears he was actually had a minor role in Kun's administration. This was a problem for him later on when the FBI kept tabs on him, something that appears to have damaged his career.

Data disappears...

Most people have read about the unfortunate disbanding of the well-regarded responsible investment team at Insight Investment. Having had a look at the Insight website today it appears that the ‘Responsible Investment’ section, which had quite a lot of useful documents in it, has been removed or made inaccessible. This also means that you can’t access their voting and engagement records, which were presented in one of the best systems I have come across in my voting geekery.

So let me mount my hobby-horse another time and take it for a quick ride. Doesn’t this just demonstrate the problem of a voluntary system of disclosure, where the data is only provided at an asset manager’s discretion? Insight started disclosing its voting back in 2004, and it was a big asset manager, so there was a lot of data there. Now it is gone.

Because there is no central repository for voting data, where we could access voting decisions from previous seasons regardless of whether the manager had been taken over, unless someone at decides to reverse this decision I presume Insight's voting record is gone for good. I think it's unlikely that SWIP (who took the equities bit of Insight) will suddenly decide to make it all public again, for the simple reason that they don't disclose any data themselves.

In contrast, if we had a mandatory system, where managers had to make an annual report on how al their votes have been cast, and file it with an organisation like the FRC, this problem would not emerge.

Straight to the politics and economics section...

Select committee shuffle

I've spent a few hours at the Treasury committee hearings this week - yesterday was Sir David Walker, today UKFI followed by Paul Myners. I wasn't able to attend the 'show trials' in February when the likes of Fred Goodwin and Andy Hornby gave evidence, and these sessions were much more sparsely attended.

Nonetheless there was some interesting stuff in there. I thought some of what Walker said was quite encouraging. In particular he moved on to talking about shareholder engagement without prompting from the committee. And judging from some of his comments (ie scepticism about engagement in the recent past) he appears to have some idea of the very real challenges in getting investors to take these things seriously. There was no-one there except us from the investor world, which I was surprised about.

Today I was really impressed by John Kingman. His answers were (mostly) very fluent and he came across as very much on top of his area. Which is rather important since he has been in charge of our investments in the banks. He definitely seemed to have a clear idea of who had responsibility for what in the HMT-UKFI-banks interface. UKFI did take a bit of flak for not revealing the bonus pot for 2008 for RBS. And Michael Fallon (rightly) pulled Kingman up at one point for "mandarin-speak" but all in all it was a polished performance. There was some interesting discussion too about the relative weight UKFI puts on representing the taxpayer's interest as shareholder and as bank customer.

Next up came Paul Myners, though we ducked out a bit early when they took a 10 minute break in the meeting as this session it wasn't on a topic of direct relevance to us. Given their recent encounters you might have expected this to be quite a fractious session, but actually what we saw of it was quite good-natured. That said there did seem to be a bit of a crackle in the air between Myners and Fallon.

Finally, the committee itself. I'm quite impressed by John McFall and he was quite punchy today in particular. And generally I had less of a sense of them missing the right questions to ask, whilst asking the 'populist' ones, though obviously I would have asked some different ones myself. It's democracy - a bit messy, doesn't work brilliantly sometimes, but it seems to do the job we want/need doing.

Remuneration and electric shocks

I've just started reading Mistakes were made (but not by me) which is all about self-justification, typically arising from cognitive dissonance, and the way it distorts decision-making. Obviously it immediately made me think of the way the former heads of RBS and HBOS defended themselves in front of the Treasury select committee. But it also made me think about shareholders' justification for their recent activity.

Early on the book talks about the famous Milgram experiment (the one where subjects thought they were giving shocks to a person in another room when they got questions wrong). The experiment is principally known because it appeared to show how people defer to authority, but the book makes the point that it also tells us something about self-justification:

[T]wo thirds of [the subjects] go all the way to the maximum level they believe is dangerous. They do this by justifying each step as they went along. This small shock doesn't hurt; 20 isn't much worse than 10; I've given 20, why not 30? As they justified each step they committed themselves further. By the time people were administering what they believed were strong shocks, most found it difficult to justify a sudden decision to quit.

This immediately made me think about the way that shareholders have effectively legitimised high levels of executive remuneration. I have no doubt that many (most?) people working in corporate governance at asset managers believe, looking back, that things have got out of control, but how did we get here?

I think at each stage we had a similar opportunity to challenge. But then the company putting forward a given policy - the authority figure (and unfortunately some corp gov people swoon a bit when faced with a real-life executive) - provided a justification. Our industry is different - we need to pay top dollar to recruit and keep the talent. So the investors let it slide. Next time the company comes back and says we need to pay more to stop the talent moving into private equity. Ummm.... ok then. And so on.

At each point most shareholders deferred, and in doing so will have justified their decision to themselves, and become more wedded to it. Therefore we reached the stage prior to the crisis where very few companies were facing serious shareholder pressure (no remuneration reports were defeated in 2008 remember). By that point, having let so much go past them, it must have been difficult to justify actually challenging a company that was only a bit worse than the others.

GMB pensions Q and A

A belated plug for the latest communique from GMB Heroine of Pensions (First Class) Naomi...

The nights are drawing in and scary ghouls are wandering the country (well party conference season wasn’t that long ago) so it must be Autumn and time for another Pensions Q&A. The self-same party conferences gave a few rather hefty clues about the plans the major parties (and the Liberal Democrats) have regarding your twilight years. This edition will therefore be dedicated to the view from the top of David Cameron’s mountain from where he looks down on those of us without a multi-million pound nest egg to retire on.

OCCUPATIONAL PENSION SCHEMES

1. Personal Accounts
Personal Accounts are supposed to be the saviour of those workers whose employers don’t provide them with a pension scheme. There is of course rather a danger that Labour’s plan to move all those without an occupational pension into Personal Accounts from 2012 will be reviewed or reformed away by any incoming government but generally the indications are that the mighty brains of the Conservative front bench (and Vince Cable) haven’t come up with anything better so they’re likely to run with this one. As a defined contribution scheme with less than 8% of earnings being invested, Personal Accounts are not going to provide for a luxurious retirement on the Costa del Pension but it’s better than nothing, which seemingly is the alternative.

That, I’m afraid is the end of the good news – yep, you blinked, you missed it.

2. Closing the MPs’ Pension Scheme to New Entrants
Now I know this might not give rise to oceans of sympathy for all those new MPs desperate to get their hands on an expenses form but it’s a very bad sign. If an ever increasing number of MPs don’t have a good quality, defined benefit pension scheme to join, how bothered do you think they’ll be about the rest of us having one? Don’t get me wrong, a 1/40th accrual fully indexed final salary pension is rather generous these days but moving from that extreme to the other of bargain basement defined contribution scheme isn’t going to help anyone.

3. Capping Taxpayer Funded Public Sector Pensions at £50,000 because Tax Relief on Private Sector Pensions is Capped
I’ve taken this directly from George Osborne’s speech as I’m afraid despite his rather expensive education this policy statement (and that’s what we’ve been led to believe this is) makes about as much sense to me as an Ikea instruction guide in the original Swedish. Firstly to strip away the complete piffle – the tax relief regime applying to private sector pensions is exactly the same as that applying to public sector pensions, so the stated reason for this proposal is flawed at the outset. Secondly to question the profoundly unclear – what is a taxpayer funded public sector pension? No public sector scheme is funded exclusively by the taxpayer (except technically the armed forces scheme but we’ll leave that to one side). Employees contribute for one thing and in local government 27% of the scheme’s income comes from investments. Despite this, Ozzy wants to cap pension benefits at £50,000 a year. Again to most this sounds like a faraway figure that won’t affect them. Think again. Just like closing the MPs scheme, this is the thin end of a very bleak wedge. If NHS consultants (medical not management), head-teachers and local authority chief executives don’t benefit from having a good quality pension scheme, why would they support the continuation of these schemes for nurses, social workers and teaching assistants?

Above all, remember Cameron’s words in 2008 – “My vision is to move increasingly towards defined contribution schemes rather than final salary schemes.” If that’s his view from the summit, I think we’d better all batten down the hatches at base camp.

STATE PENSIONS

Before you sit there thinking, ‘oh well it’s ok, the Tories are now the party of the poor I’ll be able to rely on the state pension’ - a couple of flies in that particular ointment. Firstly announcing a raft of policies that are going to create rather than reduce poverty hardly inspires confidence. Secondly, another of Ozzy’s great ideas is to increase the state pension age to 66 ten years earlier than is currently planned. We already know that radically different life expectancies between rich and poor make this a seriously regressive way of saving the public purse a few pennies so how this fits in with the new fluffy Tory image I’m not sure. As for the £13bn a year the Tories claim this would save, that figure is disputed by practically everybody with access to a calculator.

To end on a happy note, all political parties are committed to restoring the earnings link to the basic state pension. Obviously this decision is made somewhat easier since the inflation underpin that Labour introduced means that in April 2010 the state pension will rise by 2.5% (to £97.65 a week) while average earnings stands at about 1.6%.

So there you have it, more amazing news and analysis on the pension page of GMB’s website: www.gmb.org.uk/pensions

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.