Monday 30 November 2009

Private equity 'a force for good'. Repeat. Repeat. Repeat.

Back in 2007 I blogged about the way that the phrase "a force for good" was being repeated by a lot of folks in the private equity industry to defend their activites. I had a further trawl last year and found that the phrase was now regularly used by hacks writing about the industry.

Back in 2007 I said:
I don’t think this is an evil corporate plot by the way. I always tend to boring explanations of why things happen, rather than conspiracy theories, hence I doubt very much that the private equity industry and its cheerleaders have decided to use the same slogan. It is possible that a PR firm may have encouraged the BVCA to use it, as a quick skim of Wol Kolade’s interviews reveals that he has used it a lot.

The today I stumbled across this interview about media-coaching for the head of Blackstone Group.
Every era has a picture or an anecdote associated with it. Before, it was K.K.R. and Barbarians at the Gate. Now it’s the party. It has become more or less the anecdote. That increase in profile will never go down, and I don’t see that trend reversing.

But I do see a way forward for them. They have to be the best of the best. Don’t make one speech, make a hundred speeches.

The remarks I read dealt with globalization. He should be a part of that debate in Davos, in Washington, in tons of conferences. I’d tell him, you can be a force for good. Use that as an opportunity.

Hindsight is always 20-20. Shoulda woulda coulda. Again, I think the way forward is to be a force for good and really embrace it.

This sort of thing (I mean corporate PRs telling folks how to spin) doesn't really bother me. What bothers me is the way that people regurgitate it without thinking. Have a Google for "private equity" and "a force for good" and see what I mean.

Sunday 29 November 2009

Random Sunday night thoughts

One of the things I've been thinking about lately is the way that our relationship to institutional structures affects the way that we interact with others. Two things keep jarring with me, and I think that they are basically different aspects of the same thing. First is the way that organisations appear to act differently - more rationally - than the individuals that compose them. Second is the way that individuals seem to act differently when they perceive themselves to be in a given institutional context.

Just a couple of examples to flesh out what I mean. First, organisations, or the management teams that take decisions, appear to be capable of taking decisions that the individuals that compose them might find cruel or unethical if they were taken at a personal level (either a one-to-one business relationship or a non-work scenario, for example). Somehow being part of the institution, or adhering to its values (such as shareholder value) enables them to either shed other behavioural norms, or defer to to a sort of ideological authority. Thinking about the Milgram experiment, it's almost as if the institutional norms play the role of the experimenter - insisting that they continue on a given path despite their qualms, or at least providing them with the justification for doing so (and of course, most of the time there is an actual authority figure further up the chain).

Secondly I think about how I and others act at work. We must all be on a spectrum ranging from those who simply don't imbue the organisational ethos and continue as if all work relationships are simply personal relationships situated in an office and those who defer totally to the organisation, and seek to act in a way that maximises their effectiveness and the effectiveness of others in line with the organisational goals. Assuming most of us sit some distance from either extreme, I imagine I can't be alone in finding people too far towards either end quite irritating/frustrating. Some people don't seem 'worky' enough. Though we might be happy to share lunchtime or moments during the day talking about home-life, some people seem to barely recognise that this isn't what they get paid for. Yet at the other extreme there are those that can't see anything at work unless it is through the prism of organisational goals.

I have a mate who is really lovely bloke, full of good stories, friendly and funny. But if you arrange to meet up you can guarantee that he will be late. On a social level I admire him and the fact that he hasn't been corroded by the workplace. But on a professional level (having worked with him) I know he can be incredibly frustrating for exactly the same reasons.

What this leads me to think is that in effect what happens when we operate within an organisation is that we tend to simplify or stylise our interaction with others. Because we don't really need to know what they did at the weekend, or how they are feeling, for managers in particular much non-organisational communication becomes formalised and essentially meaningless. In contrast we start to think about people in terms of their organisational capacity. They become a series of bullet points, a shorthand for they can and can't do, and the situations in which they can and cannot be deployed. And their ability to make themselves organisationally effective, and to communicate back in organisational terms will probably make them successful, so there is an incentive to participate. (Incidentally, I think humour in the workplace plays an interesting role here. Many jokey comments actually contain a little moral about effective an ineffective organisational behaviour).

At one level such a process may be necessary in order for an organisation to behave rationally, but it probably also explains why so many people find work such a drag, and think their managers are tossers. It probably also has something to do with why when commercial interests start to intrude in a given sphere we can feel the change.

When I go back over these thoughts I realise that I've probably been hugely influenced by some of the Habermas stuff I've read. Anyway, I think this is a topic I'll be coming back to.

Thursday 26 November 2009

Shareholders need to act on pay now

Paul Myners gave another speech this week calling on shareholders to start grappling with remuneration, and quickly. As he said if they don't start getting stuck in, pressure will build for Government and/or regulators to have another go.
Failure by those in positions to affect change – Board directors, remuneration committee members and, importantly, shareholders – and show leadership towards a new culture of fairness and just reward will inevitably lead to calls for more intervention by Government and regulators.

Taxpayers feel entitled to have a view on this matter – particularly if they perceive directors are unable to strike the right balance in determining sensible remuneration practices that are calibrated to risk; or shareholders who do not appear willing or able to hold directors to account.

In a year in which all major banks have draw on and benefited from taxpayer and central bank support – some of them very significantly – public attention will focus on the decisions that boards make about bonuses.

Many banks have earned large profits this year from remarkably benign conditions, conditions created through the interventions by governments across the world, profits that owe very little to the talents and skills of individual traders or investment bankers.

These profits must surely be retained by shareholders in the business as capital to support the credit needs of customers and the economy.

I expect our major institutional investors, insurers and pension funds, to be forthright in making these points to all bank remuneration committees, and to exercise their votes if their views are disregarded.

It would be good if they made their views on this public, sooner rather than later. I would expect the clients of fund managers – pension funds trustees and others – to hold their fund managers’ feet to the fire; insisting on accountable, fair and just practice.

On this last point, if you are a trustee here's a simple proposal. Why not request that all your fund managers prepare a report on how they voted on remuneration at the banks over the past 2 or 3 seasons? And if you don't like what you see, do something about it.

Walker Review - the good, the bad and the bonkers

Below are a few thoughts on the final report of the Walker Review. I continue to think that the Review is a missed opportunity, and suffers by comparison to Adair Turner's report on financial regulation. It is very much positioned within mainstream industry opinion in my view. Many people will regard that as the right approach, but given then colossal scale of the crisis I think something a bit radical could have been attempted. Nonetheless it is well-written and well-argued and Walker has clearly stood his ground on many issues where there had been lobbying from vested interests, and in some places I think he has driven in some proposals that open up a bit of room for future reform.

Annual election of BOFI chairs - here Walker has stood his ground and taken an approach that crops up in other areas in respect of wider form, namely being vaguely supportive but not really pushing on. So the recommendation has been widened to encourage BOFI boards to review annual election for all directors, but they are not told to actually do it as best practice. And actually in the text around the recommendation some of the usual arguments against are rehearsed. Nonetheless it does open the door a bit further. I suspect that if shareholders collectively pushed on this at the banks it would be had for the boards to say no, and I'm not sure all of them actually think it's a bad idea.

Stewardship code - I'm not at all keen on the adoption of the ISC Code as the basis for the Stewardship Code because it's not a particularly stretching code in my view. But actually that probably isn't the important point. The key win is that the FRC gets to own the Code, and to review its operation. The ISC is no longer formally involved (which is a change from the initial recommendation). In addition in the section about how the FRC will assess progress Walker suggests that it takes over the IMA engagement survey (see 5.39). This is a great idea as although the IMA report is a good piece of work they do (understandably) spin the results. The claims on voting disclosure being particularly challengeable.

And what about voting disclosure? I set myself up to be disappointed and I am. He argues that the voluntary approach plus comply or explain should continue. This is simply pointless. If you accept that public disclosure of voting records is right in principle, as Walker does, all that voluntarism achieves is the absolute certainty that the market as a whole won't adhere. And as we know through the experience of the existing regime to date it will also allow the current practice of variable forms of disclosure which makes it very hard to do anything with the data. This much is well known - so this issue has simply been ducked. Gutted.

Pensions - the Fred Goodwin recommendation is expanded a bit to catch similar cases, but Walker doesn't address the glaring disparities between boardroom and shopfloor. Again this doesn't take any serious work to establish - just read a few annual reports. So another missed opportunity. I hope we can get some investor pressure around this issue, but I have no optimism about this given their failure to get stuck in previously.

I'll try and bung up some further thoughts over the next few days as I read the report properly. Having been disappointed by the initial Walker recommendations, today's report doesn't really surprise me. It's basically as expected. But I do wonder whether this will prove to be enough. For one, it's a big gamble on sticking with a shareholder-centric governance system, which may prove to be a big mistake if asset managers don't up their game. Second, I think we could yet see some real anger about remuneration practices. The whole policy debate - ie the actual policy proposals, not what people say in newspapers...! - has taken place within a theoretical framework which simply doesn't mesh with public opinion. The assumption of many is that the public don't get the arguments, and hence we have to make the right noises to cool the temperature but actually in practice do not need to fundamentally reform. I think this could be another dangerous assumption. The apparently quick return to business as usual in the City could yet threaten a sort of private sector legitimation crisis - that parallel with the position of the unions in the 70s keeps recurring...

Tuesday 24 November 2009

Fund manager sell-outs

A snippet from Paul Myners' latest speech:
In 1990, the Economist compared shareholding to gambling.

The writer said that shares were little more than betting slips, bought at a low price, with the hope that the bet will come good. Shareholders studied the markets much like a gambler might study a form guide, they backed what they hoped would be the winner, then simply sought to extract their ‘winnings’ as quickly as possible.

The author observed that the notion that a shareholder owns part of a company “makes as much sense to a shareholder as it would to the average gambler to imagine that he owns part of Lady Luck, running in the 2.30 tomorrow afternoon” .

Nowhere is this more evident than when fund managers accept the bounce in a share price that comes with a takeover, rather than saying to their clients “we rejected that bid; we know that the share price will fall when the offer lapses, but we take a long-term view and we believe in the company, its strategy and its future. It is always hard to find good companies in which to invest and we don’t intend to sell out of this one simply because an opportunistic bidder appeared. We know that you, our clients, have chosen us to manage your fund for this reason and we know that your interests are focussed on long-term returns rather than a single quarter’s performance”.

I wager that few fund managers feel comfortable in speaking in such a way to their clients.

Absolutely. If only there were a test case to see if asset mangers were willing to change their approach. Like a bid for a big name UK-listed company that they could challenge for example. Hmmm.....

Walker Review - what can we expect?

There was a lot of speculation in the papers this weekend about possible changes to the Walker Review recommendations. Most focus has been on this issue of disclosure of remuneration arrangements for highly-paid individuals below the board. Walker proposed this should be in bands, but others had pushed for individual details to be disclosed. According to reports in the papers it probably will be bands after all.

Cue much outrage from various quarters, but actually I'm not so sure. Firstly, it is the structure of these arrangements that is the most important. Secondly, as someone pointed out to me this afternoon, if investors want this information why don't they just ask for it? If institutions collectively called on BOFIs to disclose the data, could they really refuse? The problem is - as always - that very few institutions show any desire to take such an approach.

It also sounds like Walker will tweak the recommendation on non-exec time commitments. This is because of concerns that such a rule could stop chief execs from acting as NEDs on other boards. This was basically what he said to the Treasury select committee a couple of weeks back so I expect to see it.

There hasn't ben much speculation about the proposals on shareholder engagement which presumably means - if Walker has successfully stood his ground against the conservative end of the asset management business - that we can probably expect to see them unchanged. I'm interested to see if he has picked up on any of Paul Myners' ideas in respect of voting rights and, more recently, the need for a new investor representative organisation.

And fingers crossed for some movement on voting disclosure, but I'm not optimistic...

Monday 23 November 2009

voting as feedback

Just a thought, but it struck me recently how fundamentally differently I seem to see the exercise of shareholder voting rights compared to some people I know in the asset management business. And judged by the general trend in shareholder voting - very low levels of opposition except in rare cases - this seems to be a general industry perspective.

I find this odd as the right to vote is a formal and direct means to provide feedback to companies - and the market - about views on companies' policies and practices. The continuing reluctance of even supposedly activist investors to vote against in all but a handful of cases is to me problematic. It suggests one of two things. Either investors think everything is basically fine but with the odd problem at the extreme, even in respect of remuneration. Or - I think more likely - they do have concerns but for some reason think it is not productive to express them via their legal rights.

This to me is daft for a number of reasons. First, it's surely a dumb negotiating tactic to give companies the impression that they need to actually steal your wallet before you will vote against them. Would a politician be worried if a constituent told them they would be voting in favour of their re-election but had some concerns? I'm sure something would register, but the primary thought must be 'that vote is in the bag' and focus will turn towards those who are not definitely onside.

Secondly, as I've argued before, this approach can only legitimise behaviour that investors have concerns about. An institution may think they have made a point by expressing concerns before voting in favour, but if the resolution passes with 90% plus in favour what will the outside world think? In essence this sort of covert dissent doesn't give the market a true picture of owners' views.

Thirdly, ultimately therefore I think that this timid approach to voting deprives both companies and investors as a whole from useful feedback. It's a bit like saying you will never sell or short the company's shares. You might convince yourself that you're being responsible, but arguably you're actually distorting the effect of an important feedback mechanism. If you buy the wisdom of crowds type view of markets, then surely it is important that negative or dissenting views are actively expressed. Investors that don't use their voting rights effectively may be doing more damage than they realise.

Saturday 21 November 2009

Telling stories

There are a couple of interesting and related posts on Falkenblog that caught my eye. This one on narratives, and this one on Malcolm Gladwell. I've not blogged about narratives for a while, but I do think they are absolutely fundamental to how we interpret the world and they run much deeper than we often realise.

I used to get irritated by people who said they didn't read newspapers - because they seemed to think they were more clever than they were - but I've changed my opinion. I've always thought that journalism is about story-telling, but the more I've thought about this the more I think it is fundamentally true.

Not only does journalism seek to fits bits of information into a narrative structure (even though they might not fit together really) but as a journalist you are specifically taught to do this. That's doing journalism properly. Two or three stories of the same type make a trend, and then encourage journalists to look for more of them, whilst not being anything like as interested in stories that point in the other direction. Confirmation bias is doing it right. Real-life randomness just doesn't fit the model.

You can clearly get a situation where journalists highlight and reinforce (if not create) an apparent trend - and by extension define a sense of who/what organisation is important in relation to it - without any real reference to underlying reality. There's a bit in Homage to Catalonia where Orwell talks about hacks creating emotional superstructures over the top of events that never really happened. Well I think in day-to-day journalism the same thing happens in a less intense way. The events happened but don't have the importance/relevance given to them. You get the impression that the punters realise this once in a while, but most of the time it occurs unchallenged.

I do not think this is fitting of info to narratives is in any way limited to journalism. As I've blogged previously, Fisher's 'narrative paradigm' proposes that this structure actually underlies all forms of communication. Going a bit more detail, George Lakoff has argued that the use of metaphor is core to how we understand the world, to the extent that it can even be seen in mathematics. And as I've blogged recently, Albert Hirschman set out that certain forms of argument have a recurring appeal in politics.

We spot the desire for narrative in the press, or in crap Malcolm Gladwell books, but it affects all of us, all of the time. We probably need narratives in order to make sense of "a bunch of stuff that happened" and give meaning to it. But as such we need to be aware of its pull on us, and try and distinguish between a genuine attempt to analyse, and a comforting and familiar story that allows us to fit some facts into it.

Friday 20 November 2009

Thursday 19 November 2009

A snippet of Tory thinking on the crisis

This here is quite interesting. There's a quote from Conservative shadow Treasury minister Mark Hoban:
‘If you were to listen to what City minister Lord Myners says, you would think responsibility for this crisis rested with shareholders and boards. I don’t know what happened to Lord Myners in his earlier life that led him to this view,’ Hoban said.

Unless I'm being thick, the implication is that it's a bit wrong-headed to think that boards or shareholders bear responsibility for the crisis. I find that a bit difficult to comprehend. Surely the boards of the failed banks must take primary responsibility for the failures of those banks? Ultimately the responsibility for the success or failure of a company must lie with those running it. Otherwise why do they have power (and rewards) in the first place?

Now you could argue that some financial institutions are simply unmanageable, and that the boards of those institutions don't even understand some of the products and strategies being utilised. But I'm pretty sure that isn't where this comment is coming from.

Judging from the comments that come later the argument is that the regulators should shoulder the blame for not preventing the crisis. But that logic leads you to blame the Environment Agency for companies polluting.

What about shareholders then? Well, as is no doubt obvious, I don't think that institutional investors covered themselves in glory before the crisis. Some argue though that you can't blame them as they don't have access to the same information that boards have - they will never be able to second guess boards. Now that might be true - but how is it any different from the position of regulators?

Ahhh but, you may argue, that's what regulators are supposed to do. It's their job to prevent things from falling over. True enough - but what exactly then is the role of a fund manager? You pay them to put your money into companies (or in reality the shares of companies) that do well and thus generate a return on your capital. If they say they can't be expected to spot the sort of failures that led to the crisis, what can they be expected to spot? And surely as fund management as a service - as opposed to regulation - is basically all about performance, surely there ought to be more incentive for fund managers to get these things right?

I'm not at all suggesting that regulators don't bear responsibility, but I really don't get the idea that boards especially don't have a bigger case to answer. And if you think regulators are just hopeless box-ticking bureaucrats trying to cover their own backsides, then why didn't self-interested investors solely looking solely to maximize returns do any better?

This little snippet of Tory thinking leaves me a bit bemused.

Wednesday 18 November 2009

M&S appointment

Well well well.... it's an external candidate for new chief executive after all that. Funny that, as one of the reasons given for Rose combining chair and chief exec roles was that by doing so he could delegate some of his executive functions to the internal candidates to prove themselves. It sounded like cobblers at the time and either it was just guff, or it didn't work.

Notably whilst we have a date for Bolland to start (Feb), we don't have a date for Rose to leave. At a push he could stay till July 2011 remember, so it's by no means an ideal situation. Chief exec going on to become chair and all that. And M&S hasn't started the process of recruiting a chair by the sounds of it.

It is pretty clear that the company never had any intention of appointing the chair first, though some investors felt this was still achievable for some reason at the time of the AGM. Now the focus has to be on getting an independent chair in place. Whilst I'm sure Bolland can stand his ground it's not an ideal situation to have his immediate predecessor as chair.

Tuesday 17 November 2009

new ISC code

Is available here.

Reactions from the Standard, Times, Grauniad, FT and Paul Myners.

The logic of collective shareholder inaction

"The fact that management tends to control the large corporation and is able, on occasion, to further its own interest at the expense of the stockholders, is surprising, since the common stockholders have the legal power to discharge the management at their pleasure, and since they have, as a group, also an incentive to do so, if the management is running the corporation partly or wholly in the interests of the managers. Why, then, do not the stockholders exercise their power? They do not because, in a large corporation, with thousands of stockholders, any effort the typical stockholder makes to oust the management will probably be unsuccessful; and even if the stockholder should be successful, most of the returns in the form of higher dividends and stock prices will go to the rest of the stockholders, since the typical stockholder owns only a trifling percentage of the outstanding stock. The income of the corporation is a collective good to the stockholders, and the stockholder who holds only a minute percentage of the total stock, like any member of a latent group, has no incentive to work in the group interest. Specifically, he has no incentive to challenge the management of the company, however inept or corrupt it is."

From The Logic of Collective Action.

Saturday 14 November 2009

A few thoughts about levelling down

I've blogged a few times before about levelling down in respect of pension provision, because I find the arguments put forward by people like Ros Altmann wholly unconvincing. So I though I would try and explore the logic of the argument in reference to Personal Accounts.

The common claim is that when Personal Accounts come into force (or perhaps ahead of it) with the requirement of a 3% contribution from companies if employees don't opt out, many employers will "level down' the provision they offer. (Incidentally, note that depending on strength with which this point is expressed it falls into one of the two classic reactionary forms of argument as set out by Albert Hirschman. If, taking the stronger line, it is argued that Personal Accounts will result in less saving, it's perversity. If on the other it is argued that the reform will have no impact (because levelling down offsets the gains) it's futility.)

In practice levelling down by companies would presumably mean either reducing their contribution to a non-Personal Accounts DC pension scheme to the 3% level (from a higher level), or simply enrolling their staff into Personal Accounts and closing their existing scheme (which again must have been more generous than 3% in order to count as levelling down). Just to be clear - the only other possibilities are first, that the employer already has a scheme that is better than Personal Accounts and sticks with it, or that the employer did not have a scheme, or pay into a scheme, and now is forced to pay into Personal Accounts. In the first case there is no levelling down, in the second case there is levelling up.

So, why would an employer level down? Well one reason is because they can save money. Fine, but this does first lead to a question over why they don't level down now, rather than when Personal Accounts go live in 2012. In fact they could level down now to zero. So why don't they do so? There are at least three possible (not necessarily credible) reasons. First, they see some value to providing a pension, perhaps because it helps recruit and retain staff. Second, they fear employees' reaction if they do level down. Third, they are unaware that they could contribute less (nothing, in fact).

Obviously in the first case the introduction of Personal Accounts could actually reduce the value of providing a pension (because the comparative advantage to the potential employee is reduced) which could be argued to provide a reason to increase the level of company contribution. The second case is possibly more plausible. Companies may wish to reduce their pension commitments and Personal Accounts could provide the cover to do so. Companies could argue that their pension costs will go up (if everyone ends up auto-enrolled) and thus they need manage this. I think the final case is less plausible, but there may be small businesses out there which have a GPP or stakeholder set up with a contribution of over 3% and perhaps their adviser may make them aware of the incoming regime and urge them to respond.

But we can see that in practice most employers are not levelling down now. So they are not sufficiently concerned about costs to take pre-emptive action. And if companies do reduce contributions now, how much weight do we place on the introduction of Personal Accounts, which don't go live for another 3 years. To what extent is the company simply saving money, rather than being pushed into an action by impending reform? It simply is not clear that the reform 'causes' the company decision. Critics of Personal Accounts need to present evidence if there is any.

A more realistic version of the levelling down argument is that companies wish to maintain their current pension costs rather than reduce or increase them. What do I mean by this? Well, I think the main cause of any any adjustment to companies' pension provision will not actually be Personal Accounts at all, it will be the requirement to auto-enrol. Think about it - this is where the cost pressure really is. If I am running a scheme with a 6% company contribution maybe only 40% of my employees actually join it. But if they are auto-enrolled and only 1 in 5 decide to opt out (ie I now have a membership rate of 80%) then my pension costs have risen by 100%. If I then decide to 'level down' to the 3% minimum I keep my total pension costs the same, but the amount contributed to each employee's pension has halved.

This seems to me to be a not unrealistic (if very simplified) picture of how some companies may think and act. But it is clear then that the real issue for companies will be auto-enrolment (whether into Personal Accounts or existing schemes) not the new scheme in itself. It also means that - if companies adhere to my stylized version of responding to auto-enrolment - the 'levelling down' refers to the amount contributed to each pension, not the amount contributed in aggregate.

This is important, because it means that what is actually implied by critics of auto-enrolment (not Personal Accounts!) is that it is better for employers to contribute more to fewer employees than it is to contribute less to more. This is not an unreasonable position (for example because they may think that the minimum contributions are too low) even though I don't share it. But it is a position that is not made explicit - either because those advancing the argument don't want to be explicit, or because they haven't thought through the logic of their position.

A final point - obviously a company facing auto-enrolment could choose to level down to an extent that their aggregate commitment is lower as well as their average contribution rate. This would be levelling down in both senses. But once again it is the company's decision to pitch their commitment at this level, and again it is not clear how the reform 'causes' them to take this step. Once again, it's over to the critics to provide the proof.

Friday 13 November 2009

Spot on

"To date, institutional investors have said little about the lessons they have learnt over the last two years. Put simply, they have not produced satisfactory answers to the question ‘what were the owners of these banks doing?’ Remember that shareholders approved value-destroying transactions, and remuneration practices that now appear to have been poorly aligned with corporate health and shareholder wealth. I expect institutional investors, on behalf of their clients, to be much more challenging in the future than they have in the past, but I wonder whether their clients have similar increased expectation and have reflected this in their manager dispositions and incentives."

"The unitary board and Combined Code assume that shareholders will act as informed and value-pursuing investors. A failure by fund managers to act in this way, or to be required to do so by their clients, raises questions about the underlying foundations of the unitary board and Combined Code. Sir David Walker will need to give this careful consideration."




Wednesday 11 November 2009

Nice line, nice image

But they may point in different directions.

1. A description of the existence of firms in the midst of markets: "islands of conscious power in this ocean of unconscious co-operation like lumps of butter coagulating in a pail of buttermilk"

The quote is from D.H. Robertson and I found it in here.

2. I like this.

Tuesday 10 November 2009

Why how shareholders vote matters

I'm at home looking after The Boy today, and he's currently in mid-snooze so thought I would bung up a link to a paper (PDF) on 'corporate voting' that looks interesting, though I don't share its approach. I found this remark particularly interesting:
"[I]n principal-agent settings, voting provides legitimacy to a system by which agents act for the larger group. It serves both to legitimize the choice of the agent as well as a means to monitor the work of the agent."
There is a really bad argument advanced in some quarters that voting doesn't matter that much. I understand the point - though I would counter that it is often made by organisations whose own voting is sometimes questionable - and it has some validity. But I think it hugely underestimates the legitimising function voting performs. All those votes fund managers cast in favour of executive remuneration policies matter, those votes against trade union-backed resolutions matter, and their votes against governance-related resolutions matter. Unless it genuinely is the case that the issue being voting on has been dealt with, a vote in favour is an endorsement, will be read as such by the company, and will be portrayed as such to the market. When Stuart Rose survived the LAPFF resolution at the M&G AGM this year he didn't say "I take on board the scale of the vote in favour" he said "we won". Companies know this, so should trustees. And they should hold their fund managers accountable for questionable voting decisions.

Monday 9 November 2009


Paul Myners once again came out with some interesting comments today, when he spoke in response to the Asset Management Working Group report. This bit in particular caught my eye:
If fund managers show no wish to act in the way economic theory tells us we should expect owners to do then we will have to ask whether core assumptions that underpin the unitary board and the Combined Code accord with reality. The concept, for instance, of ‘comply or explain’ clearly assumes investors acting as informed owners, engaging with the unitary board; not an assumption that sits entirely comfortably with the behaviours of many fund managers that has enabled the emergence of the ‘ownerless corporation’. This is a significant issue for Sir David Walker to address – have we assumed more from fund managers than they are in practice willing and able to deliver? If so, how do we address this governance deficit? To whom should the unitary board account if shareholders are not willing to fulfil the role?

Needless to say I think that nails it. I think the fund management industry risks a lot by not taking the governance question seriously. And to be honest I'm not sure the AMWG report takes us any further forward given that the comments on engagement seem to correspond very closely to the views expressed by the IMA. Be careful what you wish for.

Bits & pieces

1. The Other TPA report an acknowledgment by the BBC that they may have been hoodwinked by the actual TPA.

2. Great post on S&M about Tobin taxes. The Andrea Terzi paper Chris links to is well worth a read.

3. Via Tim Worstall, an interesting little piece by Eugene "EMH" Fama in defence of... err... the EMH.

Airbrushing analyst history

Hat-tip to Aled for alerting me to this rather interesting paper. Here's the abstract:
We document widespread ex post changes to the historical contents of the I/B/E/S analyst stock recommendations database. Across a sequence of seven downloads of the entire I/B/E/S recommendations database, obtained between 2000 and 2007, we find that between 6,594 (1.6%) and 97,579 (21.7%) of matched observations are different from one download to the next. The changes, which include alterations of recommendation levels, additions and deletions of records, and removal of analyst names, are non-random in nature: They cluster by analyst reputation, brokerage firm size and status, and recommendation boldness. The changes have a large and significant impact on the classification of trading signals and back-tests of three stylized facts: The profitability of trading signals, the profitability of changes in consensus recommendations, and persistence in individual analyst stock-picking ability.

Sunday 8 November 2009

Detective dissonance

A funny thing happened last weekend linked to this question of cognitive dissonance that I'm interested in. We ended up watching one of those ITV adaptations of an Agatha Christie novel with David Suchet as Poirot. I say ended up watching, actually it's become a regular fixture (hey, we're new parents, our social life is not what it was). This particular adaptation was of One, Two Buckle My Shoe which, like quite a few Agatha Christie plots, involves some character not being who they appear to be. Basically, early on we are introduced to the character of Mabelle Sainsbury Seale. Later, one of the other characters assumes her identity in order to help carry out a murder.

The thing is that in the TV adaption it should have been obvious that this is what happened (I haven't read the book so I don't know if it is also the case in the original). You see the actress playing the 'real' Mabelle a couple of times. Then later you also see the fake Mabelle. The strange thing was that when I watched the programme at one level I clocked this. In a scene where Poirot (who never sees the real Mabelle alive) bumps into the fake Mabelle, I thought to myself 'that doesn't look like the same actress'. And in fact they were really quite different. However, because at that time the course of the plot wasn't clear, and because she kept being referred to by other characters as if she were the real Mabelle, I started to convince myself that actually maybe it had been the same actress.

This, I humbly submit, was an attempt to reduce the dissonance between two ideas - 1. "that is a different actress" and 2. "everyone is referring to her as if it is the same character". In attempting to do address this I (subconsciously) decided to downplay the evidence of my own eyes in favour of what others had said.

Subsequently it became clear that were indeed a real Mabelle and a fake one, and all along I had an uneasy feeling about the identity of the person that Poirot met. So the dissonance was never eliminated. But I did go a long way to ignoring what I had actually seen in favour of what others had said about the same event. Now it strikes me that if I can pull this kind of trick on my own mind in respect of the entirely trivial matter of watching a TV programme, then this may affect my decisions much more strongly in others areas (especially where there isn't any physical evidence). And actually when I think about it I can see attempts to reduce dissonance in lots of areas of my life.

Equally I think I see it a bit in the bit of the world I inhabit. There is IMO a tendency to take what a lot of organisations say at face value (particularly if you are paying them a large fee). If, for example, there is evidence to suggest that Organisation X's behaviour isn't quite in line with the way that they promote themselves to the market, I suspect the tendency on the part of those that employ that organisation will be to downplay the evidence. And indeed some of the conversations I have had with trustees justifying decisions made by their fund manager would seem to bear this out.

There is no answer to this. And, as Tavris and Aronson point out, actually the reduction of dissonance through self-justification (like many heuristics) enables us to make decisions quickly and stick with them. This is not unimportant. But equally we need to be constantly aware that attempts to reduce dissonance may result in the suppression of useful information that might be used to solve difficult problems, be they a fictional murder, or ineffective organisational relationships.

Saturday 7 November 2009

Bela Lugosi's Red

Interesting factoid that I discovered via a documentary today - in addition to being a trade union activist, Bela Lugosi was actually involved with the 1919 communist revolution in Hungary, led by another Bela - Bela Kun. He was heavily involved in the Hungarian actors' union and it appears he was actually had a minor role in Kun's administration. This was a problem for him later on when the FBI kept tabs on him, something that appears to have damaged his career.

Thursday 5 November 2009

Data disappears...

Most people have read about the unfortunate disbanding of the well-regarded responsible investment team at Insight Investment. Having had a look at the Insight website today it appears that the ‘Responsible Investment’ section, which had quite a lot of useful documents in it, has been removed or made inaccessible. This also means that you can’t access their voting and engagement records, which were presented in one of the best systems I have come across in my voting geekery.

So let me mount my hobby-horse another time and take it for a quick ride. Doesn’t this just demonstrate the problem of a voluntary system of disclosure, where the data is only provided at an asset manager’s discretion? Insight started disclosing its voting back in 2004, and it was a big asset manager, so there was a lot of data there. Now it is gone.

Because there is no central repository for voting data, where we could access voting decisions from previous seasons regardless of whether the manager had been taken over, unless someone at decides to reverse this decision I presume Insight's voting record is gone for good. I think it's unlikely that SWIP (who took the equities bit of Insight) will suddenly decide to make it all public again, for the simple reason that they don't disclose any data themselves.

In contrast, if we had a mandatory system, where managers had to make an annual report on how al their votes have been cast, and file it with an organisation like the FRC, this problem would not emerge.

Straight to the politics and economics section...

Wednesday 4 November 2009

Select committee shuffle

I've spent a few hours at the Treasury committee hearings this week - yesterday was Sir David Walker, today UKFI followed by Paul Myners. I wasn't able to attend the 'show trials' in February when the likes of Fred Goodwin and Andy Hornby gave evidence, and these sessions were much more sparsely attended.

Nonetheless there was some interesting stuff in there. I thought some of what Walker said was quite encouraging. In particular he moved on to talking about shareholder engagement without prompting from the committee. And judging from some of his comments (ie scepticism about engagement in the recent past) he appears to have some idea of the very real challenges in getting investors to take these things seriously. There was no-one there except us from the investor world, which I was surprised about.

Today I was really impressed by John Kingman. His answers were (mostly) very fluent and he came across as very much on top of his area. Which is rather important since he has been in charge of our investments in the banks. He definitely seemed to have a clear idea of who had responsibility for what in the HMT-UKFI-banks interface. UKFI did take a bit of flak for not revealing the bonus pot for 2008 for RBS. And Michael Fallon (rightly) pulled Kingman up at one point for "mandarin-speak" but all in all it was a polished performance. There was some interesting discussion too about the relative weight UKFI puts on representing the taxpayer's interest as shareholder and as bank customer.

Next up came Paul Myners, though we ducked out a bit early when they took a 10 minute break in the meeting as this session it wasn't on a topic of direct relevance to us. Given their recent encounters you might have expected this to be quite a fractious session, but actually what we saw of it was quite good-natured. That said there did seem to be a bit of a crackle in the air between Myners and Fallon.

Finally, the committee itself. I'm quite impressed by John McFall and he was quite punchy today in particular. And generally I had less of a sense of them missing the right questions to ask, whilst asking the 'populist' ones, though obviously I would have asked some different ones myself. It's democracy - a bit messy, doesn't work brilliantly sometimes, but it seems to do the job we want/need doing.

Tuesday 3 November 2009

Remuneration and electric shocks

I've just started reading Mistakes were made (but not by me) which is all about self-justification, typically arising from cognitive dissonance, and the way it distorts decision-making. Obviously it immediately made me think of the way the former heads of RBS and HBOS defended themselves in front of the Treasury select committee. But it also made me think about shareholders' justification for their recent activity.

Early on the book talks about the famous Milgram experiment (the one where subjects thought they were giving shocks to a person in another room when they got questions wrong). The experiment is principally known because it appeared to show how people defer to authority, but the book makes the point that it also tells us something about self-justification:
[T]wo thirds of [the subjects] go all the way to the maximum level they believe is dangerous. They do this by justifying each step as they went along. This small shock doesn't hurt; 20 isn't much worse than 10; I've given 20, why not 30? As they justified each step they committed themselves further. By the time people were administering what they believed were strong shocks, most found it difficult to justify a sudden decision to quit.
This immediately made me think about the way that shareholders have effectively legitimised high levels of executive remuneration. I have no doubt that many (most?) people working in corporate governance at asset managers believe, looking back, that things have got out of control, but how did we get here?

I think at each stage we had a similar opportunity to challenge. But then the company putting forward a given policy - the authority figure (and unfortunately some corp gov people swoon a bit when faced with a real-life executive) - provided a justification. Our industry is different - we need to pay top dollar to recruit and keep the talent. So the investors let it slide. Next time the company comes back and says we need to pay more to stop the talent moving into private equity. Ummm.... ok then. And so on.

At each point most shareholders deferred, and in doing so will have justified their decision to themselves, and become more wedded to it. Therefore we reached the stage prior to the crisis where very few companies were facing serious shareholder pressure (no remuneration reports were defeated in 2008 remember). By that point, having let so much go past them, it must have been difficult to justify actually challenging a company that was only a bit worse than the others.

Monday 2 November 2009

GMB pensions Q and A

A belated plug for the latest communique from GMB Heroine of Pensions (First Class) Naomi...

The nights are drawing in and scary ghouls are wandering the country (well party conference season wasn’t that long ago) so it must be Autumn and time for another Pensions Q&A. The self-same party conferences gave a few rather hefty clues about the plans the major parties (and the Liberal Democrats) have regarding your twilight years. This edition will therefore be dedicated to the view from the top of David Cameron’s mountain from where he looks down on those of us without a multi-million pound nest egg to retire on.


1. Personal Accounts
Personal Accounts are supposed to be the saviour of those workers whose employers don’t provide them with a pension scheme. There is of course rather a danger that Labour’s plan to move all those without an occupational pension into Personal Accounts from 2012 will be reviewed or reformed away by any incoming government but generally the indications are that the mighty brains of the Conservative front bench (and Vince Cable) haven’t come up with anything better so they’re likely to run with this one. As a defined contribution scheme with less than 8% of earnings being invested, Personal Accounts are not going to provide for a luxurious retirement on the Costa del Pension but it’s better than nothing, which seemingly is the alternative.

That, I’m afraid is the end of the good news – yep, you blinked, you missed it.

2. Closing the MPs’ Pension Scheme to New Entrants
Now I know this might not give rise to oceans of sympathy for all those new MPs desperate to get their hands on an expenses form but it’s a very bad sign. If an ever increasing number of MPs don’t have a good quality, defined benefit pension scheme to join, how bothered do you think they’ll be about the rest of us having one? Don’t get me wrong, a 1/40th accrual fully indexed final salary pension is rather generous these days but moving from that extreme to the other of bargain basement defined contribution scheme isn’t going to help anyone.

3. Capping Taxpayer Funded Public Sector Pensions at £50,000 because Tax Relief on Private Sector Pensions is Capped
I’ve taken this directly from George Osborne’s speech as I’m afraid despite his rather expensive education this policy statement (and that’s what we’ve been led to believe this is) makes about as much sense to me as an Ikea instruction guide in the original Swedish. Firstly to strip away the complete piffle – the tax relief regime applying to private sector pensions is exactly the same as that applying to public sector pensions, so the stated reason for this proposal is flawed at the outset. Secondly to question the profoundly unclear – what is a taxpayer funded public sector pension? No public sector scheme is funded exclusively by the taxpayer (except technically the armed forces scheme but we’ll leave that to one side). Employees contribute for one thing and in local government 27% of the scheme’s income comes from investments. Despite this, Ozzy wants to cap pension benefits at £50,000 a year. Again to most this sounds like a faraway figure that won’t affect them. Think again. Just like closing the MPs scheme, this is the thin end of a very bleak wedge. If NHS consultants (medical not management), head-teachers and local authority chief executives don’t benefit from having a good quality pension scheme, why would they support the continuation of these schemes for nurses, social workers and teaching assistants?

Above all, remember Cameron’s words in 2008 – “My vision is to move increasingly towards defined contribution schemes rather than final salary schemes.” If that’s his view from the summit, I think we’d better all batten down the hatches at base camp.


Before you sit there thinking, ‘oh well it’s ok, the Tories are now the party of the poor I’ll be able to rely on the state pension’ - a couple of flies in that particular ointment. Firstly announcing a raft of policies that are going to create rather than reduce poverty hardly inspires confidence. Secondly, another of Ozzy’s great ideas is to increase the state pension age to 66 ten years earlier than is currently planned. We already know that radically different life expectancies between rich and poor make this a seriously regressive way of saving the public purse a few pennies so how this fits in with the new fluffy Tory image I’m not sure. As for the £13bn a year the Tories claim this would save, that figure is disputed by practically everybody with access to a calculator.

To end on a happy note, all political parties are committed to restoring the earnings link to the basic state pension. Obviously this decision is made somewhat easier since the inflation underpin that Labour introduced means that in April 2010 the state pension will rise by 2.5% (to £97.65 a week) while average earnings stands at about 1.6%.

So there you have it, more amazing news and analysis on the pension page of GMB’s website:

Sunday 1 November 2009

If you want a vision of the future...

Right, now I've got the attention of George Orwell fans... I've been thinking a bit lately about what direction corporate governance and shareholder engagement is likely to take in the future. I think there are some obvious trends already emerging, along with the re-emergence of older ideas, and a few potential opportunities that don't (yet) seem to have been developed. Bear in mind I'm cutting a few corners and making some big assumptions in all this, and basing my comments purely on the UK, but here you go...

First up, I think that arguably more damage has been done in this crisis to the reputation of institutional shareholders as owners than to the UK's corporate governance regime. Think about it, no-one is seriously arguing that we move away from 'comply or explain' (even though others are), and you can find plenty of statements from companies, investors and others in responses to Walker, the FRC etc boldly stating that the UK's governance is not broken.

In marked contrast there seems to be a fairly solid consensus that institutional shareholders collectively have not covered themselves in glory (and by extension that something needs to change as a result). The reasons given for this vary - shareholders aren't really interested, they are inherently conflicted, clients don't ask them to do it, when they do engage it's at a superficial 'box-ticking' level, the information asymmetry undermines effective engagement, etc - and as a result the point behind the various critiques is often quite different. But a consensus there does seem to be, which is why the outgoing NAPF chair (to my surprise) actually seems to have hit entirely the wrong note, even according the Association's members.

Notably therefore we are very likely to see some sort of formal code for investors themselves to sign up to or explain why not. It also seems very likely that this will fall under the remit of the FRC rather than the ISC (a body which itself has suffered potentially fatal reputational damage as a result of Paul Myners' trenchant criticisms of it). Depending on what finally comes out of the Walker Review there may even be a small role for the FSA here, something which has the fund managers hopping mad.

But, second point, how likely is this process to lead to a change in the level and nature of engagement? This year there has been an uptick in voting - a fairly basic yardstick for measuring activism admittedly, but a vital one IMO - but it has not ben a fundamental shift. I suspect you'll struggle to find an RBS investor who backed the bank's remuneration report, for example. But actually go back just one year - and the annual report which made crystal clear that enhanced pensions were available to directors - and the remuneration report sailed through. In addition, there are fund managers out there who are still voting in favour of god-awful remuneration policies, just not the headline-grabbing ones. Therefore next season will actually tell us a lot more than this about how much things have changed. I have a suspicion that there is a substantial element of, for want of a better word, marketing in some institutions' voting this year.

Which leads on to point three - if we don't see a step-change on the part of institutional shareholders then what happens? In terms of high politics it won't necessarily matter because the Tories will be in power and their policy interest in this area is not obvious. A few examples - the Tories slagged off the FSA remuneration code when it appeared, but didn't talk the FSA about it during the consultation period. They don't seem to have put anything in to the Walker Review or commented on the FRC review of the Code. And their own 'White Paper' on financial reform had I think one or two paragraphs in it on corporate governance, and that said 'we don't know what we think yet'. So I suspect politically savvy fund managers are thinking they only need to make it until May and all this governance stuff will calm down again. (Incidentally, I suspect a change of government is going to be something of a rude awakening for those progressive types in this bit of the world who seem to think there is no real difference between the parties.)

But in public policy generally in this area, a return to pre-crisis behaviour by institutional shareholders could do a lot of damage. As I've banged on regularly in the past, if the owners - for whatever reason - repeatedly show no inclination to act like economic theory would suggest they ought, then people will question a shareholder-focused governance regime. If companies and their investors wish to avoid a situation where there is a greater statutory element to governance they need to recognise this. In a sense then Paul Myners is really giving institutions an opportunity to make the system work on a market basis. Again, I've said this before, but I think fund managers arguing against being encouraged to play the ownership role risk a lot as a result, though I'm not clear that they recognise this.

Which leads me on to point four - what might emerge instead? Well actually re-emerge - a stakeholder approach to governance. And funnily enough this is something that I don't really know much about, as I've always worked within the shareholder-focused governance framework. But it strikes me that if institutional shareholders effectively formally abdicate as owners in a meaningful sense, then other ideas about who is involved in governance come back into play. (And if you go back to Berle and Means they end up asking these sorts of questions - ie in whose interest should the corporation be run - which is part of their legacy that often seems to get forgotten.) For my part I would - no surprise here! - favour some sort of employee involvement. Not only for the Blairist reason that actually employees have a pretty good claim on the company compared to shareholders, but also because I think it could help discourage group think (see the Cass Sunstein point), and because I think it's right in principle.

Obviously this is a battle that is yet to even be fought, and there is no inevitability either about this happening, or that it would be successful. But it does strike me that the policy positioning the fund management industry seems to be adopting makes such a development more likely. Incidentally I'm genuinely not clear whether the position the industry is adopting is well thought out and aware of the possible impact on the governance debate, or simply short-termist arse-covering. Either way though possibilities are opening up.

There are two further potential trends that may emerge from this. First, those institutional investors which do have an interest in social, environmental and governance (ESG) issues may well start thinking much more about other ways to make an impact. If acting like an owner in the public equity market seems ineffective (because too few others will join you and you can't do it alone) I think they will a) start looking at influencing public policy directly and b) start looking at other asset classes (and the UNPRI is already doing a lot around private equity). Second, it's possible that civil society interest in using 'ownership', which has only recently started to emerge in some places, tails off again. Speaking personally, having been involved in shareholder campaigns that were not supported by one or two large asset managers that make a lot of noise about ESG issues has raised some big questions. I can't believe I am alone in this.

This leads on to point five - remuneration. First up a bit of politics. I'm not convinced by the Compass High Pay Commission, but I do think there is an open goal facing them - the failure of shareholders to police executive pay effectively, or link it too performance. I think if they just drew on some of the data already out there they could make a strong case that the current system is not working. Now that could lead you to try and make it work - and that might require a proper focus on how how shareholders look at pay (my next point) - or you could argue that it's inherently flawed, and therefore we need a rethink. I tend to the former because I think shareholders could make a difference, but you can see how a case can be made for latter. But curiously no-one on the Left has really taken a good look at the operation of the existing system (ie how shareholders act) other than just pointing at the outcomes (continual increases in exec pay).

So, point six. It strikes me that there is an opportunity to have a much more interesting debate about pay, and that shareholders are in a position to start this if they choose to. They could be asking questions like is executive pay working for shareholders, does remuneration act as a motivator, is a reasonable proportion being spent on remuneration (investment banks the obvious ones to look at here), and what about the split between execs and other employees in the same businesses? This ought really be simple self-interest. If shareholders aren't convinced that they are getting the return on their investment in remuneration, why don't they do something about it? And this is an area where some think shareholders can contribute something useful.

Point seven - this could also be a way to start thinking about whether stuff from behavioural economics and social psychology can be applied to governance. There seems to be an increasingly strong view that politics can learn something here. It would seem odd if the governance world (where the point is made so often that good structures aren't synonymous with good behaviours) did not do likewise. Again it seems like an opportunity waiting to be exploited if some investors would only show a bit of willing. There are even a few books out there that provide a jumping off point.

And finally - pressure on fees. Surely there must be some sort of backlash from pension funds against the increasing fees they are charged even though they get no better returns as a result. A focus on costs in the investment chain could lead to a) an attempt to reduce the links in the chain b) closer scrutiny of what actually takes place at each stage and c) a re-considering of the merits of long-termism. For whatever reason, pension funds and other institutions appear to be repelled by the idea that they should act like owners because it's a desirable end in its own right. Fair enough. So let's approach from the point of view that it is also costing them money, and an increasing amount. If they still don't bite then we know we have a political problem, rather than a market failure.