Wednesday 30 July 2008

Review of Nudge

Well, I finished Nudge the other day and I have to say I'm fairly impressed by it as a book. I don't know if it's quite as revolutionary as is being made out, but it's a nice and straightforward primer on behavioural economics and some of its applications.

The first section sets the scene for why nudges - policy interventions that encourage rather than mandate certain types of behaviour - may be necessary. So it builds up the argument for why we aren't the rational self-maximizers that economics has tended to assume we are. This section includes a useful run-through of some of the key heuristics and biases that have been identified and what kind of outcomes they result in. This does provide a pretty good overview of some of the major factors like anchoring, availability, representativeness, loss aversion and so on. It also stresses the importance of the design of choice, or choice architecture, and that in many cases there is no option to be 'neutral' - some kind of structure of choices has to be offered.

The second section is about financial issues, so much of this is familiar ground if you know much about recent pension reform. Still the points are worth reiterating. If you auto-enrol people into a pension most tend not to opt-out. Whereas if you don't auto-enrol many don't join. This, combined with what non-savers say themselves, suggests that non-savers aren't making a rational choice not to save. People also adopt naive diversificaton strategies - the equity content of their asset allocation (if they have made an active choice) will be heavily influenced by the allocations of the funds on offer (and what stock are popular at the time) and what's more people don't tend to shift their initial allocation. Also it seems pretty clear less in more in fund choices - too many options puts us off choosing (no really).

The section on health has a bit of a US focus, but there is interesting stuff in there. The example of the Part D prescription drugs system is useful if only to demonstrate why a random choice for non-choosers (like the carousel option proposed by the ABI for Personal Accounts) is a bad idea. Also the section on organ donations is worth a read - I think I still favour the assumed consent approach, but the idea of mandatory choice (ie having to state your position on your driving liscence) is at least worth thinking about. Also in this section are some fairly interesting suggestions for nudging people to reduce energy consumption. These are definitely worth a look since they involve, for example, being able to make peer group comparisons. I think this would work on two levels - firstly simple self-interest, wouldn't you be annoyed to know you are spending more on energy than comparable households? Secondly I think it would give people smug points for being more energy efficient.

The fourth section I probably found the least interesting, as it deals with ideas I'm not that impressed by, such as school vouchers. Having said that the idea of privatising marriage is intriguing, if unlikely to happen. Basically they argue that the state should restrict itself to civil partnerships and the legal rights that flow from them, but that 'marriages' could be arranged by other groups. That way churches could choose whether or not they want to carry out same-sex marriages. Equally other organisations could carry them out anyway. That way, the authors argue, no-one's values get compromised but neither are anyone's rights denied.

The final section sketches out some further ideas for nudges, as well as combatting some of the counter arguments that have been put forward. This latter chapter is well worth a read as the authors do a pretty good job at arguing back at some of the half-decent arguments there are out there that challenge them. Some good pro-nudge points here include the one I've already mentioned that often there isn't a neutral option - so the absence of a nudge is a kind of nudge itself. Also it is important that nudges are made explicit, so there is no sense that Government (or whoever else is doing the nudging) is being underhand.

Thaler and Sunstein argue that their approach offers a real 'third way' since it seeks an alternative to both state mandated paths on the one hand and complete laissez-faire on the other. This they call Libertarian Paternalism. That's obviously an Americanism, since in the UK libertarianism of any stripe is not a strong theme in our political culture, and seems to be (on the Right at least) the preserve of people who think speed cameras are 'Orwellian' and tax morally comparable to robbery. As such I don't expect the label to catch on here. However overall the book does provide quite a few ideas for how we could achieve some beneficial behavioural changes without being too heavy-handed. As I've said before, I think it would be a big mistake for lefties to not engage with these ideas. And if you want to get into behavioural economics this probably isn't a bad place to start.

Norfolk nights

Me and Mrs Tom are off to Norfolk for a long weekend tomorrow, so definitely won't be blogging for a few days. I will however be taking the iPod on the assumption that there isn't a real Alan Partridge on Radio Norwich.

With that in mind here's some top tuneage I've been listening to of late -

Apocalypso - The Presets
Coup D'yah - Sub Swara
various bits n bobs by Flying Lotus, Roberta Flack probably the pick
and my recurring old 1990s fave - Music Has No meaning by Consolidated (someone please remix/update this)

Burning our money...

This is from the Watson Wyatt report I mentioned the other day:

"We believe that many of the value propositions in the industry are weak and that little investment is conducted on a genuinely long-term basis. Our analysis suggests that the pension fund ‘food chain’ – the annual payments a pension fund makes to the various agents it employs – has increased by 50% over the past last five years. Much of this increase reflects a shift in assets away from traditional long-only and towards more expensive alternative asset classes. While an individual pension fund may get value from paying a fee of 2% plus 20% of performance, it is clear that pension funds in aggregate will be worse off – there is not enough alpha to go round."

They go on to say that there might be a backlash against the level of fees.

Monday 28 July 2008

Investing in infrastructure

There's a very interesting post about infrastructure investment over on Capital Matters. The SEIU (the most active US union in terms of capital stewardship) has recently trailed the idea that the unions and/or public sector pension funds might set up their own investment vehicle to avoid getting fleeced by existing offerings with 2 & 20 fee structures (2% annual management charge plus 20% of performance). Now it seems that things might be moving forward:

Public pension funds, governors, state treasurers, comptrollers, and the Service Employees International Union (SEIU), whose members participate in pension funds with more than $1 trillion in assets, have begun preliminary discussions about how to create this type of investment vehicle.

PS. On the fees issue I've just been reading Watson Wyatt's Defining Moments report which has quite a bit of interesting stuff in it for a relatively short report. They state quite clearly that pension funds are wasting an ever greater amount of money through investment costs, and suggest that there might be a backlash over fees in the future. I'll write it up shortly.

Nudge stuff

I'm almost finished Nudge, which seems to be the policy wonk's Harry Potter this year. It's pretty good, though I am already familiar with quite a bit of the stuff in it. They do give a well-deserved plug to How We Know What Isn't So. What surprises me a bit is some of the negative reaction. Have a look at this bit on the Beeb website today. Especially this bit:

But Hazel Blears, communities secretary and former Labour Party chairman, told the BBC: "Every now and then a book pops up which everyone talks about for a while in the Westminster bubble: Freakonomics, The Wisdom of Crowds, The Tipping Point. Nudge is the latest fad.

"Each of these books may help us understand an issue or challenge us to think a little differently. But the harsh reality is that none can provide a blueprint for a better world. Politics is never that easy."

Eh? Where do we think the idea of auto-enrolment into Personal Accounts came from? And it was a big political decision to go for a quasi-compulsory approach. If you go and have a look at the White Paper launching Personal Accounts you can see several references to Thaler's work, and if I remember right it was also quoted in the Pensions Commission's reports. (Actually I think James 'bad photographer' Purnell may even have made this point).

I don't think behavioural economics is the be all and end all, and I wouldn't class myself as a libertarian paternalism, but this stuff can provide some useful insight for developing policy in a way that cuts with the grain of human behaviour. It would be a mistake to go cool on it just because the Tories are sniffing around.

Dan Le Sac vs Scoobius Pip said it right: Thou shalt not stop liking a band just because they become popular.

Saturday 26 July 2008

Metaphors We Live By

This book is ace. It's one of those books that manages to crystallize half-thought-out ideas and insights that you have but never really manage to develop. And once you get your head around the central ideas you can see how applicable these are in many different bits of the world.

Obviously, it all about metaphors, and the early chapters of the book look at the types of metaphors we use and how prevalent they are. This stuff alone is really worth a read just to make yourself aware of just how often we use metaphors, but also how we use many different expressions of the same underlying metaphor. Take the example I posted previously:

Theories (and arguments) are buildings:

Is that the foundation for your theory? The theory needs more support. We need some more facts or the argument will fall apart. We need to construct a strong argument for that. I haven't figured out yet what the form of the argument will be. Here are some more facts to shore up the theory. We need to buttress the theory with solid arguments. The theory will stand or fall on the strength of that argument. The argument collapsed. They exploded his latest theory. We will show his theory to be without foundation. So far we have put together only the framework of the theory.

Surprising isn't it that we use loads of different expressions based around one metaphor? That leads on to one of the fundamental arguments in the book - that metaphors are not merely linguistic devices, they are conceptual. We don't just use the 'theories are buildings' metaphor to get across our message, we actually think and act in those terms too.

Off on a bit of a tangent I think this may in part explain why something can sound both logical and false at the same time - the communicator has metaphorical coherence, but the metaphor doesn't seem to capture what is being described. To my uncultured mind this also seems to fit together (like a construction...) pretty well with my other favourite view of the world, the narrative paradigm. Fisher suggests that we decide the validity of an argument based on narrative coherence. This obviously has some pretty major implications for our understanding of 'truth', and indeed the latter part of the book covers this in some detail. (I'm not going to go into this now as it goes much more into philosophy).

They also argue that our metaphors are grounded in experience, hence a lot of them are about space, orientation and travel. Think how often you use 'journey' metaphors to describe things, for example. This might be in terms of relationships - we're going our separate ways, the worst is behind us etc - or in terms of work - I personally use the phrase "I'm getting there" a lot in reference to work projects. So really we are perceiving first and describing second in terms of more direct/basic experiences.

The book's afterword is also well worth a read as it describes briefly how metaphor analysis has been applied is various fields from psychology to political science. The latter obviously interests me, and leads me on (it's a journey you see) to try and use this stuff politically. If we buy (and I think I do) the argument that metaphors are conceptual, not merely linguistic, then a) we ought to be able to indentify the metaphors that people are using to understand the current situation and b) we may be able to establish alternatives.

Obviously I have a political bias, but I can't quite reconcile the strength of the rejection of Labour by the punters with what is actually going on in the UK. We have had a decade and a bit of uninterrupted prosperity (alright partially debt-fuelled), with no major worries about inflation or unemployment or all the other big issues of the past. So why does it seem that the voters want to wipe us out at the next election? There must be a way of understanding the world they have developed that we ought to be able to engage with - but what is it and how do we do it?

Friday 25 July 2008

Why aren't UK bank directors accountable?

I'm avoiding the rather large Glaswegian elephant in the room because a) it's already been covered much better than I could do elsewhere and b) I want to focus on upbeat, happy things like sticking the boot into the directors of banks.

Mark Burgess of Legal & General (the big index-tracker that hold a big chunk of UK equities) has asked the question that has been in my head for months now - why so little accounability in the UK banking sector? In the US several high-profile banking execs have walked (unfortunately often with monster payouts) but in the UK there is nothing comparable.

"We have seen the top 11 executives leave UBS, the heads of Citigroup and Wachovia step down and the chief executive at Merrill Lynch go. But only one UK director has had to leave a UK bank and that was because he had angina. You have to say that is curious," Mr Burgess said.

Steven Crawshaw, chief executive at Bradford & Bingley, which only succeeded in raising rescue funding after three attempts, resigned due to ill health.

But the boards of both Royal Bank of Scotland, which launched the UK's biggest ever rights issue in April, and HBOS, whose £4bn rights issue was only taken up by 8 per cent of shareholders, so far remain in situ.

Mr Burgess said Sir Fred Goodwin, RBS chief executive, and Sir Tom McKillop, chairman, who continue to resist calls for their resignation, were equally to blame for the bank's deteriorating performance following its £12bn rights issue and its €71bn (£56bn) acquisition of ABN Amro, the Dutch bank.

"I think they both have a lot to answer for," he said.

In contrast, in Europe the heads of UBS and Société Générale have stepped down.

The chief executive of Fortis, which was in the consortium led by RBS in the bid for ABN Amro, was forced to resign this month.

I agree with all of that. My question in return though is why have institutional shareholders like L&G not been seeking accountability. In the US this has been happening, often led by unions, but in the UK even institutional investors prefer to snipe from the shadows.

The FT leader today is on this subject, but its suggestion of introducing another advisory vote seems a bit misplaced. Surely it is shareholders who should use their existing rights more effectively?

Thursday 24 July 2008

Canadian teachers try to buy

Interesting story here from The Times. The OTPP has an interesting investment operation, and puts a lot into infrastructure. It has a 25% stake in Northurmbrian Water for example, and has (or had) a non-exec on the board.

A few random thoughts about capital stewardship

I thought I'd splurge a few thought about capital stewardship that have been swilling around in the 'mind tank' (copyright: The Mighty Boosh).

Following on from Paul Myners' comments last week, I have to admit I'm a bit of a sceptic myself about what the mini industry around corporate governance and responsible investment has achieved. But fundamentally I think capital stewardship activity is worthwhile and needs more input from lefties.

At present if often seems there's a pretty unappealing choice between investing your assets the 'traditional' way and just seeking to maximise returns, and signing up with a governance or SRI product of questionable value. I say 'questionable value' not to belittle the work that goes into these things, as there are many many good people involved, bur rather because it's difficult to see what the punter gets out of it, apart from a feeling of vaguely doing the right thing.

In the institutional world (ie pension funds and other large investors) this is partly a problem of lack of clarity about objectives. Are we trying to create value, improve the system, change the world, or a mixture? It really isn't as simple as saying 'a bit of all of them' because at some point you always end up asking 'why?' and 'what have we achieved'? If you are unclear about your objectives it becomes hard to measure progress, so it maybe preferable to not really try.

The commodification of capital stewardship through product offerings is an alternative. You can pick out a product and that enables you to tick the box of 'doing SRI' or 'doing governance'. The act of appointing a provider, who then goes off and does the 'ownership' bit for you, is the 'doing something' bit sorted for you. But then the provider sets the objectives and, in turn, decides what results are and what performance' against the objectives looks like. That isn't necessarily about enfranchising the ultimate owners is it?

This is why I continue to think that the unions have a major role to play, because they are not (or shouldn't be) willing to simply hand over the money and say 'do SRI for us'. They have a clear set of objectives and standards. I think they could also play a significant role - if they choose to play it - in representing ordinary savers. They could be a countervailing force to the atomisation of ownership power resulting from the shift to defined contribution pension provision, and the associated accrual of the power by service providers.

It strikes me that there is loads of unexplored territory between simply handing over your money to service providers and letting they try and generate a return no questions asked, and the alternative of bunging a few quid (or a small % of assets in the case of a pension fund) in an SRI/activist offering. But it requires some thinking about, and specifically clarity of of objectives.

What does the existing system do that we don't like? A few examples might include an excessive focus on short-term results that can damage long-term prospects, a failure to fairly distribute the fruits of labour (why do directors get paid an ever large slice?), failure of investee companies to adhere to baseline standards and so on. If we are clearer about what we want it will be easier to see which products and service meet the needs of the labour movement and, more likely, where the gaps are that need to be filled.

Wednesday 23 July 2008

If voting changed anything...

Labour Outlook is calling for Labour-supporting bloggers to take part in Iain Dale's annual top 100 best political blogs list here. They say:

Although some have their misgivings, all Labour blogs should be take part this year as it's an excellent opportunity to raise the profile of the many excellent lesser-known Labour blogs.

At worst, it ends up with another Conservative-dominated list but with a few more Labour blogs included and being visited. At best, Labour blogs form a major section of the list, raising the profile of the quality sites out there and challenging the assumption that Labour bloggers can't compete with the more well known Tory ones.

Sounds sensible to me, as does a vote or two for the aggregator blogs we all take for granted like Labour Outlook, Bloggers4Labour and Tigmoo.

Tuesday 22 July 2008

Irish Congress of Trade Unions on private equity

Still catching up on last week's developments, below is a short bit taken from the ICTU statement on private equity.

"It is vital private pension schemes and national governments take a long hard look at these multinational free loaders. In our own case, the National Pension Reserve Fund must implement socially responsible investment policies as a matter of urgency.
"The investment of workers' retirement savings is an area to which the Irish Congress of Trade Unions has increasingly turned its attention. It is no longer sufficient to focus solely on the benefits side of pensions, important as these are, but also on the kind of investments made by our pension schemes. These can have a great impact on workers' jobs and livelihoods.

Monday 21 July 2008

Unite on private equity and capital stewardship

Managed to miss this last week. More evidence that UK unions are getting into capital stewardship.

Unite warns private equity: act responsibly or risk losing our pensions investments

Private equity could soon see its access to pensions funds challenged by unions as concern grows that members' savings are being used to support buyouts which hit jobs and communities.

The UK's biggest trade union, Unite, representing nearly two million workers in UK and Ireland, with members participating in pension schemes worth billions of pounds, has joined forces with major US union, the SEIU, to warn that union pension schemes should no longer be relied on by the buyout industry as a source of ready money.

Concerned that private equity buyouts mean job losses and insecurity, Unite is establishing a capital stewardship programme to scrutinise how pension funds managers are investing retirement savings. The move comes on the Global Day of Action (today, Thursday, July 17th, 2008) on private equity. To mark the day, MPs have tabled a Commons motion calling for tougher statutory regulation of private equity.

According to Tony Woodley, joint general secretary of Unite: "We will be taking a long, cool look at where our members' retirement savings are going.

"We shall not prop up leveraged buyouts where workers are made redundant, factories are closed, and jobs are outsourced or off-shored. Nor will we support poor investment decisions where our members' savings take the hit for reckless, get-rich-quick schemes.

"There will be no blank cheques. If private equity wants our pension money, then they must prove that this money will not help throw workers on the scrapheap while lining the pockets of the equiteers.

"Private equity operates in the mists of secrecy, which is not a culture we want to expose our members' pensions savings to."

According to Unite, pension schemes have a duty to ensure that they are not over-exposed to investments built on debt. They will be pressing pension trustees should consider the impact of private equity investments on society at large, including the treatment of workers and whether private equity is paying its full dues to the UK taxpayer.

A typical strategy of a buyout firm is to buy a company off the stock market, load it with debt and squeeze out profits by cutting costs, including labour costs. Buyout firms also avoid paying taxes by deducting the interest on their debt, reducing their tax obligation to zero and denying the British taxpayer hundreds of millions of pounds in revenue.

Job cuts soon followed when private equity took over Bird's Eye, the AA and Burton's Foods. A preliminary review of European companies acquired by one private equity company, KKR, indicates that KKR has been responsible for the loss of nearly 10,000 jobs across the continent in the past seven years.

The Global Day of Action will see coordinated action in 25 countries to highlight the operation of the leveraged buyout industry.

Hat-tip: Michael L

TUC report on member trustee representation

Blatant steal from the TUC about the shift to equal member representation on pension fund trustee boards.

Member involvement on pension scheme boards continues to grow
New TUC research reveals today (Monday) that 86 per cent of pension scheme boards now have one-third of their trustees nominated by members and many are moving towards 50 per cent representation.

The TUC research - The member voice in pensions governance - shows that six months after the requirement for boards to have one-third of trustees nominated by pension scheme members came into effect, 86 per cent of boards are already complying with the regulation.

The TUC believes these findings show that industry scepticism towards pension schemes recruiting enough member nominated trustees (MNTs) is misplaced. In fact, several schemes have commented that they found it easier to recruit MNTs than employer nominated trustees (ENTs).

The research also shows that 24 per cent of pension schemes have gone beyond the minimum requirement and have at least 50 per cent member nominated representation. Despite claims in some industry quarters that pension schemes and employers are overwhelmingly hostile to a 50 per cent requirement for MNTs, the TUC research found that only 30 per cent disagreed or strongly disagreed with the target.

In order to maintain the growth member involvement on pension scheme boards, the TUC report calls for the Government to implement its manifesto commitment and move towards requiring 50 per cent membership.

The TUC believes it is important for members' voices to be heard in the running of their pensions. MNTs can bring the views, experiences and interests of members to the governance of their pensions, who are the ultimate owners of the investments held in their pension scheme.

Member involvement is also essential to protect schemes from any unscrupulous employers who may act without members' best interests at heart. During the TUC research, a number of respondents made specific reference to the Robert Maxwell scandal.

TUC General Secretary Brendan Barber said: 'It's absolutely vital that members' voices are heard in decisions about the governing of their pensions, particularly in times of economic uncertainty.

'The growing number of member nominated trustees on pension schemes is therefore great news for the millions of people who rely on them to govern their retirement income responsibly.

'These findings shatter scepticism from some industry quarters about recruiting member nominated trustees. In fact, one in four pension schemes are going beyond the legal minimum with at least 50 per cent member representation.

'In order to continue this progress, the Government must implement its manifesto pledge and require all schemes to have 50 per cent member nominated representation.'

The research also shows a disappointing lack of diversity among pension trustees, with boards still dominated by white men over 45. Just 11 per cent of trustees in the schemes surveyed were female, less than one per cent were from a black and minority ethnic background and less than one per cent were under the age of 35.

While many of the trustees in the TUC research are based in male dominated workplaces, such as manufacturing, the research still shows that trustee boards are struggling to reflect the diversity of their workplaces.

Update: Doh! should have read this properly, most schemes have met the 1/3rd requirement, not 50/50. Headline changed...

Nudging Obama

This is my last Nudge-related post until I've actually read the book. Hat-tip to a US colleague who sent me this link to this recent review of the book which talks about Obama's interest in behavioural economics and includes some discussion of how much can really be achieved.

Sunday 20 July 2008

Sunday snippets

Just a few links that might be of interest. In The Observer a review of Richard Thaler's Nudge by the new director of Demos, which isn't bad.

Meanwhile in the business section there is a piece about Caledonia Investments trying to bung shareholders' money to the Tories, which I've mentioned before.

Finally I've stumbled across (via Technorati) an new Labour-supporting aggregator blog which is worth a look - Labour Matters.

Framing politics

It's George Lakoff week in my house. In addition to continuing with Metaphors We Live By - which is excellent - I also took a punt on Don't Think Of An Elephant.

The latter was produced in the wake of Dubya's re-election as a guide to Democrats and fellow travellers on how to talk politics, rooted in Lakoff's work in linguistics and cognitive science. Sounds interesting eh? And it is, as far as it goes. One of Lakoff's big ideas is that the split in American politics is principally a different conception of America as a family. The Right subcribes to a 'strict father' model, whereas the Democrats favour a 'nuturant parent' model, and from these fundamentally different views flow all kinds of other ideas.

He also argues that we understand issues principally in terms of frames. So, for example, the Republicans talk about 'tax relief' rather than 'tax cuts'. Tax relief suggests that taxation is an affliction, and that whoever brings relief is a hero, and whoever opposes them is a villain. Lakoff's point is that once such a frame is established it is basically part of the wiring of the brain, and as such we will ignore or seek to undermine information that does not fit the frame (confirmation bias explained a different way by the sounds of it). As such he argues that Democrats need to develop alternative frames, rather than challenging Republicans within the frame they have already established.

There are some good ideas here. Lakoff argues, for example, that the fundamentally different views of the 'America as a family' metaphor explain why lefties and righties sometimes just cannot grasp why the other side would advance a particular idea. It's not that they are being thick, certain ideas just don't make sense within a certain framework. But he also says most of us have both conceptions and may apply them differently in various parts of our lives. He gives the example of blue collar families who may have the strict father model in actual family life, but the nurturant parent model in their political views. Therefore part of what lefties can do to get their ideas across is to trigger the nurturant parent model in people's minds by framing their policies correctly.

Actually there's a bit where he describes how people can have both models in their heads by reference to the fact that lefities can 'get' Arnold Schwarzenegger movies, even though such films typically push the strong father model. Conversely that made me think of the times when I have watched a movie (usually a US one) and felt uncomfortable because of the kind of implicit views about families being propagated.

He also makes the very good point that whereas the Right tends to talk in terms of values, the Left tends to talk in terms of programmes, yet values probably explain a lot of voting behaviour. That sounds quite close to the criticism of Gordo that there are 100 initiatives, but people don't understand the vision. In contrast Cameron is super-light on detail yet we all probably have a view of him as being a liberal Tory who cares about the environment.

The problem comes when he shifts from describing the problem to setting out the solution. A lot of the advice reads like very basic media training (though if the book is aimed at campaigners, maybe that is understandable) and some of the suggested arguments (ie reframe tax as sensible investment) look weak. That said, Lakoff argues that the Right's frames to some extent have power because they have been repeated over and over, and that the Left has a lot of catching up to do.

Anyway, it's less than £7 on Amazon, and you can read it in a day so worth a look to anyone interested in this kind of thing.

Friday 18 July 2008

Lib Dems call for public sector pension schemes to close

Yes really. See the statement by Lord Kirkwood in Professional Pensions page 9, 17th July issue. More evidence that Cleggy is pushing the Lib Dems to the Right?

A Nudge and a Myners strike

I went to two different events at the RSA yesterday, both of which were interesting for different reasons. First up was the lunchtime presentation by Richard Thaler, author of the latest behavioural economics book Nudge, which is being talked up by all and sundry. He gave some interesting examples of behavioural nudges, my personal fave (which shows the level I operate at) being the fake flies painted in urinals in the loos in one airport. Apparently since they were introduced 'spillage' has gone down by 80%, because blokes aim at the fly!

He also talked about the importance of choice architecture and made the point - relevant for later on - that there isn't a 'neutral' option. One design or other has to be decided upon and this will have an effect on subsequent choices.

Julian Le Grand also spoke, and gave some examples of policy ideas developed using insights from behavioural economics. I think the idea of a smoking permit which he used is a really interesting one. You would need to get a permit once a year in order to buy cigarettes, which could be quite an effective nudge (imagine having to start each year thinking 'I must get my permit to smoke for the next 12 months'). Unfortunately it was shot down in flames in the media, though I wonder a clever bit of framing could have helped out there.

The event was packed, and they seemed to be doing a brisk trade in copes of Nudge when I left. I've not actually got the book yet though it is on order from Amazon and quite looking forward to getting it.

Back at the RSA in the evening was the launch of the Tomorrow's Investor project which looks like an interesting initiative. The event featured a presentation by David Pitt Watson followed by responses from UKSIF's Penny Shepherd, personal finance journo Jasmine Birtles and PADA chair Paul Myners. A good turn out from the Unison capital stewardship mob too!

I think it's fair to say the real action was the split between the views of Pitt Watson and Myners. David sketched a more optimistic picture, arguing that the democratisation of ownership through funded pensions and other savings had already started to have an influence on the nature of ownership. He gave the example of the success of UNPRI. (He also gave John Gray and his blog a plug - what are you paying him John?!)

Myners was far more critical, arguing that there had been very little real progress. Most institutional shareholders didn't take ownership seriously, SRI barely figured on the radar of company boards (as an influence on them), trustees were still spoon-fed by advisers and still focus on short-term performance despite its irrelevance.

I think the broad consensus from our little group was that although the Pitt Watson view was the one we would like to believe, the Myners perspective seemed to fit more with our own experiences.

One point of disagreement with Myners. When discussing how Personal Accounts will consider ownership issues he said that members should have the choice of an SRI fund, but that that decision should not be made for them. But, as Richard Thaler said at lunchtime, neutrality isn't an option. If the PA trustees decide that SRI will be done via a fund option, they are also making a decision about the default fund where we all know the overwhelming majority of members will probably end up. That's why we have to think properly about the default fund's design. The PADA consultation on investment will take place later this year - this is a major opportunity for the unions to push the ownership issue.

More broadly yesterday left me convinced that some serious work needs to be put into applying things we can learn from behavioural economics to capital stewardship. (Much more broadly I'm also wondering whether 'ownership' as a concept in relation to shareholding itself needs a serious rethink, but that's another story).

Pakistan problem

Looking at the violence that kicked off as a result of the drop in the market reminded me of this bit from Irrational Exuberance:

"The valuation of the stockmarket is an important national – and international – issue. All of our plans for the future, as individuals and as a society, hinge on our perceived wealth, and plans can be thrown into disarray if much of that wealth evaporates tomorrow. The tendency for speculative bubbles to grow and then contract can make for very uneven distribution of wealth. It may even cause many of us, at times, to question the very viability of our capitalist and free market institutions. It is for such reasons that we must be clear on the prospect for such contractions and on what should be our individual and national policy regarding this prospect."

Thursday 17 July 2008

Blue behaviourialism 2

Arrgghhh! Arrrgghh!!!! The Finkster is at it again. His article is worth a read, and this list of books he lists are all worth a look (except Malcolm Gladwell, whose stuff I can't stand) but it is annoying seeing the Tories make all the running on this stuff at the moment. On the plus side I see that in addition to his talk at the RSA today, Richard Thaler is also doing a slot at the IPPR tomorrow.

UPDATE: Actually there's a mini discussion on Bloggers4Labour. (Hat-tip: S&M)

Wednesday 16 July 2008

Union day of action on private equity

July 17th is a day of action on private equity, principally driven by the SEIU from what I can tell. Lots more info here.

Tuesday 15 July 2008

Capital stewardship blogging

A quick plug for John Gray who has a string of recent posts on capital stewardship here, here, here and here.

Incentives to save

Today Scottish Widows has put out a report on savings. Amongst its recommendations are the need for 'incentives to save'. For once this isn't a financial services company calling for the Government to pay people to take out their products, instead they suggest a disregard of savings in respect of means-tested benefits.

A good thing too. Plenty of stuff I have read suggests that financial incentives to save simply don't do the job. For example here's what a PPI report issued in 2004 said:

There is no evidence that tax incentives increase the overall level of saving.

Incentives may change the way in which people save, diverting savings into pension funds. But tax incentives have not been effective in generating enough pension saving for future pensioners.

There is no evidence that tax incentives increase total saving Saving is generally seen as ‘a good thing’ and policies are often proposed or implemented to increase the amount that people save1. These policies are often targeted at groups who do not have large savings, and in particular lower income groups. This could be to encourage people to be more secure financially, or to spread their income more evenly over a lifetime. Saving is also encouraged as a way of reducing state expenditure.

However, there is no evidence to suggest that tax incentives increase the overall level of saving 3. Explanations put forward for this generally fall into one of three areas:

• Tax incentives are complex, making them difficult to understand.
• Tax incentives often do not appeal to their target group. Low to middle income groups (who are traditionally low savers) pay lower rates of tax, and so gain less from reduced tax liabilities.
• The amount that people want to save is determined by a range of factors not linked to tax relief or rates of return, such as income and affordability.

And the Sandler review:

[T]here is little evidence to suggest that tax incentives have a significant impact on overall savings levels, especially amongst the lower-income groups for whom increasing saving should be a priority. What is more, it is evident that such incentives generally increase the complexity of the regime as a whole, and that this complexity leads to higher costs.

Governance, fund voting, decision-making...

Just a few links today. Firstly this speech by corporate governance veteran Ira Millstein is well worth a read. It really gets into the problem of how changes in the capital markets are undermining some of the key assumptions of the corporate governance 'movement' (for want of a better word). Here's a taster:

Although all the new organizations may indeed be technically defined as shareholders, what does each of them value? What is shareholder value between one investor who will profit from driving the share price down, another who wants to take the company private, another looking for instant cash, and one more who is thinking about long-term growth? How do boards serve many masters? Can they do so? Which shareholders? With what intentions? What we are now learning is that the notion that directors owe a fiduciary duty to be “fair” to all shareholders is turning out to be a quite imprecise guide to directors. We are entering new territory.

Secondly this report by the Investment Company Institute - the trade body for mutual funds - is worth a look. It's an attempt to defend the record of mutual fund voting in the wake of a number of critical reports. However the main drawback is that it only provides aggregate voting stats for funds as a whole. Any voting geek will tell you that the real story is the variation between fund managers.

Finally I just stumbled across this article on my recent topic of why people change their minds. It also links to this piece which also looks interesting.

Monday 14 July 2008

Richard Thaler: the podcast

From The Times. This stuff is everywhere at the moment. Not too late to get to see Thaler this week...


Meanwhile, over in New Zealand the first results are starting to emerge from the introduction of their KiwiSaver pension system. This isn't miles away from the Perosnal Accounts model being developed in the UK, and is using the auto-enrolment plus opt-out model of membership. You can find some stats on how it is doing here.

It looks like the opt-out rate is about 15%, so that would suggest that membership is going to be pretty large. Notably membership so far doesn't seem to vary much between age groups, or by gender. The second point is a key one. One of the successes of the mandatory superannuation system in Australia was that it massively boosted the number of women with funded pension provision. In addition there doesn't seem to be much of a levelling-down effect so far.

A couple of points, one serious and one silly. First up the Pensions Policy Institute makes the point that the KiwiSaver isn't directly comparable to Personal Accounts, which they expect to have more of a levelling down effect.

Secondly I see that the NZ government website on which you can find reports about the success of KiwiSaver shares the same name as that of Scottish Life's Steve Bee, who seems to be on a personal crusade to undermine confidence in the UK equivalent (for example).

Blue behaviourialism

Arrgghh... it's definitely happening, the Tories are going to steal behavioural economics. I didn't buy The Grauniad on Saturday so missed this piece about Thaler. Now in today's edition Osborne makes a blatant pitch for it.

Sunday 13 July 2008

Sunday snippets

Some bits from today's Observer etc. First up there's an interesting little bit in Andrew Rawnsley's column this week about the growing influence of behavioural economics:

Both leaders are also under the influence of American behavioural theorists. A fashionable book called Nudge, which contends that laws are less effective at changing people's behaviour than social pressure, has found an eager audience within Cameron's circle. In similar vein is Robert Cialdini's Influence: The Psychology of Persuasion. The Social Market Foundation in Britain has made its own contribution, Creatures of Habit? The Art of Behavioural Change, with some practical suggestions about how government can persuade people to stop acting badly and do things which are good for them and society.

What's interesting is that Tories seem to be willing to take these ideas pretty seriously. Look at Danny Finkelstein dropping in Kahneman and Tversky for example, he's also written about Dan Ariely (me too) and, I think, Richard Thaler. I can't think of anyone comparable on the Left who is taking a similar line. I think it would be a big mistake to allow the Right to occupy this territory.

The Observer business section actually has one or two interesting bits in it. For example this piece about Fannie Mae and Freddie Mac. I thought the US system was actually quite a good one, shows you what I know. In the same territory the Rowntree Foundation report mentioned in this piece looks like it might be worth a read. Notably they are realistic that you can't regulate away house price bubbles.

Finally, and not at all related, my copy of Metaphors We Live By turned up yesterday (along with Descartes' Error, which looks fascinating). I'm really looking forward to this, and having had a quick flick and read this morning I've already managed to annoy Mrs Tom with examples of how prevalent metaphors are in day to day speech. Here's a short bit that has relevance to my rather botched post yesterday:

Theories (and arguments) are buildings:

Is that the foundation for your theory. The theory needs more support. We need some more facts or the argument will fall apart. We need to construct a strong argument for that. I haven't figured out yet what the form of the argument will be. Here are some more facts to shore up the theory. We need to buttress the theory with solid arguments. The theory will stand or fall on the strength of that argument. The argument collapsed. They exploded his latest theory. We will show his theory to be without foundation. So far we have put together only the framework of the theory.

The next section on 'ideas as food' is great too - 'half-baked' ideas, 'raw' facts, propositions that are hard to 'swallow', 'meaty' concepts, information being 'spoon-fed' etc. Great stuff.

Saturday 12 July 2008

Why do people change their minds?

One of the things that has been interesting me lately is why people change their opinion on a given issue. Partly this stems from my own shifting views, particularly on work-related stuff, and in part also from my interest in political defections. Here's some blurb I wrote about this a few months back:

I think the desire for narratives also manifests itself when people radically change their political views. It's notable that when some people's politics change they often seem to go through a wholesale change. We can all think of examples of those formerly some way out on the Left who subsequently became thoroughly right-wing. That is of course absolutely their right, but it is surprising that a number of such people seem to shift their view from Left to Right on each and every issue. It's unlikely that any 'side' is the sole repositery for truth, therefore wouldn't we expect to see more people become unaligned (as they realise that the side they had affiliated with is 'wrong' on certain issues) or simply moderate their views, rather than shift from one pole to another? If people are rationally considering each and every issue we might well expect to find this happen, but if we are principally in the business of buying narratives then maybe it's not surprising to see people chuck out one and replace it with a diffrent one. It's a lot easier than thinking through each issue in detail.

I think this sort of holds together, but I think it needs fleshing out a bit. What I've been thinking about lately is how those big headline beliefs (ie Left vs Right) sit on top of a stack of smaller ideas (what I'm going to call 'prop' beliefs). Now in order to shift fundamentally from one position to another, and for your new position to be sound, I think you must need those prop beliefs to support your big new idea. But how do you acquire them?

Personally, I have shifted a lot in the direction of letting people get on with things rather than trying to direct them centrally, so I'm much more comfortable with markets (in general) than I have been before. In addition I'm much less confident about the degree of control that is possible in any case. But how have I acquired these views?

In large part it is the result of work-related reading, but I can split this into sub-categories. There are areas that I understand well, where I think what I have done is looked at the empirical evidence (ie investment performance figures) and reached a given conclusion. Then there are the bits that I understand less well, where I think I have largely accepted propositions that sound reasonable (probably because they have narrative rationality) and/or because they come with the social proof of being advocated by 'experts'. So these are the prop beliefs supporting my revised perspectives.

Hopefully that all makes sense so far, but what interests me is which comes first, the big ideas, or the prop beliefs? Intuitively the changes in the prop beliefs ought to affect the bigger beliefs that sit on top of them. But going back to my bit of blurb from a previous post, I wonder whether it doesn't sometimes happen the other way around.

Perhaps we don't always acquire our big reliefs rationally by building on top of smaller established prop beliefs. Perhaps (for whatever reason) we acquire the big belief and then rapidly establish the props in our mind required to support it. That would seem to fit more easily with those cases where people switch completely from one perspective to another. In my own case, have I made up my mind to adopt new beliefs, and am now working on the evidence to support them, or do the prop beliefs come first? What's sauce for the goose and all that... Tricky one eh?

Off on a bit of a tangent, I'm always amazed to read pieces arguing that people are afraid to criticise [insert minority group, default option: muslims] for fear of being seen as prejudiced. I'm particularly amazed when I read such articles in national newspapers that regularly run negative articles about minorities. As far I am concerned it is patently false that people are prevented from speaking out, because they seem to do it all the time.

What is also noticeable is that vehemence and self-righteousness with which these claims are made, and I wonder whether that isn't actually a bit of a clue to what is going on. For whatever reason, many people do feel a bit shameful about laying into minorities. However by instituting the prop belief that they are being censored from saying what they want they are able to utilise this to access a feeling of self-righteousness in 'speaking out'. In this example the prop belief would seem to be used to address cognitive dissonance arising from their desire to say something and their desire not to be seen as insensitive/prejudiced.

Or am I talking rubbish?


I thought I would bung up some links to interesting blog posts on the state of the economy. So here are three from different perspectives that caught my eye lately.

Capitalists @ Work on the 'Brown-out'
Snowflake5 on oil consumption
Stumbling and Mumbling on job losses

Friday 11 July 2008

Two completely unrelated things

But both worth a look. The first is this article on Finance Week about credit rating agencies. Here's the beef:

Of the 1,956 investment professionals surveyed by the CFA Institute, 11% said they had seen a credit rating agency change a bond grade in response to pressure from an issuer, underwriter or investor. Of the 211 respondents who said they had witnessed an agency change its rating in response to pressure, 51% said the pressure took the form of a threat “to take future ratings business to other” rating agencies.

I know there is a fundamental conflict in rating agencies being paid by those they rate, but I still find this genuinely shocking.

On a completely unrelated point I've been flicking through some articles on the (defunct) Rockridge Institute's website. Lots of interesting stuff on there from George Lakoff and others on reframing language. Here's one to kick you off.

Westminster Village 2 Blogosphere 0

The turnout collapsed, he received 5,000 fewer votes than last time he stood, and public opinion has not budged according to ConservativeHome. David Davis describes this as a "stunning message". To excitable bloggers maybe!

Some people initially claimed this would be an example of the mainstream media (MSM in the blogosphere) calling it wrong, and the Westminster Village being out of touch. In fact it looks rather the reverse now. In addition you do have to wonder how long Right bloggers can keep plugging this 'Westminster Village' line. I'm not sure how convincing it is to attack the 'Westminster Village' if you are, have been, or want to be a parliamentary candidate. Or run a political bookshop, magazine etc.

And for all the claims of bloggers 'telling it like it really is', lets see how Right blogs respond to a cleary weak result for Davis that will probably be forgotten very quickly. To accept Davis' "stunning message" line unquestionably is surely the business of party hacks, not independent-minded keyboard warriors...

Thursday 10 July 2008

David Davis campaign

Oh blimey, even ConservativeHome is wondering whether the whole DD campaign wasn't just a waste of time. As they point out public opinion on 42 days has not budged, despite his national crusade.

Still, we all know that the Westminster Village is out of touch on this one as evidenced by the fact that some people wrote some things on the internet that backed Davis, and that Bob Geldof has had a moan in The Telegraph.

Let's wait until we see just how soundly The Church of Militant Elvis has been thrashed before we pass judgment.

Analysing labour issues...

Very quick plug for the latest Enhanced Analytics Initiative progress report which includes a little bit of discussion about human capital issues that some analysts are looking at. Notably one report taking a butchers at elf n' safety in Australia.

I've had a few conversations with folks lately about the investors look at labour issues (if at all), including at the CWC trustee meeting today which I was able to get along to for a bit. So I'll will try and bung up a post about it this weekend.

Wednesday 9 July 2008

Rose gets tweaked on the nose

Stuart Rose at M&S that is. At the AGM today a rather large 22% of shareholders failed to back his elevation to executive chair. It's customary to call such a significant lack of support a 'bloody nose', but as he has the combined role in the bag now that seems a bit inappropriate.

Tuesday 8 July 2008

Vote against Caledonia Investments' Tory donations

One to look out for if you are a pension fund trustee. Caledonia Investments has its AGM on 29th July and is seeking authority to make donations of up to £75,000 to the Conservative Party, with a specific focus on marginal seats.

It is resolution 17 on their proxy card. Here's what they say:

The Board has been concerned for several years by the consistent rise in taxation and public expenditure suffered under the current Government and also by the increasing burden of legislation that it has imposed on UK businesses, with consequent adverse financial and operational impact. These issues contribute towards making businesses in this country less competitive in world markets and have an adverse effect on the performance of Caledonia’s investment portfolio.

The Board believes that a Conservative government would seek to cut government waste, excessive bureaucracy and high borrowing, and bring down spending as a share of national income, which would be of great benefit to business and the economy in general and thus to the Group’s business and Caledonia’s shareholders in particular.

Accordingly, the Board is seeking to renew the approval to make political donations to the Conservative Party given by Ordinary Shareholders at the 2007 AGM. Authority is however now being requested to make donations of up to £75,000 in aggregate, as opposed to the £60,000 approved last year, in order to enable the Company to assist the Conservative Party in building resources in marginal seats in the approach to the next general election.

This approval, if granted, will last until 1 January 2010 or, if earlier, the conclusion of the next annual general meeting of the Company.

This is shareholders' money - don't let them pee it away on partisan political donations. If you are a trustee find out if you have any money in Caledonia (which is an investment trust). If you do find out what your fund manager is planning to do, or even better instruct your manager to vote against it.

Unite and USW and capital stewardship

Just a quickie on the Unite USW merger. The USW is one of the US unions that has played a role in the workers' capital movement, having been a force behind the establishment of the Heartland Labor Capital Network for example. From the looks of it they have been particularly interested in the area of economically targeted investments. Could be a good basis for developing capital strategies in the new merged union?

Monday 7 July 2008

A Rightie I can respect...

While the David Davis stunt-election-cum-future-leadership-challenge-marker tying some lefties in knots as to whether or not they should support him (the answer to me is quite obviously is NO), I've got to say my Rightie-of-choice tonight is Peter Oborne. I've just watched his Dispatches programme 'It shouldn't happen to a muslim' and I felt like giving the bloke a round of applause at the end of it.

With plenty of Righties talking themselves into believing challenging Islamic extremism is somehow comparable with WWII or the Cold War, here was a conservative finding a completely different story. He argued that the muslims were being unfairly characterised as extremists, leading to tensions in local communities and even violent attacks. Rather than wartime analogies, the comparison he drew was with earlier examples of us stigmatising minority groups, and he was particularly scathing about media coverage of muslims.

And what was best of all about it was that he didn't lessen the impact of his message by diluting it with needless caveats and qualifications (we don't need to preface every discussion about muslims by restating our opposition to religious extremism). This was a forceful attack on intolerance and ignorance and those that exacerbate the problem. I diagree with him about a lot, but on this he was absolutely spot on.

TUC trustee conference docs, reports etc

John Gray has already blogged about the recent TUC trustee conference here and here, so I'm not going to bother.

However you can get a copy of Brendan's speech to the conference here, and you can download the breakout session presentations here.

Private equity and agency problems

Hat-tip to Global Proxy Watch for this one, a paper on agency problems with respect to private equity. Remember the pitch from proponents is that private equity solves the agency problem in the shareholder-company model. I've blogged before that I'm a bit sceptical about this. But this paper looks to do the work properly rather than guess at the problem!

Here's the abstract:

Because a buyout fund buys 100 percent of the company and controls it, it has often been argued that buyout funds reduce the problems created by a separation of ownership and control. Buyout funds are in full control of companies but minority shareholders. The majority of the shareholders are the investors in the funds. This new governance structure may introduce new agency conflicts and preserve some of the old ones. To understand whether buyout funds reduce overall agency conflicts, we need to better understand the relation between buyout funds and their investors. As a step in this direction, this paper describes the contracts between funds and investors and the return earned by investors.

The average fund charges the equivalent of 8 percent fees per year despite a return below that of the Standard and Poor's 500. This excessive rent raise the question of why does the marginal investor buy buyout funds? I explore one potential - and probably the most controversial - answer: some investors are fooled.

I show that the fee contracts are opaque and difficult to quantify. In addition, compensation contracts imply lower fees at first sight than in reality. What generate large fees are some details of the contracts, not the big headline. Investors may thus underestimate the impact of fees. I also show the different aspects of the fund raising prospectuses that can be misleading. I then discuss whether investors can learn or whether this situation may persist. Finally, to further understand the potential agency conflicts between buyout funds and their investors, I discuss a few features of buyout contracts that exacerbate conflicts of interest, rather than mitigate them. For example, several contract clauses provide steep incentives that distort the optimal timing of investments, their leverage, their size and the number of changes operated in portfolio companies.

Saturday 5 July 2008

Richard Thaler book, blog, lecture, t-shirt etc

Richard Thaler, one of the big names in the field of behavioural economics, has a book out called Nudge which looks quite interesting. He also has a blog on the go which you can find here.

And he's giving a lunchtime talk at the RSA later this month. This is actually on the same day as the session on Tomorrow's Investor that I mentioned t'other day, that one is an evening session though. I'm going to try to get to both.

Friday 4 July 2008

Machines and metaphors

A passing reference to Paul Ormerod in this post on Stumbling and Mumbling made me go and have a quick flick through my copy of Why Most Things Fail. I found it quite a challenging read, as he is very sceptical about the record of social democracy. But to be honest I have quite a bit of sympathy with the general pitch that it's very difficult to plot a successful course of action given an unknowable future. There's a great bit early on where he translates a statement from a director of GM about a new launch as basically stating "Our new product model might do well, or it might not. We don't know."

But the bit I was reminded of when flicking through the book last night was this nice little para late on where Ormerod is describing Hayek's views:

The visions of the world articulated by orthodox economics and by Hayek are fundamentally different. Conventional theory describes a highly structured mechanical system. Both the economy and society are in essence giant machines, whose behaviour can be controlled and predicted. Hayek's view is much more rooted in biology. Individual behaviour is not fixed, like a screw or cog in a machine is, but evolves in response to the behaviour of others. Control and prediction of the system as a whole is simply not possible.

The bit I really like is the reference seeing systems as machines. I think this is a widespread and fundamental misconception. In my bit of the world I think it plagues some attempts at systemic reform. I think that there is an implicit assumption, for example, that the investor-company relationship would function radically differently if only different information was being fed into the machine.

(Incidentally this is another reason why I continue to think that the unions could be a serious force here. There has always been an element of scepticism on the unions' part about SRI because of its failure to address labour issues effectively. As a result they have often gone off and done their own thing, often quite successfully. Union investor activism can be successful (in my view) because it has immediate goals, rather than a systemic approach. Unions still need to have a view on the systemic issues, but seem to get less bogged down in this area than SRI proponents.)

More broadly I think this conception of systems as machines is further evidence of the way we attracted to certain ideas and ways of viewing the world. Seeing systems as machines is comfortable because it implies that control is possible, and that you can have an idea of what the system working well looks like (and therefore how to achieve good results). I think these little short-cuts we use to describe bits of the world must have a fairly significant influence on how we understand it too.

And with that in mind, my next book purchase is going to be this.

Thursday 3 July 2008

Shareholders and the public, again

The RSA is carrying out an interesting little project called Tomorrow's Investors about shareownership, based on the familiar (if you read this blog anyway!) idea that ownership is becoming more democratised. Here's what they say:

Today, roughly two-thirds of the UK population own shares. But only a small minority engage with their investments. Tomorrow?s Investor is the first project to look at the corporate system from the perspective of ordinary citizens. Are we getting what we want from our investments? Is there a gap between the decisions that are taken on our behalf and the decisions that we would take if we were really engaged in this process? Do we want to or have the tools to get involved?

The RSA is conducting deliberative research to look at these questions. This will be the first stage of a project with the potential to deliver sweeping change in the culture of investment.

What is the problem?

Most people in the UK own shares. We own them not only in our own names, but also through our investments in pension companies and investment funds, a capital stake amounting to more than £500 billion in UK markets alone.

This democratisation of share ownership has changed the way public companies are owned. As recently as the 1970s, corporations were controlled by handfuls of wealthy individuals. Now, taken together, ordinary investors own large stakes in many of the biggest companies in the world.

Yet despite high profile scandals, increased criticism of the behaviour of some hedge funds, and widespread public dissatisfaction with boardroom pay raises, we largely remain passive and uninformed owners. As a result, people often find themselves with shareholdings that conflict with their interests. And the corporate system has a vacuum of power at its very centre.

Our response

By law and by tradition, companies are accountable to their owners. Yet it is not often acknowledged that true accountability is a two-way process. It involves not only being held to account, but also giving an account.

This kind of accountability only emerges out of a dialogue - one that is fair and honest on all sides. Tomorrow's Investor wants to kick-start this conversation.

And if you open this PDF it details some basic research the RSA has done into what indirect investors think about shareholder engagement. Here are the headline findings:

Over 70 per cent of respondents owned shares by some indirect means, mostly through private pensions or managed investment funds.

33 per cent of respondents did not know where any of their indirect shareholdings were invested. Most people had never had any contact with their fund manager, or with the trustees of their pension fund.

66 per cent of respondents felt that they did not want to be more involved in the financial management of their indirect shareholdings.
49 per cent felt they did not want to be more involved in ethical management.

However, the vast majority of respondents felt that public companies would benefit from greater investor involvement. 59 per cent felt that ethical management needed investor input; 47 per cent felt that this was the case with financial affairs.

A Marxist view of losing money in market crashes

This is from an old Howard Davies speech:

One sidelight on the Wall Street crash which has some relevance today is the story of the Shenandoah Corporation launched by Goldman Sachs. It was what we today would call a leveraged investment trust. It crashed dramatically. One of the investors who lost his money in Shenandoah was Groucho Marx who observed ‘I lost $250,000. I would have lost more, but that was all I had’.

Wednesday 2 July 2008

Primitive property slumpism

I'm nicking/misusing the term 'primitive slumpism' (which Trots seem to use as a pejorative term for the celebration of economic crises as a force for radicalising the proles). I'm using it here to refer to my own simplistic understanding of what might be going on in the property market, specifically how banks can amplify the problem.

The idea that banks can get get carried away during a property bubble is not a new one. Will Hutton recently explained how the process worked in one of his columns in the Observer. What's interesting though is the role of the banks when the bubble bursts. Below is a nice and clear description of how this might work taken from an essay by Richard Herring (this one, not this one) and Susan Wachter in the bubble book I'm reading this week:

Bank behaviour may also play an important role in exacerbating the collpase of real estate prices. A decline in the price of real estate will decrease bank capital directly by reducing the value of the bank's own real estate assets. It will also reduce the value of loans collateralized by real estate and may lead to defaults, which will further reduce capital. Moreover, a decline in the price of real estate is likely to increase the preceived risk in real estate leding. All these factors are likely to reduce the supply of credit to the real estate industry. In addition, supervisors and regulators may react to the resulting weakening of bank caapital positions by increasing capital requirements and instituting stricter rules for classifying and provisioning against real estate assets. these measures will further diminish the supply of credit to the real estatte industry and place additional downward pressure on real estate prices.

That sounds pretty believable to me, though it does suggest if I understand it right that if banks' capital ratios are to be revisited then we might want to wait a bit. In addition the essay also makes the point that depositor protection (which is clearly a good thing) has the effect of insulating banks against market pressure. Why pull your money Northern Rock style if you know it is underwritten by an insurance scheme?

There's another interesting bit later in the essay where they discuss herding by banks in respect of risk. Herding is something that will be very familiar to anyone who has looked at active fund managers, and it was explored quite a bit in the Myners Review of course. I've never really considered how it might affect banks though, especially in the midst of a crisis. Here's what they say:

A bank knows that if it takes on an idiosyncratic risk exposure and loses, it may face harsh regulatory disciline, including termination. But if it is careful to keep its risk exposures in line with those of other banks, even if a disaster occurs, the regulatory consequences will be much lighter. The supervisory authorities cannot terminate all banks or even discipline them harshly. Indeed, the authorities may be obliged to soften the impact of the shock on individual banks in order to protect the banking system.

When you think about it, this makes a lot of sense (from the banks' point of view) but it is also really annoying. These massive financial rewards are handed over to financial institutions for their expertise and insight, yet it seems a lot of what they do involves just sticking with the pack, even when the pack is behaving in a very risky way.

Anyway, it's turning out to be a great book.

Investor suffrage

Now this looks like a really interesting idea, and one that could fit in well with the DB to DC shift in the UK and a number of other countries. The blurb below explain the idea (for mutual fund read unit trust in the UK):

Imagine you invest in a mutual fund. The fund has always voted the shares it holds on your behalf, but today it offers you a choice. You can have the fund continue to vote the shares, or the proxy rights can be transferred to a third party of your choosing—perhaps an environmental group, a trade union, or a professional association.

Now suppose an on-line "proxy exchange" is established, allowing millions of investors around the world to conveniently transfer proxy rights to whomever they like. What will recipients of all those proxy rights do with their new economic power? How will corporations be transformed?

Doesn't this just scream Personal Accounts at you? With millions more people savings billions of pounds through Personal Accounts this will result in a further shift in shareownership towards the ordinary punter. The problem is, of course, that the result could be that all the power relating to that ownership could accrue to fund managers rather than the real owners or their representatives. Why not instead allow individual savers to allow a third pirty to handle voting for them? Notably they even suggest that unions could be involved.

I think this is a great idea, and one that could be pushed with PADA when they carry out their consultation on the investment arrangements of Personal Accounts later this year.

Tuesday 1 July 2008

Bubbling away...

I've got a few days leave this week that I'm spending at home sorting out a few bits and pieces and reading, and may not be blogging much. One of the books I want to make some headway with is Asset Price Bubbles: The Implications for Monetary, Regulatory and International Policies, which is a collection of just over 40 essays that came out of a conference in 2002. This is an area that I really want to understand a bit better, especially given what has happened recently.

Having read a few of the essays, in addition to the useful overview, it strikes me that there is already some significant common ground about bubbles, though it isn't actually that helpful for addressing them. For example it seems to be a fairly widely held view that it is very difficult for central banks, regulators etc to identify bubbles in advance.

In addition there is a fair bit of consensus that financial innovation can work against the emergence of bubbles, rather than be a cause of them. I want to read around this argument quite a bit more, but I don't have a problem with it at face value. In understanding what has gone wrong in the capital markets lately I think we have to distinguish between whether there inherent flaws in some of the new financial instruments, and whether rather they were misunderstood/misrepresented.

Anyway it looks like it will provide some geeky reading over the next few days.