FRC stuff

The FRC has released its proposed new version of the Combined Code, plus the results of the previous review. Obviously it is significantly influenced by Walker. Notably the FRC propose two options on director elections - either annual election of the chair, or of all directors. I reckon we could well end up with the latter, because the former feels like a tilt away from the unitary board, surely?

Some useful commentary from the FRC on this stuff too:

it was argued that voting on the board as a whole was more consistent with the concept of collective responsibility, but there were concerns that it might have a destabilising effect or encourage short-termism on the part of the board and shareholders. The FRC notes these concerns, although anecdotal evidence suggests that this has not been the experience of those companies that have moved to annual reelection of all directors. In those cases the majority of investors have used their votes responsibly.

As I blogged previously, investors who oppose annual elections are - in my opinion - simply taking their pro-management stance too far. So it's good to see the FRC look at the actual evidence of companies that have made the move, rather than taking for granted that the conservative position is the right one.

Private equity 'a force for good'. Repeat. Repeat. Repeat.

Back in 2007 I blogged about the way that the phrase "a force for good" was being repeated by a lot of folks in the private equity industry to defend their activites. I had a further trawl last year and found that the phrase was now regularly used by hacks writing about the industry.

Back in 2007 I said:

I don’t think this is an evil corporate plot by the way. I always tend to boring explanations of why things happen, rather than conspiracy theories, hence I doubt very much that the private equity industry and its cheerleaders have decided to use the same slogan. It is possible that a PR firm may have encouraged the BVCA to use it, as a quick skim of Wol Kolade’s interviews reveals that he has used it a lot.

The today I stumbled across this interview about media-coaching for the head of Blackstone Group.

Every era has a picture or an anecdote associated with it. Before, it was K.K.R. and Barbarians at the Gate. Now it’s the party. It has become more or less the anecdote. That increase in profile will never go down, and I don’t see that trend reversing.

But I do see a way forward for them. They have to be the best of the best. Don’t make one speech, make a hundred speeches.

The remarks I read dealt with globalization. He should be a part of that debate in Davos, in Washington, in tons of conferences. I’d tell him, you can be a force for good. Use that as an opportunity.

Hindsight is always 20-20. Shoulda woulda coulda. Again, I think the way forward is to be a force for good and really embrace it.

This sort of thing (I mean corporate PRs telling folks how to spin) doesn't really bother me. What bothers me is the way that people regurgitate it without thinking. Have a Google for "private equity" and "a force for good" and see what I mean.

Random Sunday night thoughts

One of the things I've been thinking about lately is the way that our relationship to institutional structures affects the way that we interact with others. Two things keep jarring with me, and I think that they are basically different aspects of the same thing. First is the way that organisations appear to act differently - more rationally - than the individuals that compose them. Second is the way that individuals seem to act differently when they perceive themselves to be in a given institutional context.

Just a couple of examples to flesh out what I mean. First, organisations, or the management teams that take decisions, appear to be capable of taking decisions that the individuals that compose them might find cruel or unethical if they were taken at a personal level (either a one-to-one business relationship or a non-work scenario, for example). Somehow being part of the institution, or adhering to its values (such as shareholder value) enables them to either shed other behavioural norms, or defer to to a sort of ideological authority. Thinking about the Milgram experiment, it's almost as if the institutional norms play the role of the experimenter - insisting that they continue on a given path despite their qualms, or at least providing them with the justification for doing so (and of course, most of the time there is an actual authority figure further up the chain).

Secondly I think about how I and others act at work. We must all be on a spectrum ranging from those who simply don't imbue the organisational ethos and continue as if all work relationships are simply personal relationships situated in an office and those who defer totally to the organisation, and seek to act in a way that maximises their effectiveness and the effectiveness of others in line with the organisational goals. Assuming most of us sit some distance from either extreme, I imagine I can't be alone in finding people too far towards either end quite irritating/frustrating. Some people don't seem 'worky' enough. Though we might be happy to share lunchtime or moments during the day talking about home-life, some people seem to barely recognise that this isn't what they get paid for. Yet at the other extreme there are those that can't see anything at work unless it is through the prism of organisational goals.

I have a mate who is really lovely bloke, full of good stories, friendly and funny. But if you arrange to meet up you can guarantee that he will be late. On a social level I admire him and the fact that he hasn't been corroded by the workplace. But on a professional level (having worked with him) I know he can be incredibly frustrating for exactly the same reasons.

What this leads me to think is that in effect what happens when we operate within an organisation is that we tend to simplify or stylise our interaction with others. Because we don't really need to know what they did at the weekend, or how they are feeling, for managers in particular much non-organisational communication becomes formalised and essentially meaningless. In contrast we start to think about people in terms of their organisational capacity. They become a series of bullet points, a shorthand for they can and can't do, and the situations in which they can and cannot be deployed. And their ability to make themselves organisationally effective, and to communicate back in organisational terms will probably make them successful, so there is an incentive to participate. (Incidentally, I think humour in the workplace plays an interesting role here. Many jokey comments actually contain a little moral about effective an ineffective organisational behaviour).

At one level such a process may be necessary in order for an organisation to behave rationally, but it probably also explains why so many people find work such a drag, and think their managers are tossers. It probably also has something to do with why when commercial interests start to intrude in a given sphere we can feel the change.

When I go back over these thoughts I realise that I've probably been hugely influenced by some of the Habermas stuff I've read. Anyway, I think this is a topic I'll be coming back to.

Shareholders need to act on pay now

Paul Myners gave another speech this week calling on shareholders to start grappling with remuneration, and quickly. As he said if they don't start getting stuck in, pressure will build for Government and/or regulators to have another go.

Failure by those in positions to affect change – Board directors, remuneration committee members and, importantly, shareholders – and show leadership towards a new culture of fairness and just reward will inevitably lead to calls for more intervention by Government and regulators.

Taxpayers feel entitled to have a view on this matter – particularly if they perceive directors are unable to strike the right balance in determining sensible remuneration practices that are calibrated to risk; or shareholders who do not appear willing or able to hold directors to account.

In a year in which all major banks have draw on and benefited from taxpayer and central bank support – some of them very significantly – public attention will focus on the decisions that boards make about bonuses.

Many banks have earned large profits this year from remarkably benign conditions, conditions created through the interventions by governments across the world, profits that owe very little to the talents and skills of individual traders or investment bankers.

These profits must surely be retained by shareholders in the business as capital to support the credit needs of customers and the economy.

I expect our major institutional investors, insurers and pension funds, to be forthright in making these points to all bank remuneration committees, and to exercise their votes if their views are disregarded.

It would be good if they made their views on this public, sooner rather than later. I would expect the clients of fund managers – pension funds trustees and others – to hold their fund managers’ feet to the fire; insisting on accountable, fair and just practice.

On this last point, if you are a trustee here's a simple proposal. Why not request that all your fund managers prepare a report on how they voted on remuneration at the banks over the past 2 or 3 seasons? And if you don't like what you see, do something about it.

Walker Review - the good, the bad and the bonkers

Below are a few thoughts on the final report of the Walker Review. I continue to think that the Review is a missed opportunity, and suffers by comparison to Adair Turner's report on financial regulation. It is very much positioned within mainstream industry opinion in my view. Many people will regard that as the right approach, but given then colossal scale of the crisis I think something a bit radical could have been attempted. Nonetheless it is well-written and well-argued and Walker has clearly stood his ground on many issues where there had been lobbying from vested interests, and in some places I think he has driven in some proposals that open up a bit of room for future reform.

Annual election of BOFI chairs - here Walker has stood his ground and taken an approach that crops up in other areas in respect of wider form, namely being vaguely supportive but not really pushing on. So the recommendation has been widened to encourage BOFI boards to review annual election for all directors, but they are not told to actually do it as best practice. And actually in the text around the recommendation some of the usual arguments against are rehearsed. Nonetheless it does open the door a bit further. I suspect that if shareholders collectively pushed on this at the banks it would be had for the boards to say no, and I'm not sure all of them actually think it's a bad idea.

Stewardship code - I'm not at all keen on the adoption of the ISC Code as the basis for the Stewardship Code because it's not a particularly stretching code in my view. But actually that probably isn't the important point. The key win is that the FRC gets to own the Code, and to review its operation. The ISC is no longer formally involved (which is a change from the initial recommendation). In addition in the section about how the FRC will assess progress Walker suggests that it takes over the IMA engagement survey (see 5.39). This is a great idea as although the IMA report is a good piece of work they do (understandably) spin the results. The claims on voting disclosure being particularly challengeable.

And what about voting disclosure? I set myself up to be disappointed and I am. He argues that the voluntary approach plus comply or explain should continue. This is simply pointless. If you accept that public disclosure of voting records is right in principle, as Walker does, all that voluntarism achieves is the absolute certainty that the market as a whole won't adhere. And as we know through the experience of the existing regime to date it will also allow the current practice of variable forms of disclosure which makes it very hard to do anything with the data. This much is well known - so this issue has simply been ducked. Gutted.

Pensions - the Fred Goodwin recommendation is expanded a bit to catch similar cases, but Walker doesn't address the glaring disparities between boardroom and shopfloor. Again this doesn't take any serious work to establish - just read a few annual reports. So another missed opportunity. I hope we can get some investor pressure around this issue, but I have no optimism about this given their failure to get stuck in previously.

I'll try and bung up some further thoughts over the next few days as I read the report properly. Having been disappointed by the initial Walker recommendations, today's report doesn't really surprise me. It's basically as expected. But I do wonder whether this will prove to be enough. For one, it's a big gamble on sticking with a shareholder-centric governance system, which may prove to be a big mistake if asset managers don't up their game. Second, I think we could yet see some real anger about remuneration practices. The whole policy debate - ie the actual policy proposals, not what people say in newspapers...! - has taken place within a theoretical framework which simply doesn't mesh with public opinion. The assumption of many is that the public don't get the arguments, and hence we have to make the right noises to cool the temperature but actually in practice do not need to fundamentally reform. I think this could be another dangerous assumption. The apparently quick return to business as usual in the City could yet threaten a sort of private sector legitimation crisis - that parallel with the position of the unions in the 70s keeps recurring...

Fund manager sell-outs

A snippet from Paul Myners' latest speech:

In 1990, the Economist compared shareholding to gambling.

The writer said that shares were little more than betting slips, bought at a low price, with the hope that the bet will come good. Shareholders studied the markets much like a gambler might study a form guide, they backed what they hoped would be the winner, then simply sought to extract their ‘winnings’ as quickly as possible.

The author observed that the notion that a shareholder owns part of a company “makes as much sense to a shareholder as it would to the average gambler to imagine that he owns part of Lady Luck, running in the 2.30 tomorrow afternoon” .

Nowhere is this more evident than when fund managers accept the bounce in a share price that comes with a takeover, rather than saying to their clients “we rejected that bid; we know that the share price will fall when the offer lapses, but we take a long-term view and we believe in the company, its strategy and its future. It is always hard to find good companies in which to invest and we don’t intend to sell out of this one simply because an opportunistic bidder appeared. We know that you, our clients, have chosen us to manage your fund for this reason and we know that your interests are focussed on long-term returns rather than a single quarter’s performance”.

I wager that few fund managers feel comfortable in speaking in such a way to their clients.

Absolutely. If only there were a test case to see if asset mangers were willing to change their approach. Like a bid for a big name UK-listed company that they could challenge for example. Hmmm.....

Walker Review - what can we expect?

There was a lot of speculation in the papers this weekend about possible changes to the Walker Review recommendations. Most focus has been on this issue of disclosure of remuneration arrangements for highly-paid individuals below the board. Walker proposed this should be in bands, but others had pushed for individual details to be disclosed. According to reports in the papers it probably will be bands after all.

Cue much outrage from various quarters, but actually I'm not so sure. Firstly, it is the structure of these arrangements that is the most important. Secondly, as someone pointed out to me this afternoon, if investors want this information why don't they just ask for it? If institutions collectively called on BOFIs to disclose the data, could they really refuse? The problem is - as always - that very few institutions show any desire to take such an approach.

It also sounds like Walker will tweak the recommendation on non-exec time commitments. This is because of concerns that such a rule could stop chief execs from acting as NEDs on other boards. This was basically what he said to the Treasury select committee a couple of weeks back so I expect to see it.

There hasn't ben much speculation about the proposals on shareholder engagement which presumably means - if Walker has successfully stood his ground against the conservative end of the asset management business - that we can probably expect to see them unchanged. I'm interested to see if he has picked up on any of Paul Myners' ideas in respect of voting rights and, more recently, the need for a new investor representative organisation.

And fingers crossed for some movement on voting disclosure, but I'm not optimistic...