Monday 30 April 2007

Local authority funds to target Shell

Local authority pension funds are being urged to vote against the remuneration report of Shell at its forthcoming AGM following the company’s failure to link directors’ management of non-financial issues, such as health and safety, with long-term pay awards.

The £75bn Local Authority Pension Fund Forum (LAPFF) whose members own over 1% of Shell shares, believes the company should link management of non-financial issues such as health and safety to its long-term incentive plan (LTIP). Currently there is only linkage to the annual bonus and the sustainable development component of the bonus, which covers a range of non-financial factors including safety, represents a maximum of only 5% of a director’s potential pay package.

The Forum does not consider this to be an adequate incentive, given the critical importance of issues like safety in the oil sector. As such the Forum has recommended that its members vote against the company’s remuneration report. Looking forward, LAPFF has proposed that Shell’s LTIP, which represents 54% of directors’ pay mix, should contain safety-related and other non-financial business performance elements.

The Forum also has concerns about Shell’s climate change targets. The Forum is not convinced that Shell’s target to reduce emissions to 5% below 1990 levels by 2010 is adequate. While a reduction in emissions has been achieved between 2004 and 2006, the target effectively allows for a 20% increase in emissions between 2006 and 2010 rather than providing a real incentive for further emissions reduction. An adjustment of Shell’s target is called for in the bonus calculation, to ensure that directors are adequately stretched before receiving a payout. In addition the Forum has concerns that the target could in part be met by the progressive elimination of flaring in Nigeria, which it considers to be a compliance issue rather than a voluntary act.

LAPFF chairman Cllr Darrell Pulk said: “If companies believe that issues such as climate change, or safety, are critical to their future success then they need to make this crystal clear in the manner in which they reward their directors. Simply linking a small portion of the annual bonus to non-financial targets does not focus executives enough on the longer term instead of the quarterly results treadmill. These are long-term issues, so why not link them to long-term incentives? This is not just an issue for Shell, or for the oil sector. It is something all companies and their investors should be considering. As long-term shareholders we need to ensure that we are incentivising our directors to manage these issues effectively.”

The Forum has been engaging with Shell for 18 months, initially focusing on climate change, but more recently addressing both climate change and health and safety in a remuneration context.

Shell’s AGM is scheduled for 15th May.

Long-term investing

Looks like I may be too cynical about the ability of pension funds to develop long-term investment strategies. According to FTFM today, some pension funds are already there. Here's some text from the article:

But how easy is it for institutional investors to break this short-termist cycle and find fund managers willing to invest for the long-term? And will they be rewarded for doing so? The first hitch is that few asset management houses are geared to investing for the long term. "Finding houses has been quite hard work, it's a bit of a niche style," says Roger Urwin, global head of investment consulting at Watson Wyatt, which has been feeding a steady trickle of its clients into long-term mandates since 2003.

"There are very few people who supply the mandates that Gore is looking for," says Yusuf Samad, investment consultant at Hewitt Associates and a founder of the Marathon Club, a collaboration of trustees, executives and specialists promoting long-term investing and responsible ownership.

There is clearly a chicken and egg scenario - few asset managers will set out their stall to invest long-term unless they see a market for such wares. And pension fund trustees, probably a conservative bunch at the best of times, may prefer to play safe and follow the herd. "We live in a very measured and pressured environment," says Mr Urwin. "The trustees have to demonstrate that they are on the ball all the time and that leads to a very standard sort of mandate."

Nonetheless there has been some progress. Watson Wyatt has secured more than 40 long-term mandates for its UK clients, who are typically investing 5 to 15 per cent of their assets for five to 10 years. Crucially, all of these are still up and running.


Whatever the rationale the slow but steady emergence of longer-term investment philosophies is likely to prove an inconvenient truth for managers unwilling to play ball. "We have seen an increase in mandates," says Mr Samad. "In the last three years we have done many, many mandates with managers that take a very long-term view."

Would be interesting to see what these mandates look like.

Analysts are stupid

There's a great bit the FT today, with AllianceBoots chair Sir Nigel Rudd slagging off analysts. Seems like it's primarily aimed at the sell-side.

Sir Nigel Rudd has rounded on retail analysts, describing them as “stupid” for failing to see the value in Alliance Boots after last year’s £7.78bn merger of the retail chain with Stefano Pessina’s Alliance Unichem drugs wholesale business.

“When I did the Alliance Boots deal, everyone hated it. The greatest pleasure out of all of this has been the analysts,” said Sir Nigel. “I actually love that. They are so stupid most of them ... they are very bright or stupid.

“They write all this stuff, but they don’t sit back and say healthcare is a growing business, people are getting older, they need more medicine.

“What I saw in Boots was a pharmacy ... and what was more logical than merging with a chemist. And they didn’t get it.”

Asked if he thought analysts were a waste of time, Sir Nigel said: “Yes, mostly. I think the buy-side shareholders have a lot of talent in-house and I think analysts in investment houses are there to buy and sell stock or assist the salesmen buying or selling stock. That is what buy-side people tell you; they read the analysis but they aim off from it.”

Mr Pessina, executive deputy chairman, has repeatedly said his decision to take Boots private less than a year after the £7.78bn ($15.6bn, €11.4bn) merger was largely driven by the public market’s lack of understanding and undervaluation of the business. However, Sir Nigel said Boots’ success was not determined by the ownership structure. “I don’t buy this argument that you can’t be innovative and do difficult things as a public company, but that is the view Stefano has got. It is not my view.”

In early March, just before Mr Pessina and Kohlberg Kravis Roberts announced a £9.7bn indicative offer (they have since agreed to pay £11.1bn), only four out of 21 analysts had the stock on buy, with 10 on a sell.

Philip Dorgan, analyst at Panmure Gordon, who had Alliance Boots on a sell before the bid war, said there are “two sides to the equation”. “I have some sympathy with Nigel Rudd, but what he is saying is that we needed better understanding of Alliance Boots and that is part of his responsibility,” he said.

Thursday 26 April 2007

RBS update

The vote on the RBS share option scheme yesterday has been obscured by the rather bigger news of the bank bidding for ABN Amro. However this report in an Irish paper gives the details. About a quarter (22.44%) of shareholders voted against, and that is after some last minute concessions from the company.

It will be one of the bigger votes against this season, but actually the level of opposition is perhaps a bit low. Effectively the company was asking shareholders to approve an option scheme without telling them all the performance targets. Pretty hard to argue you are interested in performance-related rewards if you don't know what the targets are. I would be interested to see how any fund manager can justify voting for it.

Wednesday 25 April 2007

Share price as a performance indicator

I've just been alerted to this paper which does a pretty good demolition job on the idea of using share price as an indicator of corporate performance. I've got a huge amount of sympathy with this. We all want the companies in which we have investments to do well because a) that helps pay our pensions and b) that means there are jobs. However how can one single indicator like the share price, which is buffetted around on the sea of investor views and fears, really tell us much about what is really going on in companies? In addition what happens to those companies if directors think that their principal objective, and what they are highly incentivised to achieve, is arising share price?

Here's what John Plender had to say on the subject in his interesting book Going off the Rails:

The bizarre irony here is that the shareholder value movement has ended up replicating the errors of socialist planners in the old Soviet Union who imposed targets on industrial managers that were frequently met by fiddling the figures or doing damage to some other aspect of the business. By fixing on a single managerial incentive – the share price – the Anglo-American system has encouraged management to maximize short-term profits at the expense of longer term growth. When managers found that they could not generate enough short-term profit to satisfy investors and stock market analysts in the bubble period, they resorted to takeovers as a means of keeping one step ahead of the baying hounds of the financial community. And when takeovers became more difficult to pull off in the depressed stock market conditions that followed the bubble, they took to window-dressing the figures either within the rules or fraudulently as at WorldCom.

Investing for the long term

I posted a while back about the Marathon Club, a group of pension funds that are seeking to stimulate debate and activity around long-term investment strategies. As I've mentioned before, it's a bit bizarre that pension funds seem to be adopting increasingly complex and short-termist approaches to investment when they should be in business (we hope) for decades to come. As Warren Buffett has argued far more eloquently than I could, all that happens when you trade more is that you incur more costs (those costs being the extra fees for the people you pay to trade for you, so they aren't too keen on long-termism...).

The Marathon Club is genuinely trying to develop alternative thinking. They have just issued a new guidance note which sets out some key elements of long-term mandates:

· Trustees’ investment beliefs should be clearly articulated and explicitly recorded – an example of such a document is provided

· Clear objectives for risk and return should be set, based on those beliefs and longterm goals, and communicated clearly to advisers and investment managers

· Selecting of fund managers should be directly linked to how each candidate fits with the trustees’ long-term investment beliefs and objectives, together with the establishment of clear mandate parameters

· Alignment of trustee and manager objectives is best achieved through individual managers owning a stake in their business. Appropriately structured performance incentive fees should also be introduced and maintained

· In building a long-term relationship with a manager, it is important to place greater emphasis on the content rather than the frequency of review meetings, and include an opportunity to test the continuity of or changes to philosophy, process, people and the rationale for stock selection – the Guidance provides examples of this.

· Implementation requires strong governance and leadership, to control strategy and objectives consistent with established investment beliefs, and able to withstand shortterm market movements.

I am a bit sceptical about the potential for change here - partly for behavioural reasons - but I'm glad there is someone out there trying to address these issues. One to keep an eye on.

SEIU warning over private equity

The US union the SEIU has published a report on private equity. They have also set up this website. As a bit of background the SEIU has probably the biggest capital stewardship programmes of any union anywhere, and they have some people focused solely on privare equity. If only we in the UK had that kind of resource!

Here's the Guardian's take on it:

Private equity firms are reshaping the American economy to the detriment of workers and local communities, one of the largest trade unions in the US said today after publising a report into the industry's growing influence.

The almost 2 million-strong Service Employees International Union said the booming private equity buyout industry had turned back the clock on community involvement and workers rights. In a dossier documenting deals in the US over recent years, the union highlighted buyout deals that it argued left companies "hollowed out" or even bankrupt. Others saw gains that were paid exclusively to the new private equity owners.

Claims that the industry created jobs and boosted the economy were unfounded, said the union, pointing out that there was little quantitative research in the US to support the idea. It said the only detailed study was carried out in the UK and while it showed that buyouts inceased the number of jobs in 60% of cases after six years, almost all workers suffered cuts in pay.

Deals could work in the interests of all parties, the report said, pointing to one example of a buyout where workers were consulted and included in profit sharing. However, this example had rarely been repeated, the union said.

Private equity groups have come under increasing scrutiny by politicians, trade unions and investor groups foillowing a series of high profile deals. Groups backed by so callled "mega" buyout funds have attempted to buy some of Britain's biggest companies. While plans to takeover retailer J Sainsbury were jettisoned earlier this month, several other companies have been taken over, including car breakdown firm the AA, ice cream maker Walls and Boots Alliance.

The industry raised more than $500bn (£250m) last year to invest in buyout funds and commentators expect that figure to be exceeded this year. Pension funds and university endowment funds are some of the chief investors in buyout funds, which promise annual returns of between 20% and 30%.

The SEIU has 1.8 million mainly blue collar members in the healthcare and public service sectors. It said: "The private equity industry, armed with more than half a trillion dollars of capital, is today engineering financial deals that together are larger than the annual budgets of most of the world's countries.

"The financial juggernaut is generating hefty returns to its investors, extraordinary riches for its executives, and newly relevant questions about the impact of its business practices on American workers, businesses, communities and the nation."

Monday 23 April 2007

Update - RBS gives some ground

According to The Grauniad, Royal Bank of Scotland has graciously agreed to disclose the targets that will be used in the share option scheme. It had previously expected shareholders to vote to adopt it without these being disclosed.

A welcome move but surely far too late? The AGM is on Wednesday, with the voting deadline today. That means that surely most institutions will have cast their votes before this latest development?

The vote will be interesting since, from a very mainstream corporate governance perspective, what the company is doing is probably worse than BP (the ABI has 'amber-topped' RBS, whereas it let BP go through). That should imply a bigger vote against. Also one gets the impression at a bit of a desire on the part of some institutions to have another crack at exec pay. The last couple of seasons have been without serious high-profile rebellions, but behind the scenes many are concerned at the failure to rein in high pay. After the BP vote they be more willing to take a few companies to task.

Boots private equity bid 'unsettling' for staff

Not surprising there has been quite a bit of union reaction to the likely takeover of Boots. The first bid came from KKR which is working with the company's deputy chair Stefano Pessina. Hopwever a rival hiogher bid has been been put in by Terra Firma and the Wellcome Foundation.

There is some USDAW commentary in the Beeb report here. The GMB has put out a statement calling for Patricia Hewitt to delay the deal. Notably The Observerclaims some insiders at Boots are also worried that the company might be asset stripped.

As always, keep an eye on the role of the pension fund. According to ex-Boots Finance director John Ralfe, the trustees are in a strong position on this one.

Friday 20 April 2007

Pension Protection Fund considers SRI

There's an interesting snippet on the IPE website about the Pension Protection Fund (our equivalent of the US Pension Benefit Guaranty Corporation) looking to develop a socially responsible investment strategy. It's worth noting because it's another example of an institution with a relationship with Government setting the pace. No-one is under any illusion that the PPF isn't interested in generating returns to pay pensions, but the PPF clearly believes it can do this and also take an active stance on shareholder engagement. So why can't private sector funds do it? 18 April 2007 15:55:

UK – The UK’s £305m (€446.3m) Pension Protection Fund is seeking a consultant to help it create a policy on socially responsible investing.

The provider will also have to ensure that the PPF's fund managers adhere to the policy, a spokesman for the UK's pension "life boat" told IPE.

Furthermore, the fund is looking for active governance proxy voting services to complement the SRI policy.

"This is all about taking forward our commitment to socially responsible investment," the spokesman said.

Deadline for participation is May 2.

FNV paper on SRI, hedge funds & private equity

This is a shameless lift from the Committee on Workers' Capital email news alert (sorry Oliver!) but worth a plug.

FNV has translated its report on socially responsible investing, hedge funds and private equity (which was mentioned in the story circulated on w-c-l mid-March) into English. It is available for download below.

Some highlights:

After several years focussing on "structural pension issues" in the Netherlands, FNV is once again examining pension investment and responsible investing issues. As indicated on page 5, "[FNV] policy must focus more on the way the investment process is to be shaped." The 12-page report mentions some interesting points, in particular:

* FNV reasserts its belief in, and commitment to, the three P’s of "Profit, People and Planet" approach to sustainable investing (page 1) [However, the VBDO report highlighted below, "Voting on sustainability by 8 large Dutch institutional investors," suggests that large Dutch pension funds are voting against ESG issues raised in US shareholder resolutions 84% of the time.]

* FNV believes Dutch pension funds should subscribe to UNPRI and investors should ask companies to actively submit to OECD guidelines on MNEs (page 3);

* "Another point of interest is how FNV can come to a more aggressive approach in its investment policy [...] Not that the FNV is not aware that trade unions take up a different position in their role as representative of employees than in their role on the board of a pension fund. The FNV wishes to balance both positions as well as possible. In this respect, corporate social responsibility and socially responsible investments could have an important bridging function" (page 5);

* "Pension funds must make high demands on the socially responsible investment policy of internal and external asset managers." (page 9);

* On the differing Anglo-Saxon and Dutch approaches to union approaches to investment policy: "the two approaches are now clearly growing towards one another. The general approach increasingly exists of a mix of structure and real targets, as well in Anglo-Saxon countries as in continental Europe.
The FNV will therefore have to detail and implement actual targets in its policy. Special attention must be paid to the number of sectors/companies that increasingly try to exclude the trade union when it comes to determining the working conditions for business-related services. This could imply that Dutch pension funds increasingly call anti trade union companies to account according to the Anglo-Saxon approach. It is often possible to join the activities of sister organisations." (page 11);

* "In 2007, the FNV will systematically focus more on its role in the executive boards of pension funds. The FNV will particularly focus on issues with regard to socially responsible investments and corporate governance. The FNV will unite the forces and will equip the trade unions, which assist the executive boards of unions in pension funds, with facilities." (page 12)

Private equity

FNV takes a nuanced view of private equity, acknowledging the range of PE investments and productive roles PE can play in the capital markets. However, "a number of private equity funds seem to evolve from medium-term investors to (very) short-term investors. This requires for the pension funds – in their role as investor - to become more observant with regard to the social aspects of such an investment strategy. [...] Private equity companies should report just as much on their ‘People’ and ‘Planet’ activities as large companies that are quoted on the stock exchange and the pension funds must also strongly request that they do so and assess these private equity companies based on the received information." (pages 7-8)

Hedge Funds

FNV criticizes investments in activist hedge funds that aim to produce short-term returns at the expense of employees’ rights. "The FNV fundamentally disapproves of investments in hedge funds which in fact are intended to obtain a seat in the company’s management. This would cause for the executive board of pension funds to become (indirectly) responsible for the company’s policy and thereby withdraw from its role as shareholder. The executive boards of pension funds simply do not have the means to do so and this would result in an undesirable and complex entanglement of responsibilities." (page 9)

(Main points summarized by CWC Secretariat, with thanks to Chris Driessen for translating the FNV report into English.)

FNV summary report on SRI, HF, and PE (FNV, Apr. 18): (PDF)

Wednesday 18 April 2007

NUJ and boycotting Israel

Interesting the reaction that the NUJ's new Israeli boycott policy has caused. Judging from a trawl of the internet, there isn't much support for the new position. There's a good discussion on the UK Press Gazette blog which gets into the question of whether unions should be passing these kinds of resolutions, as opposed to the more central work of defending members (of course they don't preclude each other).

I have to say the language used in the resolution does irritate me a bit. Clearly some of the Israeli treatment of the Palestinians is despicable, but I am not at all clear that it is comparable with Apartheid South Africa. And speaking as an ex-journo something about it feels wrong in terms of impartiality - this is quite clearly taking sides in a complex conflict. It's particularly bizarre to pass it at the time when the NUJ is working with its Palestinian counterpart to push for the release of kidnapped BBC journo Alan Johnston, who has apparently been abducted by Palestinian militants.

More broadly one has to question what impact a boycott of this kind will have, if it can even be practically implemented (as others have pointed out, laptops include technology developed by Israelis). Does it help Palestinians to economically damage Israel, or does it harm them? In a situation like Burma there is no realistic alternative to economic sanctions, because the regime is undemocratic, but that's not the case with Israel.

It's also reminiscent of the first wave of shareholder activism, which sought to get investors to sell their shares in 'bad' companies. It might feel like 'doing something', but unless a lot of people do it then there is very little impact on the share price, plus you give up your voice. As a result 'engagement' developed as an alternative strategy, based on the idea that you have more influence if you actually own the company than if you don't.

So all in all this NUJ policy just seems like an empty gesture to me.

More on exec pay

The voting advisory service RREV issued a report at the start of the week looking at some of the trends in executive remuneration. Here are the headline stats that RREV disclosed.

Salaries and bonuses

Median salary increases for CEOs ranged from 8% (FTSE 100 and SmallCap) to 14% (FTSE 250). At CEO level, the largest percentage growth was at the lower quartile level, which was particularly marked at FTSE 100 companies, with an increase of 18%.

Annual bonuses

Performance related bonus payments received by executive directors increased by higher percentages than salaries.
At CEO level, median bonus payments at FTSE SmallCap companies increased by 31%, at FTSE 250 companies by 34% and at FTSE 100 companies by 39%.
In 2006 many companies have raised the maximum annual bonus potential. The data shows that bonus payments have increased as a percentage of (increased) salary across the board.

New executive incentive plans proposed

The use of performance share plans continues to account for the clear majority of new schemes.
The number of new option plans and co-investment/matching plans proposed continued to decline, while the number of performance share plans remained approximately the same as in 2005.

Annual award limits

Generally, the median face values of annual award limits under new executive incentive schemes have increased compared to the previous year.

Performance conditions

In 2006 there was a clear shift from the use of pure market-based conditions to the use of a combination of market and non-market conditions.
In the FTSE 100 and FTSE 250 this has been chiefly at the expense of single non-market conditions.
In the FTSE SmallCap, conversely, schemes using a single market-based condition were those that declined, while non-market conditions remained steady.
The most common market-related performance measure in new incentive schemes continues to be relative Total Shareholder Return (TSR) and the most common non-market measure continues to be Earnings per Share (EPS).

Some interesting stuff in there, and it hasn't escaped the attention of the T&G! Of course the question is what are shareholders doing about it? It's all very well wringing our hands over the incessant increases in pay and benefits, but if you don't vote against these policies what can you expect? Unfortunately many institutional investors - and let's be clear that we are talking primarily fund managers here since so few of our pension funds are activists - seem to be happy voting against a handful of key policies a year. This implies the problem is at the margins, rather than endemic.

PS. I've just been looking at our analysis of a fund manager which is publicly-listed (ie you may hold shares in it) and the chief exec received non-pay rewards of not much short of 950% of salary.

Tuesday 17 April 2007

The next big shareholder oppose vote on exec pay?

I'm flying a kite here, but I wouldn't be surprised to see Royal Bank of Scotland take a bit of flak at its AGM next Wednesday. According to The Times, the ABI have given it an 'amber top', and the firm I work for (PIRC) has recommended an oppose, plus there are certainly some institutions out there that certainly plan to vote against have had some issues with the company over pay for a couple of years.

Sunday 15 April 2007

Business leaders vs politicians

It's interesting to note the tone of some reactions to shareholder opposition to Lord Browne's pay package. It raises some questions about media attitudes to business leaders. Anthony Hilton's commentary in the Evening Standard is fairly typical of the sort of thing I'm thinking about:

This country has a strange way of showing it believes its future depends on getting the right people to run its great business. Lord Browne, the chief executive of BP, was forced yesterday to endure his last annual meeting of the oil giant against a backdrop of carping criticism about the terms of his retirement package from the company -- one which was said by the critics to be unreasonably generous.

This surely gives all the wrong signals. The Browne retirement package does indeed run into the millions and is way beyond the comprehension of normal people but that is not the point.

Whatever the problems the company has experienced in recent months, it has nevertheless been transformed under Browne's leadership and shareholders have an investment worth many billions of pounds more today that it was when he took over. Against the scale of his achievement the reward is minor.

The argument is pretty clear - Lord Browne has been such a great leader that criticism of his remuneration is rather unseemly. He's been so fantastic that not only should we grin and bear it, we should be grateful, and we put the company's recent failures in context. A further argument commonly made by the likes of Jeff Randall is that we don't celebrate our business leaders enough.

Fair enough, and I understand the perspective, but I do wonder if political journalists could get away with this kind of arguments. We don't celebrate our politicians enough, in fact we only ever carp at their mistakes, we should be grateful for the visionaries that lead us. What's more let's put their mistakes in in a bit of context. Doesn't sound right does it? So why do business media commentators think we should afford corporate leaders a level of deference they would never extend to politicians? Just look at the hatchet job Jeff Randall has done on Gordon Brown of the dividend tax credits issue.

I realise I'm a member of a pretty small club on the Left here but I do actually agree that we could do with more (and better) business coverage. What businesses do is important to all of us, and we should pay more attention to it. With the private sector continuing to take over functions which were once the preserve of the state, this becomes even more pressing.

However this also means that business commentary could become more critical, not less. If business leaders assume more political imnportance, they must also become more accountable.

Friday 13 April 2007

Big vote against exec pay at BP

The shareholder revolt at BP's AGM yesterday was a lot larger than I was expecting. If you include abstentions then 22% of the company's shareholders failed to back the remuneration policy. That might not sound that large, and obviously the company has won the vote. But it is a large anti vote in any proxy season, and for a company like BP it is a serious message from its owners. The Telegraph coverage of the AGM is pretty good.

What makes the large vote all the more surprising is that two of the main voting advisory services - RREV and the ABI's IVIS - actually gave the remuneration report the all clear. Only the firm I work for - PIRC - came out with a vote against. This suggests a number of things. One is that some large shareholders were influenced by PIRC's analysis and/or did not accept the line taken by IVIS or RREV. Also it's possible that US investors decided to give the company a kicking, afterall BP's big safety problems were in the US.

Overall it felt like there was a real turn in investor attitudes to BP's pay policy in recent weeks. Despite the respect that Lord Browne still commands in the City, there were genuinely serious issues at stake, so it is entirely right that a large block of shareholders voted the way they did.

The vote was also interesting because local authority pension funds, who own about 1% of the company, wanted to see more linkage between pay and management of safety. I am certain that there will be more pressure in this area in the future. There was some discussion amongst investors about this a couple of years ago, Hendersons and USS produced this paper, but it didn't seem to go anywhere. However the BP case could well be the start of a trend. It's worth keeping an eye on.

Finally, I can't help but have a laugh at the ABI's conflicting lines on BP over the past few days. I don't blame them in one sense, they have probably been asked for a quote each time and simply supplied a straightforward statement. But the phrase "U-turn" does leap to mind.

From The Times on Monday:

Michael McKersie, assitant director of investment affairs, revealed the ABI had given BP a ‘blue-top’, essentially a clean bill of health in its traffic light system of judging corporate governance breaches.

Mr McKersie said: “A red top is a blatant failing by a renumeration committee. We have carefully looked at everything in BP’s report and it does not fall into this category.”

And from the FT today:

"This was certainly a larger number voting against than you would normally see."

"Remuneration is often a convenient way to express wide-ranging concerns. There is a message here and the company should not be complacent."

Ho hum.

Wednesday 11 April 2007

TaxPayers Alliance criticises union campaign on private equity

I've just spotted this interesting opinion piece from the right-wing* TaxPayers Alliance. There's some heady talk in the article. Peter Hain is, apparently, an "unreconstructed Marxist". Unions meanwhile are too stupid to realise that private equity is good for business, and creates jobs.

Also, speaking as a bit of a pensions geek, I have to query this sentence:

Their preferred employment practices are those of the public sector, where almost 9 days per year are lost through sickness, against 6 in the private sector, and where almost 90% of workers can look forward to final salary pensions when they retire at 60, compared with just 16% of private sector workers, many of whom will retire at 67.

Many of whom will retire at 67? Eh? Have you seen the average retirement age stats for the private sector? From memory for big companies the average is lower than the public sector, and it certainly isn't 67. So where is the 67 figure coming from? It sounds a bit like the future State Pension Age which both a) applies to everyone (whether a public or private sector worker) and b) is the age at which you draw the pension, not when you retire. Normal retirement age in occupational schemes varies, and is normally 60 or 65, so I really am a bit flummoxed. I presume they just got confused.

More broadly the TPA worry me a bit. Anyone with a bit of savvy should be able to suss out that this is a politically/ideologically motivated campaign, rather than the genuine voice of the ordinary taxpayer. Although many ordinary punters grumble (not unreasonably) about tax, most would not go on to take the positions advocated by the TPA. However they are frequently used as a source by the right-wing bits of the media, and I suspect some people are taken in.

* Check out the backgrounds of some of the TPA's people. For example they include the former leadership campaign organiser for David Davis.

Sainsbury's bid IS dead

Quick update, the bid is dead. Interesting bit on Reuters giving some insider views.

Sainsbury's bid dead?

At the risk of tempting fate, it looks like the private equity bid for Sainsbury's is dead in the water. After the departure of both TPG and Blackstone, plus the decision of the Sainsbury family members with minority shareholders to hold out for £6 a share, it looks like it could be game over.

Some interesting commentary from the Telegraph and the Mail on this. Not my natural news preferences but their business pages are worth a read (Jeff Randall aside...).

More broadly the Telegraph also has a piece on the IMF's warnings about the potential for a collapse in the private equity industry. I'll try and find the original report.

Monday 9 April 2007

Mobilising our money

Just a quickie on the Government's proposed Personal Accounts pension scheme. According to the White Paper on Personal Accounts, the scheme will ultimately have assets of £100bn to £200bn, and a membership of between 6 and 10 million people (these figures are on page 135 of Chapter 7 of the White Paper). Needless to say this will be the largest pension scheme in the UK, in terms of both assets and members.

Union membership in the private sector is from memory something around 15% of the total workforce. Given that most members of the Personal Accounts scheme will come from the private sector that suggests that maybe a million union members could end up in the scheme (this is a bit optimistic, since many of those enrolled into the scheme will be from the SME sector which has both patchy pensions coverage and lower union membership). Now imagine if all those union members could be convinced to apply some kind of labour-oriented activism policy to their assets. It could have significant power, both as an force engaging with companies and in dealing with service providers.

Although I am personally not at all keen on DC provision the Personal Accounts system could bring about some democratisation in the capital markets - IF there is a concerted effort by the labour movement to grasp the opportunity. We need to start thinking - right now - about how individual scheme members can be given the opportunity to express their values through their investments. I'm not talking disinvestment (because I don't think it achieves much) but voting and engagement strategies.

This should be difficult for ideologues (on any side) to argue against since it is really applying democracy to investments. If scheme members don't want to take any sort of activist stance with their investments that's fair enough, but equally those that do should not be prevented from doing so (this is the kind of development envisaged in The New Capitalists). If we could make it straightforward for union members and Labour supporters to make that kind of choice within the Personal Accounts system that would be quite an achievement.

Saturday 7 April 2007

Sainsbury's bid in trouble

The CVC private equity consortium has been knocked back in its initial bid for Sainsbury's. It's unlikely to be the end of the story, although the Telegraph thinks it could be, as the consortium will no doubt come back with a higher bid. The bottom line is that several of the large shareholders felt the offer of about 555p a share was too low. These include the Sainsbury family but also Alliance Bernstein who, according to The Times, owns a whopping 14.9% of the company.

Thursday 5 April 2007

Sainsbury's bid

Things are moving in the private equity-backed bid for Sainsbury's. A formal bid looks imminent, although KKR has pulled out of the consortium because of concerns about its ongoing interest in Alliance Boots.

According to The Times, the bid is going to go ahead despite a failure to reach agreement with the trustees of the Sainsbury's pension fund.

A CVC-led group is planning to approach J Sainsbury’s board with an indicative takeover offer, despite having failed to reach agreement with the supermarket chain’s pension trustees.

The consortium, which is thought to be planning an offer of about 550p-a-share, or about £9.5 billion, needs to gain the backing of Sainsbury’s board for its offer before a Takeover Panel deadline of April 13.

One source close to the matter said: “They’ll send a letter to the chairman expressing interest at a certain price and asking for due diligence.” He added that the approach could come as soon as today.

Talks with the trustees over the handling of the supermarket’s £410 million fund deficit are not expected to be concluded until next week at the earliest, but the bidders are being forced to act without their backing because of the looming deadline.

It's worth reading the whole of The Times pice as it has an interesting bit of commentary on the role of the Pensions Regulator.

DC schemes and private equity

Just a thought but an upcoming question must be what impact, if any, the major shift from defined benefit to defined contribution pension provision will have on the flood of money going into private equity funds. It seems unlikely that any DC fund is going to include PE in its default fund (maybe I'm wrong), or offer it as a fund choice. Here's a snippet I pulled from a Bank of England report on the issue (it dates from before the big shift to DC):

“Another factor which could have a significant impact on the flow of pension fund money into private equity is the gradual move from defined benefit pensions to defined contribution pensions… [DC scheme] members are unlikely to be fully aware of venture capital or how to measure its associated risks. This lack of knowledge, together with the difficulties involved in investing very small amounts of money, will not be conducive to investment in venture capital.”

Finance for Small Firms – Seventh Report, page 55, Bank of England, January 2000.

And here's an excerpt from a release by actuaries Lane Clark and Peacock from the same sort of time also taking a sceptical line:

The nature of DC pension provision means it is highly likely that assets will be invested even more conservatively than at present. This is because an individual with a DC scheme will tend to move into cash and gilts as he or she approaches retirement to a greater extent than would not be required in a DB scheme.

Says Haines: “The increasing maturity of DB pension funds is already leading investment away from equities, towards safer vehicles such as bonds. This offset is likely to be accelerated by the move to DC pension schemes. This will mean that overall pension provision will be reduced as a percentage of each pound invested. Individuals with DC pension schemes will also find the downside risks of private equity investment far too much to bear.

Might be interesting to see what some of the really big DC funds do.

Wednesday 4 April 2007

Stats on pension fund contributions holidays

Just to put the taxation of dividend income in some context you can access figures on employer contributions holidays on the Inland Revenue website. You can get year-on-year figures here and the cumulative figures here. Note a small number if schemes are still taking contributions holidays, although there maybe cases where they are forced to do so (too geeky to explain).

Headline stats for info:

Method of reduction. reduction (£ms)
Contributions holiday (employer) 13,560
Contributions holiday (employee) 264
Contributions reduction (employer) 4,779
Contributions reduction (employee) 851
Refund to employer 1,217
Increase in benefits 9,129
New benefits 176
Total 29,976

Local government funds question Shell

Another bit of news on the Local Authority Pension Fund Forum, who are engaging with Shell over climate change and health & safety. It's a major stock, so plenty of unions will hold it too, so maybe scope for some collaboration? Report from The Times below.

Royal Dutch Shell will face a showdown with shareholders next month amid claims that it is not doing enough to tackle climate change, The Times has learnt.

The Local Authority Pension Fund Forum is concerned that the oil group’s directors can earn too much of their annual bonus by hitting “easy” carbon emission targets.

It has written to Jorma Ollila, the Shell chairman, asking for an explanation, and has threatened to urge investors to vote against Shell’s remuneration report at its annual meeting in May.

The forum is also calling on the group to link executive pay with health and safety issues, repeating a demand to BP, Shell’s rival, a week ago.

Shell has pledged to cut carbon emissions to 5 per cent below 1990 levels by 2010. Progress on the emissions target makes up part of a sustainable development goal that accounts for 20 per cent of a board director’s annual bonus. Jeroen van der Veer, the chief executive, received a bonus of almost £1.4 million last year.

Ebba Schmidt, a spokeswoman for the forum, said that the CO2 target appeared to be too soft for a group that had already managed to cut emissions by 15 per cent by 1999. Emissions were 9 per cent below the 1990 level in 2005.

Ms Schmidt said: “We have yet to receive an explanation about the stringency of this target. It feels to us that a company of Shell’s size could do more and it may be too easy.”

A Shell spokeswoman said that the 5 per cent target was challenging, given that it had to be met while the group grows its business. She said: “Over the last five years, we have invested $1 billion in alternative energy such as wind, solar, bio-fuels and hydrogen.”

Tory adviser says Brown not to blame for pensions crisis

Not sure how I missed this in the FT yesterday, but it's worth repeating. Stephen Yeo used to work as pensions policy adviser to the Tories. I take my hat off to him for being so upfront about everything. I've cut out some key paras from the FT report.

Did Gordon Brown's "stealth tax" raid on pension funds cause the spectacular decline of final salary pension schemes? Absolutely not. Did it do damage? Indubitably - and quite a lot.

But was it even the main cause of two-thirds of defined benefit schemes now being closed to new members? No.

That was the conclusion yesterday of Stephen Yeo, a senior partner at Watson Wyatt, the pension consultants. As a former adviser to David Willetts when he was the Conservative pension spokesman, Mr Yeo is no apologist for the chancellor.

But he declared: "I don't think it is even in the top three reasons" - while acknowledging that "it certainly wasn't helpful".


Three key factors undermined defined benefitpensions.

First, what were once aspirations were turned by successive governments into guarantees that employers had to meet. One example was a promise to protect against inflation both the rights of employees who had left for other companies, and those whose pensions were already being paid out. Lord Turner estimated these changes increased the cost of pension provision by about 50 per cent.

Second, increased longevity hugely raised costs: a 65-year-old man is now on average expected to live for 20 years, against 12 in 1950.

And third, the long bull market of the 1980s and 1990s, which had made pensions appear almost cost-free, ended. The collapse of the dotcom boom in 2000 wiped around £250bn off pension fund assets.

Add to that accounting rules that put pension deficits on the balance sheet just as they were ballooning, and the existing drift towards closure of final salary schemes became a stampede.

The contribution of the tax credit change to this was not insignificant: a £50bn hit against a £250bn stock market fall, and far greater longer-term costs from rising life expectancy and inflation proofing.

Elsewhere both the TUC and NAPF have put out statements arguing that abolishing tax credits did not cause the crisis. Perhaps they could tell Jeff Randall.

Tuesday 3 April 2007

A bit of balance

There's some more sober commentary on the impact of taxing pension funds' dividend income around today. Nils Pratley's piece in the Grauniad comes seems pretty even-handed to me. Also the NAPF has put out a sensible statement. Nice to see the lobby group for employers running pension funds not take the opportunity to blame eveything on the Government. They really do seem to be trying to change their approach. Here's an excerpt:

The removal of the tax credit in 1997 was very unhelpful. But it was only one of several reasons why workplace pensions have come under pressure in recent years. Some of these pressures were beyond anyone’s control, such as increasing longevity and the fall in equity markets. But others were man made, such as the introduction of new accounting rules (FRS17) and the decision by successive Government’s to increase pensions regulation.

Just as an aside does anyone think that such a hard landing in the equity markets was avoidable? Given that many fund managers were privately sceptical about the value of the TMT stocks they felt compelled (because of the need to generate competitive relative returns) to shovel clients' money into, isn't there an argument that if they had played the arbitrage role efficient markets theory suggests they should that the bubble could have been deflated less dramatically?

Monday 2 April 2007

Executive pay - a few thoughts

Thanks to Jim, a TU trustee on a private sector fund, for this interesting piece.

Executive pay – a few thoughts

I was taking recently to the Head of Corporate Governance at a major asset management firm about executive pay. The conversation was initiated by a question I had asked about their views on Lord Browne’s retirement package at BP and the critical position taken by the LAPFF. I had also asked what their views were generally on the rate of growth in executive pay and whether in their view it was a case of “get used to it”.

The responses seemed to confirm my perception that asset managers, City institutions generally and many spokesmen for “business” live on a different planet to the rest of us and view such issues as social justice, fairness and what “value” and wealth creation are all about from a completely different set of principles and beliefs than the general public.

To be fair to him, he did recognise that there must be limits to executive pay which derive from the existence of a form of “social contract” and that public perceptions about executive pay are bound to play a part in shaping the debate about it. Nevertheless he took the view that BP’s package to Lord Browne on his retirement was appropriate and justified, regardless of BP’s recent share price performance and the recent high profile health & safety disasters that have befallen the company.

The main thrust of asset managers’ corporate governance policies with regard to executive remuneration are based on a focus on the performance conditions that attach to them. There is nothing wrong with this approach per se so the question is why is it that asset managers are failing to apply the brakes effectively to the rate of growth in executive pay?

I think the answer lies in the values and beliefs that define the framework that asset managers work with and apply when determining what performance conditions are appropriate. Furthermore, the values of the true owners of the capital that asset managers manage for them as their agents are not being effectively articulated and so the values that the general public hold to, which shape the “social contract”, do not find adequate expression within the investment process, even if they do manage to find expression within the political arena. As a consequence people who do have concerns about executive pay tend to see the solutions through politics and government intervention. Their own direct role as investors is overlooked.

The following themes are important in the debate about executive pay:

• The “social contract”

• What is “success”?

• Leadership

• Investment time horizons

• Defining best practice

The “social contract”
“Executive pay is rising – get used to it” seems to be the attitude of asset managers and “The City” when it comes to executive pay. There is, however, a countervailing view – the public and workforces deeply resent the developments that are occurring in executive pay which are seen as excessive. It is a high profile social and political issue.

Because it attracts such widespread resentment it is an important aspect of the question of “leadership” and also of the question of the “success” of companies. The long term success of companies (and the emphasis has to be on the words “long term”) depends on internal cohesion within companies and upon a high level of trust being established. Workforces do not trust executives who are seen to be enriching themselves at the expense of workers and society at large. It also undermines wider public trust in “business” and impacts on companies’ “licence to operate”. When large sections of the British workforce face severe restrictions on wage growth and threats to the security of their pensions, the apparent absence of such limitations to executive remuneration and pension packages are a serious problem. The attitude “executive pay is rising – get used to it” displays a complacent disregard for economic, social and political realities.

An important argument often used to explain and justify the rate of growth in executive pay is the influence of a “market for executives” and the role of this market in driving up executive remuneration at a much higher rate than labour markets generally. But is there really a “market” for executives? Arguably it is more of an “old boys club” that is at work. Corporate executives and the higher echelons of the financial community which influences executive remuneration are members of a distinct social class with its own mores (values and belief systems) and institutions. It is a social class with the power to determine its own share of the wealth generated by society overall and the notion of a “market” for executives is a fa├žade which masks this more fundamental reality. Executives commonly sit one another’s remuneration committees – it is hardly a model conducive to mutual restraint!

It is also a contributory factor that Boards of Pension Trustees, who invest capital on behalf of ordinary people, are failing to apply any restraint to executive pay as they do not hold their agents to account. This is because many corporate pension scheme trustee boards include senior company executives who themselves are unlikely to see executive remuneration as a critical issue. Member nominated trustees have not, so far, proven themselves to be able to overcome this obstacle. Their own training and understanding of issues is heavily influenced by the values of mainstream City thinking and the values and beliefs of their own senior managers on the trustee board.

If the necessary will existed it would be possible to address the issues of executive remuneration by focussing primarily on the performance conditions. The question, then, is what values (beliefs) inform the definition of the performance conditions. Here we inevitably move into discussion of what “success” is and what “qualities” investors should value in executives (and directors). Should the performance conditions be informed by the values of the true owners of capital (ordinary people and pension scheme members for the large part) or by those who are actually the agents for these owners?

Is success defined by short term performance against such measures as earnings per share, total shareholder return or are other long term measures (including EPS and TSR over the long term) more important? If long term “success” is what matters then what are the real drivers of such long term success and value creation?

Studies into the drivers of “high performance companies” have identified human capital factors as of huge importance amongst the group of success drivers critical to long term success (e.g. the 2005 study and report by the Work Foundation). “Trust” is the essential glue holding successful companies together and, as discussed above, the question of executive remuneration plays an important role in either engendering or destroying trust inside companies.

Understanding these critical drivers of success is also relevant in defining what qualities investors should be seeking in executives and also in shaping what the “duties” of executives and directors should be. The proposed “duty to promote the success of the company” in the new Companies Act may well weaken the interests of shareholders with short term time horizons who are interested mainly in share price performance and movements over the short term (shareholders who behave more like speculators than owners). On the other hand it may well strengthen the interests of long term owners, who in any event are also the employees, customers and communities who ultimately own the capital being invested. Asset managers who argue that the “duty to promote the success of the company” will weaken shareholder interests might well be indicating that they hold to the beliefs of short term, speculative investors. .

“Success”, “Leadership” and the qualities investors look for in executives.
If success is defined by short term EPS/TSR measures then what investors want from executives and how they judge them is different than if success is defined by looking to the long term. Many chief executives have been critical of investors who pressure them to deliver short term financial results without giving proper consideration to the long term health and success of the company. The damage wreaked on UK plc by a financial system driven by short termism is described in the hard hitting book by Don Young and Pat Scott– “Having Their Cake”. The interests of long term investors are better served by executives having the leadership qualities that will deliver long term success for the company, through building trust and cohesion within the organisation, and the performance conditions attaching to remuneration packages need to be built from this perspective. This may or may not halt the “unstoppable” growth in executive remuneration, but, more importantly, it will allow developments in executive remuneration to be managed within a context of promoting social cohesion and trust. (This could have a beneficial social influence beyond the boundaries of companies themselves and help shape a new and more healthy social commonwealth generally – arguably at present too many people who play leadership roles in society – and this includes business leaders - engender a culture of selfish individualism which is undermining the fabric of our society.)

Best Practice
Turning to how best practice is defined and who should define it. Whilst a pragmatic and flexible approach to applying a framework of principles is right, it is important to recognise that the process of defining what is best practice is in fact a political process in which a variety of “actors” play a shaping role. No one organisation or interest group can claim to have sole rights of determination and in this context it is inappropriate to label other groups with alternative values and views on what best practice should be as “unrepresentative”. Best practice is a matter of public interest and whilst corporate governance “experts” have an important role to play they are not and cannot be the only “representative bodies”. It is entirely appropriate and legitimate, for example, for the TUC as a voice of the trade union movement to be able to contribute to the process of defining and evolving best practice in corporate governance. Boards of companies, investment managers, pension trustees and even individual pension scheme members, and many other groups or individuals, all have a right to play a role. Indeed, pension trustees probably have a duty to play a role, which too few of them actually recognise – if they do not then the interests and beliefs of ordinary pension scheme members are not properly articulated and the field of action is left open for the agents of the owners to shape the agenda instead. It is the quality of their contribution and whose interests it serves which matters, not whether membership of some “representative body” can be demonstrated. For an investment manager to accuse other actors in the arena of corporate governance as being “unrepresentative” implies that they view themselves as in some way a “representative body”. They are certainly entitled to express views on corporate governance matters but if they wish to claim a “representative” status then it can only be as the agents of the owners of capital.

Party of European Socialists paper on financial markets

On Friday the Party of European Socialists (the socialist bloc in the European parliament) released a major report on the financial system, in particular focusing on the role of hedge funds and private equity. It's a monster (200 pages plus), so I've had no time to read it yet. You can get the exec summary here. If anyone is interested in the full version let me know and I can email you a copy.

Jeff Randall outs himself as a twassock

More guff in today's Telegraph about the impact of the abolition of dividend tax credits in 1997. Lumbering in comes Alan Sugar Mini-Me Jeff Randall. As I posted over the weekend, if you read the Treasury documents released on Friday you can see that the Treasury outlined a range of possible scenarios, some of which have clearly not come to pass. However the Telegraph editorial line on this is clearly 'go for the worst possible interpretation', and our Jeff doesn't disappoint.

It's true that the Chancellor is not solely to blame for the unravelling of our retirement schemes. In the 1980s and 1990s, many companies were so complacent about funds being in surplus that they took "pensions holidays": they simply stopped paying in. That action now looks almost criminally negligent.

A sharp rise in life expectancy has also played a part. The longer that pensioners hang around, drawing from the pot, the harder it is for funds to be confident about meeting future obligations.

But all that pales alongside the Chancellor's decision to pay for his profligate spending spree on unreformed public services in part with the money of millions of pensioners.

Yeah maybe employers cutting contributions had an impact, yeah maybe people living longer than the actuaries had accounted for in their calculations matters a bit. But it's really Brown's fault...

No figures on all of this you notice. It would be interesting, for example, to see the comparative impact on a typical scheme of the abolition of tax credits versus changes to mortality assumptions. You might also want to have a look at the actual cost of the tax change compared to the value of contributions holidays taken by companies.

Let's make no bones about it, this is an attempt by the Right to try and pin the pensions crisis on Brown. It's factually flawed and can be proven to be so but unless people start making noise about it the simplistic "Brown killed the pension funds" version will become the popular wisdom.