Friday, 20 November 2009
Thursday, 19 November 2009
A snippet of Tory thinking on the crisis
This here is quite interesting. There's a quote from Conservative shadow Treasury minister Mark Hoban:
Unless I'm being thick, the implication is that it's a bit wrong-headed to think that boards or shareholders bear responsibility for the crisis. I find that a bit difficult to comprehend. Surely the boards of the failed banks must take primary responsibility for the failures of those banks? Ultimately the responsibility for the success or failure of a company must lie with those running it. Otherwise why do they have power (and rewards) in the first place?
Now you could argue that some financial institutions are simply unmanageable, and that the boards of those institutions don't even understand some of the products and strategies being utilised. But I'm pretty sure that isn't where this comment is coming from.
Judging from the comments that come later the argument is that the regulators should shoulder the blame for not preventing the crisis. But that logic leads you to blame the Environment Agency for companies polluting.
What about shareholders then? Well, as is no doubt obvious, I don't think that institutional investors covered themselves in glory before the crisis. Some argue though that you can't blame them as they don't have access to the same information that boards have - they will never be able to second guess boards. Now that might be true - but how is it any different from the position of regulators?
Ahhh but, you may argue, that's what regulators are supposed to do. It's their job to prevent things from falling over. True enough - but what exactly then is the role of a fund manager? You pay them to put your money into companies (or in reality the shares of companies) that do well and thus generate a return on your capital. If they say they can't be expected to spot the sort of failures that led to the crisis, what can they be expected to spot? And surely as fund management as a service - as opposed to regulation - is basically all about performance, surely there ought to be more incentive for fund managers to get these things right?
I'm not at all suggesting that regulators don't bear responsibility, but I really don't get the idea that boards especially don't have a bigger case to answer. And if you think regulators are just hopeless box-ticking bureaucrats trying to cover their own backsides, then why didn't self-interested investors solely looking solely to maximize returns do any better?
This little snippet of Tory thinking leaves me a bit bemused.
‘If you were to listen to what City minister Lord Myners says, you would think responsibility for this crisis rested with shareholders and boards. I don’t know what happened to Lord Myners in his earlier life that led him to this view,’ Hoban said.
Unless I'm being thick, the implication is that it's a bit wrong-headed to think that boards or shareholders bear responsibility for the crisis. I find that a bit difficult to comprehend. Surely the boards of the failed banks must take primary responsibility for the failures of those banks? Ultimately the responsibility for the success or failure of a company must lie with those running it. Otherwise why do they have power (and rewards) in the first place?
Now you could argue that some financial institutions are simply unmanageable, and that the boards of those institutions don't even understand some of the products and strategies being utilised. But I'm pretty sure that isn't where this comment is coming from.
Judging from the comments that come later the argument is that the regulators should shoulder the blame for not preventing the crisis. But that logic leads you to blame the Environment Agency for companies polluting.
What about shareholders then? Well, as is no doubt obvious, I don't think that institutional investors covered themselves in glory before the crisis. Some argue though that you can't blame them as they don't have access to the same information that boards have - they will never be able to second guess boards. Now that might be true - but how is it any different from the position of regulators?
Ahhh but, you may argue, that's what regulators are supposed to do. It's their job to prevent things from falling over. True enough - but what exactly then is the role of a fund manager? You pay them to put your money into companies (or in reality the shares of companies) that do well and thus generate a return on your capital. If they say they can't be expected to spot the sort of failures that led to the crisis, what can they be expected to spot? And surely as fund management as a service - as opposed to regulation - is basically all about performance, surely there ought to be more incentive for fund managers to get these things right?
I'm not at all suggesting that regulators don't bear responsibility, but I really don't get the idea that boards especially don't have a bigger case to answer. And if you think regulators are just hopeless box-ticking bureaucrats trying to cover their own backsides, then why didn't self-interested investors solely looking solely to maximize returns do any better?
This little snippet of Tory thinking leaves me a bit bemused.
Wednesday, 18 November 2009
M&S appointment
Well well well.... it's an external candidate for new chief executive after all that. Funny that, as one of the reasons given for Rose combining chair and chief exec roles was that by doing so he could delegate some of his executive functions to the internal candidates to prove themselves. It sounded like cobblers at the time and either it was just guff, or it didn't work.
Notably whilst we have a date for Bolland to start (Feb), we don't have a date for Rose to leave. At a push he could stay till July 2011 remember, so it's by no means an ideal situation. Chief exec going on to become chair and all that. And M&S hasn't started the process of recruiting a chair by the sounds of it.
It is pretty clear that the company never had any intention of appointing the chair first, though some investors felt this was still achievable for some reason at the time of the AGM. Now the focus has to be on getting an independent chair in place. Whilst I'm sure Bolland can stand his ground it's not an ideal situation to have his immediate predecessor as chair.
Notably whilst we have a date for Bolland to start (Feb), we don't have a date for Rose to leave. At a push he could stay till July 2011 remember, so it's by no means an ideal situation. Chief exec going on to become chair and all that. And M&S hasn't started the process of recruiting a chair by the sounds of it.
It is pretty clear that the company never had any intention of appointing the chair first, though some investors felt this was still achievable for some reason at the time of the AGM. Now the focus has to be on getting an independent chair in place. Whilst I'm sure Bolland can stand his ground it's not an ideal situation to have his immediate predecessor as chair.
Tuesday, 17 November 2009
The logic of collective shareholder inaction
"The fact that management tends to control the large corporation and is able, on occasion, to further its own interest at the expense of the stockholders, is surprising, since the common stockholders have the legal power to discharge the management at their pleasure, and since they have, as a group, also an incentive to do so, if the management is running the corporation partly or wholly in the interests of the managers. Why, then, do not the stockholders exercise their power? They do not because, in a large corporation, with thousands of stockholders, any effort the typical stockholder makes to oust the management will probably be unsuccessful; and even if the stockholder should be successful, most of the returns in the form of higher dividends and stock prices will go to the rest of the stockholders, since the typical stockholder owns only a trifling percentage of the outstanding stock. The income of the corporation is a collective good to the stockholders, and the stockholder who holds only a minute percentage of the total stock, like any member of a latent group, has no incentive to work in the group interest. Specifically, he has no incentive to challenge the management of the company, however inept or corrupt it is."
From The Logic of Collective Action.
From The Logic of Collective Action.
Saturday, 14 November 2009
A few thoughts about levelling down
I've blogged a few times before about levelling down in respect of pension provision, because I find the arguments put forward by people like Ros Altmann wholly unconvincing. So I though I would try and explore the logic of the argument in reference to Personal Accounts.
The common claim is that when Personal Accounts come into force (or perhaps ahead of it) with the requirement of a 3% contribution from companies if employees don't opt out, many employers will "level down' the provision they offer. (Incidentally, note that depending on strength with which this point is expressed it falls into one of the two classic reactionary forms of argument as set out by Albert Hirschman. If, taking the stronger line, it is argued that Personal Accounts will result in less saving, it's perversity. If on the other it is argued that the reform will have no impact (because levelling down offsets the gains) it's futility.)
In practice levelling down by companies would presumably mean either reducing their contribution to a non-Personal Accounts DC pension scheme to the 3% level (from a higher level), or simply enrolling their staff into Personal Accounts and closing their existing scheme (which again must have been more generous than 3% in order to count as levelling down). Just to be clear - the only other possibilities are first, that the employer already has a scheme that is better than Personal Accounts and sticks with it, or that the employer did not have a scheme, or pay into a scheme, and now is forced to pay into Personal Accounts. In the first case there is no levelling down, in the second case there is levelling up.
So, why would an employer level down? Well one reason is because they can save money. Fine, but this does first lead to a question over why they don't level down now, rather than when Personal Accounts go live in 2012. In fact they could level down now to zero. So why don't they do so? There are at least three possible (not necessarily credible) reasons. First, they see some value to providing a pension, perhaps because it helps recruit and retain staff. Second, they fear employees' reaction if they do level down. Third, they are unaware that they could contribute less (nothing, in fact).
Obviously in the first case the introduction of Personal Accounts could actually reduce the value of providing a pension (because the comparative advantage to the potential employee is reduced) which could be argued to provide a reason to increase the level of company contribution. The second case is possibly more plausible. Companies may wish to reduce their pension commitments and Personal Accounts could provide the cover to do so. Companies could argue that their pension costs will go up (if everyone ends up auto-enrolled) and thus they need manage this. I think the final case is less plausible, but there may be small businesses out there which have a GPP or stakeholder set up with a contribution of over 3% and perhaps their adviser may make them aware of the incoming regime and urge them to respond.
But we can see that in practice most employers are not levelling down now. So they are not sufficiently concerned about costs to take pre-emptive action. And if companies do reduce contributions now, how much weight do we place on the introduction of Personal Accounts, which don't go live for another 3 years. To what extent is the company simply saving money, rather than being pushed into an action by impending reform? It simply is not clear that the reform 'causes' the company decision. Critics of Personal Accounts need to present evidence if there is any.
A more realistic version of the levelling down argument is that companies wish to maintain their current pension costs rather than reduce or increase them. What do I mean by this? Well, I think the main cause of any any adjustment to companies' pension provision will not actually be Personal Accounts at all, it will be the requirement to auto-enrol. Think about it - this is where the cost pressure really is. If I am running a scheme with a 6% company contribution maybe only 40% of my employees actually join it. But if they are auto-enrolled and only 1 in 5 decide to opt out (ie I now have a membership rate of 80%) then my pension costs have risen by 100%. If I then decide to 'level down' to the 3% minimum I keep my total pension costs the same, but the amount contributed to each employee's pension has halved.
This seems to me to be a not unrealistic (if very simplified) picture of how some companies may think and act. But it is clear then that the real issue for companies will be auto-enrolment (whether into Personal Accounts or existing schemes) not the new scheme in itself. It also means that - if companies adhere to my stylized version of responding to auto-enrolment - the 'levelling down' refers to the amount contributed to each pension, not the amount contributed in aggregate.
This is important, because it means that what is actually implied by critics of auto-enrolment (not Personal Accounts!) is that it is better for employers to contribute more to fewer employees than it is to contribute less to more. This is not an unreasonable position (for example because they may think that the minimum contributions are too low) even though I don't share it. But it is a position that is not made explicit - either because those advancing the argument don't want to be explicit, or because they haven't thought through the logic of their position.
A final point - obviously a company facing auto-enrolment could choose to level down to an extent that their aggregate commitment is lower as well as their average contribution rate. This would be levelling down in both senses. But once again it is the company's decision to pitch their commitment at this level, and again it is not clear how the reform 'causes' them to take this step. Once again, it's over to the critics to provide the proof.
The common claim is that when Personal Accounts come into force (or perhaps ahead of it) with the requirement of a 3% contribution from companies if employees don't opt out, many employers will "level down' the provision they offer. (Incidentally, note that depending on strength with which this point is expressed it falls into one of the two classic reactionary forms of argument as set out by Albert Hirschman. If, taking the stronger line, it is argued that Personal Accounts will result in less saving, it's perversity. If on the other it is argued that the reform will have no impact (because levelling down offsets the gains) it's futility.)
In practice levelling down by companies would presumably mean either reducing their contribution to a non-Personal Accounts DC pension scheme to the 3% level (from a higher level), or simply enrolling their staff into Personal Accounts and closing their existing scheme (which again must have been more generous than 3% in order to count as levelling down). Just to be clear - the only other possibilities are first, that the employer already has a scheme that is better than Personal Accounts and sticks with it, or that the employer did not have a scheme, or pay into a scheme, and now is forced to pay into Personal Accounts. In the first case there is no levelling down, in the second case there is levelling up.
So, why would an employer level down? Well one reason is because they can save money. Fine, but this does first lead to a question over why they don't level down now, rather than when Personal Accounts go live in 2012. In fact they could level down now to zero. So why don't they do so? There are at least three possible (not necessarily credible) reasons. First, they see some value to providing a pension, perhaps because it helps recruit and retain staff. Second, they fear employees' reaction if they do level down. Third, they are unaware that they could contribute less (nothing, in fact).
Obviously in the first case the introduction of Personal Accounts could actually reduce the value of providing a pension (because the comparative advantage to the potential employee is reduced) which could be argued to provide a reason to increase the level of company contribution. The second case is possibly more plausible. Companies may wish to reduce their pension commitments and Personal Accounts could provide the cover to do so. Companies could argue that their pension costs will go up (if everyone ends up auto-enrolled) and thus they need manage this. I think the final case is less plausible, but there may be small businesses out there which have a GPP or stakeholder set up with a contribution of over 3% and perhaps their adviser may make them aware of the incoming regime and urge them to respond.
But we can see that in practice most employers are not levelling down now. So they are not sufficiently concerned about costs to take pre-emptive action. And if companies do reduce contributions now, how much weight do we place on the introduction of Personal Accounts, which don't go live for another 3 years. To what extent is the company simply saving money, rather than being pushed into an action by impending reform? It simply is not clear that the reform 'causes' the company decision. Critics of Personal Accounts need to present evidence if there is any.
A more realistic version of the levelling down argument is that companies wish to maintain their current pension costs rather than reduce or increase them. What do I mean by this? Well, I think the main cause of any any adjustment to companies' pension provision will not actually be Personal Accounts at all, it will be the requirement to auto-enrol. Think about it - this is where the cost pressure really is. If I am running a scheme with a 6% company contribution maybe only 40% of my employees actually join it. But if they are auto-enrolled and only 1 in 5 decide to opt out (ie I now have a membership rate of 80%) then my pension costs have risen by 100%. If I then decide to 'level down' to the 3% minimum I keep my total pension costs the same, but the amount contributed to each employee's pension has halved.
This seems to me to be a not unrealistic (if very simplified) picture of how some companies may think and act. But it is clear then that the real issue for companies will be auto-enrolment (whether into Personal Accounts or existing schemes) not the new scheme in itself. It also means that - if companies adhere to my stylized version of responding to auto-enrolment - the 'levelling down' refers to the amount contributed to each pension, not the amount contributed in aggregate.
This is important, because it means that what is actually implied by critics of auto-enrolment (not Personal Accounts!) is that it is better for employers to contribute more to fewer employees than it is to contribute less to more. This is not an unreasonable position (for example because they may think that the minimum contributions are too low) even though I don't share it. But it is a position that is not made explicit - either because those advancing the argument don't want to be explicit, or because they haven't thought through the logic of their position.
A final point - obviously a company facing auto-enrolment could choose to level down to an extent that their aggregate commitment is lower as well as their average contribution rate. This would be levelling down in both senses. But once again it is the company's decision to pitch their commitment at this level, and again it is not clear how the reform 'causes' them to take this step. Once again, it's over to the critics to provide the proof.
Friday, 13 November 2009
Spot on
"To date, institutional investors have said little about the lessons they have learnt over the last two years. Put simply, they have not produced satisfactory answers to the question ‘what were the owners of these banks doing?’ Remember that shareholders approved value-destroying transactions, and remuneration practices that now appear to have been poorly aligned with corporate health and shareholder wealth. I expect institutional investors, on behalf of their clients, to be much more challenging in the future than they have in the past, but I wonder whether their clients have similar increased expectation and have reflected this in their manager dispositions and incentives."
"The unitary board and Combined Code assume that shareholders will act as informed and value-pursuing investors. A failure by fund managers to act in this way, or to be required to do so by their clients, raises questions about the underlying foundations of the unitary board and Combined Code. Sir David Walker will need to give this careful consideration."
Source.
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