SEC lobby on proxy access

A plug for the lobby of the Securities and Exchange Commission in the US. The SEC's proposals on proxy access could actually mark a step backwards if allowed to stand.

On July 27, the U.S. Securities Exchange Commission (SEC) issued a request for comments on a document that includes rules that would severely roll back shareholder rights in the U.S. in two respects: 1. the ability of a shareholder to use the proxy statement to nominate a director ("proxy access"); and 2. threaten the right of shareholders to file resolutions.

1. The SEC proposals would create cumbersome and unworkable procedures for investors to influence the process of company board elections, otherwise known in the U.S. as "proxy access". The SEC proposal denies shareholders the right to submit resolutions urging companies to adopt procedures to include shareholder-nominated director candidates in their proxy solicitations. This represents a roll-back from shareholder rights recently gained under U.S. case law.

2. The SEC is also examining possible changes to the way that non-binding shareholder proposals are dealt with at U.S. companies. Shareholders could be required to hold a significantly larger stake in a company in order to make a shareholder proposal (e.g. a 5% threshold). This would leave shareholders scrambling to put together coalitions in order to continue to engage U.S. companies. Another suggested change would allow companies be able to "opt-out" of the shareholder resolution process entirely, either by a vote of the shareholders or by a simple vote of the board of directors.

For international institutional investors, a key priority will be to send the SEC a strong signal that the right to file non-binding proposals must be preserved as is (issue #2). There is an initiative underway to coordinate international responses to the SEC though the Clearinghouse of the Principles for Responsible Investment (PRI) for PRI signatories. Details and additional resources can be found below and attached.

Given the importance of the proposed changes under consideration, international institutional investors and other advocates of shareholder rights are being encouraged to send the SEC a written submission prior to the October 2 deadline. Your support in this regard would be greatly appreciated.


Additional Resources

1. PRI Clearinghouse: coordination of international responses to the SEC on the right to file shareholder resolutions. through the PRI Clearinghouse. PRI Clearinghouse posting by Domini Investments (USA) enclosed (pdf), as is draft PRI signatory letter (doc)

2. Background materials prepared by AFL-CIO. The materials include a template comment letter to the SEC geared towards US investors as well as background materials on both proxy access and shareholder resolutions.

3. Dow Jones Article, "US Activists Launch Online Opposition To SEC Proxy-Access Plans," August 29, 2007 (copied below)

4. SIF and ICCR website: www.saveshareholderrights.org

5. SEC Proposals

* SEC proposals - comments received to date:
http://www.sec.gov/comments/s7-16-07/s71607.shtml

* SEC Proposals: Shareholder Proposals Relating to the Election of Directors (34-56161)- http://www.sec.gov/rules/proposed/2007/34-56161.pdf

Shareholder Proposals (34-56160) - http://www.sec.gov/rules/proposed/2007/34-56160.pdf

* SEC Proposals comment submission page: http://www.sec.gov/cgi-bin/ruling-comments?ruling=s71607&rule_path=/comments/s7-16-07&file_num=S7-16-7&action=Show_Form&title=Shareholder%20Proposals

More on The Halo Effect

Just about finished this excellent book, and I have to say it's one of the best finance/business books I have read in long time. Much of it is taken up with trashing the typical "analysis" you find in the business pages and management books. A key element is this idea of the Halo Effect, namely if a company does something right - performance - people often see (or choose to see) success in other areas. So a successful company is accredited with having a great culture, or management, or both. In contrast poor performers are are seen as getting the same things wrong.

In addition, many studies of successful companies look backwards. They find successful companies and ask them, or search the business media, for what the company got right. As such they tend attribute success to certain factors once they know what the performance 'answer' is. Although some studies try to overcome this by also including a sample of less good or poorly-performing companies, they often still draw on the same kind of flawed reporting (business press 'stories', asking managers what they got 'right', etc).

The book also argues that success is temporary. Not only is there the effect of mean regression, but companies are also not operating in a vacuum. Competitors can copy products or practices and thus close the gap. Therefore advice (consulting) that claims to offer management techniques that are surefire winners on some quasi-scientific basis, is basically rubbish. In addition performance is, unfortunately, relative, not absolute. A company can significantly improve, becoming more efficient and profitable, yet still lose ground if its competitors are improving at a faster rate. So a business can fail even when it is doing well.

Perhaps my favourite thing about the book is the emphasis on story-telling in both the business press and management books. Much commentary stresses the roles of key individuals, certain decisions, or elements of a particular business's culture or strategy. Yet these are really little more than narratives with a moral in them (ie focus on your core business). I've always had a gut feeling that business reporting works primarily on this basis, and is therefore fundamentally misleading (if perhaps inspiring to some). I don't think I'll ever be able to read the business pages in the same way now.

Great stuff all round. I suppose the next question is how do we apply it?

Burma links

Federation of Trade Unions - Burma

Burma Campaign UK

Burma Campaign UK "dirty list" (companies with links to Burma)

Global Unions Burma list (similar to above)

US pension funds & economic activity

The US public sector pension funds are the giants of the investment world. CalPERS, for example, can have a major influence not just on investee companies, but also on countries. CalPERS took some flak a few years back when it introduced a screening approach to investing in emerging markets. Basically it refused to invest in some countries because of concerns about corporate governance, human rights and so on.

but they can also have a big impact on a local level. Recently CalPERS released a study that looks at it impact on the Californian economy. You can find it here and below is a short excerpt from the announcement of the study:

CalPERS economic impact in 2006 created 124,377 jobs, returned state and local tax revenues of nearly $832 million, and generated employee compensation of $4.9 billion to exceed the payrolls of heavy construction, civil engineering, and motion picture and video production industries.

Overall, CalPERS investments made the pension fund a bigger player in the California economy than machinery manufacturing, oil and gas extraction, and the amusement, gambling and recreation industries.

More than half of the pension fund’s economic impact in 2006 came through private real estate development. About 29 percent was through domestic public equities – activities of public stock companies, and 11 percent in construction-related partnerships.

By region, economic impacts included: Los Angeles, $2.2 billion; San Francisco, $1.6 billion; San Diego, $577.2 million; Inland Empire, $372.3 million; Sacramento, $288.7 million; Central Coast, $89 million; Great Valley, $70.2 million; Northern California non-urban, $46 million; and Central California non-urban, $7.3 million.

Pretty impressive stuff, and it also flags up the fact that North American seems to take the economic impact of its pension funds far more seriously than we do in the UK. Typically commentary from the pensions industry almost seems to make a point of stressing that investments are seeking to do nothing more than generate returns. On one level that is clearly true but it also reeks of the reluctance of the UK to think more creatively about how to use the power of institutional investment.

While I'm on the subject of US pension funds, I also spotted this bit from CalSTRS (the teachers fund in California) about sustainable investing. Again it is the sort of thing that you wouldn't really catch UK pension funds (barring the Environment Agency) doing. It does make you wonder whether we could push public sector funds in the Uk to go a lot further...

Top of the blogs

I've just stumbled across this post on Tory blogger Iain Dale's site. Its a list of the top 100 left of centre blogs in the UK.

A few shout outs are in order, notably John Gray at Number 60, John W at Number 50, TIGMOO at 44, and Trot central Dave's Part at 9.

The most important question is, of course, whether I made it into the list. I did, at 86, just ahead of ex-minister Michael Meacher! So that's almost bottom decile performance which means plenty to do in order to achieve the recognition clearly deserved next year.

PS John W has a look at the list here.

Meryvn King and the halo effect

Another day, another fall in Northern Rock's share price. Now attention is focused on the position of Bank of England governor Mervyn King, and his apparent "u-turn". Only a week ago King was publicly against a bail-out, and indeed the Bank has been steadfast in its refusal on the grounds that it creates moral hazard. But the queues outside Northern Rock changed the reality and King in effect reversed his position. Now the knives are out. Some accuse him of giving into political pressure, others of not acting soon enough. He may struggle to survive.

Funnily enough this coincides with me starting to read the excellent book The Halo Effect by Philip M. Rosenzweig. I would describe it as kind of the management equivalent to Fooled By Randomness by Nassim Nicholas Taleb, it's about how we attribute outcomes to the wrong causes, particularly in retrospect. And bloody hell could it have been written specifically to describe some of the commentry around the Bank's actions.

For example this bit in today's Torygraph business section. First it massively simplifies what has occured - apparently King's u-turn can only be either in response to something nasty we don't know about, or because he was sat on by the Chancellor. Second it does the typical wonky thinking thing of projecting attributes, like so:

More than ever it looks like King has been reading from the wrong page of the regulatory manual, betraying his background as a clever academic when the situation required the gut feel of a banker.

A real banker, you see, wouldn't have changed his/her mind. They would already haven known the optimal response in advance. King in contrast is of course an academic who only makes decisions based on textbooks, and then changes his mind, or is forced to. Really, having begun reading The Halo Effect I could almost have written the Torygraph stuff myself. It's not "analysis", it's more like a fable - The Tale Of The Academic Who Couldn't Run A Central Bank In A Crisis.

The really odd thing about all this, if you think about it, is that a real full-on crisis has been averted. When the facts change, I change my mind. No-one was really expecting to see a run on Northern Rock, so the pre-existing approach had to change. Why is altering your approach when the situation changes a bad thing? And as for the accusation that the Bank should have acted quicker, well maybe. But maybe again that's just hindsight bias. We can only see what we think the best decision would have been in retrospect, and even then we can't see all the possibilities that other decisions would have created.

So personally I don't think the Bank has done a bad job.

And on that note here is Anatole Kaletsky's piece in the Times today, which is the counterpoint the Torygraph analysis.

Northern Crock - do investors really understand companies?

There's a great bit on the FT website recalling some of the rather positive analyst comment in recent months on Northern Rock. It turns out that our highly-paid betters in the City were still churning out good news stories about the bank even as it became clear that the bank was in trouble.

One e-mail, purportedly sent by a trader at Lehman Brothers on Friday morning, urged, “load up on Northern Rock for your children, your mum, your goldfish” – just as the bank was suffering the first of two days of heavy losses.

Not that he was the only one. John-Paul Crutchley of Merrill Lynch issued a bullish note to clients, with a price target of 913p on the stock. It ended the day at 438p, having fallen 201p.

Cazenove said in July that there were “two main issues confronting Northern Rock in the short term: an increased cost of funding due to a spike in three-month Libor, and the possibility of wider spreads being demanded by investors given current market conditions”. But its otherwise commendable prescience was marred by its conclusion: “In the short term we believe the group has sufficient flexibility to meet its funding needs.”

Meanwhile fund manager Baillie Gifford seems to have been the most exposed to the Northern Rock collapse. According to the report from Thomsons below they have now sold out, racking up a £200m loss.

Baillie Gifford sells entire holding in Northern Rock - source

By selling its entire stake the fund manager has suffered a loss of up to 200 mln stg.

LONDON (Thomson IM) - UK fund manager Baillie Gifford has sold its entire stake in troubled UK mortgage lender Northern Rock, sources close to the situation said.

Although the fund manager said it had reduced its 5.98 pct stake to 'under' the 5 pct threshold, a source confirmed earlier press reports that it in fact had sold its entire share capital in the lender, realising its loss of up 200 mln stg.

At 11.19 am Northern Rock shares were down over 8 pct, or 24 pence at 280.

While it is very tempting to have a laugh at the City for their inability to do any better than a day trader, I agree with Mr Gray that the problem is that it isn't "the capitalists" who suffer when they get it wrong. You won't have to look very far to find pension funds that had money in Northern Rock, and as such are looking at big losses on their investment. Another reminder why the workers capital agenda is so important.