Wednesday 28 October 2009

Tory bloggers and climate change

An interesting post by Sunder at Next Left. There's a reasobale counterpoint that it doesn't really matter what Tory bloggers think, since it will be Tory MPs and ministers that will decide the line. If you asked Labour bloggers for their opinion on the 50% top rate tax rate I suspect you're get overwhelming support, whereas elected members may well think differently. But it does suggest, along with the Blues' contortions over Europe, that there is more than a little in the charge that the Tories haven't changed as much as Dave and Gideon would like to suggest.

Tuesday 27 October 2009

Voting disclosure - nearly there?

I know this is a bit of a hobby horse of mine, but I've been reading through the submissions to the Walker Review looking to see what sort of of responses there have been to the recommendation on voting disclosure. It's recommendation 22, and it reads as follows:
“Voting powers should be exercised, fund managers and other institutional investors should disclose their voting record, and their policies in respect of voting should be described in statements on their websites or in other publicly accessible form.”
Effectively it just restates best practice, since the ISC has already said (just about) that public disclosure is desirable. But the lack of detail in support of this recommendation does seem to leave the door open to making it mandatory, which obviously I support.

Anyway, I had a trawl through the submissions and found that actually of those that comment specifically on this recommendation, a majority are supportive (and a fair few explicitly call for mandatory public disclosure). A handful appear openly hostile - not surprisingly the IMA and AIC are not supportive - with a few more ambivalent (the ABI and L&G suggest it's a waste of time). So the debate seems to have shifted failry decisively in favour of public disclosure.

A final point. I think we do need to tackle this 'no-one is interested in the data' argument head on. In my opinion, as one of the handful of voting data geeks out there, the amount of legwork involved for an ordinary punter to find out anything useful is the problem. Voting data can be hard to locate - it isn't always where even someone like me would expect to find it.

The format it is disclosed in can also make it very difficult to understand - I've just been looking at one manager's disclosure and it doesn't even tell you what the resolutions are, so unless you have the AGM agenda to hand all you know is that they voted against 'resolution 10' and for the rest. Not exactly illuminating.

And, most importantly, if you really want to take an informed view you need to compared your manager's voting against the rest of the industry. In other words you need to repeat the search for data perhaps dozens of times. Only a handful of sad people are going to bother :-)

If we make disclosure mandatory, and define the format of disclosure, it will be much easier to carry out comparative analysis. Someone geeky like me can go and get all the data and bung it in a survey for you. Or put it on a website, a sort of for voting.

At the moment voting data is disclosed in a way that suits asset managers, rather than the punters, and it requires a large amount of effort to make sense of it. But if we make it easier for people to interpret the data I'm confident the interest will grow.

Monday 26 October 2009

Dissing Shiller, etc

I've mentioned Paul Marsh's 1990 report on short-termism a couple of times. It is definitely worth a read as, even if you disagree with some of the conclusions, it's actually a much more meticulous assessment of the arguments than many more recent short-termism reports.

It's interesting to note in passing that Robert Shiller gets a bit of a slap. This was pre-Irrational Exuberance, when he was more interested in volatility, though with hindsight you can understand why he ended up where he did. Anyway, here's Marsh's put-down:
[S]ome researchers have moved away from a fcous on trading rules, and instead have devised tests for "excessive volitility". The best-known work here is by Shiller (1981) who claimed that stock market prices were far more volatile than could be justified by the much lower volatility of dividends. Subsequent researchers, notably Marsh and Merton (1986), have shown that Shiller's analysis is fundamentally flawed, since it ignores what we know about the way that managers decide on dividends, namely that they try to "smooth" them out over time.

I think that's fighting talk!

Separately, I thought I would flag up a bit I disagree with, which is this:
Faced with the demand for better short-term performance, the fund manager... cannot sell the future short. The only way he or she can outperform is to identify undervalued shares and buy them, and/or overvalued shares and sell them. This, however, can be achieved only through careful investment analysis of a company's short and longer-term prospects - something widely held to be a good thing.

I don't disagree that this is what ought to happen, rather I think that in certain circumstances short-term pressures may lead to "careful investment analysis" getting skewed to result in the picking of stocks that seem to be heading up regardless - see the TMT bubble.

Notably Marsh's report, which - as should be obvious - I like, was commissioned by IFMA (the old name for fund management industry's trade body). Post the TMT bubble EAMA (the European equivalent) commissioned a series of essays on what just happened. Compare and contrast this excerpt from one of the pieces in it:
When Vodafone acquired Mannesman, many investment managers took the view that it made sense to increase their holding even though they believed the shares to be expensive and likely, eventually, to fall in value. The same managers became ever more likely to invest in TMT stocks the more expensive they became. Why? Because to be underweight in these investments without the certainty of being proved right, created significant business risks if the impact on short-term relative performance was serious and if the Principal took a dim view of the way his funds were being managed. Failing conventionally when managing a portfolio can sometimes lead to an acceptable outcome for an investment manager’s business.

If you're interested the piece is by Chris Cheetham, former chief investment officer at Axa, now at HSBC I think. The collection of essays is called Boom and Bust: The equity market crisis - lessons for asset managers and their clients.

The BNP bubble

Staying on the BNP issue for one more post, I really do question the argument that has it that the rise of the far Right is a reflection of the failure of mainstream parties to address legitimate concerns. If that were the case then presumably the problem in the 30s was that mainstream parties weren't addressing legitimate concerns about the Judeo-Bolshevik threat.

Personally I think that some of the concerns that lie behind the growth of the BNP are similarly bollox. Therefore the last thing that mainstream parties ought to be doing is legitiming concerns that may not have much basis in fact (ie the threat of Islamification, immigrants getting priority for council housing etc). The problem is, of course, that even when politicians do hold the line against misconceptions, these concerns persist, and there is always someone on hand to keep stoking the fire.

Flipping forward, the more people that start to accept the BNP view of immigration, the more likely they are to end up talking to others that share their view. And, if we accept Cass Sunstein's argument, this is likely to lead to reinforcement and a tendency to even more extreme positions.

To me it looks like the political equivalent of a speculative bubble. And unfortunately I suspect our ability to detect and try and deflate bubbles is likely to be as successful in politics as it is in economics. At some point the bubble will burst, and those caught up in the mania will look back on it with regret, but at the moment to many in the midst of it it must seem like it must be well-founded because look at all the others who agree.

Friday 23 October 2009

Obligatory Question Time post

Generally thought Nick Griffin came across badly, but the fact that almost the whole programme was devoted to the BNP, and given the relentless attacks on him, it felt hugely one-sided and unfortunately rather self-righteous. It's was a bit like a chance queue up to throw rotten fruit at the Nazi in the stocks.

Griffin made some bad howlers - why not simply state 'I accept that the Holocaust happened' and distance himself from the KKK? Those and the rant late on about the far-left BBC must have made him come across as a bit of nutter to genuinely unaligned people. Unfortunately I suspect he will learn from this and trim his sails for his inevitable next appearance. Perhaps 'exposing' the BNP to debate will simply make them craft their message even more carefully?

As for the UAF demo, whilst I'm glad there was a demo, I think it was stupid to try and break into the studio, and the people shown on telly getting literally dragged out of Television Centre looked ridiculous. However I have no idea what Iain Dale is on about claiming that they used 'fascist' tactics because there was a vaguely threatening chant. a) It's a (rubbish) chant used on about every anti-fascist demo I've ever been on b) it's usually initiated by a perpetually outraged teenage Swuppie who is extremely unlikely to put it into practice c) I can't believe that a West Ham supporter hasn't heard much worse than this ;-) To argue that an aggressive chant on a demo is 'fascist tactics' is to further devalue a word that has already lost much of its meaning.

Thursday 22 October 2009

A Knightian aside

Stumbled across the following in Risk, Uncertainty and Profit and rather liked it.
"We find ourselves compelled to strive after things which in a "cool, calm hour" we admit we do not want, at least not in fullness and perfection. Perhaps it is the manifest impossibility of reaching the end which makes it interesting to strive after it."

For your reading pleasure

1. Paul Myners' latest speech. I like this line - "To say that the compensation practices in the City are ‘necessary’ is simply not the case; they are ‘culturally embedded’ in an industry that now needs to reform."

2. Another enjoyable post from Will at Potlatch.

3. Commentary on the TUC response to Walker here. Unison also has a response on the Walker submissions site, but I can't link directly to it.

Wednesday 21 October 2009

Governance reform - issues to watch for

Given that in the next couple of months we will see both the final Walker Review recommendations (and the govt's response to them) and the results of the FRC's latest review of the Combined Code, it could be quite a significant period for governance reform.

Personally, I don't think that Walker will shift much ground from his original recommendations though there may be changes in some areas. Arguably the Code will go through some sizeable changes (in part because of what Walker says). So in the spirit of a sort of "4 Tests for Walker" type preview here are a few areas where I hope the Walker, the FRC and the govt keep their nerve or even go a bit further.

1. A new 'Stewardship code' for institutional investors, and a new role for the FRC in respect of it. I think this is almost certain to go ahead, and this will also mean that the Combined Code loses the section on shareholders. The important question is who has responsibility for it. Obviously I don't think it should be the ISC, so let's hope Walker sticks to his guns and gives it to the FRC.

2. Voting disclosure. It's time to make this mandatory, surely? The arguments against it simply don't stack up. The principle is accepted by most of the market, so making in mandatory would simply vastly improve execution. Standardised, market-wide info is what is required, the voluntary approach hasn't delivered it after several years of trying, so logically it's time for coercion.

3. Annual election of directors. Walker has only gone for annual election of BOFI chairs, so even the ISC takes a more radical position (annual election of committee chairs). I genuinely think investor consensus on this is now shifting to favour annual elections, so I'm hoping that Walker and the FRC recognise this and push a more forward-looking position.

4. Directors' pensions. The recommendation in Walker on directors' pensions is a missed opportunity. There are a number of other issues that can and should be caught by tweaking this recommendation (see the TUC's annual PensionsWatch report for details) and the Code review could also pick them up. This is long overdue and, given the Fred Goodwin experience, surely one the govt would like to crack too.

Now, I'm not being particularly ambitious with my list. We're a long way from the idea of employee or stakeholder representation on boards, for example. But I would have thought that if we can get most of these boxes ticked, or close to it, at least some progress - within the current framework - will have been made.

Monday 19 October 2009

Ireland to implement statutory governance?

This is very interesting. From the looks of it the Irish government is planning to put key provisions of its Combined Code on Corporate Governance into legislation. This will cover the following issues:

· Board composition and independence
· Segregation of CEO and Chair
· Clear definition of executive and non-executive responsibilities.
· Audit committee composition, independence, role and function
· Responsibilities and composition of board committees
· Segregation of committee chairs
· Risk management
· Selection of non-executive directors
· Sanctions for non-compliance

That's a pretty full list - though nothing there about remuneration - and on the face of it this is a shift away from a purely market-driven approach to corp gov. Effectively the state will be defining best practice in terms of board structure etc.

Saturday 17 October 2009


Via Duncan, I came across the following para in this article.

A transaction tax on financial instruments is very likely. This will raise revenue for governments and make shareholders behave more like owners. Shareholder failure to police risky management activities was largely due to the very short holding periods for equities. A suitably high transaction tax would force investors to hold shares for much longer periods and to engage management to control risk. This would reduce the need for governments to police risk-taking in corporations. What could be more laudable than a tax that turned everybody into Warren Buffett?

A couple of points. Firstly, is it 'very likely'? I don't detect much of a groundswell of opinion behind this idea, right or wrong. But secondly, I do think if the 'shareholder as owner' thing is going to be effective then we probably do need to think about the financial incentives for staying put. The steady drumbeat from the mainstream institutional investor leadership is 'don't make us do this stuff'. And I don't actually see much point in mandating such behaviour (you might as well put your effort into regulating the companies, rather than forcing investors to provide oversight). But we could tilt the playing field a bit so that there was a bit more reason why shareholders might try and engage. And as I said t'other day, my own preference would be to positively incentivise holding for the long-term.

UKSIF policy submissions

Some good stuff here. Some of the commentary in the Walker submission in particular is interesting, and I'm glad that someone is saying things like this -

Management literature has long suggested that remuneration is a “hygiene factor” rather than a “motivator”, ie. talent may be de-motivated by what is perceived as insufficient remuneration but only transiently motivated positively by remuneration. Other motivators are more effective for delivering high quality sustained performance. The remuneration debate to date has largely failed to reflect this insight.

UKFI investment mandate

Can be found here (PDF). Just a snippet:

UKFI will (amongst other things):

(i) (on behalf of HM Treasury) vote all the shares wherever practicable to do so;

(ii) inform the relevant Listed Investee Company in advance of its voting intentions; and

(iii) disclose how it has voted.

Friday 16 October 2009

NAPF's odd comments part 2

The outgoing NAPF chair has repeated what he wrote to The Guardian at their annual conf it seems.
He said: "I am fed up with government ministers and regulators pointing the finger of blame at pension funds and pension fund trustees for the banking crisis. There are others far more culpable and they must shoulder their responsibility and look to put their own houses in order first."
Hitchen added schemes take their responsibility as corporate owners seriously.
However, he added: "Our job is to pay pensions, not to run the banks. And our influence is limited - today, we own just 13% of the UK stock market. It is ironic that as more and more DB pension funds enter run-off, driven in no small part by government and regulator-driven policies, we are now expected to come to the rescue of capitalism."

I just don't get what the issue is here. I don't think anyone is particularly blaming pension funds, and by that I mean two things. First, it is very clear that the principal focus of Walker etc is on the boards of companies themselves. Second, though there is (rightly) also a focus on the role of shareholders as owners, it's mainly aimed at asset managers isn't it?

Also I don't get the false choice that is suggested between taking ownership seriously and paying pensions. Again, if you read the Walker Review the focus on shareholder engagement is entirely based on the idea that this is in shareholders' financial self-interest. And this is corp gov basics, separation of ownership and control and all that. According to this way of thinking, surely, the existence of well-run companies (ie the survival of an important aspect of capitalism) directly contributes to the payment of pensions. That's why pension funds should be interested.

Finally, it is true that pension funds' influence is limited, and they account for a declining share of equity ownership. But let's be honest - most pension funds have never really tried to exert the influence that they do have. Ask any asset manager how many questions they get from clients about corporate governance etc. The client pressure on them to act like owners barely exists, whereas a perceived focus on short-term return does (I say perceived because pension funds claim they don't put such pressure on). If you feel that keeping your job has more to do with short-term returns than long-term ownership, what are you going to prioritise?

Unfortunately the language used above, which I am sure will have many an NAPF member nodding in favour, only reinforces the idea that corporate governance and ownership activity have no overlap with financial self-interest. If you want an example of why we have this ownership problem, this is it.

Wednesday 14 October 2009

Exit, voice and loyalty (dividends)

The more I think about it, the more I think I like the idea of loyalty dividends. Basically the idea is that long-term shareholders are entitled to an extra bit of dividend once they have held their shares in a company for a set period. It exists in a few places, but hasn't really taken off, but has been floated by ex-Hermes man Peter Butler in the past as a way to incentivise 'ownership' (see page 4 of this PDF).

In essence it's no different to any other type of customer loyalty scheme, and in that sense the advantage (as I see it) is that it tips the balance marginally in favour of voice as opposed to exit. So investors may actually have a grumble to management rather than simply flogging their shares to another investor, and thus may encourage the board to address issues of concern.

Investors can of course still flog their shares if they want to, but by marginally tilting the balance in favour of holding this would hopefully address the problem of asset managers generally choosing the exit option when they don't like management, leaving the problem unaddressed. Also it would be up to each company decide whether such a scheme was valuable, rather than the approach of a Tobin Tax - to make exit less attractive, rather than voice more attractive - which would hit everyone. So there could be a bit of experimentation and if it doesn't work it's easy enough to scrap.

I'm sure there are some obvious problems - so what are they?

A bit more on representative bodies

I realised that I missed this speech by Paul Myners last week, which includes a great bit on the ISC:
[I]n practical terms the ISC has struggled to deliver tangible results.

This should not come as a surprise.

The forum is a coordinating mechanism for trade bodies who themselves operate primarily to promote the interests of their own industries – there is no one organisation in the UK that speaks solely and exclusively on behalf of institutional investors without commercial benefit as an overriding goal. This, in my view, is a deficiency.

To compound this disconnect, the ISC is a loose collection of trade associations rather than member firms, and as such is two degrees removed from the operational nexus of the industry.

The committee has rarely met and has not evolved. It is controlled by industry trade bodies; it has no budget or permanent secretariat.

Trade bodies clearly and correctly operate primarily in the interests of their own fee-paying members. This may or may not accord with the interests of end investors but it is a fact of life that parties selling services to others for gain are not necessarily always going to have entirely shared interests with their clients.

PS. I am picking up a fair few hits from people looking for various speeches he has given, so I'm creating a 'Paul Myners' label for any of you wanting to pick up previous speeches. I'll go backl and label all previous posts. Of course, you can also get them on the HMT website here.

Monday 12 October 2009

Myners in the FT

Paul Myners has an article in todays FT on ownership that is worth a read. A couple of bit particularly caught my eye. For example this bit:

Investors' emphasis on short-term return communicates itself to business leaders who feel obliged to think and act short-term; take on more risk, which the fund manager reduces through diversification - an option not open to employees.

This is very much in line with the point raised by Margaret Blair, that employees make a firm-specific investment. Some good stuff here too about why fund managers end up focusing on the short term (what signals are their clients sending them?)

And this bit:

I am struck by the absence of a body in the UK that speaks on behalf of institutional investors without a commercial or trade association interest. Creating an independent Council for Institutional Investors would be a step forward.

I reckon some sort of UK version of the CII is long overdue. As I've blogged a bit before, it's a bit of a problem that collaborative engagement gets funneled through trade bodies which lobby on several fronts (ie ABI represents insurers as PLCs as well as shareholders), rather than through a body that only represents investors as investors (and the real investors - not the investment agents - too).


If investors won't play the ownership role, policymakers will look to other alternatives.
It is partly the failure of institutional investors such as pension funds to voice concern or to pressure banks into better behaviour that has persuaded ministers to opt for the big stick of regulation. By behaving like neglectful absentee landlords (© Lord Myners), pension funds have encouraged policymakers to choose more onerous supervision.

Sunday 11 October 2009

The rhetoric of reaction

This is a rather enjoyable little book, and just the thing to keep your progressive politics warm this winter, with the black cloud of a Tory government on the horizon.

To simplify, Hirschman identifies three recurring (and somewhat contradictory) types of conservative/reactionary arguments.

1. Perversity - a proposed reform will actually have the opposite effect to that intended, or make the problem worse.
2. Futility - the proposed reform will have no real effect.
3. Jeopardy - the idea that a reform will result in the loss of something else (ie a previous reform).

It's a pretty simple classification, but it does capture the shape of recurring reactionary arguments. As I've blogged a bit before, I think sometimes people are attracted more by the structure/shape of an argument rather than its content (or whether it is actually accurate). Hirschman makes the point that some of the arguments that fall into his categories seem to have roots in much older myths.

Just how common these types of arguments are can be demonstrated by a quick dip into one of my favourite issues - mandatory disclosure of shareholder voting records. And just to keep things bang up to date, the following excerpts are taken from the IMA's submission to Walker (PDF). I think they manage to cover all three bases:

A “one- size-fits-all” requirement would undermine progress. As well as looking at the number of managers that disclose, the survey analysed voting details published on web-sites. This showed a wide variation in the matters reported, indicating the complexity of this matter and the difficulty of introducing regulations that would require uniform disclosure. In effect, imposing a “one-size-fits-all” legislative requirement would undermine the progress made to date.


The voting process could be undermined. Public disclosure could undermine and generally “dumb down” the voting process due to the sensitivity of the issues and the confidentiality necessary.


Mechanistic, meaningless reporting would result. Requiring disclosure would result in pages of statistics and tables, which could be meaningless without further analysis.


Now my point - on this occasion - is not that the arguments are wrong, but rather that they do fit pretty well into Hirschman's taxonomy. They are simply reactionary arguments of a classic type.

Final point - obviously conservatives are sometimes reformers, and 'progressives' deploy these types of arguments against them in turn to defend the status quo. So they are not intrinsically Left or Right. Having said that one side does tend to use them a lot more than the other - inevitably since conservatives tend to think the status quo is acceptable/natural and a concerned by the ramifications of moving away from it.

Anyway, a great little book.

Saturday 10 October 2009

Taxpayers Alliance probed

Finally some meejah scrutiny of the TPA. More digging definitely required tho.

Hat-tip: Nigel

PS. Some research I did into the overlap between TPA supporters and Tory donors here and here.

Friday 9 October 2009

Walker Review submissions

The Walker Review is making submissions available online here, though apparently only of the organisation agrees to their submission being public. There are some notable absences, but perhaps some organisations feel they have been more effective lobbying behind the scenes. Anyway, though I'd point a couple out - Unite and Bob Monks (both PDFs).

Thursday 8 October 2009

Short-termism: another blast from the past

Not surprisingly, we have quite a few books kicking around at work about governance and related issues. I really ought to have a proper hunt through these before my regular Amazon splurges, as sometimes we already have copies of things I want to read.

A good example is Short-Termism On Trial by Paul Marsh, which I now have two copies of at home, having ordered one before realising that we have a work copy. It is worth a read as it represents a fairly comprehensive stab at this regularly re-occuring criticism of the company-shareholder relationship in markets like the US and UK. It makes a pretty good case that actually a lot of the criticisms voiced don't have much evidence to back them up. And it argues that if there is a problem then it is companies, rather than investors, that are at fault. I'm not entirely convinced, but I can't think of a comparably well-researched case for the prosecution.

It's also worth a read just to remind yourself that there is nothing much new in the current debate about ownership. Just a few excerpts as examples that not much has changed:

Amongst the favourite suggestions are disenfranchising shareholders who have held their shares for less than, say, a year...
A recurring theme in the current UK debate (!) is that the problems of short-termism, whether they be perceptions or reality, would be greatly ameliorated if shareholders acted more like "owners".
[E]ven in an ideal world of excellent communications and dialogue between companies and institutions, it would still be very difficult for fund managers to have the detailed knowledge required to intervene successfully in a firm's affairs.

Masterchef The Professionals - important!

1. Please note that this programme is not comparable to things likes 'Ghost-hunting with McFly' or whatever. By 'the professionals' they mean trained chefs, not The Professionals. So do not expect to see Bodie and Doyle battling it out in a restaurant kitchen. If that did happen presumably it will be called Celebrity Masterchef: The Professionals.

2. Greg Wallace has added another string to his bow in this series. In addition to being required to perform his traditional ' dessert gurn', he is also employed as a professional echo for Michel Roux Jnr.

Reversing the 'tax raid' on pensions

I dunno how much we should read into this, given the total abscence of detail. But in general it does suggest again that the Tories are more interested in posturing than serious pension reform.

First up, what is the policy meant to achieve? It cannot, for example, repair the damage done to defined benefit schemes, finance directors will not suddenly re-open them because they have a bit more investment income. It will therefore marginally increase the funding position of these schemes. This is clearly not a bad thing, but not a particularly exciting objective.

Equally it will provide a bit more income for the many more people who are now in DC schemes. That may or may not make a difference. A bit more dividend income certainly won't offset the sort of falls we saw in share prices in recent years. Again obviously better to have than not, but not really a big contribution to the pensions problem IMO.

Secondly, who is going to benefit? If pension funds get a few extra quid, it benefits the members of these schemes. But the stats out there suggest that membership is skewed towards full-time male employees (and union members...!). Until Personal Accounts kick in this will remain the case, and the effect will therefore be to give a bit more money to those people already in pension schemes over those that are not. Is this really a sensible use of money if we want to spend more on pensions? Would it not be better to simply spend a bit more on the state pension, since we know everyone will get it?

Wednesday 7 October 2009

Pensions geekery

1. An interesting intervention by Aviva - calling for flat rate tax relief on pension contributions - highlighted by the TUC.

2. A bit of analysis of the Tories proposals on state pension age here, here and here.

Annual elections - what is the big deal?

I've got to say I'm a bit perplexed by some commentary today from some UK institutions about the idea of annual election of directors. Such as:
"Annual re-elections are potentially distracting to the board, (and) create instability and additional work for the shareholders without any material benefit. So it's not a good idea," said Colin Melvin, chief executive of Hermes Equity Ownership Services.

Eh? But some companies already have annual election of directors, just a few off the top of my head - BP, Pearson, Vodafone, Unilever. Are all these companies 'unstable' because of it? The benefit of annual elections is that if there is a problem at a company that arises in the short-term, you use your vote to express concern at a particular director's role, or even ultimately vote them out. That is not possible when they are on a three-year cycle - see for example the current ITV debacle. It is no extra work for shareholders (unless you consider voting 'work'), but it does mean that you can hold directors accountable immediately if necessary. In practice I think it would be very rarely exercised, but it should be there.

Now you could argue that the vote isn't that important, and that actually shareholders can remove directors without resorting to voting them out. True but a) it is not always the case that director will just roll over and b) follow this through logically - what is the point of voting rights in the first place then?

My personal view is that opposition to what seems to be a perfectly reasonable reform stems from an unfortunate direction the institutional share-owner culture has taken in recent years. In the understandable desire to avoid being seen as 'radical', 'political' or 'gadflies' some shareholders bend over backwards to demonstrate their support for management. I understand this - we shouldn't start from the position that companies are 'wrong' and that shareholders need to 'do something'. But I think this tendency has now gone too far in the other direction.

This can be seen in the utterly unimpressive voting record of most big institutions on remuneration - even though they know claim it is obvious that pay policies were flawed, and can tell you exactly what the flaws were. Well why didn't you use your voting rights to challenge them then? And don't claim that you were active behind the scenes, because we all know that we have failed to tackle executive pay inflation.

It can also be seen in their default position of management support when a union or NGO takes an issue to shareholders (again check out the voting records on shareholder resolutions raised by such groups). Now once again you can make the case that this is the 'responsible' thing to do - not supporting a challenge to management. But I personally fundamentally disagree, and I believe that institutions that routinely oppose shareholder resolutions effectively legitimise management complacency on some important issues. And having been involved in several such campaigns, I can tell you that from the proponent's point of view it simply feels like you have been stabbed in the back - especially when it's an institution that talks a lot about ESG issues (and there are several guilty parties here).

ho hum.

Tuesday 6 October 2009

Overdue plug

For this here RSA report (PDF) on pensions reform by David Pitt Watson which covers some topics I regularly bang on about.

Monday 5 October 2009

Back to the beginning part 2

I'm really glad I went back and read The Modern Corporation and Private Property by Berle and Means. It is a great overview of the rise of the public corporation with dispersed shareholders, it's really well written, and it really does deserve its reputation as a foundation text in corporate governance.

But the other reason I'm glad I went back and read it is because it made me realise what a partial view you get of it from listening to governance people sometimes. Yes, it's central theme is the separation of ownership and control, but the book does not simply advocate the extension of greater rights to shareholders to address this (which is today's 'obvious' answer to the issue). They go further and argue that the separation of ownership and control changes the nature of property - hence the title.

Actually in the final chapter of the book they argue that there's a good case to be made that companies be run in the interests of 'the community'. There's also a bit in this chapter that really made me think of the ownership debate going on currently. Here they are not necessarily talking about the willing surrender of ownership, rather it is the result of wider share-ownership. But actually it reminds me of the stance some in the asset management industry are currently taking in respect of the Government, via the Walker Review, trying to get them to act more like owners:
"[T]he owners of passive property, by surrendering control and responsibility over the active property, have surrendered the right that the corporation should be operated in their sole interest, -they have released the community from the obligation to protect them to the full extent implied in the doctrine of strict property rights."
As I've said before, I think institutions should think carefully when they make the argument that they shouldn't be forced to act like owners. As Berle and Means suggest, this actually starts pulling at a thread that could cause much bigger issues to unravel.

Finally, it was also worth a read to bring to my attention the fact that an Adam Smith quote that is a particular favourite of governance people actually goes on quite a bit longer. The bit I am familiar with is the line about company directors "being the managers rather of other people's money than their own, it cannot be well expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own".

The quote is usually deployed again to strengthen the agency theory critique of public companies, and the need for a focus on shareholder value, and by extension greater shareholder rights. Yet actually in the passage Smith goes on to basically argue that joint stock companies are inherently flawed, and haven't done a great job. And this was long before the dispersed-shareholder version we have today arrived on the scene.

It's just a jump to the Left

There's an enjoyable lefty critique of financial reform here (PDF). There are some great bits of invective in there:

By the mid 2000s venture capital survived not as a practice but as a rhetorical label which had been appropriated by the BVCA trade association which was defending leveraged private equity.


This is very different from the City of London’s version of “ethical investment” which means more fastidiousness about the coupons which your fund manager buys.

So mean, and so true.

Saturday 3 October 2009

Norwegian activism, in the UK

Norges Bank Investment Management is the investment arm of the giant Norwegian pension fund. Yesterday it held a briefing about its plans for stepping up shareholder engagement. There's a release about its plans in respect of some US holding here, and a report about its support for annual election of directors here.

NBIM has made some interesting comments in response to the Walker Review, in addition to their support for annual director elections, they are also interested in how companies address the need to balance remuneration policy between the needs of directors and those of employees. I think they could do something genuinely original here, since most investors don't look at the employee angle. They are also sceptical about 'say on pay' partly because they believe it almost attempts to devolve the issue to shareholders, and thus can act to legitimise high pay.

Why should the UK pay any attention to a Norwegian investor? Well, as I mentioned, it is huge. In fact it estimates it owns about 1.75% of UK equities. That will give it a bigger slug in British companies than many domestic asset managers. And judging by what they are saying they could be much more serious about ownership than some of our homegrown investors.

Friday 2 October 2009

Odd comments from the NAPF...

In this letter to The Grauniad earlier in the week:

Your interview (Too many UK firms fall into foreign hands, September 24), reports that City minister Lord Myners would "summon" the National Association of Pension Funds (NAPF) to a meeting to discuss what he perceives to be a lack of resources – and therefore commitment – on the part of occupational pension funds to raise standards of corporate governance. We are always happy to discuss matters withMyners and will be happy to do so again.
The NAPF is, and always has been, an "active driver of effective ownership", as the minister is aware – we actively engage with investee companies and our corporate governance guidelines are used by a leading voting agency. We see this as an integral part of building value for, and providing pensions to, scheme members, which is, after all, what pension funds are there to do.
Pension funds' priority is to ensure that they are able to pay pensions to their members. This alone presents many challenging issues, especially in the current environment. Government policies have forced pension schemes to close and they grapple with ever-growing deficits out of UK equities – to the extent that pension schemes now own less than 15% of the UK market. It is ironic indeed, then, that government now wants to call on pension schemes to be the saviours of capitalism.
Constructive comment – not unwarranted criticism – is what is needed from government.
Chris Hitchen

First thing, I'm not sure what the message is. If (ok - a big if) ownership activity is in funds' financial self-interest, as implied in para 2, how come it then appears to be contrasted with the 'proper job' of paying pensions, dealing with deficits etc in para 3?

Second, let's be absolutely clear about this - most private sector pension funds do diddley squat in this area. You can count the funds that make a serious go of it on the fingers of one hand just about. Anyone with any knowledge of the limited ownership activity by shareholders in the UK would tell you that the utter passivity of most pension funds is a big reason why more does not get done. If you think shareholders should act like owners, then arguably criticism of pension funds is actually pretty reasonable.

UPDATE: Nigel pointed out the TUC response here.

Thursday 1 October 2009

This time is different

Just a quickie, but I was trawling the Torygraph's finance section as you do and came across this blog post by the sometimes interesting Edmund Conway. He refers to what sounds like an interesting book on the subject of financial crises:
As a new book, This Time is Different, by the economists Carmen Reinhart and Ken Rogoff, proves in devastating detail, humans have succumbed to financial crises for century after century, ever since the Middle Ages. They are a product of the fact that human life exists in a state of flux between rationality and emotion. This was something John Maynard Keynes understood, but that moderneconomists conveniently forgot.
Sounds like something I would like. And I like the title, which is a reference to the truism that the four most dangerous words in finance are 'this time is different'. So off I go to Amazon to look it up. If you search by that title, there's the book as the top search result, but it also pulls up this corker:
Dow 30,000 by 2008!: Why It's Different This Time
Hehe. I have no idea if the title is meant to be a similar reference, but I think we can say with some certainty that this time it wasn't different, and the prediction contained within the title was a bit off-target.

Work is the blight of the blogging classes

Work and dad-dom are affecting my ability to blog regularly at present. So in the meantime read this (sorry I still haven't replied to you, Nick!), this and this.