Tuesday 30 June 2009

Capital stewardship in practice

See John Gray's posts here and here.

I keep saying this, but

Paul Myners has given another interesting speech, this time to the British Bankers Association. Usually in ministerial speeches you get a mixture of political scene-setting, a recap on initiatives undertaken and, if you're lucky, today's policy announcement. You very rarely (for all kinds of understandable reasons) see an attempt to grapple with some of the intellectual issues behind the policy brief.

Myners has given a string of speeches that I think many people in my bit of the world will think are both well-informed and challenging (in a good way). I can't think of another minister likely to make reference to strong-form efficient markets hypothesis and portfolio theory. He makes reference to the fact that the current review of governance etc needs to go deeper than Higgs and Cadbury, so we can only hope that Walker is indeed going to take a crack at some of the big issues.

Anyway, here's a short chunk, but the whole thing is worth a read.

If we challenge the objectiveness of markets in finding ‘fair value’ and expose the very approximate date that lies at the heart of TSR and portfolio performance calculations we create an opportunity for a more enlightened debate that might take us towards a better understanding of shareholder value. But this will not happen while focus for institutional investors is on outperforming competitors and indices over short time periods. This approach, quite rationally, has lead most core fund managers to create portfolios that are highly diversified and lacking in stock specific conviction; going with the crowd; not dissenting form the consensus (as we saw with the dot.com bubble); subordinating ‘fair value’ to second guessing. Such an approach has a profound bias over time to extremes of under or over valuation. That is why no major institutional shareholder stood up to challenge the increased leverage building up in the banking sector; no major institution seriously questioned hubristic take-overs; no one told Chuck Prince to “sit out the next few dances”; few challenged the wisdom of putting companies under pressure to ‘optimise balance sheet efficiency’ by taking on more debt or risk falling in to the hands of bank-financed private equity. No one spoke up for the end client, the pension scheme member or funder. No one exposed the nonsense of extreme behaviour and extreme valuation.

I'm interested to hear what Duncan makes of this too.

Monday 29 June 2009

Institutional investors firing blanks says TUC

The annual TUC Fund Manager Voting Survey is published today, full version is here (PDF). It confirms a lot of what you probably expect - actually institutional investors as a whole didn't put much pressure on the banks on either pay or strategy in the run-up to the crisis, at least judged by how they used their voting rights.
The TUC's 2008 fund manager voting survey analyses the voting records of 20 fund managers and pensions funds between July 2007 and July 2008, including votes on banks' remuneration reports and the RBS acquisition of ABN Amro.

The survey shows that investors did not signal any great concern about remuneration reports at bank AGMs. HSBC was the only bank to receive less than 60 per cent for its remuneration report from the survey respondents. The report received just under 82 per cent support at its 2008 AGM.

The survey also shows that out of the respondents only one investor - Co-operative Insurance Society - opposed the acquisition of ABN Amro by RBS in 2007, which is now widely regarded as one of the worst deals in UK corporate history, despite receiving overwhelming support from RBS shareholders as a whole.

The survey reveals big differences between institutional investors in their general approach to boardroom pay. At one end of the scale six respondents supported every remuneration report covered in the survey while six of the respondents supported fewer than half.

A similar gap emerged in investor stances on incentive schemes. Eight respondents supported all incentive schemes in the survey and a further eight opposed the majority of schemes. Most of the respondents took the same position on both remuneration and incentive schemes, suggesting that they have a clearly defined stance on these issues.

It clearly points up the fact that there are differences between asset managers in terms of how pro-management they are. This point is obvious to anyone who spends any time looking at voting data, but many trustees still think that delegating voting to managers doesn't really matter. All I can say is that in that case don't be surprised if you find your pension fund has voted for somethings you don't like, and against some union-friendly initiatives.

Separately the NAPF has published a survey suggesting that pension funds are starting to put a bit of effort into activism. Quick blurb below, more on the NAPF website.
Key findings from the National Association of Pension Funds 2009 engagement survey show that nearly half (49%) of pension schemes will spend more time scrutinising the actions of their fund managers on engagement issues as a result of the economic crisis. Over three quarters of funds (78%) said they will give more time to reviewing reporting and 57% said they will pay more attention to votes cast.

Sunday 28 June 2009

FSA extends shorting disclosure regime

Via the extremely informative Corporate Law and Governance, I picked up the news that the FSA said on Friday that it was extending the shorting disclosure regime again. The full policy statement is here (PDF).

I'm actually a bit surprised by this. The FSA says that the decision was taken "to minimise the potential for market abuse and disorderly markets in UK financial sector stocks". Yet as I blogged previously the FSA's previous discussion paper on shorting was pretty positive about the practice, arguing that it delivered market benefits.

The other interesting thing to note in the latest statement is the support for the extension of the disclosure regime from 4 'trade associations' (see pages 4 and 5). Based on the list of respondents, and assuming that the likes of the ISLA and AIMA are opposed, it looks likely that the more 'traditional' investment lobby groups were in favour. This is no great shock in one sense, as I am pretty sure the ABI have said as much publicly, but what does it say about their implicit views about how markets operate? Or is it 'long-only lobbying'?

Friday 26 June 2009

Caledonia Investments plans to fund the Tories, again

Caledonia wants to give more shareholders' money to the Tories. See resolution 16 on its 2009 AGM circular here. Specifically they say:
The Board strongly believes that the hard decisions that need to be made to sustain economic recovery require the return of a Conservative Government at the forthcoming general election. It will be especially vital to curb the soaring level of public borrowing to achieve such a sustained recovery and the Board considers that only a Conservative Government will credibly address this critical issue. Otherwise, the long term prosperity of the UK as a whole, and the Company and its shareholders in particular, will be under severe threat. The Board also notes recent statistical evidence which shows that UK stock market returns have been significantly greater in periods of Conservative government than Labour government.
The Board is therefore of the firm view that it is in the interests of all Ordinary Shareholders again to seek approval for the Company to make donations of up to £75,000 in aggregate to the Conservative Party. As before, donations will be targeted towards building resources in marginal seats in the run up to the general election. This approval, if granted, will last until 1 January 2011 or, if earlier, the conclusion of the next annual general meeting of the Company.
Last year a number of fund managers voted for this proposal. If you are a trustee (pension or charity) check to see if you have any money in this investment trust, and if so you need to find out which way your manager plans to vote.

The AGM is on 23rd July.

Walker Review snippet

Consultation paper due out on July 16th apparently. Let the lobbying commence!

No Gods No Masters

Look here.

Thursday 25 June 2009

Telegraph prints lies about pensions

Todays' editorial in the Telegraph about pensions is one of the most inaccurate pieces of writing on this subject that I think I have ever seen in a national newspaper. It's simply a rehash of ill-informed prejudices about the UK's pension system and it has so many things wrong with it that it is hard to know where to start.

When Labour took power a dozen years ago, private pensions in this country were the envy of Europe.

No they weren't, for numerous reasons. For one the replacement rate (your post-retirement income compared to your pre-retirement income) was significantly higher in many other countries, in part because they have far more generous PAYG schemes, and because the state system in the UK was vandalised by the Tories. Secondly the private pensions system here has always had huge gaps compared to other similar countries, with approx half the workforce only in an occupational scheme. This stuff can be found in the Pensions Commission report.

Then there were employer wheezes like clawback etc.

Finally many other European countries thought that funded pensions were too risky, as they could be damaged by volatile financial markets. The simpletons, eh?

Why the collapse? A primary reason is the decision of Gordon Brown, as Chancellor, to use his first Budget in 1997 to scrap the tax relief on pension fund dividends – a scheme dreamed up, incidentally, by his right-hand man, the Schools Secretary Ed Balls.
Utter bollox. The primary drivers are improved life expectancy, poor investment returns and the fact that companies have to disclose deficits on their balance sheets. The Tories' former pensions adviser Stephen Yeo has said as much.

It has been estimated that this spiteful measure has cost private pension schemes as much as £175 billion in the intervening years...

Estimated by who? I have never seen this figure before. The most commonly quoted figure is £5bn a year, which would add up to £60bn by now. But as I have blogged several times previously independent analysis by the Pension Policy Institute puts a much lower figure on it. I'm not saying it didn't hurt, but to say it was a 'primary reason' is hugely misleading.

It ushered in the era of enormous fund deficits, the demise of most final salary schemes and depleted pension pots, leaving millions worse off than they expected and forcing many to postpone retirement.
Note 'ushered in' the implcation again being that the ACT cut 'caused' the collapse of final salary schemes. Funny thing is, the tax change happened in 1997, but the wave of scheme closures only started after the post-2000 market slump.

Most state workers enjoy final salary schemes and their average pension pot is more than £427,000, compared to just £25,000 in the private sector.
This is the worst thing in the whole stinking dunghill. This is a comparison between the transfer value of a typical public sector DB entitlement and what looks like a low estimate of the average DC pension pot. They are not the same thing, nor are they directly comparable. I have been in both DB and DC schemes in my working life. I have about six years' DB entitlement, the rest DC. So just quoting my DC entitlement doesn't give you any idea of what retirement income I will be heading for.

Many other private sector workers will be in the same boat, having been in a DB scheme and built up entitlement, but many now in a DC scheme if they have moved job recently. (though many private sector workers are still accruing benefits in DB schemes because these schemes were closed to new members after they had joined). And in any case inevitably DC pots will be on average smaller because most DC schemes have only been set up in the past few years.

The Telegraph's comparison is simply bogus. It has either been written by someone who knows very little about pensions, or it is deliberately dishonest.

Its one attempt at reform – the modest suggestion that existing state employees retire at the same age as the rest of us – was meekly abandoned by the then trade secretary Alan Johnson at the first squeak of resistance from the unions.
Again, very misleading. Who are 'the rest of us' and when do we retire? Many private schemes had a normal retirement age of 60 in the past (the same as most public sector schemes), but have recently increased it for new starters (same as the public sector). The LGPS incidentally has had an NRA of 65 for years. But in any case that is just the date your pension gets paid at, not the age at which you can retire. You can retire when you like if you can afford to, and from memory there isn't a big difference between public and private sectors. I think on average people empoloyed by bigger companies retire earlier than the public sector average, but I'd need to check.

There is one section in this stream of rubbish that is true -

This craven behaviour means an incoming Conservative government will have to pick up the pieces. David Cameron said this year that he is ready to meet the challenge.

Make no mistake. If you are a public sector worker the Tories are going to come for your pension - they have said so numerous times. The same people who broke the earnings link, gutted SERPS, and encouraged people to leave good occupational schemes to join personal pensions now want to launch an ideological assault on the pensions of people employed by the state. They haven't changed - they are the same vindicative gits they always have been. Don't say you weren't warned.

PS. I have never been a public sector employee, so I have no vested interest in this.

Wednesday 24 June 2009

Tuesday 23 June 2009

M&S battle heats up

RiskMetrics has come out in favour of LAPFF's resolution seeking an independent chair. Given that a large number of UK institutions take RiskMetrics as a feed (and some just follow their recommendations) this will inevitably boost the level of support for the resolution. I bet the board aren't happy. Game on.

M&S gives ground... on pay

Interesting move by M&S to say Stuart Rose and Steve Sharp will waive part of their potential entitlement to share awards because of investor unease.

There are two possible readings of this. Maybe the company was facing a serious revolt from shareholders, and the ABI in particular, over this issue and therefore had to cave in.

But my cynical side wonders whether there isn't some horse-trading going on. Has M&S chucked investors a bone on remuneration policy to stave off a bit of pressure on the rather bigger issue of combined roles? Giving ground on pay gives the ABI something to show for its engagement. It has still amber-topped its report on M&S because of the LAPFF's shareholder resolution, but it has said that it always does this when there are such initiatives.

The fact that both M&S and the ABI issued public statements on this is what surprises me. It's unusual. But then maybe once M&S had put out its statement, which refers obliquely to 'shareholder representative bodies', the ABI really had to put something out and wanted to control the message by issuing a quote.


Monday 22 June 2009

Voting with your feet

I mentioned L&G sticking their necks out in the governance debate recently. Well you can download their thoughts here. One bit that I like in their commentary is the dismissal of the argument that if big investors don't like a company they can just sell. Apart from the fact that this isn't much good for UK Plc, I'm also doubtful that it actually happens like that in practice, at least at the big houses. They underweight, rather than sell out alot of the time.

L&G also doesn't buy the argument, but for different reasons:
investors ‘voting with their feet’, is the most commonly cited reason for a lack of engagement. However, while this action is possibly logical for shareholders who are not closely connected with the management of a company, we feel it misses the point. Investors typically start their engagement process by meeting a company before an investment is made. Prevention is the best way of solving corporate governance concerns and if investors wait until something has gone wrong before they start to engage, it will often be too late to solve the problem.

The whole thing is worth a read.

Sunday 21 June 2009

Neuroscience. Meh.

Well, I've finished the book I mentioned in the previous post (it's got 'business hardback' double-spacing so it's quick work), and it's not brilliant. In fact it really comes across as an amalgam of three separate bits. First, some genuinely interesting insights from neuroscience. These include the importance of visual input in conception, and how the tendency to efficient use of energy in our brains leads us to look for the familiar when faced with new things (hence we can be put off if we can't find something familiar). This is used to point up some of the key features of successful iconoclasts (seeing differently, overcoming fear, social intelligence).

Second, laid on top of these insights - which whilst interesting wouldn't make a whole book on their own - is some Malcolm Gladwell style waffle, providing short stories about successful people from business, politics etc and trying to claim that the aforementioned traits are in evidence. This stuff is tedious and I would argue not really supported by the science. No surprise to see a section on investors in here, which seems to be a requirement of any behavioural science book these days. My favourite low point is the claim in the privatising space travel chapter that the skills to get someone into space are just like those needed to get a dotcom company up and running. Bleurgh!

Then finally, tacked on the end without any thought of how to mesh the content of the rest of the book, is a kind of field guide to what impact different kinds of drugs have on your brain. Again this is actually really interesting, but it just doesn't really link in with the rest of the book (which is presumably why it's described as an appendix).

Strange book, but a few useful nuggets in there.

Familiar ideas

A quick snippet. Last year I blogged a little bit about the legitimation of ideas (ie by what process an idea comes to be accepted or rejected as valid). A couple of bits on this here and here. Based on the totally non-scientific way I think my own brain operates I believe I (and probably others) have an inherent tendency to try and 'subdivide' new information by reference to concepts I already have in place.

In a stack of books I ordered recently I took a punt on this one. It turns out that I might not be miles off the mark. Berns argues that our brains are constantly trying to act as efficiently as possible, and once something is familiar (or appears to be so) they expend less effort on it. Once your brain has come across an item half a dozen times, the level of brain activity detected when being presented with it again is roughly half what it would be on first viewing. Berns argues that because our brains are seeking to be efficient we do indeed instinctively look for the familiar. It's less effort. He argues that this is why optical illusions 'work', even though we may 'know' that we are being presented with an illusion.

Ho hum.

Saturday 20 June 2009

Investor reforms

Legal & General arranged a press briefing this week to set out its views on corporate governance, shareholder activism and what reforms might be needed. Here's an article from The Times for example. Notably L&G has advocated at least two policy reforms that go beyond the recent ISC statement - annual election of all directors (not just committee chairs), and making the vote on remuneration reports binding. In fact both these ideas seem to be commanding increasing support from investors as far as I can tell.

A few thoughts on this - first, it really does demonstrate what a waste of everyone's time the ISC statement was, since it doesn't go as far as many members of its membership organisations want to. It is lowest common denominator stuff. Second, that means that surely these ideas ought to get a hearing in the Walker Review. If this is increasingly mainstream investor opinion of what reforms are needed it should not be hard for Walker to endorse it, or even go a bit further.

And that's the final point - what's the leading edge of the reform debate now? Mainstream investors are advocating reforms that were once on the periphery. What at the ideas that the still find a bit too much? A couple of mine that might be worth pushing are employee representation on remuneration committees, and disclosure of comparative information about pay across companies so investors can see how directors' pay increases compare with other employees. (it could also capture below board policy information in financial institutions too). Both definitely a bit too 'labour movement' for most investors, but now is the time to be pushing the debate on governance reform wider.

Thursday 18 June 2009

Another shareholder resolution - M&S

Another AGM to watch in July is Marks & Spencers. Last year the company announced (without prior consultation with shareholders) that Stuart Rose was going to become combined chair and chief exec - in clear breach of the Combined Code. The argument put forward was that this was necessary in order for succession-planning (ie next chief exec after Rose). However not a single investor I have spoken to about this issues believes this. The consenus seems to be that it's a power grab and/or ego trip on Rose's part.

However, most investors want him to stay on as chief exec. At last year's AGM about 22% of votes were not cast in favour of his re-election, though the overwhelming majority of this protest was made up of abstentions. Amongst those abstaining were the likes of BGI, L&G, Co-op, Hendersons etc. A few investors also voted against the report and accounts as a protest.

This year the Local Authority Pension Fund Forum has filed a resolution calling on the company to appoint an independent chair - ie split the roles - by July 2010. It is focused purely on the governance issue, and the LAPFF is not going to push for a vote against Rose. So in theory this ought to give investors who have a problem with the governance situation, but still have faith in Rose, a safe outlet for their concerns.

It will be very interesting to see which way fund managers vote on this one for several reasons.

1. Most investors own corporate governance/shareholder voting guidelines makes specific reference to not supporting combined roles unless the circumstances are execeptional. Yet, as mentioned above, no-one I have spoken to accepts the company's formal argument - that this is necessary in order for effective succession planning - so you would expect this to be a no-brainer. So it will be interesting to see what reasons managers give for not following their own guidelines (as I have no doubt that some will take this route).

2. The resolution has been filed by fund managers' clients - the pension funds, or 'asset ownwers' to use one of the tedious bits of jargon of my bit of the world. There is no doubt that LAPFF will be looking at which way managers jump, and many of these managers have LAPFF members as clients. The ISC's recent statement said that clients need to tell managers if they want them to be active on governance issues. I would say this resolution is a pretty clear message from a significant group of fund managers' clients.

3. The policy background to this is important too. As I've blogged numerous times, the spotlight is firmly on shareholders now, with the expectation that they need to demonstrate that they can play the ownership role effectively. Again bear in mind that no-one really believes that the combined roles at M&S are necessary. This is a classic example of a needless governance breach, and a potentially ower-powerful chief exec dominating a board. So what is the right course of action for a responsible owner in this environment?

4. Final point - look out for behavioural/cognitive biases at play in attempts to defend the indefensible. Status quo bias is the most obvious one to watch out for - arguments along the line that of course we don't like the situation, but challenging it could upset the balance/destabilise the company etc. This is a classic example of the default assumption that the status quo is not risky, and that trying to move away from it is. But in reality in this case accepting the current status quo maybe the risky option, because of the resulting concentration of power. The other one to watch out for is herding - I suspect this happens as much with corporate governance issues as with other investment decision-making. Managers will try and assess the consensus of other investors' views before sticking their neck out.

The AGM is on 8th July.

Wednesday 17 June 2009

New NAPF chair...

... is Lindsay Tomlinson from BGI, see NAPF site. Note he's not a pension fund representative - and if you look back this is not uncommon for NAPF chairs - but actually he's always struck me as one of the more thoughtful people in the fund management world. For example.

Efficient markets and regulation

Further to yesterday's snippet on analysts' view of market efficiency, I had a quick butchers at the CFA's conference this weeks on the same topic. The full programme is here, but session that caught my eye is this one -
Efficient Markets and Market Regulation

Verena Ross, Director of Strategy and Risk, FSA

As covered previously, the Turner Review spends a bit of time examining some of the ideas that have underpinned regulation and how this affects what it does. The message seemed to be a pretty clear a shift away from the EMH and relying on market discipline, so this session could be really interesting. I'm not going, but on the unlikely off chance that anyone reading this is, if you could let me know what the thrust of the presentation was I'd be very grateful (presumably it might appear on the FSA website).

And on the same thought, here's a short snippet from Asset Price Bubbles: The Implications for Monetary, Regulatory and International Policies which makes the point about why this matters:
The rational behaviour paradigms… imply a restrained role for policymakers. Regulations that interfere with investors’ pursuit of profit opportunities or the flow of information will be detrimental to financial market efficiency. In those models where frictions are identified… enlightened public policies will attempt to eliminate those frictions by removing restrictions on trading (e.g. lock-ups) and financial innovations. Behavioural finance models… have substantially different implications. Regulations should be tightened on self-directed retirement plans and the access that “unsophisticated” investors have to sophisticated and risky financial products. Transaction taxes effected to retard speculation would be a radical intervention… [T]ighter regulations on accounting and advertising and greater penalties for false reporting would seem warranted.

Tuesday 16 June 2009

Analysts think markets are 'irrational'

Quite amusing.
Investors irrational says CFA UK survey

CFA UK Survey Reveals that over two-thirds of financial professionals believe that markets behave irrationally.

Members of CFA UK report low levels of belief in market efficiency and investor rationality. A recently conducted survey shows that the vast majority (77%) of the 438 respondents believe that investors don't behave rationally as individuals.

Worryingly, 67% believe that investors in aggregate also fail to behave rationally. And the same proportion disagree with the statement that market prices fully reflect all available information.

Behavioural finance comes out of the survey with greater support. Most respondents believe that behaviour finance is a useful addition to modern portfolio theory (86%). Though most (76%) agree that it is not yet sufficiently robust to replace modern portfolio theory as the basis for investment thought.

Tesco AGM - use your vote

A quick plug for the excellent work being done by Unite to combat discrimination against agency workers in the meating packing and supply sector. Unite has been pushing the big supermarket chains to address this issue in the companies that supply them with some success.

Their latest initiative is a shareholder resolution at Tesco's forthcoming AGM which Unite has filed with the West Yorkshire Pension Fund. It seeks to get Tesco to -

Allocate a non-executive board member to Tesco's Corporate Responsibility Committee to share accountability for implementation and achievement of these policy commitments.
Commit to annual reporting publicly on performance and progress on relevant Tesco policies, including formalising specific Key Performance Indicators to measure compliance.
Implement as a manageable model for demonstrating progress, improvements to Tesco's UK meat and poultry supply chain, which has been identified as a particular area of non-compliance with implications for social cohesion. The company should develop a framework, through the auspices of a multi-stakeholder group that includes worker representatives such as the Ethical Trading Initiative, that will:
• ensure Tesco suppliers eliminate discrimination and treat all workers equally regardless of employment status; and
• provide support for UK meat and poultry suppliers to Tesco to ensure they satisfactorily deliver equal treatment and a reasonable ethical norm in this sector.

It's resolution 23 on the AGM agenda, and the meeting is on 3rd July. Most pension funds will hold Tesco because it's such a large company so if you're a trustee this is am opportunity to use your share-ownership to address workplace rights in a company you part own.

At the least you should try and find out how your fund manager(s) intend to vote on the resolution, but better yet why not instruct them to vote for the resolution?

Monday 15 June 2009

Disastrous decision

The Observer is losing Simon Caulkin's excellent column, one of the few bits I regularly read. Nine times out of ten he has something insightful to say. So why ditch one of their genuine assets?

UPDATE: Bloggers who think this was a bad move here.

Great governance blog

Came across this recently. Straight into the blogroll.

Ownership and the Far Right

Unfortunately it's not only people on the Left who are interested in the potential to develop share-ownership into something more meaningful than its curtent casino chip status. Check out this bit from the BNP's 2005 manifesto:
"If ordinary Britons increase their savings rate and invest the money in British industry, it will over time transpire that they are the owners of British industry. This has been called “pension-fund socialism,” and it combines the efficiency of capitalist private ownership with socialism’s ideal of worker ownership of the means of production. It also gives workers an incentive to care about the long-term health of the companies they work for, as they are part owners. It is also a pro-nationalist policy, as it tends to bring the ownership of British industry into British hands. The BNP supports the gradual assumption of worker ownership through their pension funds."
Hat-tip: Dizzy (though I don't agree that it proves they are 'far left' or any other kind of left)

Friday 12 June 2009

My kind of blah

From Risk, Uncertainty and Profit:
"Every event has an infinite number of causes, and it depends on circumstances, the point of view, the problem in had, which of these we single out as 'The' cause. 'The' cause of of a phenomenon is merely that one of its necessary conditions which is for some practical reason crucial, generally from the standpoint of control. It is the one about which we must concern ourselves, the circumstances enabling us to take the others for granted. It may be quite correct to name a dozen different antecedents as 'the' cause of a particular occurrence, according to the point of view."

Thursday 11 June 2009

Watching the watchmen

Interesting contribution from Hermes to the debate about the ISC's new statement. They make the useful point that it should not be up to the ISC itself to assess how well its members' members are doing in meeting the ISC statement of principles when it becomes a code -
Colin Melvin, chief executive of Hermes Equity Ownership Services, which provides governance services for investors with £50bn ($81.7bn) of assets, told the Financial Times that the monitoring role should be transferred to an independent body.

The current investment governance framework, he added, “is equivalent to giving the CBI onfederation of British Industry responsibility for the Combined Code on corporate governance”.
Quite right. The only thing I would add is that the ISC's track record doesn't inspire confidence either. It's now two years since the ISC published its framework on voting disclosure, but it still has produced no analysis of how it has worked in practice, despite being asked by Ed Balls to do so.

Friendly fire

Sorry to knock the team, but who does this make you think of?
Manias generally have been associated with the expansion phase of the business cycle, in part because the euphoria associated with the mania leads to increases in spending. During the mania the increases in the prices of real estate or stocks or in one or several commodities contribute to increases in consumption and investment spending that in turn lead to accelerations in the rates of economic growth. The seers in the economy forecast perpetual economic growth and some venturesome ones proclaim no more recessions - the traditional business cycles of the market economies have become obsolete.
From Manias, Panics and Crashes: A History of Financial Crises

Wednesday 10 June 2009

Odds & ends

Back from a very relaxing few days up on the North Norfolk coast. A few bits that caught my eye.

1. Via S&M, this post on Falkenblog is a good defence of the EMH, and a lot of it rings true with me, even though I'm not a believer. John Kay says the EMH is illuminating but not true, which is a useful way of looking at it.

2. Via Charlie, Stephanie Flanders has blogged about another Osborne speech that has generated some interest, since he talks about creating along-term investment culture (a phrase I think we used at the TUC not so long ago!). A few handfuls of salt to take this Damascene conversion with. One, it wasn't so long ago that Osborne was brown-nosing the BVCA, and criticising unions for attacking private equity. Secondly, why keep the proposal to scrap duty on shares, since this will make trading more attractive (in fact the opposite of Keynes' idea in the end of my previous post). Finally, the speech itself is detail free, and seems to do little more than restate existing or emerging best practice (apparently pay in the financial sector shouldn't encourage short-termism for instance).

3. Finally, Matthew Taylor, who kindly gave me a plug, has a couple of pieces about the recent corporate governance circle event at which Paul Myners spoke. I would be interested to hear folks at the event said/thought about the recent ISC statement (welcomed by George Osborne by the way).

Saturday 6 June 2009

Keynes on short/long-termism

I'm killing a bit of time when I should be packing stuff for our first ever family holiday (as in the three of us) which will be a few days up on the North Norfolk coast. I just been flicking through the General Theory for something to do and it reminded me how great the whole of chapter 12 is. Many of Keynes' insights apply just as much today, and are very relevant to the continuing discussion about investor short-termism. There are quite a few famous passages in this chapter, so I've pulled out few other bits that l like.
In abnormal times in particular, when the hypothesis of an indefinite continuation of the existing state of affairs is less plausible than usual even though there are no express grounds to anticipate a definite change, the market will be subject to waves of optimistic and pessimistic sentiment, which are unreasoning and yet in a sense legitimate where no solid base exists for a reasonable calculation.


[T]he professional investor is forced to concern himself with the anticipations of impending changes, in the news or in the atmosphere, of the kind by which experience shows that the mass psychology of the market is most influenced. This is the inevitable result of investment markets organised with a view to so-called "liquidity". Of the maxims of orthodox finance none, surely, is more anti-social than the fetich of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources on the holding of "liquid" securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelope our future. The actual, private object of the most skilled investment today is "to beat the gun", as the American so well express it, to outwit the crowd, and to pas the bad, or depreciating, half-crown to the other fellow.


Investment based on genuine long-term expectation is so difficult today as to be scarcely practicable. He who attempts it must surely lead much more laborious days and run greater risks than he who tries to guess better than the crowd how the crowd will behave; and, given equal intelligence, he may make more disastrous mistakes. There is no clear evidence from experience that the investment policy which is socially advantageous coincides with that which is most profitable. It needs more intelligence to defeat the forces of time and our ignorance of the future than it does to beat the gun. Moreover, life is not long enough; - human nature desires quick results, there is a peculiar zest in making money quickly, and remoter gains are discounted by the average man at a very high rate.


When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism - which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object.


Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits - of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere. Only a little more than an expedition to the South Pole, is it based on the exact calculation of benefits to come. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but mathematical expectation, enterprise will fade and die; - though fears of loss may have a basis no more reasonable than hopes of profit had before.

What I like about this chapter is the clear emphasis on our inability to know the future. Despite all the forecasting that goes on, and the fiendish mathematics employed in the City, this is a barrier that we can never get over and we always need to be aware of this.

By the by, despite Keynes' criticism of liquidity fetishism he does acknowledge in this chapter that you need a given level of liquidity in order for investing to be more attractive than simply hoarding and/or loaning money. However he also suggests that there should be a substantial tax on transactions in order to discourage speculation.

Undershooting low expectations

Well, at least it was 3-4 pages rather than 2-3. Yes the ISC paper is out (PDF), though at present it's not actually on the ISC's own website. It reads like the fund managers have nobbled it. From my take on it there is no real acknowledgment that they could have done a better job. And, more importantly, there is no sense that being active in governance should be part of the job of being an asset manager. Instead the emphasis early on is on fund managers' clients (so pension funds primarily) setting better mandates.

Whilst I certainly think pension funds ought to set out their expectations more explicitly, surely the ISC ought to be making the argument that there is a fiduciary duty to take these issues seriously. The lack of such an emphasis, combined with recent comments from industry figures that managers should always have the right to just sell out, and not be required to be active, suggests that the fund management lobby doesn't want to play ball.

It gets worse. From what I've heard it sounds like the paper that has appeared is actually a watered down version of an earlier draft. From what I heard one proposal that had been floated originally was to make it easier to file shareholder resolutions, and apparently there was also a call for annual elections of all directors. The first point doesn't appear in the paper that came out yesterday, and on director elections the recommendation is that only committee chairs face annual re-election. In both cases the original proposal was hardly radical - like the vote on remuneration reports it would only be a problem for companies if investors actually used their rights effectively, and we are still some way from there. So to bottle them looks particularly weak (I wonder if the investment companies lobby didn't like the director elections, since it would affect their membership).

So it's a missed opportunity, and I know that some investors aren't that impressed with the ISC's paper. More interesting I suppose will be what Lord Myners thinks of it. He has put pressure on the ISC to up its game - this paper surely falls short. Perhaps it's a political gamble - the industry (or part of it) is working on the assumption that Labour is doomed and therefore has no need to respond seriously to pressure from HMT. Certainly there are no signals that the Tories are interested in this stuff, and they have historically taken the industry line at face value, along with its money (from Fidelity & Caledonia Investments). So they are probably right in thinking a Conservative administration would leave them alone. The prospects for reform don't look promising.

Thursday 4 June 2009

UKSIF report on pension funds

A quick plug for UKSIF's survey of pension fund practice in terms of ESG issues. More details here. Headlines below:
BT Pension Scheme retained its Platinum ranking in this second bi-annual survey, while The Barclays UK Retirement Fund, BP Pension Fund and HBOS Final Salary Pension Scheme all progressed to a Gold ranking from Silver. Three quarters of repeat respondents achieved a higher score this year than in 2007.

The survey found that trustees of three quarters of surveyed funds now believe that ESG (environmental, social, governance) factors can have a material impact on the fund’s investments in the long term. Two thirds of trustees thought it was important to align the plan’s RI policy with the fund sponsor’s CSR policies.

Has the ISC got the message?

Lord Myners has been very critical of the (non) role of the Institutional Shareholders Committee in some recent speeches. The ISC brings together the main instititional investor lobby groups - ABI, AIC, IMA and NAPF. It is due to put out a paper in response to the crisis which, rumour has it, will appear shortly.

Let's hope the ISC - and its constituent members - have got the message. The worst thing it could do would be to produce a 2-3 page piece of blah that does little more than restate best practice. What we need is clear statement that institutional investors of all kinds recognise their fiduciary duty to act as good owners, and this means going beyond just being willing to vote against the odd pay report now and then. Also it shouldn't simply be up to fund managers' clients to mandate them to do this - though that would help - they should do this stuff anyway.

I'm sure the ISC's paper will be read with great interest when it appears.

Wednesday 3 June 2009

Labour's best strategy after tomorrow

Regroup on the ice planet Hoth.

Tomkins vote points to clueless shareholder activism

A quick trip into shareholder voting geekery. Have a look at the vote on the remuneration report at Tomkins' AGM this week. Results here. The abstentions are almost as big as the votes in favour. On straight votes for and against, the remuneration report vote passed with 61% in favour. But add together abstains and oppose votes, and the company only got active support from 38% of its shareholder base.

That large number of abstains probably results from some investors blindly following voting advice and/or fund managers herding in voting as they do in other investment decisions. This is now the second company this season - the first was Amec - which has passed its remuneration report on minority support.

Personally - though I'm in a minority at work I know (this is a personal blog remember!) - I've never really seen the point of abstaining on the remuneration report, given that it's an advisory vote in any case. In practice it leads to 'splitting the difference' when companies make some concessions (ie moving from an oppose to an abstain). But if the company does enough, why not vote in favour?

We now have the ridiculous situation of two large companies passing remuneration reports on minority support. Yet the companies in question can quite legitimately argue that they won a majority of votes cast.


Tuesday 2 June 2009

Blogging light to moderate

Work is the blight of the blogging classes as they should say, and my desk is creaking under the weight of 'stuff that needs doing', so I'm going to be blogging less often for a bit.

Monday 1 June 2009

Passive managers - a bit too passive?

LAPFF has commissioned an interesting bit of research, looking at what passive (ie index-tracking) fund managers do in terms of voting engagement. Now, as passive managers don't have the option of selling out of companies where there are problems, the argument goes, voting and engagement is the only method they have to protect and enhance value on behalf of their clients.

So what do they actually do? Here are a few of the key findings -
- Managers vote proxies but do not do so consistently across the world. An estimated £130bn of assets are not regularly voted.

- Managers engage with companies to some degree but again this is not consistent across the world. It is estimated £350bn of assets are rarely, if ever, engaged.

- Resources are limited. A total of 11 individuals were identified who are responsible for the implementation of ESG policies for these £700bn of assets, held in upwards of 3000 companies across the world... investment totalling less than 4/100th of 1 basis point in Responsible Investment overall.

- Small cap stocks are rarely engaged. Managers tend to focus their engagement activities on their largest holdings.

- Holdings in emerging markets are typically never engaged. There was no evidence £15 billion of assets, held in upwards of 1000 companies, are engaged on behalf of clients, despite probable higher levels of ESG risk.

In other words, there are a lot of gaps. They don't even vote in some of the markets, and we aren't just talking small markets here. Engagement is home-biased and focuses on large caps. And across £700bn of assets there are just 11 people handling these ownership responsibilities.

This IMO is clear evidence of the ownership deficit. Fund managers just aren't set up or resourced to do the job properly, even when trading isn't their (alleged) core competence. And you can judge what impact this potentially has by looking at the share register of a typical UK company. One or two of the big passive managers are always in the top 5 investors.