2 snippets

1. Interesting para at the end of this piece (presume it's from tomorrow's FTFM):

There is an underlying question in all this about whether the public ownership model for companies still makes sense. Lord Myners was asked at the NAPF event whether voting rights should be transferred to employees. He replied mutual ownership was an interesting idea, as there were some real disadvantages of the public company model.

2. Quite liked this bit from 'On the fetish character in music and the regression of listing' by Theodor Adorno:

"If one seeks to find out who 'likes' a commercial piece [of music], one cannot avoid the suspicion that liking and disliking are inappropriate to the situation, even if the person in question clothes his reactions in those words. The familiarity of a piece is a surrogate for the quality ascribed to it. To like it is almost the same thing as to recognise it. An approach in terms of value judgements has become a fiction for the person who finds himself hemmed in by standardised musical goods."

I don't think I buy the general approach, but he certainly hits a few targets. I also think familiarity has an important influence of the popularity & legitimacy of ideas.

EMI, agency theory and stuff

A few inter-linking points that are swishing around my tiny little mind this Friday evening. First up, a quick thought about EMI. It's a simplistic point, but it does demonstrate that whatever advantages private equity might have as an ownership structure, these surely can't outweigh poor decision-making. Private equity has concentrated ownership, plus, if you buy the Jensen argument, all that debt focuses management minds. But ultimately it's just a different structure. Companies who dislike pressure for corporate governance reform often make the point that good policies and structures don't make good managers, exactly the same is true even when the agency problem is in theory reduced under private equity ownership.

Secondly, what does the continuing growth of executive remuneration - apparently unlinked to performance - tell us about agency theory? One could argue that the problem agency theory would lead us to expect in respect of remuneration - managers making out like bandits because they can - has actually got worse since we have actively tried to deal with it. For all the apparent pressure for performance-related rewards, the amounts involved have surged.

Does this mean that we've misapplied agency theory? Possibly (and I would certainly question - for different reasons - whether performance-related rewards actually deliver for the notional 'principals') but perhaps it has ben poorly applied mainly in the sense that we've been looking in the wrong place. After all, fund managers are agents too. And they are both a) judged on short-term timescales themselves and b) paid highly. So wouldn't executive remuneration arrangements that reinforce the idea that high rewards are necessary and encourage a focus on short-term results be what we expect them to promote? Just asking, like.

Finally, in a similar vein, recent events lead me to query the theoretical framework I was previously quite impressed by which is laid out in Political Power and Corporate Control. The argument is broadly that there are three core constituencies in governance - investors, managers and employees - and depending on their relative strengths they will tend to ally in certain combinations. So in a country like Germany where employees have to some extent shared interests with management because of the governance structures, they will tend to ally against investors. Whereas in a country like the US where both employees an investors are shut out of power in governance they ally against management (think of the extent of union involvement in shareholder activism there).

So far so good, but then in these terms the UK ought to develop along the same lines as the US. Yet in reality examples like Cadbury demonstrate that actually management and employees often seem to find common cause against investors (though it didn't come to much in that case). Perhaps it's partly because labour still has some residual strength within companies. Perhaps I'm simplifying too much, and labour is beginning to see the possibility of allying with investors. Or maybe the framework needs to be applied a bit differently. But it doesn't seem to quite fit the UK in my opinion.

Long-termism

A couple of related bits on short/long-termsim. First, Pesto has blogged about recently ex-Cadbury chair Roger Carr's remarks about hedge fund involvement in the Kraft bid. Here's what he had to say:

"It was the shift in the [share] register that lost the battle for Cadbury. The owners were progressively not long-term stewards of the business but financially motivated investors, judged solely on their own quarterly financial performance...

"There were simply not enough shareholders prepared to take a long term view of Cadbury and prepared to forego short term gain for longer term prosperity...

"At the end of the day, individuals controlling shares which they had owned for only a few days or weeks determined the destiny of a company that had been built over almost 200 years."

He reportedly went on to argue that the right to vote should be restricted to those have held shares for a given amount of time. This is an idea that Myners has floated previously. I also think there is a good argument that companies could use dividend policy to encourage long-term ownership. I know some investors don't like these sorts of ideas and that equal treatment of shareholders being something of a point of principle, but I suspect that this isn't such a strong argument anymore. So I reckon we might see more policy interest in some sorts of incentives for long-term holders.

Separately, in the IRRC/Mercer study there is a short section looking at potential remedies for short-termism. The interesting thing is that fund managers themselves float ideas (unprompted) that you might not expect, like a transaction tax. Worth a read.

Grainger danger!

The first remuneration report of the year bites the dust. I bet there will be a few more this year.

Long-only short-termism

Hmmm... this (PDF) looks very interesting. The stats:

The key findings of the quantitative analysis include:

• Nearly two-thirds of strategies have turnover higher than expected, with some strategies recording more than 150-200 percent higher turnover than anticipated. Of the 822 strategies for which Mercer had expected and actual turnover information, 55 exceeded the turnover during the sample period. The average turnover was 26 percent higher than anticipated.

• Within the entire sample of 991 strategies, the average annual turnover of the sample is 72 percent, with some 20 percent of strategies having turnover of more than 100 percent.

• Value managers tend to have a lower annual turnover figure than the other style types. Large capitalization portfolios have lower turnover rates than small capitalization strategies, and socially responsible investing (SRI) strategies have lower turnover than non-SRI strategies.

• Across regions, UK, Canadian and Australian equity strategies have the lowest average turnover value, while European (including UK), international and US strategies have the highest average turnover levels.

The key insights from the qualitative case study analysis from the fund managers include:

• Causes of short-termism include volatile markets and changing macroeconomic conditions; mixed signals from clients; short-term incentive systems; and behavioural biases;

• Fund managers recognize the potential destructive nature of short-termism even while claiming it was unavoidable. The managers indicated that short-termism potentially places short-term pressure on companies; increases market volatility;
demonstrates a lack of discipline in fund managers’ investment processes; and creates a misalignment of interests between fund managers and their clients.

• The managers also identified potential solutions to short-termism, further details of which can be found in the report.

Robin Hood, Robin Hood, riding through the capital markets

The Robin Hood Tax – turning a crisis for the banks into an opportunity for the world

A Robin Hood Tax on banks’ financial transactions could raise hundreds of billions of pounds to fight poverty, protect public services and tackle climate change, according to a campaign launched today by an unprecedented coalition of domestic charities, aid agencies, unions, faith organisations and green groups.

The campaign is calling on the leaders of the UK’s political parties to support a global tax on the banks to help repair the human damage caused by the global economic crisis, protect public services at home, fight poverty abroad and help foot the bill for climate change.

The campaign, supported by almost 50 organisations including Oxfam, the TUC, Barnardo’s, The Salvation Army, ActionAid and Save the Children, is launched with a promotional film starring Bill Nighy, and written and directed by Richard Curtis (Four Weddings and a Funeral, Comic Relief). It is backed by regional events, advertising and online promotions challenging politicians, banks and the public to Be Part of the World’s Greatest Bank Job.

The Robin Hood Tax is backed by financiers and hundreds of economists who have signed a letter supporting the campaign.

Alastair Constance, City trader and founder of Ethical Currency, which already levies a voluntary rate of 0.05 per cent on all currency transactions, said: "Billions of pounds whizz round the global financial system every day. A tiny tax on each transaction is absolutely practical and will hardly be noticed by those paying it. But it could still raise billions to help make the world a better place."

The Robin Hood Tax would not be levied on banks’ transactions with their high street customers, but only apply to transactions between financial institutions. While different rates of tax would apply to different types of transaction, they would start at just five pence for every thousand pounds traded – an average of 0.05 per cent.

But even such tiny taxes would raise hundreds of billions of dollars a year given the scale of transactions – equivalent to $10,000 a day for every one of the 1.2 billion inhabitants of the world’s 30 richest countries in the OECD. Experts have estimated an international transaction tax system could eventually raise as much as £250bn ($400bn) every year.

While an internationally agreed tax system is the best way to proceed, the UK Government and European Union should start extending transaction taxes already in existence, such as the UK’s 0.5 per cent stamp duty on shares, the campaign says.

This would both raise much needed money and encourage other countries to adopt the proposal, with modern foreign exchange markets an attractive and easy target for a unilateral tax on sterling and Euro transactions.

The market for financial transactions has exploded in the last decade, and is now worth 60 times global GDP. Before the financial crisis banking was the most profitable industry in the world, with profits five times that of the pharmaceutical industry, and three times bigger than the privatised utilities, according to consultants McKinsey & Company. At the same time the financial sector is not taxed as much as other sectors.

The campaign is calling for countries which levy the tax to keep half the proceeds domestically and for the rest to be split 50-50 between poverty reduction and tackling climate change. The UK’s share of the tax would amount to tens of billions of pounds.


Money raised by a Robin Hood Tax could be used avoid cuts to vital public services and for a range of good causes including:
• Meeting the Government’s target to halve child poverty (£4bn)
• Ending the benefit trap that makes it too expensive for people to leave welfare and return to work (£2.7bn)
• Protecting schools and hospitals at home and abroad under threat of cuts
• Meeting the Millennium Development Goals to cut child deaths by two-thirds, maternal mortality by two-thirds and tackle malaria and HIV/AIDS, and
• Providing resources to enable a deal to be done on tackling climate change.

The UK campaign is part of an international movement with similar calls being made in the USA, Europe and across the developing world. Gordon Brown, Angela Merkel, Nicolas Sarkozy, Nancy Pelosi, Jose Manuel Barroso, Meles Zenawi (Ethiopia) have all spoken out in recent months in support of some form of transaction tax.

Financial figures who have backed transaction taxes include Lord Turner (FSA), George Soros, Warren Buffet, Avinash Persaud (chairman of Intelligence Capital), Sir Philip Hampton, (RBS chairman) and Terry Smith (chief executive of money brokers Tullett Prebon).

Polling carried out by YouGov for Oxfam shows there is already significant public support for a Robin Hood Tax, with almost twice as many people in favour of the policy as oppose it. It is also the public’s favoured option for reducing the UK’s deficit – well ahead of reducing public spending or raising income tax, VAT or corporation tax. Faced with a 12 per cent deficit, the next government will be facing a stark choice – raising other taxes such as income tax or VAT, cutting services, or taxing the banks. The campaign believes that the Robin Hood Tax is the right idea at the right time.

In a letter to the leaders of the UK’s political parties, the campaign says: “You could ignore the big problems facing the world, and accept that climate change will stay unchecked, and that the poorest people at home and abroad will have a very hard time of it over the next decade. Or you can find all the money needed by directly taxing the British public themselves.

“Or you can work to find an innovative, modern, regular way of accumulating a fund of money to deal with big issues boldly. We would ask you seriously to consider the Robin Hood Tax as that radical new option – a small tax on bankers that would make a huge difference to the UK, to the poorest countries and to our planet. Let’s turn the crisis for the banks into an opportunity for Britain and the world.”

Barbara Stocking Oxfam Chief Executive, said: “We have a once in a generation opportunity to make global finance work in the interests of ordinary people at home and abroad. A tiny tax on banks would make a massive difference to the millions of ordinary people around the globe forced into extreme poverty by the economic crisis.”

Brendan Barber TUC General Secretary said: “The crash was made in the finance sector – finance should now make a proper contribution to putting right the damage the crash caused and preventing huge cuts in vital public services.”

Claire Melamed Head of Policy at ActionAid said: “We now have a chance to raise enough money to create real and lasting change. If politicians are brave enough we could turn a financial crisis into an opportunity for the world’s poor by raising billions from the banks to spend at home and abroad.”

Latest Myners speech

Some good stuff in this.