Wednesday 30 September 2009

Tuesday 29 September 2009

Scaredy cat

I quite like Danny Finkelstein's stuff, but I had snort derisively or something at this bit in a post about the Cass Sunstein book I've mentioned previously:
Let me tell you about one of the most frightening moments of my life. It came when I was at university, spending a week in Blackpool as a delegate to the National Union of Students conference.

Clearly, if that's one of the most frightening things he has witnessed he needs to get out more. He goes on to compare an NUS meeting seeking to expel a group of Tories to a Nuremberg rally. Yes really.

I have two serious-ish points to make. First, it's worth noting in passing that Sunstein describes Mandela as an extremist in the book - but one with a valid cause. He also talks about 'good extremism'. And obviously the Finkster's terrifying experience with the NUS was directly related to the anti-apartheid cause. I'm not saying that this excuses the behaviour he describes, or that Sunstein provides justification for it either. Just it's a bit odd that he doesn't make this link.

Secondly, though I regard myself as a moderate lefty, I found this bit of his post really annoying:
I believe that the work, and now the life, of Cass Sunstein provide a lesson to political moderates. The views of individuals change when they are part of groups. Certainty becomes greater as theories are corroborated, people gather information that confirms their earlier views, and group members seek approval from others. All this pushes individuals farther in the direction they were already inclined to go. Professor Sunstein calls his book Going to Extremes, but group polarisation means that a mildly centrist group would become more resolutely centrist.

What I don't like about it is the implication that being a centrist is the same as being a moderate. There are two problems with this in my opinion. First, being a centrist (as in somewhere between Left and Right) does not at all mean that you are a moderate. If both Left and Right agree on immigration controls, and you plant your flag between them, that doesn't make you a moderate on the issue in general, it just means you have split the difference between two dominant views. Also what about historical drift? What was the 'moderate' position on a sensible level of public ownership of industry 30 years ago, and what is it now? The moderate if they are a centrist will have just floated on the surface as the tide of this debate shifted.

Secondly, and more importantly, this idea of left/right/centre is generally pretty hopeless because it encourages people to think that these concepts sit on a map with almost measurable distances between them. It is a really unhelpful metaphor. The clustering of sometimes inconsistent political beliefs around the poles of Left and Right should tell us that it is not that simple. Centrists can be extremists too, and not in the sense of extremely moderate.

Interesting blog alert

Come across this one via Charlie. Economic sociology seems to be a major focus. Interesting stuff.

Monday 28 September 2009



A final bit of Blair-ism

I mean this one, not this one. Here's a snippet that has relevance to the sorts of ideas Paul Myners has been toying with:
Companies should be free to experiment with alternative securities and contracts with their suppliers of finance capital that allocate risk, reward and control in new ways. Firms should be able to issue securities with voting rights that vest over a period of time, for example, or provide for more than one vote per share if held by employees or other stakeholders. Once issued such securities, as well as more ordinary securities, should not be subject to unilateral or arbitrary changes in voting rights or other claims unless the initial registration statement explicitly notes that voting rights could be changed unilaterally. In other words, voting rights should be honored, but there should be no prohibitions against particular contract terms. If outside investors are leery of these securities, companies may find they are a higher-cost source of capital and avoid them. But companies might also find that the motivational effects of giving certain stakeholders special voting strength outweigh the negative effects of a higher cost of capital. Investors might even find that investing in companies where employees act like owners and exercise considerable control entails less risk than investing in firms whose managers have no monitors other than anonymous financial markets.

Sunday 27 September 2009

L&C response to the IoD response to the TUC

I just spotted this press release on the Institute of Directors website responding to the TUC. It's dated 11th September, so presumably it is a response to the TUC's Pensionswatch report which came out that day. This is an area I know fairly well, so I thought I'd take a look at what the IoD says. Here's the killer quote:

“The majority of directors can only dream of a generous retirement pot. Our recent survey shows that only one in seven IoD members have gold-plated occupational pension schemes, compared with six in seven in the public sector.

And here's the text below that explains it a bit more:

In February 2009, the IoD carried out a survey of 980 IoD members. It found that, contrary to myth, most directors do not have gold-plated company pensions. Almost half (45%) have no occupational or employer-sponsored pension scheme at all. Just 12% of directors are members of defined benefit schemes, the same proportion as in the private sector as a whole and compared with membership of defined benefit schemes in the public sector of 90% of employees.

First point - the TUC report doesn't claim to provide a picture of all directors' pensions - it is explicitly focused on the UK's biggest companies. In contrast the IoD claim here does not tell us what the sample used was. To state the obvious, if the IoD's survey did not cover the same or a similar sample it is not surprising that it came to a different conclusion. It's like comparing a survey of the big supermarkets with a survey of all retailers. It's clearly not a valid comparison or any kind of rebuttal.

Second point - we don't know how the IoD figures were arrived at. Looking back at the original release they issued in February on the survey we don't know what the response rate was, who was targeted etc. The TUC survey is of companies annual reports and they state in the report how many reports provided usable info. So the data is a matter of public record. In contrast the IoD's survey may well suffer from a self-selection bias. Directors who still get a DB scheme might not want to publicise this, whereas directors who only have a DC scheme, or nothing at all, may feel more reason to respond, especially to a survey which was primarily intended to bash public sector pensions, again.

Third point - actually there is another survey out there that looks at almost the same sample as the TUC's - it's done by Lane Clarke & Peacock, and the latest one is here. And guess what - it's findings on things like proportion of directors with DB schemes, average contribution rates etc are almost exactly the same as the TUC's. It is therefore entirely valid to say that directors of the UK's biggest companies have by far the most generous pension provision, gold-plated if you like, and that this is not simply a result of their higher salaries.

Fourthly, let's have a look at this claim that 45% of directors have no pension at all. Well actually, both the TUC and LC&P also found that an increasing number of directors are not offered, or do not join, a company pension scheme. But in most cases in their sample these directors are offered a significant cash payment in lieu of a pension. It may well be the case that a number of the 45% of directors the IoD says don't have a pension have something similar. Needless to say, for other employees such rules do not typically apply. If you don't get offered membership of a pension scheme, that's tough. If you do get offered but you don't join, again that's your decision and the company does not compensate you (except perhaps if you are part of a flex benefits scheme). And it's also worth noting the value of some of these payments in lieu - they seem to typically be in the 20% to 30% of salary range, but some are much higher.

There are a couple of points in the IoD's defence, sort of. First, it's a reasonable argument (though the IoD doesn't make it) that just looking at the FTSE100 doesn't tell you very much about directors' pensions as a whole. But nonetheless this doesn't alter the fact that there are hundreds of directors with pension provision far more generous than that available to anyone else in the UK - so it's simply wrong to state that it's a myth that directors get 'gold-plated' pensions (and some would clearly be more expensive than gold-plated...).

Second, it's clear that directors along with other employees are being shifted from DB into other provision. But the TUC survey acknowledges this, and more importantly even when this shift occurs directors at the biggest companies get very generous provision under the new arrangements - much larger DC contributions as % of salary, or these big payments in lieu I mentioned previously.

Tackling extremism on remuneration committees

There's a policy idea that unions have floated a few times in the past and that has come up once or twice in the financial crisis (Paul Myners touched on in it one speech) that I've always liked - putting some sort of employee representation on remuneration committees.

These committees, according to the Combined Code, are supposed to be sensitive to pay and conditions across the company when setting pay, yet many still manage to keep deciding that The Only Way Is Up for directors, even when cutting staff. The idea of having an employee rep on there would be to bring a bit of balance to discussions. Naturally enough, it is the sort of idea that most governance people in the UK would laugh at.

But there might be some evidence that actually it isn't a bad idea. Cass Sunstein's new book Going to Extremes is all about how people's views become more extreme if they are in groups of like-minded people. Groups of Democrats become more liberal when they talk together, Republicans become more conservative. The decisions these groups reach are more extreme than the views of the individuals that make them up had previously. The book details the real world effects of the this - juries reaching very different decisions depending on who is on them etc.

Sunstein says that this has obvious implications for business - particularly where board members reinforce each others' risk-taking mentality. And it does suggest that the notion of having independent non-execs on the board to provide challenge is therefore well-grounded.

But it also made me think of remuneration committees. Although these obviously have independent representation on them as best practice, what would seem to matter more is the committee members' attitudes to remuneration practices. Even if they are notionally independent, if they all share the view that you need to pay serious wedge and not quibble over large demands then surely they are likely to reach 'extreme' decisions on pay? (I mentioned this to a colleague at work and he immediately came up with the Dick Grasso case - the members of the compensation committee all being senior Wall Street figures).

So if we accept this basic line of argument, wouldn't it make sense to get someone from the shopfloor, even a TU rep, at least feeding into the remuneration committee, in order to try and disrupt the potential tendency to reach extreme decisions? (And thinking much further ahead, it would be interesting to research NEDs' views on remuneration, and see what the outcomes have been at rem comms where they sit with others with like minds).

Friday 25 September 2009

This para made me laugh for some reason

Some good stuff from Chris Dillow:
And herein lies a paradox of managerialist politics. One the one hand, politicians sell themselves like any other product: "Great public services at prices you'll like." But on the other hand, they expect - and forcefully extract - an allegiance unavailable to ordinary firms; as Alasdair MacIntyre wrote, "it is like being asked to die for the telephone company."

PS. This is good too.

Thursday 24 September 2009

Strategy, pay and shareholders

Another interesting argument that came up Tuesday's seminar was the ability of shareholders to really get to grips with strategic issues facing investee businesses. One company representative made the point that it was very difficult for shareholders to second-guess directors in terms of strategy (one quick aside: given the track record of M&A in terms of delivering for shareholders, maybe they should just be generally sceptical). In many cases the directors knew the industry they worked in very well, and knew a lot more about what would and would not make a sensible acquisition. In contrast shareholders did not have access to the same kind of information, and other factors (portfolio diversification etc) made it unlikely they could exercise sensible challenge even when it might be needed.

On the other hand, he argued, shareholders could say something sensible about pay because they could be more objective about it than directors, because they had knowledge of other companies and (I would add) all the relevant information is in the public domain. Notably this is a complete flip around of the typical views expressed by many shareholders - pay takes up too much of their time and isn't that important, they shouldn't micromanage the detail etc.

It also feeds into the argument I've made before. Fund managers who are opposed to the Government's efforts to get them to act more like owners say that the information asymmetry they face compared to directors makes it very difficult (if not too difficult). Fair enough, but then if that affects your ability to take a view on relatively simple issues like board structure and pay, why shold we have any faith in what's supposed to be your core ability - forecasting the prospects for investee businesses. What is diferent in principle, other than the latter is surely even harder?

Finally this also made me think a bit more about this question of employee involvement in governance and decision-making. This is an idea I am clearly likely to be sympathetic to given my background, but it's one I've never really explored in detail. As Blair argues, employees have a lot tied up in companies compared to shareholders. In public companies with dispersed shareholders they also surely typically have better information about the company than investors. So the more I read and think about this (and others are way ahead of me), the more convinced I am that there are solid reasons for thinking a lot more about how employees are represented in governance, and also how we look at their role in ownership.

Wednesday 23 September 2009

Fidelity is still funding the Tories

I had thought that Fidelity had stopped funding the Tories. Afterall, if you search for 'Fidelity' in the Electoral Commission register of donations the last entry is for £30K in May last year.

But this week, whilst looking at something completely different, I stumbled across the fact that they are indeed still funding the Dark Side, only they don't use the name 'Fidelity' anymore, the cheeky scamps!

Try searching the register for 'FIL'. You should pick up a donation from FIL Investment Management for £30K in September last year, and a further £25K this June. The address is clearly Fidelity's address, and, if you need more proof, the company registration number - 2349713 - is the same.

That takes Fidelity's total donations to the Tories since April 2004 to £550,000.

Tuesday 22 September 2009

Paying for performance?

PIRC and Railpen have jointly published a report today looking at the experience of six years of having a shareholder advisory vote on remuneration. There are both positives and negatives. In respect of the former, notice periods have come down (which should mean less payment for failure risk) and there has been a shift to performance-related elements making up the larger part of total remuneration. But on the other hand, total reward has risen rapidly, with little evidence of a good link to performance (directors seem to do very well in good years, and a bit less well in bad years).

I would make two points in defence of the shareholder vote. First, we don't know what might have happened without its introduction, though if we look to the US, where there is no vote, pay levels are much higher, and huge pay-offs despite failure still occur. Secondly, shareholders haven't used their vote effectively, with average votes against remuneration reports very low. Companies can legitimately say that what we see is what shareholder have approved. If shareholders had been more willing to vote against more reports we might have a different picture. Having said all that, I was speaking to a large institution who was sceptical about the value of a shareholder vote on remuneration policy, and worried by its potential role in legitimising high pay.

I also noticed at the seminar launching the report more evidence of the scepticism I blogged about previously in regard to the motivating effect of performance-related pay. Some investors aren't convinced it works, and nor are some directors. Notably Dan Ariely got a couple of mentions for his work in this area. There is also a general feeling that remuneration has got way too complex (which must itself raise questions about whether directors can be motivated by the schemes in place). And finally, I think there is some interest in having a look at the split between employee and director remuneration, and whether recent trends make any sense for shareholders. I get the impression that some interesting stuff is bubbling away under the surface of the remuneration debate.

PS. If anyone wants a copy of the report email me and I'll send you the PDF.

Sunday 20 September 2009

Are shareholders really owners?

Another of those books that I really should have read years ago is Ownership and Control by Margaret Blair, and I'm rapidly ploughing through it as it is music to my ears. I know the book by reputation as it famously (in my small corner of the world any way) makes a strong argument about employees' residual claims on companies alongside those of shareholders. To simplify massively this is based on the idea that employees make firm-specific investments that are not typically transferable.

What I didn't realise why quite how sceptical she is about the usefulness of the concept of ownership as applied to the company-shareholder relationship:   
In large publicly traded corporations, the normal rights that constitute ownership of real property have been unbundled and parceled out to numerous participants in the enterprise. Many physical assets may be involved, as well as many intangible assets, and the various rights and responsibilities associated with those assets are carved up in different ways. Thus taking "ownership" as the starting point in discussions about corporate governance, a point from which certain rights or claims are supposed to flow, is quite problematic... [T]he common assertion that "the shareholders are the owners" of large corporations is a highly misleading statement that often does more to obscure the important issues than to illuminate them.    
I'm obviously fairly sympathetic to this argument. I think the ownership concept is a useful one for getting people to think about how we ensure that companies are run properly (or as well as is possible in the circumstances). But when you get into the detail, it can indeed be a bit of a misleading way of looking at things, and as a result may lead to policy ideas that are unlikely to have much impact.

I think Tomorrow's Company were on the money when they said that ownership is a 'helpfully inaccurate' way of thinking about shareholders and companies. 

Saturday 19 September 2009

Friday 18 September 2009

Myners keeps the pressure up

Another interesting speech today, with some suggestion that we haven't seen the last of the Government's initiatives in respect of encouraging shareholder engagement:

Company directors must make decisions based on long-term performance considerations; investment managers must engage with the companies in which they invest and hold them to account when they fail to think long-term; shareholders, for instance pension fund trustees, must ensure that their managers are appropriately incentivised to engage and held to account when they don’t. 

Shareholders must take front-line responsibility for the companies in whose equity they have invested their client funds.

Shareholders have previously spoken of their concerns that there were structural impediments to effective engagement.

Therefore I welcome the recent announcements by the FSA and the Takeover Panel that their rules do not constitute an impediment to effective collaborative engagement by like-minded shareholders.

There is no structural or regulatory obstacle to the pursuit and delivery of effective stewardship. But does the will exist for shareholders and trustees to take seriously their fiduciary and legal responsibilities? Sir David Walker will have more to say on this. 
Some good stuff too on rewards in the financial sector (and is the reference to footballers a bit of a dig at John Varley?):
There is an irony in the labour market not working effectively at the heart of financial markets; the citadel of market efficiency.

Supply is not responding to pricing signals. If some activities like proprietary trading are so profitable, banks clearly have an economic incentive to participate, provided risks are properly controlled and regulation complied with. But why do banks appear to be allowing a disproportionate share of surplus to pass to employees?

Do these employees really have unique talents, or are they largely reliant on the banks' capital and franchise and the banks' knowledge, from order flow? Logically, the banks would 'institutionalise knowledge', and nurture pools of talent to reduce dependence on individual talent; writing it down and building bench strength.

And yet they do not appear to have done this. Derivative traders are not footballers with unique talents, and should not be paid as though they are. Bank owners, our pensions and savings, are possibly being short-changed by ineffective governance and stewardship.

And why do M&A bankers get so hugely rewarded? What skill do the members of this small elite community have which cannot be replicated by others? I suspect a great deal has to do with the authority of the investment bank’s brand – which begs the question why individual bankers frequently pocket 50 per cent or so of the fee charged by the bank to clients.

Some get bonuses in excess of £10million per annum (and not always for advising on transactions which deliver all they promise, as we have seen in banking sector transactions in recent years). Why hasn't the market mechanism adjusted pricing? What is frustrating a logical market response? If the market was working rationally, these rewards should have led to a sharp increase in supply and downwards pressure on margins. 

And finally, some good tub-thumping on relative pay levels:

 There is another very important issue around remuneration: perceived fairness. Organisations with extreme distributions of income are inherently prone to greater instability. It is harder to foster shared values and common culture. It can be a source of risk.

The national minimum wage is £5.73 per hour. That means that someone working for forty hours a week for forty-eight weeks a year earns £11,001.60 per annum.

According to the Office for National Statistics' Annual Survey of Hours and Earnings (ASHE), "mean" gross annual earnings across all employee jobs in 2008 came to £26,020 and "median" gross annual earnings was £20,801, across all employee jobs.

I sometimes think that Remuneration Committees and senior investment banking executives need to be reminded of this reality before they disgorge huge bonuses. And they have to ask themselves whether they have fully explored all options to protect organisational and shareholder interests before going down the route of making payments which many in society find unacceptable in terms of reward for skill and contribution.

 The whole thing is worth a read. 

(not) in it for the money

I've had two or three conversations over the past few days where a sentiment I share, but didn't expect to hear from investors, was voiced - namely that remuneration isn't that important when we're thinking about the motivation of directors. It also comes as there is an increasing trend to argue that remuneration wasn't a significant driver of behaviour pre-crisis (again I broadly agree).

Clearly people are motivated by a variety of factors - and money is definitely one of them - but to date shareholders haven't really given much thought to this. Instead investors' approaches to remuneration (as a proxy for motivation) are often still based on the very simple idea that you should tie pots of cash to outcomes you want achieved. Therefore the mainstream response to remuneration 'reform' in the wake of the crisis has inevitably been to seek to make sure the outcome (results) is measured over the long-term. From this perspective it's simply a question of designing better targets.

There is some evidence that this is a legitimate concern, though it seems to be the case that it is a problem where rewards are tied to a very specific kind of outcome that genuinely is quanitifiable. In contrast at board level you do have to wonder if we could ever design targets that would capture the sorts of behaviour we want directors to exhibit. What's more some of the metrics that underpin remuneration seem to me to be based on things are hard for the board to personally control. The result is that they end up getting extra reward for performance that may be generated elsewhere.

And finally, the trend to multiple performance indicators which all feed into a performance assessment that drives reward just feels wrong to me. If factor X accounts for 10% of the calculation of your bonus/LTIP/whatever, should you only spend 10% of your time seeking to manage it? And is a director realistically likely to respond in such a way, dividing up their time to ensure that they hit each metric? I don't think so, and if not then what is the point in it being in there? The director will effectively simply be rewarded if, by chance, the company happens to do well on factor X.

In general then, a lot of the investor approach to remuneration seems to have been driven by a desire to address a problem that may not be there (or not matter as much as agency theory would suggest). Perhaps that's why there is currently a bit of chatter about pay versus other types of motivation, and I hope this discussion goes somewhere.

As the man said:
"You have to realise: if I had been paid 50% more, I would not have done it better. If I had been paid 50% less, then I would not have done it worse."

Thursday 17 September 2009

Unions, the TPA and research

Whilst I was looking at the Electoral Commission website yesterday I had a quick look at donations to some of the non-Labour left parties. Notably the RMT spend about £70K on No2Eu, which barely registered on the electorate's radar.

At the same time the Taxpayers Alliance is - admittedly with the help of journos who can't be bothered to a) consider the TPA's political orientation and/or b) check out their research - is getting a free ride in media. Their (undisclosed) donors get a big bang for their buck.

Much as many of us on the Left dislike the TPA, we should acknowledge that they have been successful at getting their point of view across. Some of their research is wobbly, but at least they do primary research and don't simply rely on rhetoric to make their arguments.

There are some big battles ahead for the labour movement, not least over public sector pensions. Would it not make more sense for unions like the RMT to spend their limited resources funding high-quality research to make their arguments, rather than peeing it away on political projects that have no impact? Or maybe even support a left TPA-style group?

Wednesday 16 September 2009

Caledonia Investments' helicopter drop

Just a quick update on Caledonia Investments. As I've blogged previously, this investment trust has successfully (with the help of some well-known asset managers) passed resolutions to give shareholders' money to the Conservatives. It's starting to show up on the Electoral Commission register. They handed over nearly £100k from last Feb to this April, and £40K in the this April alone. Much of it is targeted at Meon Valley.

Here are the details of donations in 2009 that have been picked up so far.

Conservative PartyMeon Valley
Caledonia Investments PLCstatus: Companycompany reg no: 235481
Cayzer House30 Buckingham GateLondonSW1E 6NN
£ 20,000.00

Conservative PartyDudley South
Caledonia Investments PLCstatus: Companycompany reg no: 235481
Cayzer House30 Buckingham GateLondonSW1E 6NN
£ 5,000.00

Conservative PartyMilton Keynes Federation
Caledonia Investments PLCstatus: Companycompany reg no: 235481
Calidonia investmentsCayzer House30 Buckingham GateLondonSW1E 6NN
£ 5,000.00

Conservative PartyEaling Central and Acton
Caledonia Investments PLCstatus: Companycompany reg no: 235481
Cayzer House30 Buckingham GateLondonSW1E 6NN
£ 5,000.00

Conservative PartyEltham
Caledonia Investments PLCstatus: Companycompany reg no: 235481
Cayzer House30 Buckingham GateLondonSW1E 6NN
£ 5,000.00

Just a quick aside, here's what Caledonia chief exec Tim Ingram had to say as justification for the donations -

"It is worth understanding why we are doing it. It is not for purely political reasons, it's economic reasons. We are an investment trust so we take equity positions in other companies, which are mainly British. We firmly believe that our shareholders will get greater wealth creation in the economic conditions created by a Tory government than by a Labour government."

Stirring stuff, but if it's so important does he use his own money? Try searching the Electoral Commission list of donors for 'Ingram'. Surprisingly no Tim Ingram appears on the list. There is a Chris Ingram listed as a Tory donor, and Tim Ingram has middle initials C and W, so possibly that's him. But even if it is he's put in quite a bit less than Caledonia's shareholders.

The Grauniad backs voting disclosure... I think

Isn't that what this is getting at, in Monday's editorial about exec pay? I presume they don't think institutions should only report votes on remuneration reports, incentive schemes etc.
One easy way to sharpen up institutional investors would be to mandate them, to state how they voted on each pay resolution – and why.

Tuesday 15 September 2009

Two takes on Tobin taxes

Both from the FT whilst I was off. Martin Wolf is not completely opposed, suggesting that it might lead to more considered investment decisions:

…I might now entertain the argument that willingness to invest in costly “due diligence” on what investors are buying may be undermined by the perceived ease of selling. For these reasons, market liquidity no longer seems an unambiguous good. Maybe shifting the structure of incentives towards “buying and holding” might be better.

But Willem Buiter says it would be the wrong way to tackle the problem. Here’s the key bit for me:
“Churning” can be a problem for individual savers. Excessive transaction volumes can be caused by perverse incentive systems that link the remuneration of traders – acting as agents for owners of wealth – to trading volumes. Even here, the right solution is not transaction taxes but regulation restricting the undesirable features of these contracts directly. If excessive pay in the financial sector is a problem, tax pay.

Congress Voices

The TUC has launched a rather wizzy new website called Congress Voices, which allows you to follow what is going on at Congress this week, including the facility to comment on resolutions. More evidence of Tigmoo getting its head around the interweb.

Monday 14 September 2009

Interesting new blog alert

This one here. I don't have time to give it a proper plug, so here's what they say about themselves:

Left Foot Forward is a political blog for progressives. We provide evidence-based analysis on British politics, news and policy developments.
We are a non-partisan blog. Because we are progressive and because of the aims we’re committed to, we often find ourselves in agreement with left of centre policies and politicians. But we are focused purely on the quality of policies and furthering progressive goals, rather than on promoting individual politicians and parties.
We have been inspired by our U.S. sister site, Think Progress, and have therefore adopted their approach to blogging by setting out our beliefs and categorising our stories accordingly.
We are fighting for:
1. A proactive and sustainable economic policy that creates jobs, pulls Britain out of recession and towards a low-carbon and more equitable future.
2. Public services that work for, and are accountable to, local people and leave no one behind.
3. Safe communities where poverty and inequality are tackled, and the victims of crime are put first.
4. A multilateral foreign policy to tackle climate change, poverty, nuclear proliferation, genocide, terrorism, and disease.
We are fighting against:
1. Public greed and attempts by politicians and public servants to line their own pockets.
2. Administrative incompetence whether it takes place at the national, regional, or local level.
3. Media manipulation and bias to support a hidden agenda.
4. The threat of racism and extremism.
Left Foot Forward is edited by Will Straw. Our editorial policy is set by the editor and contributors of Left Foot Forward alone, and no one else.
We welcome ideas for stories, tip offs, and pitches for articles. Please send your ideas to or enter them in our ideas box. If you would like to support our work, please click here.

Lefties and the crisis

One fairly common thought that seems to struck lefties over the past few months is why haven't we done better out of the financial crisis. So here a few of my own quick answers to why we continue to be in a mess.

1. We didn't predict the crisis. No we didn't. We talked a lot about turbo-capitalism, financialisation, hedge funds and private equity. Some of us said (and had been saying for a very long time) that this would 'inevitably' all end in tears. But I don't think there was consistent and coherent critique advanced that was widely articulated, and who on the Left was suggesting that the banks would be the focal point of any crisis?

2. Allied to the failure to predict has IMO been the the failure to apportion blame to the right people. You can see this misdiagnosis at work in the desire to put one over on hedge funds and private equity while the crisis still affords us the opportunity. Clearly there are reasonable criticisms that can be levelled at both groups (though the former is much more disparate than the latter) but neither was at the centre of what went wrong, and both have emerged less damaged than many of us expected. And just to reiterate: Madoff wasn't a hedge fund.

3. We have tended to underestimate/play down what has happened. Again there are lots of criticisms that could be aimed at our and other goverments' responses to the crisis, but let's not pretend that some reasonably significant shifts haven't occured. Regulatory intervention is very clearly back on the agenda (and if you believe the pitch of the Turner Review, the philosophy of regulation is fundamentally altered by recent events), in my bit of the world there are noticeable moves away from a market-driven shareholder-focused approach to governance towards regulation - ie the FSA getting more involved at BOFIs. We've got a higher tax rate for the highest paid that so many lefties wanted, and look at all the sound and fury around remuneration.

I'm not saying that more could not have been done, at that some of these things are a bit of a sideshow, but lefties do seem to adopt the default position that 'nothing' has changed because capitalism hasn't been abolished. And that message does filter out to the punters (btw there is the same problem with TUs constantly slagging Labour off for not doing enough, and then being surprised when TU members aren't enthusiastic Labour supporters come election time).

4. Lack of a coherent set of alternative ideas. Let's be honest, a lot of the Left's response to the crisis has consisted of variations on 'tax the rich' and 'regulate the rich'. It's often simply come across as vindictive. On one level this is understandable, but it only takes you so far, and certainly isn't any kind of programme that deserves public support. More broadly there's been a tendency to suggest 'obvious' solutions despite the lack of evidence that they would make any difference (reinstating Glass-Steagall, developing longer-term remuneration policies, 'tighter' regulation etc etc etc).

5. We have no preordained right to benefit politically from financial crises. End of.

Sunday 13 September 2009

Tackling short-termism

Via the ace Corporate Governance, I came across this report (PDF) from the Aspen Institute. Press blurb below. 


Washington, DC, September 9, 2009—Twenty-eight leaders representing business, investment, government, academia, and labor joined the Aspen Institute Business & Society Program’s Corporate Values Strategy Group (CVSG) to endorse a bold call to end the focus on value-destroying short-termism in our financial markets and create public policies that reward long-term value creation for investors and the public good.

The statement, “Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management,” identifies three leverage points for encouraging a renewed focus on long-term value creation and for addressing one part of market short-termism, shareholder short-termism:

1. Market incentives: encourage more patient capital through tax policy

2. Alignment: better align the interests of financial intermediaries and their ultimate investors

3. Transparency: strengthen investor disclosures

The statement highlights the need to focus on the system and not just the corporation, recognizing that a complex dance involving corporate managers, boards, investment advisers, providers of capital, and government drives the results we have now. This distinguished and diverse group is unified in calling for a comprehensive examination of market short-termism in our economy. The signatories hope that policy makers in Congress, the Executive branch, and relevant regulatory agencies will heed this call.

Recognizing that voluntary action alone is not enough to address today’s economic reality, a small group came together to create the foundation for this much-needed public policy conversation. The current drafting committee began with a set of ideas shared in Aspen CVSG meetings among varied market players beginning in July 2008. This effort builds on the CVSG's ongoing focus on sustainable value for investors and society, including the “Aspen Principles for Long-Term Value Creation,” that were released in June 2007 by a coalition of business, labor, institutional investors, and corporate governance experts. The Principles called for voluntary change in practice by business and investors around metrics of success, investor communications, and executive compensation.

“Short-termism must be addressed as a conceptual whole — piecemeal approaches do not work,” said Judith Samuelson, executive director of the Aspen Institute’s Business & Society Program. “Now is the time for bold ideas to drive change in the incentives and behaviors critical to transformation of how value is created and sustained.”

Friday 11 September 2009

And this!

1. Post on the new Unison blog UnisonActive about tackling exec pay from a workers' capital perspective. Hat-tip: Mr Gray (The UK's Number 1 union blogger!)

2. This year's TUC Pensionswatch report. The usual wheezes for boosting directors' retirement income are set out - better accrual rates in DB schemes, much higher contribution rates in DC schemes, top-ups to offset tax changes, and whopping payments in lieu for directors without pensions. By far the most generous pension provision in the UK.   

Read this!

Very interesting report from Demos - Reinventing the firm (PDF) - will try and do a review if I find a bit of time. Loads of good stuff in there about ownership. 

Thursday 10 September 2009

It beats work...

This week's picnic in Ruskin Park.

Pension fund self-interest vs taxes

Chris Dillow has an interesting post up about the Tobin Tax idea, and what the arguments behind it might lead you to think about politics. It got me thinking about what I really think about the proposition. And to be honest, much as I have no sympathy with those 'outraged' by Adair Turner even talking about taxes, I'm not convinced the idea is a great one, at least in my corner of the world. 

Because of my interest in governance/ownership issues I'm thinking about equities here. Share purchases are already subject to stamp duty, yet this hasn't stopped the level of trading gradually increasing and with it the costs for those on whose behalf it is undertaken. And this hasn't gone unnoticed - Warren Buffett talked a few years back about a new law of motion - as motion increases, returns decrease. And as Watson Wyatt put it in its Remapping Our Investment World report that the increase in trading "has enriched the broking community and impoverished the average pension fund".

But would, for example, whacking up stamp duty shares even further actually do any good? It would likely only make a difference if the impact was definitely felt, but felt by who? Most funds obviously delegate investment management to fund managers. But fund managers aren't going to shoulder the cost, they will just pass it on to the client. Thus it would ultimately sting pension funds and others, not the intermediaries who are doing the trading. 

Another not entirely rubbish argument is that if increased taxes made trading in equities prohibitive, this might encourage investors to pile more into derivatives, specifically contracts for difference.

Of course there are good arguments against both of these points. The increased cost of trading is the point of course - it's intended to hurt in order to encourage lower levels of trading. And if trading levels fall far enough, pension funds might actually end up better off. And we're talking about the secondary market here really - as the Berle and Means quote below makes clear, this isn't affecting the allocation of capital to businesses. Similarly if you're bothered by a flight to CFDs then presumably these could be taxed too so that they don't become too relatively attractive.  

But I can't help thinking that if this issue is already well-known to investment consultants, for example, that there must be better ways to address it. Why can't funds put turnover limits on their portfolios, or make other changes to mandate design? Or why not focus trustees' attention more directly on investment costs as a key part of their duties? If Watsons are right and fees have gone up 50% in five years you would think that the funds' self-interest ought to kick in, yet it doesn't seem to.

This does make me wonder sometimes about the relative importance of the principal-agent problem in the trustee-fund manager relationship (and the beneficiary-trustee one) versus the fund manager-company one. The principals in the first case have (most of the time) far more power over the agent than in the second case, yet seem to rarely exercise it effectively. And we seem to spend a lot more time focusing on the second one. 

But if we got trustees, for example, thinking more about the costs they are incurring they could work with their agents to reduce them without the need to turn to tax. It seems at present that (as Gillian Tett suggested in the Prospect interview) the real problem is getting the agents to think about their own financial self-interest and act on it.

Back to the beginning

From the preface to The Modern Corporation and Private Property:
"[S]tockmarkets are no longer places of 'investment' as the word was used by classical economists. Save to a marginal degree, they no longer allocate capital. They are mechanisms for liquidity. The purchaser of stock, save in rare instances, does not buy new issue. The price he pays does not add to capital or assets of the corporation whose shares he buys. Stockmarkets do not exist for, and in general are not used for (in fact are not allowed to be used for), distribution of newly issued shares... The exchanges are institutions in which shares, arising from investment made long ago, are shifted from sellers who cash to buyers who wish stock. Purchases and sales on the New York and other stock markets do not seriously affect the business operations of the companies whose shares are the subject of trading.

"We have yet to digest the social-economic situation resulting from this fact. Immense dollar values of stocks are bought and sold every day, month and year. These dollars - indeed hundreds of billions of dollars - do not, apparently, enter the stream of direct commercial or productive use. That is, they do not become 'capital' devoted to productive use...

"...The purchaser of stock does not contribute savings to an enterprise, thus enabling it to increase its plant or operations. He does not take the 'risk' of a new or increased economic operation; he merely estimates the chances of the corporation's shares increasing in value. The contribution his purchase makes to anyone other than himself is the maintenance of liquidity for other shareholders who may want to convert their holdings into cash..."

Tuesday 8 September 2009

That Adair Turner interview

Back on the mainland ;-) after a nice break with the grandparents. Managed to stop myself looking at any emails until today, or doing (much) work-related reading. But I did buy Prospect in the airport yesterday to see what Adair Turner actually said, having only read second-hand accounts. 

Actually although the piece is worth a read, it's considerably less interesting content-wise than I was expecting. And it's actually a roundtable which also includes John Gieve, Paul Woolley (who set up the fantastically-named Centre for the Study of Capital Market Dysfunctionality about which I've blogged occasionally before), and the FT's Gillian Tett. And I'm going to be really superficial here and say that the thing that struck me most reading the article was what appear to be some quite distinct conceptual models at play on the part of those interviewed.

For instance, Turner himself seems quite attached the 'economy as a machine' metaphor, which I find a bit surprising. What do I mean by that? Well how about this:
"There was no definition of the levers to pull if you decided there were problems..."

"...we all recognise we need levers other than macro-prudential ones or other than interest rates alone."

" stop the credit bubble of 2015-20 we do need to have levers for tightening liquidity or tightening capital rules" 

Gillian Tett (background in anthropology remember) meanwhile chucks in a religious analogy in respect to some ideas about how markets operate (EMH etc):
"There is a real sense of intellectual confusion. Over the past year I have been speaking to former true believers and they're like a priest who has lost faith in the Bible, but still has to go to church, and the congregation is sitting there but he doesn't know what the Bible is anymore."
Paul Woolley though sticks with economic theory, mentioning the principal-agent issue several times. And in one of these comes one of the most interesting bits of the whole article for me:
WOOLLEY: If we agree that agents in the financial sector are capturing too much of the productive economy's return then surely part of the solution is educating the principals, the pension funds and so on, to make agents deliver longer-term investment strategies with less dealing for the agents' own sake.

TETT: It's a complete pipedream to think that the principals are suddenly going to change their ways... The pension funds are so dumb and fragmented, they're not going to protect their own interests, the FSA is going to have to be interventionist and protect the end interests of the people who supply the money - the pensioners.
I think that's a lot of the stuff I bang on about explained in a few sentences. The pension funds do get ripped off, they do seem to be paying more but getting no better results. But there is a lack of concerted pressure for change. 

Wednesday 2 September 2009

Blogging light to moderate

The Family P are off to Norn Iron for our first trip to see the grandparents on their home turf. So I won't be blogging for a few days.

Before signing off, I should say that the book I mentioned a couple of days back is really pretty good. There's a part of me that is a bit sceptical of some of the interpretations that are laid over events/situations etc, but there's a lot of solid stuff in here. And even the stuff that is a bit more speculative is worth a read. 

The chapters on views of investors, financial market impact on governance structures, and networks in governance are all right up my street and have provided some useful info. But the chapter entitled Interpretive Politics at the Federal Reserve has been my favourite so far. It basically analyses conversations at the Fed in terms of the type of framing that was going on by Volcker and others. It might be a chronic case of reading far too much into too little, but it's good fun.

That's all folks.

Tuesday 1 September 2009

So if we're going to use the Companies Act...

...what about exercising the reserve power in clause 1277?:

Information as to exercise of voting rights by institutional investors

1277Power to require information about exercise of voting rights

(1)The Treasury or the Secretary of State may make provision by regulations requiring institutions to which this section applies to provide information about the exercise of voting rights attached to shares to which this section applies.

(2)This power is exercisable in accordance with—

  • section 1278 (institutions to which information provisions apply),

  • section 1279 (shares to which information provisions apply), and

  • section 1280 (obligations with respect to provision of information).

(3)In this section and the sections mentioned above—

(a)references to a person acting on behalf of an institution include—

(i)any person to whom authority has been delegated by the institution to take decisions as to any matter relevant to the subject matter of the regulations, and

(ii)such other persons as may be specified; and

(b)“specified” means specified in the regulations.

(4)The obligation imposed by regulations under this section is enforceable by civil proceedings brought by—

(a)any person to whom the information should have been provided, or

(b)a specified regulatory authority.

(5)Regulations under this section may make different provision for different descriptions of institution, different descriptions of shares and for other different circumstances.

(6)Regulations under this section are subject to affirmative resolution procedure.

Apparently the affirmative resolution procedure is pretty speedy, so it wouldn't pose a big hurdle. And it wouldn't be too difficult to develop a coherent disclosure framework setting out the who, what and when.

So why not?