Wednesday 31 October 2007

US companies hate union shareholder campaigns

I've just been trawling the website of the US Chamber of Commerce trying to stand up a claim attributed to them in the Guardian today (scroll down to the bottom of this article) that the richest 1% in the US contribute 39% of tax revenue. I can't find it (let me know if you can) and it might be that this says more about the earnings of the top 1% in the US, but that's another story.

But what struck me is how often their president and chief exec, a bloke called Thomas J. Donohue, mentions union shareholder activism. For example, here'a an excerpt from his latest rant:

We will challenge the unions before the Securities and Exchange Commission and in court when they tap their members' pension savings and abuse the shareholder proxy process to win concessions from companies that could not be won at the bargaining table.

Here's another bit from his column back in September:

In the boardroom, the unions have engaged in no less than 300 "corporate campaigns" in recent years. In a corporate campaign, unions hit companies with constant negative publicity, litigation, and regulatory investigations designed to force the company to recognize the union without a worker vote or to extract concessions of already-unionized companies. The unions are increasingly using shareholder resolutions and proxy voting as a weapon, and are developing materials and training people to plan and lead even more corporate campaigns.

And another bit here from February promising to fight unions on director elections:

We will also oppose union attempts to meddle in the governance of corporations through their power as pension shareholders. The goal of corporate directors is to make the company and its owners money, not advance pet issues or special-interest agendas.

I don't believe the head of business lobby group would make these kind of points unless his members are chewing his ear off about it. That suggests to me that the US unions' capital stewardship work is paying off. And given the amount of resource our US counterparts put into such work they must feel that way too.

I've always thought the UK market, with ownership concentrated amongst a smaller group of institutional investors and a much more favourable political and legislative environment, is ripe for similar activity by unions here. Surely it is time we gave it a decent push?

Tuesday 30 October 2007

Iranian regime shows its true colours

From the ITF:

Osanloo sentence ‘appals world opinion’

30 October 2007

Commenting on news that Iranian trade union leader Mansour Osanloo has been sentenced to five years imprisonment ITF General Secretary David Cockroft said: “We have just heard that an injured, victimised trade unionist has been condemned to jail on charges that would be laughable if they weren’t so serious.”

“For two years Mansour Osanloo has fought back against the Iranian regime’s brutality. Now they are trying to crush him with spurious accusations of endangering national security and criticising the regime. We know – the world knows – that Mansour’s only crime in their eyes is to have asserted his right to belong to a trade union.”

He continued: “This sentence appals world opinion. Mansour has been an example to us all and to see him treated this way – beaten, arrested, rearrested, intimidated and nearly blinded – brings shame on the government of Iran. We have tried to reason with them and detected at least some sympathy for what he stands for, but that has now clearly been overruled by the hardliners.”

“The international trade union movement, including across the Islamic world, has fought all the way for Mansour and his colleagues and we will continue to do so. We will be alerting them now, along with the International Labour Organization, before planning a new wave of protests.”

He concluded: “If the government get away with this then they will hand out the same treatment to Mansour’s deputy, Ebrahim Madadi, and all of the 17,000 members of the union will be at risk.”

Mansour Osanloo, 47, is the President of the Syndicate of Workers of Tehran and Suburbs Bus Company (Sherkat-e Vahed) trade union, which has been violently repressed by the Iranian authorities. Osanloo has been made a particular target for imprisonment and brutal attacks. He is currently being held in Evin prison in Tehran. See for further information. A short film on the Osanloo case can be seen at ENDS

Exec pay, remuneration consultants and shareholders

I avoided blogging about the IDS report yesterday as I thought others would cover it. One sentence summary - pay for CEOs in the UK's biggest companies has doubled in the past 5 years. This shouldn't be that surprising to anyone who follows the exec pay debate.

What is more interesting is why it keeps on rising. According to the Right, and those who cling to the idea of rational markets at work, this pay is deserved because directors take big risks and can get fired, plus companies have to attract the best so need to pay the going rate etc. For a run-through of the defence try reading the Telegraph business comment section for a few weeks. It turns up there pretty regularly.

For those of a more sceptical mind, the Corporate Library in the US has just put out some research, covered by Reuters, which found that...

U.S. companies that hire compensation experts tend to pay their top executives more but that does not translate into higher shareholder returns.

Guess what, when you employ those firms that advise you on what to pay yourself, they don't tell you that you are being paid too much, quite the opposite. And what is more those performance-related elements of pay don't seem to effectively incentivise... err... performance. One word of warning here. It's not clear if causality has been established. It's possible that companies that tend to employ consultants tend to be bigger and tend to pay more.

A second point worth considering is that if these levels of pay are so shocking, why aren't shareholders kicking off about it. Of course most readers will be aware that by 'shareholders' we are talking mainly about fund managers, since most pension funds delegate voting to their appointed managers. And when you look at the voting records of fund managers (which is not easy in the UK, but let's leave that one for now...) they vote against a small proportion of remuneration policies.

So is it fair to conclude therefore that fund managers are largely happy with exec pay in the UK? I have seen one fund manager argue that we should just "get used to it". If this is the predominant view (and the public doesn't agree) is it time to take voting power away from them?

Final point on this rant. I have serious doubts that there is a really a market at work in any meaningful sense in the seeting of executive pay. The Work Foundation has trashed this idea quite effectively. I would also point people to the views of Patrick Gerard, who has tried to get the OFT to look at whether there is in effect a cartel at work, and Lucian Bebchuk.

One thing I am sure about. Whilst we continue to rely on fund managers to police executive pay we will continue to see reports like the IDS one.

Monday 29 October 2007

OECD report on choice and pensions

Yesterday I was banging the drum for the Left adopting behavioural economics as part of the way they address policy. Today I've stumbled across a report just out from the OECD entitled Implications of Behavioural Economics for Mandatory Individual Account Pension Systems.

Some of the information in this will be familiar to some of you I think - namely that providing a large number of fund choices can actually result in less people making an active choice. What I wasn't so clear on was that where choice is severely restricted then the level of active choice shoots up.

It does make you wonder why, for example, Sweden chose to implement a system where savers have literally hundreds of fund options. Another interesting international factoid is the provision of choice in the superannuation system in Australia (see pages 10 & 11 of the report). Industry funds (usually jointly-trusteed with TUs) are the class of superannuation fund most likely to offer fund choices (corporate schemes, surprisingly, the least), but retail funds offer the biggest range of actual options and by some distance.

Anyway, worth a read.

Strange quote on private equity from innovation minister

I just spotted the quote below on the DIUS website from innovation minister Ian Pearson. Clearly the private equity industry has been maligned recently but it's a bit of an open question as to whether it is 'unfair' or not. For example, private equity has been characterised as full of asset-stripping, cost-cutting cowboys. Whilst this maybe an exaggeration there's no smoke without fire - see the Terra Firma/EMI spat over pensions for example. Or the Work Foundation report which highlights the negative attitude private equity backed businesses have to unions.

But I'm more interested in the "vested interests" bit. Who is he on about here, and why isn't it made clear? My initial suspicion would be that it's a dig at TUs, but maybe it is also at public companies who have had a pop at PE, perhaps in part because they have felt harried by PE funds. That might explain the "aggressively creative" label he puts on private equity.

Private equity is a key part of the life-blood of the UK's innovation ecosystem. It has been unfairly maligned, often by those with vested interests. While there are issues the industry needs to address, private equity is an aggressively creative force in our economy. It is a source of our competitive advantage as a nation and we lead in Europe with the breadth and depth of the venture capital resources we offer.

Sunday 28 October 2007

The politics of behavioural economics

Behavioural economics is an increasingly influential field that is already having some application in both the City and in some areas of policy. For an example of the former, some fund managers have run training sessions that seek to help portfolio managers improve their decision-making (by making them aware of biases). And an example of the latter is some of the analysis in the Pensions Commission report and in the Pensions White Paper which has fed into the ongoing development of Personal Accounts, namely the auto-enrolment approach to membership. This is based on the understanding that failing to join a pension scheme is often (not always) the result of inertia rather than a conscious decision not to join.

I personally find this a really interesting area, but what really surprises me is the apparent lack of interest from those on the Left. I say surprising for a couple of reasons. The first is that behavioural economics in part seeks to establish how people act in practice, as opposed to how economic models suggest that they should act (ie homo economicus). As such it undermines some of the fundamental assumptions of free-market ideology both in terms of economics and human behaviour (although it should be stated that this is not its objective). Secondly, on a purely tactical level, insights from behavioural economics could be used to build the intellectual case against some policies that the labour movement finds problematic, such as the extension of "choice" in public services.

However, to date, as far as I am aware, the Left in the UK doesn't really seem to have grasped the opportunity. The only serious work I am familiar with is an attempt by Which? (ex Consumers Association) to look at choice and public services. I went along to a seminar they ran on the subject a year or two back that was really interesting and attracted quite a lot of civil servants. Around the same time the great Barry Schwartz book The Paradox of Choice was apparently a popular read in policy circles. But there didn't seem to be much interest from the unions then I haven't seen anything since.

I think that this is a missed opportunity, and risks leaving the labour movement stuck in an unproductive anti-choice position. As much as many on the Left are uncomfortable with the idea, if you ask the average punter if they want a choice (in schools, hospitals, pensions etc) they overwhelmingly say "yes". But what behavioural economics shows us is the chasm between what people say and what they do is rather large. And in many circumstances they find the choices they are presented with to be too complex. In many cases, the more choice there is the less likely the individual is to choose. And in public policy the ramifications of choice can be much more significant than in the commercial sector.

My choice of whether to have a pizza or a curry for dinner obviously has less of an impact on me over the course of my life, than my decision whether to save into a pension, or how much to save into it, or where to invest it. Yet many advocates of "choice" fail to make such distinctions. Choice for them is an unqualified good, and whilst there is no attempt to build an intellectual case against the blanket adoption of choice as a policy response their views may hold sway.

It's not just in the area of choice where behavioural economics has useful insights. I would also highlight some of the research into the misinterpretation of statistics, failure to take account of mean regression etc. For example, league tables may provide information that the punters misunderstand. Clearly some of these points are more familiar and some policy people on the Left do apply some of them. But by and large this is still a non-political area.

So my argument is that basically that we should nick it for ourselves. As I have said it provides useful tools to counter the extension of market principles to areas where this is not appropriate (this will clearly vary depending on your politics). But more broadly if the Left wants to remain relevant it needs coherent ideas about both economics and policy reform. I think that behavioural economics is going to play an important role in policy going forward, so we should seek to incorporate the insights it provides into our thinking rather than rely on past assumptions that have not proven so reliable in practice. Behavioural economics shows that the model of the self-interested maximising rational individual is flawed. That means that policy which is based on that model is also flawed. We should be using this as an opportunity to develop alternative approaches.

Friday 26 October 2007

SRI on the Politics Show this Sunday

Another quick plug. The London segment of the Politics Show this Sunday should be featuring a section about socially responsible investment and local government pension funds.

It was an interesting little piece, even if there were some factually incorrect bits in the pre-recorded bit. It's a difficult issue, and I think that came across, in the debate. Unison capital stewardship proponent, TV star (now), and all-round nice bloke John Gray has blogged about the experience here.

Local authority pension funds back UN principles

A quick plug for the LAPFF:

1. A leading pension fund body has shown its commitment to shareholder engagement by backing the Principles for Responsible Investment (PRI), an investor initiative in Partnership with UNEP FI and the UN Global Compact.

2. Following an internal review, the Local Authority Pension Fund Forum (LAPFF), a voluntary association of 44 pension funds with £85bn in assets, has decided to become a PRI signatory. The Forum has signed the principles as a ‘professional service provider’. Individual LAPFF members may also sign as ‘asset owners’ and a number have already done so.

3. The PRI provides a framework for the consideration and integration of environmental, social and governance (ESG) issues in investment decision-making. The Principles are voluntary and aspirational rather than prescriptive, and provide a menu of possible actions. The Principles can be viewed here:

4. LAPFF has become a signatory to the Principles in order to further encourage the development of responsible investment strategies by institutional investors around the globe.

5. Cllr Darrell Pulk, chair of the Forum, said: “PRI has already had a significant impact in terms of encouraging both institutional investors and the service providers that work with them to think seriously about how they address responsible investment. With a history of over 15 years of shareholder engagement on corporate governance and social responsibility issues, the Forum believes the Principles are a good fit with the approach we have been taking. We believe they can also provide a spur for the further development of LAPFF’s approach to responsible investment.”

6. There are currently more than 250 PRI signatories, with more than $10 trillion assets under management. A full list of PRI signatories can be viewed here:

7. LAPFF’s annual conference takes place on 28th – 30th November at the Bournemouth Highcliff Marriot Hotel. It will feature sessions on shareholder engagement, activist funds, private equity and pension scheme governance. For more information email

Wednesday 24 October 2007

Fund management myths

Here are two stories that blow a hole in much of the guff that the fund management industry blows in our direction. Both are from the Professional Pensions website.

1. Active managers don't beat the index

BALANCED pooled funds saw median returns of -0.1pc in the third quarter of 2007, latest CAPS figures from BNY Mellon Asset Servicing reveal.

The performance measurement firm said this was the first time in 12 months that balanced pooled funds had failed to achieve a real rate of return – as the retail prices index increased by 0.3pc over the same period.

However, balanced funds achieved a return of 11.5pc in the year to September 30; and 15.0pc per annum and 14.2pc per annum in the three and five year periods to the same date.

The poor performance was blamed on “the majority” of active pooled fund managers who failed to outperform their respective indices in the third quarter.

2. DC scheme members don't want choice

TOO MANY investment choices turn defined contribution scheme members off saving, a report by Barrie & Hibbert warns.

The financial risk consultant’s report – Managing investment choice in DC pension schemes – shows that participation rates in DC schemes drop with the introduction of greater choice.

It said in schemes with two fund options, average take-up rates were 75pc – compared with 65pc participation in schemes with 40 fund choices.

The report also noted statistics from the National Association of Pension Funds which show 94pc of DC savers opt for their scheme’s default fund.

Things to bear in mind next time you hear a fund management marketing drone tell you why your DC scheme needs loads of fund options, based on past actively managed portfolio returns...

Burma disinvestment news

Hat-tip to John G for the news on Danish pension fund ATP selling off its holdings in Total (which does business in Burma). Any pension fund trustees reading this might want to check out if their fund has a holding in it. It is a CAC 40 stock (ie French-listed) but a big one so if you have a European equities portfolio you may well hold it.

Obvious thing to do is ask your fund manager what their views are on Total's involvement in Burma, whether it is having an affect on the share price, and whether they are engaging with Total's management over the issue. Some funds (ie TU staff funds) might even want to consider whether to disinvest if they hold it.

Here's a very short exceprt from the FTUB statement on sanctions:

We salute and thank the unions, like France’s CGT coordination body within the TOTAL Group, who have called on their own employer to quit Burma, or those who are prepared to call on their own pension funds to withdraw from multinationals doing business with our country. Please understand: trading with Burma benefits only the military!

And here's IPE's story on ATP:

DENMARK - Danish labour market pension fund ATP said it has decided to sell its shares in Total and other oil companies working directly with Myanmar Oil.

“ATP’s board of directors came to this decision at its meeting today, after a debate about ATP’s investments in companies that also had activities in Burma,” the DKK 438bn (€58.75bn) scheme said in a statement.

The holdings it will sell include ATP’s stake in French oil and gas company Total, it said.

”In addition, ATP will of course adhere to the new sanctions from the EU concerning timber and precious metals from Burma,” ATP added.

Jørgen Søndergaard, chairman of ATP’s supervisory board, told IPE two or three smaller investments will be divested too, but did not name the businesses involved. He said the stake in Total – which is worth DKK935m – is a small fraction of ATP’s total equities portfolio.

The pension fund said its board came to the decision in the light of the new declaration from the Danish government on its position regarding sanctions against Burma.

Søndergaard said the Danish government had been pressing at the latest EU summit for sanctions against Burma to include oil companies as well as those involved in the timber and precious metals trade.

Tuesday 23 October 2007

US unions attack on Countrywide chief

I posted the CTW release about this yesterday. Below is today's report in the Torygraph. I see that AFSCME are involved too.

Unions try to oust Countrywide boss

A group of American trade unions is trying to oust the boss of troubled US mortgage lender Countrywide Financial.

Change to Win (CtW), which represents union pension funds holding an estimated 3.5m Countrywide shares, has written to the company's board asking it to secure the resignation of Angelo Mozilo, the lender's chairman and chief executive.

The letter to Countrywide's senior director, Harley Snyder, refers to the recent investigation by the Securities and Exchange Commission into Mr Mozilo's sales of share options, as well as the company's sub-prime mortgage woes.

CtW goes on to allege that Mr Mozilo's has tolerated a "culture of non-compliance" at Countrywide, and refers to a recent report that borrowers were pushed into unsuitable high-cost loans.

The letter claims that such actions artificially inflated the company's share price during the mortgage boom, and have since sent them in to "freefall" as the sub-prime crisis has hit home.

CtW also argues that Mr Mozilo's remuneration is "far out-of-line" with his peers. In 2006, Mr Mozilo received a total of $48m (£24m) in pay, bonuses and other rewards, while Chuck Prince, the chairman and chief executive of Citigroup, received $26m.

Mr Snyder has also received a letter from the American Federation of State, County and Municipal Employees, demanding that Countrywide splits Mr Mozilo's dual role and names an independent director as chairman.

Countrywide had not commented at the time of writing.

Markets and music

I started feeling a bit queasy reading this piece in the Telegraph by the chief exec of the British Phonographic Industry, the music business trade body. I’m not an enemy of markets. I think they can work well in some bits of society, and not in others, and I think they can be harnessed for our collective benefit. But there is something about the interface between markets and creativity that always leaves me feeling deeply uneasy.

I'm a bit Bill Hicks when it comes to music. I hate the idea of "artists trying to build a long-term career", as the article puts it. Play music because you want to play it, not because it is a "career". I would rather a band made a handful of great songs, or one great album, and burnt out, than develop a "career" and turn into a merchandise-shifting marketing strategy based on a long since spent a creative force (see Rolling Stones).

This line in particular made my stomach turn:

"...we believe that the internet will become an environment in which creativity can be effectively monetised."

Pass the sick bag. And if I ever start talking about how to effectively monetise blogging, someone please kill me.

Monday 22 October 2007

Change to Win takes aim at Countrywide CEO

More TU shareholder activism, US-style:

CtW Investment Group Demands Resignation of Countrywide CEO Angelo Mozilo

Letter: CEO’s Massive Stock Sales Have Eroded Investor Confidence

The CtW Investment Group has demanded that the Countrywide Financial Corporation Board of Directors immediately secure the resignation of Chairman and CEO Angelo Mozilo.

“The SEC investigation into Mr. Mozilo’s insider stock sales has destroyed what little remaining confidence shareholders have in Mozilo,” said William Patterson, Executive Director of the CtW Investment Group. “It is now time for the board to seek new leadership.”

A letter sent on October 19 to Lead Director Harley W. Snyder also points to Mozilo’s tolerance of a “culture of non-compliance” at Countrywide, noting recent press reports that the company systematically pressed borrowers into high-cost loans. Such actions, the CtW Investment Group argues, inflated the share price during the mortgage boom but ultimately exposed the company to extensive litigation and drove the stock into free-fall.

The CtW Investment Group works with pension funds sponsored by unions affiliated with Change to Win, a federation of unions representing nearly 6 million members, to enhance long-term shareholder value through active ownership. Collectively, Taft-Hartley funds sponsored by CtW affiliates are substantial long-term Countrywide shareholders, with an estimated 3.5 million shares.

TUC says stick to your guns, Darling

On the changes to CGT announced in the PBR, here's a lift from the TUC -

The TUC has called on Alistair Darling to resist business calls for him to do a U-turn over changes to Capital Gains Tax (CGT) in the pre-budget report but have suggested tweaks to the proposals so that they better meet government objectives and deal with unintended consequences of the proposals that have now become apparent.

In a letter to the Chancellor, TUC General Secretary, Brendan Barber, says that 'it is vital that you resist' business pressure to abandon the changes because they 'simplify a highly complex tax regime', 'acknowledge that under the current regime some individuals were paying very small amounts of tax on very considerable gains', and accept 'the widespread public concern about the very low tax paid by private equity partners on their carried interest returns'.

The TUC says that the government should go further and tweak the proposals to make the tax more progressive, to increase incentives for long term asset holding rather than speculation and encourage genuine venture capital and business start-ups. The TUC also warns that different top rates for capital gains and income will lead to an increase in tax avoidance as accountants attempt to tax income as capital.

TUC General Secretary Brendan Barber said, 'The Chancellor was right to change the Capital Gains Tax regime and he should resist calls to do a U-turn. He should not only stick to his 18 per cent CGT guns, but should go further to crack down on speculators and tax avoidance schemes. He should also tweak the proposals to deal with some of the unintended consequences that have now become apparent.

'Our suggested changes will make speculators and private equity fat-cats pay a little more and allow long term investors building up businesses and employee share savers pay a little less, while minimising the opportunities for clever accountants to dream up new tax avoidance schemes.'

The TUC suggests five changes:

* CGT should be kept at 18 per cent for business disposals, but there should be one per cent relief for each year the asset is held for the first eight years.

* Shares held in employee Save as You Earn schemes should be treated as business assets and should be subject to the same 18 per cent rate and reliefs.

* CGT should be charged at 18 per cent for non-business assets but any gain that an individual makes that take their income into the 40 per cent income tax band should be taxed at 40 per cent, but with a two per cent relief for each year the asset has been held up to a minimum rate of 18 per cent.

* The arrangement with the British Venture Capital Association under which returns to the carried interests of private equity partners are treated as capital gains for tax purposes should continue, but only in respect of those funds that restrict their total investment in any one company to £5 million or below. This will ensure that this beneficial tax arrangement only applies to genuine venture and start-up capital investments where the risk involved justifies this treatment. Carried interest on larger investments should be treated as income for tax purposes.

* To clamp down on tax avoidance there should be a general power to stop income being treated as a capital gain simply to reduce a tax bill.

Sunday 21 October 2007

Getting default funds right

Now that we are well and truly moving into a defined contribution world, surely it is time that the labour movement started thinking about the way these pension funds invest?

Just as a reminder, plenty of studies show that around 90% of DC scheme members end up in the default investment option. This is important for two reasons. First, it blows a hole in the idea (mainly propagated by people interested in selling services, but also a few politicos) than many people actually want choice, which obviously has wider ramifications. Often advocates of choice argue that if you ask people if they want it they overwhelmingly say yes. That is true. But if you look at actual practice, in DC fund decisions, the overwhelming majority choose not to choose. (I suspect you would find similar results in other non-financial areas where commercial interests have argued that choice is necessary, but that's for another day).

Secondly, clearly this means that the bulk of DC assets are going to end up in the default fund. So those of us with an interest in capital stewardship need to focus our attention there. The incoming Personal Accounts scheme looms large here. It will in time become the UK's biggest pension fund, and its default fund will therefore be a significant investor. Therefore we should be lobbying that it exercises its ownership responsibilities properly (ie voting and engagement with investee companies). I think it is important that the Personal Accounts scheme offers some niche investment options, maybe even a screened 'ethical' fund, but certainly some SRI option and a Sharia fund. But the really important issue is the default fund. Already some work is being done on this from a maindtream perspective - this report is worth a read - but there is not much discussion (to my knowledge) in the labour movement.

Given that the trustees of the Personal Accounts scheme will be aware that most people end up in default funds, they must also acknowledge that therefore they are making investment decisions on behalf of millions of savers. Those decisions encompass not only maimstream factors but also whether social and environmental issues are taken into account. Put in those terms it seems hard to argue that the default fund should NOT take any account of them.

I suspect that this is going to be a hard-fought argument, as almost certainly some on the Right (and maybe some commercial interests without SRI capability) will argue that this is playing politics with people's money. But personally I think they will be on shakier ground - why should the trustees assume that people don't want such issues factored in? In addition we need to be very wary of the 'integration' pitch from some fund managers. Many will these days argue that they already intergrate analysis of social and environmental issues into their analysis but in my opinion only a handful have the resource and competence to do this. The recent Fair Pensions report has some good stuff on this point. This issue is simply too important to let commercial interests dictate the outcome.

Finally just some random thoughts about DC investments and short-termism. As I've said 90% end up in the default option, but what about the other 10%? A lot of fund managers' DC marketing is aimed at this segment, and encouraging trustees to ensure they have enough fund 'choices' for members. Bear in mind too that fund managers routinely plug their funds on the basis of performance. This suggests to me that a significant amount of fund switching (ie between funds) in DC schemes is likely to be performance-driven. And it will be easier for individuals to switch funds than for trustees to switch mandates (for example it took years before PDFM really felt the commercial impact of its bearish stance). This in turn suggests fund managers will see more rapid fund outflows in response to poor fund performance (although perhaps on a small scale). So will that in turn increase the short-term pressures on managers, which they in turn will pass up the investment chain? On the other hand we have the 90% of assets sitting their in the default fund pretty much regardless of performance so would the pressure actually ease off as DC (and therefor DC default fund) assets grow?

I'm really not sure about this. I raised the issue in a conference once and one fund manager said short-term pressures would increase, whereas the other said that there was no evidence that it would (although I got the impression that he wanted to disagree with me because of my union affiliation!). Although the weight of assets point is compelling I wonder whether (like banks) fund managers basically know they have a lot of customers who won't switch because they a) aren't interested/informed enough to make the switch and/or b) can't be bothered. Therefore it makes sense for them to focus on those few stroppy customers (who are probably more financially literate, and better off) who might switch. So for fund managers that might mean a focus on the fund switchers, and therefore on the performance that causes it to happen. It's probably an area that needs some research. Would be interesting, for example, to see if there are different perceptions about short-term pressures depending if a fund management house is more retail or more institutional. One to think about some more!

Friday 19 October 2007

Rock head rolls

Just a quickie. The first casualty at Northern Rock is chair Matt Ridley who resigned today. According to the Beeb:

Mr Ridley told the Treasury Select Committee on Tuesday, that the bank had been hit by "wholly unexpected" events and he defended the way he and his colleagues had been running the bank.

"We were subject to a completely unprecedented and unpredictable closure of the world credit markets," he said.

He was accused of "damaging the good name of British banking" by the committee of MPs.

GMB takes aim at CVC and the Tories

I'm a bit behind the curve with this, but here and here are press releases from the GMB about the eye-watering incomes (though the BVCA doesn't want us to call it that) of partners at CVC, the owner of the AA/Saga.

Meanwhile, it seems pretty clear that parts of the Right want to turn Darling's changes to CGT into a political campaigning issue. See for example the hoo-hah in the Telegraph. This could be a problem if they manage to build the idea that Labour is clobbering small business start-ups. For an alternative view, Martin Wolf's piece in the FT today - Darling is correct on CGT - is a good read and worth using as a counter-argument.

TUC on companies doing business with Burma

Straight lift from the TUC site:

EU sanctions force seven UK companies to stop trading with Burma
Following the EU's decision earlier this week to extend sanctions so that companies in the metal, timber, minerals and gemstones industries can no longer trade with Burma, the TUC has today (Thursday) identified seven UK companies who must now sever all links with the military regime.

This week's EU decision means that three small timber companies based in Bristol, Oxford and Sheffield; three top jewellery retailers in London - Asprey, Harrods and Leviev - and one mining finance company will now have to cease dealing with Burma or face prosecution.

Before the EU's sanctions came into force on Monday, the International Trade Union Confederation (ITUC), the TUC's international equivalent, had placed 32 UK companies on a 'dirty list' of firms still trading with Burma.

Following the departure of the seven from the ITUC 'dirty list', 25 British firms, mostly travel companies, will still be able to trade with Burma. The rest are in shipping, corporate relocation, pharmaceuticals, textiles, engineering, seafood and insurance. The TUC will now be consulting unions about further action against these remaining companies.

The EU has left open the possibility of extending sanctions depending on the Burmese dictatorship's future actions. The TUC and the global trade union movement are pressing for all economic links to Burma to be cut.

TUC General Secretary Brendan Barber said: 'Companies trading with Burma are - whatever excuses they use - helping the Burmese military dictatorship to oppress the people of Burma. Child labour and forced labour are endemic in the country, and any taxes paid, currency converted or deals done will feed the military's coffers and help sustain human rights abuses.

'The Burmese trade union movement, itself banned by the military, has asked the TUC to back its struggle for freedom by boycotting Burma and that's what we need to do.'

Thursday 18 October 2007

Private equity & pension funds

It's been a bit quieter on the private equity front of late. Popular wisdom has it that the credit crunch has jammed up the buyout business (which relies heavily on debt) for now. In addition there has been speculation that the numbers behind some recent buyouts have become less rosy.

On such recent case was the takeover of music business EMI by Terra Firma. Although the private equity industry has beeen keen to improve its image of late, and ongoing spat between Terra Firma and the trustees of the EMI pension fund is generating all the wrong kinds of headlines. After what trustees have called fruitless discussions with Terra Firma over contribution rates they have referred the situation to The Pensions Regulator. See this FT piece.

According to the FT:

"[T]he EMI case is thought to be unusual because of the hard line that has been taken by Terra Firma, and the company could be the first to be on the receiving end of tough new powers."

Negotiations between trustees and sponsoring employers over contributions are never going to be easy, but there must have been some serious disagreements for it to get to this. Of course we don't know the ins and outs. Maybe the trustees are being needlessly conservative? But given that private equity prides itself on getting costs under control, what do you reckon?

More dodgy RyanAir advertising

I while back I posted this bit about companies being pulled up for misleading advertising, and everyone's favourite union-haters RyanAir featured quite a bit. Well, they've been at it again, this time the Advertising Standards Authority has banned them from repeating misleading claims about This is clearly turning into something of a habit!

So I repeat the point that if I was an investor in RyanAir I would be asking some questions. This is a company that clearly has a cowboy streak. It is infamous for its anti-union stance and it is earning itself an equally dubious reputation with regards to the veracity of its advertising. Surely it must make investors wonder what else might be going on?

RENGO report on hedge funds and private equity

RENGO, the Japanese Trade Union Confederation, has produced a report on policy issues relating to hedge funds and private equity. I can't see it on their website, but I have a PDF copy. I'm assuming most people who both read this site and are interested in such issues have received a copy via the same route I have. But if not, and you would like an electronic version, add a comment to this post and we can swap emails.

I will try and provide a summary of the report once I have read it myself.

Wednesday 17 October 2007

Hot (Trot) Gossip

I'm not normally interested in the machinations of the far-Left in the UK, but given that Respect seems on the brink of a "Peoples Front of Judea/Judean Peoples Front" moment, just a quick plug for two sites where you can follow (if you want to) the increasingly paranoid behaviour of the UK's leading Lenin wannabes, the SWP.

Check out Socialist Unity and Dave's Part. In addition to posting all kinds of embarrassing (for the SWP) internal documents, some of the discussion in the comments on posts is worth a read (honest).

The politics of Personal Accounts

The proposed Personal Accounts scheme will, eventually, become the largest pension scheme in the UK. It will be, in effect, a massive trust-based occupational defined contribution scheme. Therefore it will have a major impact as an investor, and its governance (both internal and external) will be hugely important to anyone with an interest in the development of capital stewardship in the UK.

With that in mind today's news of progress in addressing the issue of consumer representation in the governance of the Personal Accounts scheme is encouraging. According to the DWP's blurb -

Groups including Which?, Citizens Advice, the Equalities and Human Rights Commission, the Financial Services Authority Consumer Panel, Age Concern, Help the Aged, the Fawcett Society and the TUC have been invited to help set up the committee. The final membership will be decided at a later date.

This is good news, and on top of the appointmemts of Paul Myners as chair of the Personal Accounts Delivery Authority, and the CWU's Jeannie Drake as a non-exec, should make us hopeful. However it is very important that appointments made both to the consumer panel and as member representatives are thought through carefully. The labour movement needs people in there who understand the emerging politics of capital markets. It would be a terrible outcome if, for example, they get down the road of thinking that the way to deal with ESG issues is by offering an SRI fund option. Those of us who are interested in ensuring that the Personal Accounts scheme really acts like an owner need to be lobbying now.

Meanwhile, elsewhere in the pensions world, the chair of the NAPF has made some interesting comments. Chris Hitchens has argued in favour of strong governance, and against the "retailisation" of investment. Of course the NAPF has a vested interest in the survival of pension funds, as opposed to pension policies, but I do think they are genuine in the stance they have taken on scheme governance in the past 2 or 3 years. I bet the ABI don't like it!

Counterfactual history and the Falklands

This is miles off-topic, and a bit of a ramble, but I was reading this piece by Peter Riddell in The Times last week about Brown’s decision not to call an election. He gets into the interesting area of counterfactual history.

It reminded my of something I read a while back about the Falklands War, and how close we came to losing it. An interesting factoid about the Falklands War is that quite a few bombs dropped by Argentinean pilots actually hit our ships but failed to explode. This is because they were flying at low altitude and the bombs did not have time to arm before they hit their target. According to one Royal Air Force commander this may have been a pivotal factor in the war. He is quoted as saying: “Six better fuses and we would have lost.”

It reinforces the point that history can turn on very small factors, although we tend to think that much larger forces are at work (which are naturally ‘obvious’ in retrospect). What would have happened if we had lost the war? Thatcher might not have won the 1983 election, and a very left-wing Labour government may have been elected. Even if Thatcher had got back in she would have seemed very different (our narrative would have changed) and perhaps she would have followed a more cautious path domestically.

Off on a tangent, my wife and I went to Argentina at the start of the year. One of the places we visited was Rosario, the birthplace of Che Guevara (and the Barcelona player Messi too I think). We were walking along the riverside one afternoon (looking for a bar!) and came across a war memorial to the fallen of Islas Malvinas, as they know the islands in Argentina. There is something quite strange about seeing a memorial to people who died trying to kill people from your own country.

It's interesting that the Wiki in the link above article refers to the bravery of the Argentinean pilots. I read some interviews with British Falklands vets earlier this year and I was gobsmacked both by how they were able to do what they did, and that some of them had formed friendships with their Argentinean counterparts. Although my view of the Falklands war is broadly this, it's impossible not to have respect for those on both sides that fought. I can't ever imagine being the same situation or how I would deal with it.

Tuesday 16 October 2007

Northern Rock, the Beeb and the Black Swan

There's a very interesting report on the BBC website of the grilling of Northern Rock's executive team by the Treasury Select Committee. There are two things that I like about the report. The first is the fantastic attempt by the Northern Rock team to blame the run on the bank on the BBC. Get a load of this:

[Chief exec Adam Applegarth] told the Treasury Select Committee that the BBC was partly to blame for last month's run on the bank.

He blamed it for revealing the Bank of England's emergency loan to the bank.

"What severely hammered us was the retail run," said Mr Applegarth.

He said the BBC's exclusive report on 13 September, that the bank would need to seek emergency funding from the Bank of England, had scared his customers.

"It caused us immense difficulties," he said.

He revealed that the bank and the authorities had planned to announce the emergency loan the following Monday, which they hoped would have led to less panic.

The implication here is that the punters wouldn't have panicked if the info that NR had to go to the Bank of England as lender of last resort had been disclosed by the company, rather than the BBC, and at a time of its choosing. Whilst there might be a grain of truth in the idea that 'leaked' info seems more powerful than 'official' info, this leads down the path of imposing an almost war-time sense of responsibility on the reporting of financial stories. And in any case, if the execs can't predict the future - see below - how can a financial journo expect to know the impact of their story? In my own experience, stories I expected to get followed up sometimes got ignored, whereas reports I considered pretty dull (or at least 'obvious') sometimes made a splash.

Update: Robert Peston (who broke the story) has defended his decision on his blog on the Beeb site here.

The second point about the report is more interesting. Applegarth & crew argue that what happened was unprecedented (ie the freezing up of the credit markets) and that they had no way of knowing it would happen. As such they don't think they could have done anything any differently.

[The execs] explained that they had planned how to cope with certain possible problems, such as a 40% fall in house prices, but had not planned how to respond if its ability to borrow in the financial markets dried up.

"What wasn't stress-tested was the event deemed implausible - of the global markets freezing up overnight," said Mr Applegarth.

"The rapid and long-lasting closure of the global markets was not stress-tested," he added.

He said the bank had in fact started in March to slow down its lending.

But asked if he could have taken any action to mitigate the fundamental risk of the Northern Rock's business model, he replied, "No."

Well, bloody hell, isn't this a classic example of Nassim Nicholas Taleb's Black Swan theory in practice? The Wiki definition could have been written about NR! And Taleb's argument that you should plan for the unexpected high-impact events rings very true.

Although there might be problems in the regulatory/oversight regime applying to banks (ie split of functions between FSA & BoE etc) it seems pretty clear that the NR board are the ones at fault. The didn't plan for the unexpected.

Fair Pensions ranks fund managers

The socially responsible investment campaign group Fair Pensions yesterday stuck out its first ranking of the UK's largest 20 fund managers. It's worth a look and can be found here.

Exceprt from the Fair Pensions press release below.

The Fund Manager Responsibility Survey by FairPensions reveals that 75% of the top 20 fund managers do not disclose responsible investor policies that address environmental and social issues, such as climate change and human rights, as well as corporate governance matters.

Some of the UK's biggest household names such as Scottish Widows and Barclays Global Investors appear in the bottom half of the report. Goldman Sachs and State Street are ranked last. Only five fund management companies publicly disclosed a detailed policy covering environmental, social and governance issues.

Top performers in the survey included F&C, who are majority-owned by Friends Provident. F&C scored 100%, followed closely by Hermes, Morley and Insight who all demonstrated a high degree of transparency and a concrete commitment to engagement on responsible investment.

Monday 15 October 2007

Tory donor was 'delusional'

A cheap joke, but it's official - you have to be mad to donate to the Tories. See this story on the Beeb. I'm sure the journo who penned this piece must have made it intentionally funny:

Handing down his judgement, Mr Justice Henderson, said Mr Kostic would not have left the money to the Tories if he had been "of sound mind".

I also enjoyed the reference to Thatcher saving the world from "satanic monsters and freaks".

Burma disinvestment news

Quick post on a potential disinvestment move. The Dutch healthcare fund is going to review its position on companies that do business in Burma according to IPE.

Sunday 14 October 2007

Narratives, politics, money, football and stuff

Although I'm aware of the use of the term 'narrative' as a way to describe the way political ideas are put across, I've only recently come across the notion of the Narrative Paradigm developed by Walter Fisher. I'll just the post the Wiki definition to kick off:

"The Narrative Paradigm is a theory proposed by Walter Fisher that all meaningful communication is a form of storytelling or to give a report of events (see narrative) and so human beings experience and comprehend life as a series of ongoing narratives, each with their own conflicts, characters, beginnings, middles, and ends."

I find this a very convincing proposition. So much media commentary in particular seems to work on this basis. As I have mentioned previously I think this particularly the case with business journalism, but to be honest political journalism (which I enjoy more) is probably much worse as there is very little factual or objective information in a lot of it. As an example I read a bit of analysis in the Observer today of Gordo's situation, and whilst I enjoyed reading it, and will probably reuse some of it in conversation (see later...) on reflection I don't think I have actually learned anything of note from it, it's just helped flesh out a new narrative in my mind about Brown which I will use to interpret information. That's all the analysis was really - a little join-the-dots exercise to pull the new info we have (non-election, botched PBR) into a coherent-sounding story.

Here's another recent political example - I remember what I thought about Thatcher's visit to see Gordo a few weeks ago. Much as Thatcher was a hate figure for me in the 80s and 90s, the meeting didn't really annoy me as much as it did others (unlike the Digby Jones appointment which really did wind me up). I was more impressed with the idea of it being part of a 'dog whistle' strategy to pull traditional Tory voters (many of whom probably see Cameron as a poncey London liberal) behind Brown. It looked 'clever' - using the knee-jerk reactions of Tory voters to our advantage - especially given that the narrative at the time was how smart Brown was. But now, in the wake of the non-election and botched PBR, the narrative has changed. Now Gordo is politicking too much, and his attempt to steal Tory clothes like the Inheritance Tax 'reform' looks opportunitic and even a bit weak. And much as I am aware of the arbitrary nature of both narratives, because the new one 'feels' a better fit for the facts (for now) I find myself inclined to think that the Thatcher meeting has retrospectively become less clever! And by the way I bet if I dug out the Observer's political analysis of Gordo's reign from about 3 weeks ago the narrative would be very different.

Turning to the financial world, there was something similar going on in Tony Golding's book The City: Inside The Great Expectation Machine (a great introduction to how the financial system works by the way) where he talked about how fund managers view investee companies. He said they usually have two or three bullet points about a given company in their head, which might cover recent financial history, views about the management and so on. Sounds like a 'story' about the company to me.

And you can see it at work in sports too. It reminds me of how crowd reactions and commentary changed during the time Marcus Bent used to play for Ipswich a few seasons back. Early on he hit a pretty good run of form, at lots of the commentary was positive. Quite often you'd hear people say that he "nearly got on the end of a cross" or similar. So he hadn't actually converted a chance, but he got close. But after we got relegated an element of the crowd seemed to develop a new narrative for him - namely that as he was no longer in the Premiership he wasn't motivated. Hence "nearly got on the end of a cross" turned into "didn't work hard enough to reach a cross". Same type of incident - chance not taken - different interpretation. I don't think his standard of play actually changed that much (if it did how did he manage to move to other Premiership clubs subsequently?), it's just that the new narrative some of our fans had developed changed the way they viewed similar types of incidents.

Why do narratives appear to be so prevalent? One answer maybe that 'real' information is just a bit too boring for us to want to retain, whereas if we dress it up as a story it becomes more enjoyable to retain and utilise. As an illustration to broaden this one out a bit, I read Derren Brown's book on holiday this year and one section of it deals with methods to help you remember things. One suggestion is to imagine a journey through your house and to tie each thing you need to remember to a particular place in the house (you need to follow the same journey each time). I've tried it out and it definitely works. Is that because when you apply this method you create a little 'story', and it's more enjoyable (and thus easier) to use this to pull up the bit of information we need?

Narratives of course also work as a shortcut. We need to process a lot of information as we go through life, and a narrative can act like a filter, telling us which bits of information to use and which to discard. They can make decision-making easier. But I wonder whether this leads us into a position where much of what we think is comprehension is actually pattern recognition, and what we think of as discussion is actually just cutting and pasting narratives, or parts of them. Again I feel myself doing this sometimes. In political discussions in particular I sometimes find myself getting a little buzz when the other person has deployed Argument A, because I know that the 'correct' response is Counterpoint B. I will no doubt use some of the information from today's Observer piece when I feel the it is the 'correct' point to fit it into the narrative inherent in a given discussion, and get a little buzz from using it in the 'correct' place.

Pushing this a bit further on, it also seems likely to me that we believe certain things because we enjoy believing them, rather than because we have any real basis for doing so. Political extremists are a good example of this. I cannot see how anyone can rationally advocate a revolution in the UK, nor can I see how sufficient numbers of working people have little enough to lose to make a revolution seem like an appealing strategy. Yet despite this there are probably thousands of people in the UK who would still class themselves as revolutionaries. It strikes me that this is in no small part because a revolutionary narrative is more exciting than a 'reformist' one. I would even suggest that on some level such people may 'know' that a revolutionary narrative is ludicrous in a stable, prosperous country like the UK, but that the enjoyment derived from the story is simply too much for them to let it go.

Does any of this matter? To me it does. On a philosophical level I find myself much more sceptical about the extent of our actual knowledge, but that's largely something I will stick to boring my wife about. More practically I find myself a bit uneasy when I hear political strategists argue the need for the development of narratives, since they are effectively arguing in favour of implanting an arbitrary interpretative framework in the minds of the public. Whilst I think this is necessary for survival on occasion (WWII for example), it doesn't sit well when discussing how to differentiate Gordo from the Tories. I would rather that policy did that by itself.

Saturday 13 October 2007

Murray Bookchin quote on capitalism

Despite being a moderate lefty, I've always found this quote from the American libertarian socialist and ecologist Murray Bookchin (who sadly died last year) very inspiring, and to me it nails way we feel when we are affected by marketisation. I'm sure I could pick it apart for the narrative structure and subtle psychological prompts that make it work, but that would rather spoil it, wouldn't it?

What compels me to fight this society is, of course, outrage over injustice, a love of freedom, and a feeling of responsibility for perpetuating and enlarging the human spirit - its beauty, creativity, and latent capacity to improve the world. I do not care to come to terms with an irrational society that corrodes all that is valuable in humanity, that eats away at all that is beautiful and noble in the human experience.

Capitalism devours us. At the molecular level of everyday life, it changes us for the worse, and it compels people to make extremely unsavoury rationalisations for why they believe things they know - or at least they once knew - are false and for doing things that are trivialising and dehumanising.

When we struggle against capitalism, we are really struggling against our own dehumanisation, and once we become fully cognisant of that, then the danger of surrender to the system reinforces our resistance. As revolutionaries, we are fighting not only for a better society but for our very humanity.

Page 346, Anarchism, Marxism, and the future of the left.

Friday 12 October 2007

How shareholders voted at Northern Rock's AGM in April

I’ve tweaked and reposted this piece as I’m getting a bit twitchy about some of my traffic... And just to make it absolutely clear - this is a personal blog, and does not reflect any person or organization’s views other than my own.

Anyway, inspired by this post on the Snowflake5 blog, I thought I would have a trawl around for institutional investors' voting records at Northern Rock's AGM in April this year.

To be clear from the outset, there is no smoking gun in all of this. Just because shareholders didn't vote against a given proposal doesn't mean that they are in any way complicit, nor is there any evidence that shareholder engagement would have prevented any of the damage that has been done. Northern Rock ran into trouble because its business model was based on borrowing from the market, so when the credit crunch hit home they were going to be in trouble whatever happened.

However, it is worth noting that the board was awarded big salary increases at a time when they must have had some idea that the situation was becoming dangerous. In addition some shareholders might have wanted to look at the role of the auditor, as they made more money from non-audit work (including securitisation) than the audit itself.

So what about the actual votes? Well, I preface this with my usual moan that the state of voting disclosure in the UK is poor, despite the industry's claims to the contrary. I have only been able to find 8 records which are listed below, including decisions.

Note too that because a number of institutions only disclose by exception (ie they only tell you when they vote against management or abstain) we have to take it that a failure to report on Northern Rock means that they didn't vote against anything. Tiresome to say the least!

Here is the limited info I could find:

BGI (page 22 of report)
Remuneration report - For
Auditor appointment - For

Co-operative Insurance (this links you to their voting search engine)
Remuneration report - Abstain
Auditor appointment - For

F&C (page 1057 of report)
Remuneration report - For
Auditor appointment - For

Fidelity (page 222 of report)
Remuneration report - For
Auditor appointment - For

Remuneration report - For
Auditor appointment - For
(presumed, as exception-only reporting and no disclosure to the contrary)

M&G (page 84 of report)
Remuneration report - For
Auditor appointment - For

Royal London (you'll need to download the PDF if you really want to check)
Remuneration report - For
Auditor appointment - For

Standard Life
Remuneration report - For
Auditor appointment - For
(presumed, as exception-only reporting and no disclosure to the contrary)

Countering shareholder activism

Hat-tip to the excellent Corporate Governance website, here are 10 Top Tips for companies from the Brunswick Group on how to counter shareholder activist campaigns. I suppose it could be seen as a back-handed compliment that this kind of thing appears. If shareholder activism didn't work I presume they wouldn't bother saying this.

Incidentally, it is notable that union-busters The Burke Group, recently hired by Cable & Wireless to the annoyance of the CWU, specifically refer to union capital strategies as part of the threat from corporate campaigns.

Anyway, here's the Top 10...

1. Articulate operational and financial milestones that Wall Street can use to monitor progress.
2. Provide simple, straightforward disclosure about executive compensation, showing its alignment with operational objectives, financial goals and, ultimately, shareholder interests.
3. Be aware of the impact a company’s corporate governance and labor practices has on reputation.
4. Thoroughly assess your own shareholder base, and study past campaigns of any activist shareholders to learn their allies and their track records.
5. Rethink how you plan to use the Internet to communicate with different segments of your shareholder base in the age of the e-proxy, especially in terms of annual meetings and proxy campaigns.
6. Don't underestimate the importance of regular investor audits to uncover any communications issues or signs of investor uneasiness with management and the company.
7. Don't rely on the "sell-side" to tell your story or provide intelligence on your shareholder base. While they can be helpful, it's investors who own your stock.
8. Don't brush off irate shareholders or automatically turn down any shareholder’s request to meet with board members.
9. Don't fear engaging in dialogue with hedge funds; they have their ear to the ground on Wall Street sentiment and sometimes are long-term holders themselves.
10. Don't underestimate the importance of communicating and engaging such stakeholders as third-party supporters, customers, and employees; their impact on the outcome of a contested proxy vote — and on corporate reputation — are vital.

Thursday 11 October 2007

Pensions and Capital Stewardship Project

A quick plug for the work being done by the Pensions and Capital Stewardship Project within the Labour and Worklife Program at Harvard Law School. There is an overview of the project here. The project has also just published its first newsletter which can be found here. I think the newsletter is really useful, and a really good introduction for any union members/activists who want to get into capital stewardship. It's easy to read but also full of useful links.

There's a good analysis of private equity, for example, that provides a balanced look at how it actually stands up as an asset class, in addition to the questions about impact on jobs. Plus it makes the important point that unions actually have a history of working with some private equity firms with positive results. The publication also looks at the performance of pension funds vs mutual funds (you know, the 'professional' investors), no prizes for guessing which did better. In fact the same point could be made about industry superannuation funds in Australia, and our very own local government pension scheme in the UK (vs private secctor schemes in this instance).

And finally any newsletter that plugs Prof Lucian Bechuk's work on exec pay is going to get my vote. Definitely worth a read.

Wednesday 10 October 2007

Interesting quote on corporations and individuals

I stumbled across the quote below in an interview with Newsnight's industrial correspondent Paul Mason on the Red Pepper website (not one I look at usually to be honest!).

The modern corporation promises us nothing. So we promise nothing back. The fear of ‘joining’ is an aversion to dependence and it’s so widespread among people below the age of 35 that I’ve come to the conclusion that it has to be logical. That is, it is a rational response to circumstances, not some form of immaturity contingent on the defeat of the unions or the dumbingdown of university degrees.

Interesting that he describes individualisation as a "rational" response. In a way I suppose it is, it's almost like game theory. If companies shirk the patenalist approach of the past, it's not illogical for employees to reciprocate.

Tuesday 9 October 2007

Private equity execs to be taxed more

This shouldn't be a surprise to anyone who has been following the private equity story in the UK. Chancellor Alistair Darling announced in the Pre-Budget report today that the taxation of private equity income would be changed. Basically the CGT on their investment income is going up from 10% to 18%, so it's not even the worst possible outcome for them.

Solid campaigning from the unions, and some woefully inept responses from the industry itself, combined with the buyout boom running out of steam made the Masters of the Universe an easy, and popular, target for the Government. Maybe now, when they've lost the battle, the industry might reflect that when you are unpopular, threatening to leave the country if you don't get your own way is a rather weak card to play. It will be interesting to see if any provate equity execs do actually relocate given the song and dance the industry's trade body, the BVCA, made about the issue.

Some are arguing however that the tax change will also hit genuine entrepreneurs and business angels. See this bit in the FT, and Robert Peston's blog on the Beeb site.

And what about inheritance tax and non-doms? I have to be honest and say I have no strong feelings on IHT as an issue, so in purely political terms Labour has probably undone some of the damage inflicted by the non-election. Any promised further Tory "reform" of IHT would now clearly benefit only the very well-off. In addition they will have to adjust their spending plans to take account of the fact that Darling has just spent much of the money they expected to save by targeting non-doms.

There's a positive response to the PBR from the TUC (which lobbied over bother PE taxation and the non-dom issue) here.

Canadian pension fund buys voting adviser

Here's an interesting development (hat-tip to Peter C) in the ownership of proxy advisory firms. The Ontario Teachers’ Pension Plan has bought the US-based adviser Glass Lewis for a reported $46m. This follows the acquisition of the firm last year by Xinhua Finance, which caused all kinds of hand-wringing about conflicts of interest.

The Wall Street Journal has a dig suggesting that being owned by an activist pension fund brings its own conflicts. But the fund itself has argued that it will take a hands-off approach. Actually, there was a similar tie-up in the UK with RREV, which was at one time part-owned by Hermes (and the NAPF). I assume that RREV is now completely owned by RiskMetrics since the NAPF sold out. The Glass Lewis development also comes in the wake of ISS (RREV in the UK) being rebranded under the RiskMetrics stamp.

While we are on te subject of the OTPP, one of its interesting investments is a 25% stake in Northumbrian Water. This forms part of its infrastructure portfolio. Notably the OTPP has a non-exec on the board as part of the arrangement. Whilst in pure governance terms this clearly makes the director non-independent, if you are going to have an investor represented personally I would rather have a public sector pension fund in there than a fund manager.

Monday 8 October 2007

UKSIF report on pension funds and SRI

One of the annoying things about the failure of many corporate pension funds to take SRI seriously is that some of them are sponsored by companies which are leaders in the area of corporate social responsibility. With this in the mind the UK Social Investment Forum surveyed companies which are included in initiatives like the FTSE4Good index to see what their practice was like.

The overall message was fairly positive with about three quarters of respondents saying that they do have an SRI policy. Most common methods of implementation are shareholder voting and engagement. However worryingly (if you have any knowledge of the wide variation in fund manager commitment to SRI, or corporate governance for that matter) most funds said that they also delegate implementation of their policy to their fund managers.

The UKSIF report also ranks pension schemes in terms of their practice. The BT scheme comes top of the list, with the Friends Provident and Stagecoach schemes close behind. Of these I'm actually most impressed by Stagecoach as both the BT scheme and the Friends Prov scheme have in-house asset manager expertise to draw upon.

Anyway, the full report can be downloaded here.

Sunday 7 October 2007

Randomness and chief executives

I've posted previously about the misattribution (in my opinion) of business success to the actions of superstar chief execs, or company boards in general. I think the business press is particularly bad for this. I've also thought for quite a while that what really delivers results may a) happen much lower down the corporate ladder (ie some subtle change in processes that has a significant effect) and b) might not ever actually be identified.

Going further, Nassim Nicholas Taleb suggests in the great book Fooled By Randomness, that great corporate performance might just be ...err... random in any case, and as such this raises questions about how we pay execs. Here's an excerpt from the book's postscript:

Lower-ranking persons in [an] enterprise are judged on both process and results - in fact, owing to the repeptitive aspect of their efforts, their process converges rapidly to results. But top management is only paid on results - no matter the process. There seems to be no such thing as a foolish decision if it results in profits...

Now take a peek inside the chief executive suite. Clearly, the decisions there are not repeatable. CEOs take a small number of large decisions, more like the person walking into the casino with a single million-dollar bet. External factors, such as the environment, play a considerably larger role than with the [lower ranking employee]. The link between the skill of the CEO and the results of the company are tenuous. By some argument, the boss of the company may be unskilled labour but one who presents the necessary attributes of charisma and the package that makes for good MBA talk. In other words, he may be subject to the monkey-on-the-typewriter problem. There are so many companies doing all kinds of things that some of them are bound to make "the right decision."

He goes on to argue that shareholders therefore need to reflect of what executives really deliver, and whether their rewards are appropriate. If only!

PS. On the subject of executive pay, Snowflake5 blog has a nice post asking why institutions aren't under more pressure in respect of their voting on pay.

Friday 5 October 2007

Now That's What I Call Political Music 3

Following part 1 and part 2, here are a few more musical rants. I've updated the list to include some top suggestions from Ian.

Undercover Anarchist - Silver Bullet
Alternative Ulster - Still Little Fingers
Money Is Not Our God - Killing Joke
Civilization Street - Citizen Fish
Landing Party - Radical Dance Faction
Wrath Of The Black Man - Fun-Da-Mental
Vote With A Bullet - Corrosion Of Conformity
Please Don't Fight - Back To The Planet
That's Progress - Jello Biafra & D.O.A.
Television - The Beatings (though the Hiphoprisy version was better really wasn't it?)
Fight The Power - Public Enemy
I Found That Essence Rare - Gang of Four.
Guns Of Brixton - the Clash
Vengeance - New Model Army.
Walls Come Tumbling Down - The Style Council.

Thursday 4 October 2007

Disinvestment from Burma

I posted some links to Burma campaign sites previously. Unfortunately it currently looks like the military is back in control there. I personally feel that disinvestment is a tool that should be used in support of the pro-democracy movement there, and this is the position of unions around the world including the FTUB.

However there are critics of this strategy, and it always worth at least listening to their arguments. Yesterday's Times ran this piece which is a well-argued opposing viewpoint. I don't agree with it, but it's worth a read. I'm not sure the bit about Premier Oil below is quite on the money from what I have heard from people closer to the action than me. I am pretty sure the allegations of forced labour were well substantiated.

Wednesday 3 October 2007

15 years of the UK Social Investment Forum

Anyone interested in SRI in the UK will have come across UKSIF at some point. This is their 15th year of operation and this report provides a history of the organisation. I first came across them around 1998 when the Government first trailed its plans to introduce the disclosure amendment to the Pensions Act requiring to disclose their policy (if any) on SRI and shareholder voting. It was also the first time I realised how conservative the pensions industry is, as even this modest proposal resulted in a ridiculous and hysterial reaction.

UKSIF continues to do interesting work, such as the ongoing sustainable pensions project. They also held an interesting event recently on the psychological (ie behavioural) barriers to the adoption of SRI by pension funds.

Tuesday 2 October 2007

Canadian mutual fund voting

A quick plug for this report on voting by mutual funds in Canada on shareholder proposals. The blurb says....

The report notes that socially responsible investment (SRI) funds have a much better record of supporting shareholder proposals than conventional funds. SRI funds gave a combined 79 per cent support to the proposals selected, compared with 31 per cent support by the conventional funds.

Have a guess which mutual fund manager came joint bottom?

Shell fund to take contributions holiday

Now here's an interesting development that has been on the cards for some time. The pension fund of oil giant Shell is back in surplus in a big way and as such is taking a contributions holiday. According to a report on the Professional Pensions website the company will put employer contributions on hold for at least 12 months, but employee contributions continue at the same rate.

I can't believe that Shell is the only company in this situation, especially when you consider the figures for aggregate surpluses across all UK pension funds lately. It isn't being picked up in official stats yet. HMRC recently put out its annual statement on methods and amounts of reductions of pension fund surpluses (it's here) and the trend is still downwards. But surely we will start seeing an increases in the amount of reductions now that a number of large funds in particular are heading back into health.