A few random thoughts on the deal...
1. The real issue for me is, as always, ownership but I have a slightly different take on this than others. My problem is that no-one in the system really seems to be representing the interests of the ultimate owners. The management of both companies, as is well understood, are agents so we shouldn't be too surprised if Kraft's management wants to empire build. The Cadbury board is in the same agent position. They no doubt know the disastrous track record of much M&A, but they've got a good price, hence they can claim to be acting in the owners' interest in the short term.
Many of the fund managers likewise are saying that they would rather that Cadbury stayed independent but there's good money on the table. Again they probably expect the deal to have a lowish probability of really delivering, but in the short term the cash is there. The punters who sit behind the fund managers - ie the real owners - are nowhere involved, despite Unite's efforts. They might well think that the long-term success of both companies is more important (since their shares are probably held via a pension which will pay out for decades). And personally I would question if in future the firm-specific investments made by employees should hold more sway.
2. A simple point but a fundamental one - this deal probably won't deliver. Lots of studies demonstrate that many deals destroy rather than create value. Kraft shareholders may well lose out in the long-term just in these terms.
3. Lots of people will actually be on both sides of this deal. For example, UK pension funds typically invest the biggest chunk of their overseas equity exposure in the US. Many surely will hold both Kraft and Cadbury. This is a bit of a problem for those who play down concerns about the deal by arguing that it's a good deal for Cadbury shareholders, and it's Kraft shareholders' problem if they're overpaying. Actually it can be both for some investors. In this case the deal surely looks like a pretty stupid thing to back, especially given all the cash leaking away to various advisers.
4. And those fees... As I've argued before, I think any radical reform of the financial system must focus on fees. Because no-one is really acting in the ultimate owners' interest, no-one challenges all the money leaking out to advisers of various kinds - because it's not their money. According to one estimate £250m will have been peed away on fees in this deal. Yet oddly some people are more annoyed that RBS is involved (what do investment banks do?) than the amount. Again I think it's partly that we've just got used to deals costing a lot of money. But why doesn't someone try and exert pressure on the fees?
UPDATE - Andrew points out that Warren Buffett is still not impressed by the deal.
Thursday, 21 January 2010
More on bonuses
There's a decent piece by Patrick Hosking in The Times taking a look at different approaches to controlling bonuses and how likely they are to result in change. Notably he suggests that the FSA's intervention is likely to be the most effective.
Here's what he says about shareholder activism on pay:
Interestingly the book I blogged about recently makes the same point. If the fund management industry pays highly, how likely is it to rock the boat.
In practice I suspect that individual who could make a difference don't deliberately take a soft line on remuneration because they want to protect their own income. But I reckon it must be hard to take a challenging line on such issues as it may well be seen - or the individual may fear it will be seen - as an attack on City culture. I think there remains a deep cultural antipathy towards governance activism in institutions as a whole. The corp gov people might be very sincere, but the organisation doesn't buy it.
Here's what he says about shareholder activism on pay:
Collective action by shareholders has been timid. One wonders how sincere the institutional investors are about reforming banker pay. Many of the biggest fund management groups are owned by banks; almost all of them are beneficiaries of the same flawed bonus system — one that rewards short-term success and buys into the notion that financiers are hugely talented.
Shareholders should be the solution to the bonus problem. In fact they are self-serving agents who have become part of the problem.
Interestingly the book I blogged about recently makes the same point. If the fund management industry pays highly, how likely is it to rock the boat.
In practice I suspect that individual who could make a difference don't deliberately take a soft line on remuneration because they want to protect their own income. But I reckon it must be hard to take a challenging line on such issues as it may well be seen - or the individual may fear it will be seen - as an attack on City culture. I think there remains a deep cultural antipathy towards governance activism in institutions as a whole. The corp gov people might be very sincere, but the organisation doesn't buy it.
Wednesday, 20 January 2010
Do bonuses work?
Eh?
a new book by Boris Groysberg, an associate professor in the organisational behaviour unit at Harvard Business School, entitled Chasing Stars: The Myth of Talent and the Portability of Performance, makes an intriguing point: maybe it doesn’t matter a great deal if RBS loses these people.Etc
Wall Street and the City are wedded to the idea that success depends on the talent and flair of individual bankers, with David Buik, for instance, arguing that bankers deserve their cash because “it takes a very special combination of talents to work in the city. It’s a very special gift”. Groysberg’s analysis of more than 1,000 star analysts at 78 investment banks, and 20,000 non-star analysts at about 400 investment banks, suggests otherwise.
“Exceptional performance is far less portable than is widely believed,” he says. “We found that mobile stars [bankers who leave one company for another] experienced an immediate degradation in performance that persisted for at least five years. Thus their exceptional performance at their prior employer appears to have been more firm-specific than is generally appreciated. Financial compensation is a lever [in motivating success] but it is not the only lever and it is the most overused lever. Banks behave as if stars deserve and should appropriate all the value they generate, but stars without the companies they work for might not be stars.”
Which leads us to the other argument often made in favour of dishing out bonuses: the idea that lump sums are a great way to enhance performance. If you offer someone £100 to, say, compose an advertisement for a company, with a £150 bonus for doing a particularly good job, then he or she will do a particularly good job, right? But there is research to suggest that this is not necessarily the case.
In 2003 the Harvard academics Nancy Katz and Michael Beer asked more than 200 senior executives in more than 30 countries about their bonus intentions — only to discover that the vast majority of those executives thought that bonuses had little or no effect on how their employees or businesses performed.
Krafty cuts
Tuesday, 19 January 2010
Top 10 LGPS facts*
More from the GMB...
1. The LGPS is a funded scheme like private sector defined benefit schemes and unlike the other public sector pension schemes. Together the 101 LGPS funds hold more than £120billion in investments and assets, enough to pay benefits for over 20 years
2. The LGPS has a positive cash flow, with income from investments and contributions exceeding expenditure on benefits by £4-5billion every year
3. Members contribute an average of 6.4% to the scheme with higher earners paying proportionately more
4. The employer contribution rate for current service is 13.6%. In the private sector the comparable employer contribution average is 15.6%. Many employers are paying a high overall contribution to the scheme because of past underfunding and contribution holidays
5. The LGPS is collectively the biggest pension fund in the country and fourth largest in the world making it a major shareholder in business and the UK economy
6. Four million people are members of the LGPS in England & Wales either as active, contributing members, pensioners or deferred members
7. In April 2008 (2009 in Scotland and Northern Ireland) reformed schemes were launched covering all existing and new LGPS members that changed the benefit structure and increased average member contributions to the scheme from 5.8% to 6.4%
8. In the last year income from employee contributions to the scheme has increased by 15%
9. More than 7,000 employers participate in the LGPS, many of which are private sector companies providing local public services
10. Not gold-plated, the average pension in payment from the LGPS is around £4,000 a year, for women the average is £2,600
* - Bryn has rightly picked up on my misuse of the word 'factoids' in the headline, so I've changed it.
1. The LGPS is a funded scheme like private sector defined benefit schemes and unlike the other public sector pension schemes. Together the 101 LGPS funds hold more than £120billion in investments and assets, enough to pay benefits for over 20 years
2. The LGPS has a positive cash flow, with income from investments and contributions exceeding expenditure on benefits by £4-5billion every year
3. Members contribute an average of 6.4% to the scheme with higher earners paying proportionately more
4. The employer contribution rate for current service is 13.6%. In the private sector the comparable employer contribution average is 15.6%. Many employers are paying a high overall contribution to the scheme because of past underfunding and contribution holidays
5. The LGPS is collectively the biggest pension fund in the country and fourth largest in the world making it a major shareholder in business and the UK economy
6. Four million people are members of the LGPS in England & Wales either as active, contributing members, pensioners or deferred members
7. In April 2008 (2009 in Scotland and Northern Ireland) reformed schemes were launched covering all existing and new LGPS members that changed the benefit structure and increased average member contributions to the scheme from 5.8% to 6.4%
8. In the last year income from employee contributions to the scheme has increased by 15%
9. More than 7,000 employers participate in the LGPS, many of which are private sector companies providing local public services
10. Not gold-plated, the average pension in payment from the LGPS is around £4,000 a year, for women the average is £2,600
* - Bryn has rightly picked up on my misuse of the word 'factoids' in the headline, so I've changed it.
GMB defends the LGPS
The debate about pensions must not be allowed to become a race to the bottom says GMB
19 Jan 2010
GMB and other Local Government unions today published a list of ten key facts about the Local Government Pension Scheme (see notes to editors below). In doing this the three main local government unions are seeking to set the record straight about a pension scheme with over four million members and £120billion in assets.
The facts are that the new LGPS, introduced in April 2008 for all the schemes 1.7m contributing members, was agreed by employers, unions and government after several years’ informed discussion. All stakeholders participating in that debate accepted the new scheme as a sustainable and viable means of pension provision in local government for the long term.
In exchange for increased member contributions and benefit reform, employers agreed to a scheme requiring councils and other LGPS employers to contribute on average 13.6% of members’ pay year on year. The income to the scheme from members since the introduction of the new structure has increased by 15%. The average employee contribution to the scheme is now 6.4% (higher than the UK average of 4.9%). In addition the LGPS was at the forefront of introducing higher contribution rates for higher earners, a concept now being proposed by government across the public sector.
The current LGPS is not the cause of increases in Council Tax or cuts in local services. In fact money equivalent to less than 6% of Council Tax revenue goes towards the LGPS, about £70.50 a year for an average Council Tax paying household in England. The numbers being peddled by those opposed to quality pension provision in the UK are dangerously misleading for a debate that should be considered not a forum for shallow point scoring.
Of that contribution it is the funding owed for past service that is often the greater part. Past underfunding by employers has meant that insufficient funds have been put aside for future pensioners. However, as a funded scheme, unlike the others in the public sector, the LGPS has over £120bn in assets, a figure sufficient to pay benefits for more than 20 years without any additional contributions being made. In addition the LGPS receives £4-5bn more in income than it spends in benefits every year, ensuring its enduring viability.
Even in the current economic climate the LGPS received nearly £3bn in income from its investments in 2008-9. The scheme is a major shareholder in British businesses, property and regeneration. This is on top of the contribution it makes to the income of more than one million current pensioners many of whom would be entirely reliant on taxpayer financed state benefits if it wasn’t for the Local Government Pension Scheme. The average pension of £4,000 a year (£2,600 for women) does not lead to a gold-plated retirement but it does mean members have some security in later life. The local government trade unions believe that the drive to the bottom approach to pension provision being led by the Conservative and Liberals will lead to millions more pensioners suffering and significantly increased pressure on public services.
Heather Wakefield, National Secretary for Unison said, “The cost to the taxpayer of abolishing the LGPS would be high. If our members did not pay into the scheme, the taxpayer would have to foot the bill through state pensions. The private sector has shown itself happy to use taxpayers’ money to cover up its mistakes and poor decisions. They should stop talking about what does not concern them and put their own house in order. Our members – almost three quarters of them women – work hard to provide public services on low pay and have sensibly decided to contribute to a safe and well-funded scheme. Two thirds of them earn less than £18,000 a year, so their pensions can hardly be gold plated. The scheme must continue”.
Brian Strutton, National Secretary for GMB said, “Let’s be clear, the debate about pensions must not be allowed to become a race to the bottom. The private sector must stop cheapening their workers’ pensions or we’ll have future generations of pension paupers relying on state benefits. Let’s also stand up for the LGPS which is affordable and sustainable for the long term to provide future pensions for some of the lowest paid workers around; workers who will fight to protect their pensions.”
Peter Allenson, National Officer for Unite said, “The LGPS is clearly sustainable given these details brought together for the Trade Unions who are determined that the myths that some are peddling should be exposed as the scare mongering they clearly are.
The LGPS is not gold plated but actually through its investments and benefits bring real value to Local Communities.
Everyone should bear in mind that the scheme was reformed in 2008 with some benefit changes and increases for employees in their contributions with the Government and employers being party to the new scheme.”
19 Jan 2010
GMB and other Local Government unions today published a list of ten key facts about the Local Government Pension Scheme (see notes to editors below). In doing this the three main local government unions are seeking to set the record straight about a pension scheme with over four million members and £120billion in assets.
The facts are that the new LGPS, introduced in April 2008 for all the schemes 1.7m contributing members, was agreed by employers, unions and government after several years’ informed discussion. All stakeholders participating in that debate accepted the new scheme as a sustainable and viable means of pension provision in local government for the long term.
In exchange for increased member contributions and benefit reform, employers agreed to a scheme requiring councils and other LGPS employers to contribute on average 13.6% of members’ pay year on year. The income to the scheme from members since the introduction of the new structure has increased by 15%. The average employee contribution to the scheme is now 6.4% (higher than the UK average of 4.9%). In addition the LGPS was at the forefront of introducing higher contribution rates for higher earners, a concept now being proposed by government across the public sector.
The current LGPS is not the cause of increases in Council Tax or cuts in local services. In fact money equivalent to less than 6% of Council Tax revenue goes towards the LGPS, about £70.50 a year for an average Council Tax paying household in England. The numbers being peddled by those opposed to quality pension provision in the UK are dangerously misleading for a debate that should be considered not a forum for shallow point scoring.
Of that contribution it is the funding owed for past service that is often the greater part. Past underfunding by employers has meant that insufficient funds have been put aside for future pensioners. However, as a funded scheme, unlike the others in the public sector, the LGPS has over £120bn in assets, a figure sufficient to pay benefits for more than 20 years without any additional contributions being made. In addition the LGPS receives £4-5bn more in income than it spends in benefits every year, ensuring its enduring viability.
Even in the current economic climate the LGPS received nearly £3bn in income from its investments in 2008-9. The scheme is a major shareholder in British businesses, property and regeneration. This is on top of the contribution it makes to the income of more than one million current pensioners many of whom would be entirely reliant on taxpayer financed state benefits if it wasn’t for the Local Government Pension Scheme. The average pension of £4,000 a year (£2,600 for women) does not lead to a gold-plated retirement but it does mean members have some security in later life. The local government trade unions believe that the drive to the bottom approach to pension provision being led by the Conservative and Liberals will lead to millions more pensioners suffering and significantly increased pressure on public services.
Heather Wakefield, National Secretary for Unison said, “The cost to the taxpayer of abolishing the LGPS would be high. If our members did not pay into the scheme, the taxpayer would have to foot the bill through state pensions. The private sector has shown itself happy to use taxpayers’ money to cover up its mistakes and poor decisions. They should stop talking about what does not concern them and put their own house in order. Our members – almost three quarters of them women – work hard to provide public services on low pay and have sensibly decided to contribute to a safe and well-funded scheme. Two thirds of them earn less than £18,000 a year, so their pensions can hardly be gold plated. The scheme must continue”.
Brian Strutton, National Secretary for GMB said, “Let’s be clear, the debate about pensions must not be allowed to become a race to the bottom. The private sector must stop cheapening their workers’ pensions or we’ll have future generations of pension paupers relying on state benefits. Let’s also stand up for the LGPS which is affordable and sustainable for the long term to provide future pensions for some of the lowest paid workers around; workers who will fight to protect their pensions.”
Peter Allenson, National Officer for Unite said, “The LGPS is clearly sustainable given these details brought together for the Trade Unions who are determined that the myths that some are peddling should be exposed as the scare mongering they clearly are.
The LGPS is not gold plated but actually through its investments and benefits bring real value to Local Communities.
Everyone should bear in mind that the scheme was reformed in 2008 with some benefit changes and increases for employees in their contributions with the Government and employers being party to the new scheme.”
Interesting argument on pay...
We've got a review copy of this book at work. It's short & sharp and very sceptical about the idea that rewards in the corporate sector reflect talent. He also spends a bit of time looking at the argument that exec pay, or pay in the financial sector, is comparable to rewards for sports and movie stars.
One good argument he floats here is the 'Faking It' one. Could a fit young bloke who wasn't a professional footballer get away with pretending to be one, as in be able to get paid for such a position? The answer is pretty obviously no. Their lack of genuine athleticism, let alone skill, would be exposed very quickly. But could we say the same thing about people who work in the finance sector? Could we even say it about chief execs?
And there's also the lack of transferability of skills. No-one would expect that a top footballer could simply decide that they want to transfer to the top level in rugby and be able to achieve such a move. Yet executive skills it seems are transferable between industries - you don't need to know the underlying industry.
The suggestions on how to deal with the pay problem are less convincing. But the attack on conventional wisdom about exec pay (as parroted, unfortunately, by many investors) is worth a read. And you can get through the whole thing in a couple of hours.
One good argument he floats here is the 'Faking It' one. Could a fit young bloke who wasn't a professional footballer get away with pretending to be one, as in be able to get paid for such a position? The answer is pretty obviously no. Their lack of genuine athleticism, let alone skill, would be exposed very quickly. But could we say the same thing about people who work in the finance sector? Could we even say it about chief execs?
And there's also the lack of transferability of skills. No-one would expect that a top footballer could simply decide that they want to transfer to the top level in rugby and be able to achieve such a move. Yet executive skills it seems are transferable between industries - you don't need to know the underlying industry.
The suggestions on how to deal with the pay problem are less convincing. But the attack on conventional wisdom about exec pay (as parroted, unfortunately, by many investors) is worth a read. And you can get through the whole thing in a couple of hours.
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