Hooray

!!!

Nice line, nice image

But they may point in different directions.

1. A description of the existence of firms in the midst of markets: "islands of conscious power in this ocean of unconscious co-operation like lumps of butter coagulating in a pail of buttermilk"

The quote is from D.H. Robertson and I found it in here.

2. I like this.

Why how shareholders vote matters

I'm at home looking after The Boy today, and he's currently in mid-snooze so thought I would bung up a link to a paper (PDF) on 'corporate voting' that looks interesting, though I don't share its approach. I found this remark particularly interesting:

"[I]n principal-agent settings, voting provides legitimacy to a system by which agents act for the larger group. It serves both to legitimize the choice of the agent as well as a means to monitor the work of the agent."

There is a really bad argument advanced in some quarters that voting doesn't matter that much. I understand the point - though I would counter that it is often made by organisations whose own voting is sometimes questionable - and it has some validity. But I think it hugely underestimates the legitimising function voting performs. All those votes fund managers cast in favour of executive remuneration policies matter, those votes against trade union-backed resolutions matter, and their votes against governance-related resolutions matter. Unless it genuinely is the case that the issue being voting on has been dealt with, a vote in favour is an endorsement, will be read as such by the company, and will be portrayed as such to the market. When Stuart Rose survived the LAPFF resolution at the M&G AGM this year he didn't say "I take on board the scale of the vote in favour" he said "we won". Companies know this, so should trustees. And they should hold their fund managers accountable for questionable voting decisions.

Exactly!

Paul Myners once again came out with some interesting comments today, when he spoke in response to the Asset Management Working Group report. This bit in particular caught my eye:

If fund managers show no wish to act in the way economic theory tells us we should expect owners to do then we will have to ask whether core assumptions that underpin the unitary board and the Combined Code accord with reality. The concept, for instance, of ‘comply or explain’ clearly assumes investors acting as informed owners, engaging with the unitary board; not an assumption that sits entirely comfortably with the behaviours of many fund managers that has enabled the emergence of the ‘ownerless corporation’. This is a significant issue for Sir David Walker to address – have we assumed more from fund managers than they are in practice willing and able to deliver? If so, how do we address this governance deficit? To whom should the unitary board account if shareholders are not willing to fulfil the role?

Needless to say I think that nails it. I think the fund management industry risks a lot by not taking the governance question seriously. And to be honest I'm not sure the AMWG report takes us any further forward given that the comments on engagement seem to correspond very closely to the views expressed by the IMA. Be careful what you wish for.

Bits & pieces

1. The Other TPA report an acknowledgment by the BBC that they may have been hoodwinked by the actual TPA.

2. Great post on S&M about Tobin taxes. The Andrea Terzi paper Chris links to is well worth a read.

3. Via Tim Worstall, an interesting little piece by Eugene "EMH" Fama in defence of... err... the EMH.

Airbrushing analyst history

Hat-tip to Aled for alerting me to this rather interesting paper. Here's the abstract:

We document widespread ex post changes to the historical contents of the I/B/E/S analyst stock recommendations database. Across a sequence of seven downloads of the entire I/B/E/S recommendations database, obtained between 2000 and 2007, we find that between 6,594 (1.6%) and 97,579 (21.7%) of matched observations are different from one download to the next. The changes, which include alterations of recommendation levels, additions and deletions of records, and removal of analyst names, are non-random in nature: They cluster by analyst reputation, brokerage firm size and status, and recommendation boldness. The changes have a large and significant impact on the classification of trading signals and back-tests of three stylized facts: The profitability of trading signals, the profitability of changes in consensus recommendations, and persistence in individual analyst stock-picking ability.

Detective dissonance

A funny thing happened last weekend linked to this question of cognitive dissonance that I'm interested in. We ended up watching one of those ITV adaptations of an Agatha Christie novel with David Suchet as Poirot. I say ended up watching, actually it's become a regular fixture (hey, we're new parents, our social life is not what it was). This particular adaptation was of One, Two Buckle My Shoe which, like quite a few Agatha Christie plots, involves some character not being who they appear to be. Basically, early on we are introduced to the character of Mabelle Sainsbury Seale. Later, one of the other characters assumes her identity in order to help carry out a murder.

The thing is that in the TV adaption it should have been obvious that this is what happened (I haven't read the book so I don't know if it is also the case in the original). You see the actress playing the 'real' Mabelle a couple of times. Then later you also see the fake Mabelle. The strange thing was that when I watched the programme at one level I clocked this. In a scene where Poirot (who never sees the real Mabelle alive) bumps into the fake Mabelle, I thought to myself 'that doesn't look like the same actress'. And in fact they were really quite different. However, because at that time the course of the plot wasn't clear, and because she kept being referred to by other characters as if she were the real Mabelle, I started to convince myself that actually maybe it had been the same actress.

This, I humbly submit, was an attempt to reduce the dissonance between two ideas - 1. "that is a different actress" and 2. "everyone is referring to her as if it is the same character". In attempting to do address this I (subconsciously) decided to downplay the evidence of my own eyes in favour of what others had said.

Subsequently it became clear that were indeed a real Mabelle and a fake one, and all along I had an uneasy feeling about the identity of the person that Poirot met. So the dissonance was never eliminated. But I did go a long way to ignoring what I had actually seen in favour of what others had said about the same event. Now it strikes me that if I can pull this kind of trick on my own mind in respect of the entirely trivial matter of watching a TV programme, then this may affect my decisions much more strongly in others areas (especially where there isn't any physical evidence). And actually when I think about it I can see attempts to reduce dissonance in lots of areas of my life.

Equally I think I see it a bit in the bit of the world I inhabit. There is IMO a tendency to take what a lot of organisations say at face value (particularly if you are paying them a large fee). If, for example, there is evidence to suggest that Organisation X's behaviour isn't quite in line with the way that they promote themselves to the market, I suspect the tendency on the part of those that employ that organisation will be to downplay the evidence. And indeed some of the conversations I have had with trustees justifying decisions made by their fund manager would seem to bear this out.

There is no answer to this. And, as Tavris and Aronson point out, actually the reduction of dissonance through self-justification (like many heuristics) enables us to make decisions quickly and stick with them. This is not unimportant. But equally we need to be constantly aware that attempts to reduce dissonance may result in the suppression of useful information that might be used to solve difficult problems, be they a fictional murder, or ineffective organisational relationships.