voting as feedback

Just a thought, but it struck me recently how fundamentally differently I seem to see the exercise of shareholder voting rights compared to some people I know in the asset management business. And judged by the general trend in shareholder voting - very low levels of opposition except in rare cases - this seems to be a general industry perspective.

I find this odd as the right to vote is a formal and direct means to provide feedback to companies - and the market - about views on companies' policies and practices. The continuing reluctance of even supposedly activist investors to vote against in all but a handful of cases is to me problematic. It suggests one of two things. Either investors think everything is basically fine but with the odd problem at the extreme, even in respect of remuneration. Or - I think more likely - they do have concerns but for some reason think it is not productive to express them via their legal rights.

This to me is daft for a number of reasons. First, it's surely a dumb negotiating tactic to give companies the impression that they need to actually steal your wallet before you will vote against them. Would a politician be worried if a constituent told them they would be voting in favour of their re-election but had some concerns? I'm sure something would register, but the primary thought must be 'that vote is in the bag' and focus will turn towards those who are not definitely onside.

Secondly, as I've argued before, this approach can only legitimise behaviour that investors have concerns about. An institution may think they have made a point by expressing concerns before voting in favour, but if the resolution passes with 90% plus in favour what will the outside world think? In essence this sort of covert dissent doesn't give the market a true picture of owners' views.

Thirdly, ultimately therefore I think that this timid approach to voting deprives both companies and investors as a whole from useful feedback. It's a bit like saying you will never sell or short the company's shares. You might convince yourself that you're being responsible, but arguably you're actually distorting the effect of an important feedback mechanism. If you buy the wisdom of crowds type view of markets, then surely it is important that negative or dissenting views are actively expressed. Investors that don't use their voting rights effectively may be doing more damage than they realise.

Telling stories

There are a couple of interesting and related posts on Falkenblog that caught my eye. This one on narratives, and this one on Malcolm Gladwell. I've not blogged about narratives for a while, but I do think they are absolutely fundamental to how we interpret the world and they run much deeper than we often realise.

I used to get irritated by people who said they didn't read newspapers - because they seemed to think they were more clever than they were - but I've changed my opinion. I've always thought that journalism is about story-telling, but the more I've thought about this the more I think it is fundamentally true.

Not only does journalism seek to fits bits of information into a narrative structure (even though they might not fit together really) but as a journalist you are specifically taught to do this. That's doing journalism properly. Two or three stories of the same type make a trend, and then encourage journalists to look for more of them, whilst not being anything like as interested in stories that point in the other direction. Confirmation bias is doing it right. Real-life randomness just doesn't fit the model.

You can clearly get a situation where journalists highlight and reinforce (if not create) an apparent trend - and by extension define a sense of who/what organisation is important in relation to it - without any real reference to underlying reality. There's a bit in Homage to Catalonia where Orwell talks about hacks creating emotional superstructures over the top of events that never really happened. Well I think in day-to-day journalism the same thing happens in a less intense way. The events happened but don't have the importance/relevance given to them. You get the impression that the punters realise this once in a while, but most of the time it occurs unchallenged.

I do not think this is fitting of info to narratives is in any way limited to journalism. As I've blogged previously, Fisher's 'narrative paradigm' proposes that this structure actually underlies all forms of communication. Going a bit more detail, George Lakoff has argued that the use of metaphor is core to how we understand the world, to the extent that it can even be seen in mathematics. And as I've blogged recently, Albert Hirschman set out that certain forms of argument have a recurring appeal in politics.

We spot the desire for narrative in the press, or in crap Malcolm Gladwell books, but it affects all of us, all of the time. We probably need narratives in order to make sense of "a bunch of stuff that happened" and give meaning to it. But as such we need to be aware of its pull on us, and try and distinguish between a genuine attempt to analyse, and a comforting and familiar story that allows us to fit some facts into it.

TPA mission creep

Great spot by The Other TPA.

A snippet of Tory thinking on the crisis

This here is quite interesting. There's a quote from Conservative shadow Treasury minister Mark Hoban:

‘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.

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.

new ISC code

Is available here.

Reactions from the Standard, Times, Grauniad, FT and Paul Myners.

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.