Wednesday 30 December 2009

Marr's mistake

My sister got me the book of Andrew Marr's Making of Modern Britain for xmas. I've been having a flick through various interesting sections and came across a bit of a howler in it about George Orwell in the Spanish Civil War:
There he joined the anarchist POUM militia... (page 309)
Anarchist? Isn't the POUM rather famously Trotskyist (though I think some might even dispute that label)? I think it's name was something like the Unified Party of Marxist Workers (I'm not cheating by looking it up). It certainly wasn't anarchist though. The anarchists were the CNT-FAI.

I don't think this is trainspotter-ish. There were quite a few factions on the Left in Spain, but not that difficult to follow. In terms of orientation, size and influence this is a little bit like mixing up the Green Party and the Liberal Democrats today. What's more it's all spelt out very clearly in Homage to Catalonia. Maybe he hasn't read it - which would be odd as it's arguably Orwell's best book.

Ho hum.

TPA troubles

So, the Charity Commission is investigating the Higher Rate Taxpayers Alliance after all. The key issue is really whether their research is political or educational. The TPA's chief exec said the following, which caught my eye:
"All the grants made by the Politics and Economics Research Trust have been for pieces of research which have been carried out with an open mind and to the highest possible academic level," he said.
I'd be interested to see if any of the TPA's research on pensions were funded by these grants, because I don't think they exhibit an openness to different policy options, and they contain factual flaws and misrepresentations. I would certainly struggle to class them as "the highest possible academic level".

Tuesday 29 December 2009

The latest remuneration wheeze

The Grauniad reports that some companies are planning to introduce new share schemes that are designed to reduce the amount of tax that executives pay. There are a couple of interesting aspects to the reports. First the quote from PwC:
Jon Terry, head of remuneration at PricewaterhouseCoopers, said: "A number of these restrictive stock-type arrangements will come forward this AGM season."
Err... I think we can take it then that PwC has advised some of its clients on such schemes. If that is the case, maybe investors ought to question PwC about where the initiative came from. Is it remuneration committees, or are rem consultants being proactive?

Second the attitude of the ABI:
"We can't support schemes which end up costing the company more than would otherwise have been the case or simply shift the tax burden from the individual to the company. Shareholders recognise that schemes should be efficient in relation to tax implications, but there is a limit. Shareholders cannot support schemes which are nakedly for the purpose of avoiding tax," he said.
Exactly. What is the gain for investors in all this? Unless we are expecting a mass exodus of executive because of the 50% rate, why should investors feel any need to give their assent to such schemes? And the danger is that if they don't challenge those that are put forward, then the practice will spread, again with no benefit for investors.

Therefore if investors don't think that companies should help executives avoid the tax increase why not simply introduce a policy that they will vote against resolutions seeking authority to introduce such schemes. I'm assuming that as they relate to actual schemes (or amendments to them) they will need a separate resolution. So they could be voted down, rather than simply being targeted via the vote on the rem report.

In addition, if investors find out that it is the rem consultants being proactive (which wouldn't surprise me) why not encourage companies to appoint an alternative firm for future business?

2010 is going to be when we discover if shareholders are really going to change their approach on remuneration, and this issue would seem to be a good litmus test.

Sunday 27 December 2009

Jokes and proper behaviour

A couple of weeks back I mentioned that I think that jokes or humorous stories told at work often carry a moral about appropriate or inappropriate behaviour. This is something that I've blogged about a bit before as it's closely related to the topic of narratives. One of the books I've got in my stack of reading material is The Presentation of Self in Everyday Life by Erving Goffman which is obviously all about the way people behave. And here's a snippet from the introduction which is in the same territory:
Practical jokes and social games are played in which embarrassments which are to be taken unseriously are purposely engineered. Anecdotes from the past - real, embroidered or fictitious - are told and retold, detailing disruptions which occurred [to the way a person presents themself], almost occurred, or occurred and were admirably resolved. There seems to be no grouping which does not have a ready supply of these games, reveries, and cautionary tales, to be used as a source of humour, a catharsis for anxieties, and a sanction for inducing individuals to be modest in their claims and reasonable in their projected expectations.

Incidentally the perspective Goffman developed is known as dramaturgy. This is clearly similar to the the idea of 'dramatism' developed by Kenneth Burke (who gets a mention or two), and about whom I've blogged before. And Burke of course leads on to my old fave Walter Fisher.

Heffer in hyperreality

I think this piece by Simon Heffer tells you quite a bit.
put me in front of a television with a black-and-white British film made at any point between about 1935 and 1960, and I am in heaven.
The England I love is not the England I live in; the England I love is in old films. I am sure it was an era of bad food, lower life expectancy, the reek of tobacco and what we would now call illiberalism, but I love it. I feel instinctively at home there. I understand the tones of voice. I understand the understatement. I understand the double-breasted suits, the pints of mild and bitter, the half-crowns and 10-bob notes, the trilbies, the cars with running boards and double declutching; and I can even suspend disbelief when the actors playing policemen all sound like Old Etonians of the period.
I acquired the habit of old films very early on, in childhood. I suspect all children are fascinated by that most elusive of periods, the one immediately before they were born. I missed the 1950s by six months and they are an endless source of wonder to me
The bloke was born in 1960, yet feels at home in the 1935-1960 period, an era he never actually experienced. What's more what he feels at home with is by his own admission not the real period, but its depiction in cinema.

This sense of comfort in a past that was not directly experienced to me smacks of a need for things to be settled decisively one way or another. The great thing about the past is that we know how it turned out, we know who won or lost, and we can create pretty convincing reasons why they did so, even if we weren't there. In contrast the present seems totally in flux, and we can't nail down the direction of travel of while we're part of it. We don't know if our present day heroes are right, or will be seen in the future to have been heading down a blind alley.

Much as I am no fan of Simon Heffer, I don't think this is by any means unique to him, or to the Right. The one thing I think he gets right is that many of us look to the past for reassurance. The labour movement is very keen on its history, and this provides all of us with a sense of meaning, and progress. But personally I do think it's a bad sign if your favourite cultural reference points are from before your own birth. I don't think it is going to make you very effective in the present, which perhaps explains why Simon Heffer's political judgment seems so wonky.

Wednesday 23 December 2009

Monday 21 December 2009

Leverage, ownership etc

The Michael Jensen book I'm reading at the moment is really interesting for a couple of reasons. Firstly, because the essays in it form a coherent and clearly-argued perspective on governance. It's not a perspective I share, but it's definitely one of those books that I'm glad I read because it challenges some of my assumptions/prejudices. He's not an advocate of co-determination...!

Secondly, it's interesting to read older stuff from someone who thought they had discovered a significant trend when you know how things turned out subsequently. Famously, Jensen was very positive about the first big wave of leveraged buyouts because he though they were bringing a much more efficient management approach to US corporations.

This wasn't just the idea that buyouts address the diffusion of ownership, and hence go a long way to address the agency problem (which Jensen has obviously written a great deal about), but also the leverage bit of it. To simplify quite a bit, he argues that by taking on more leverage effectively management thinking becomes more focused because of the threat of bankruptcy. I'm sure there is truth in that, but it seems a pretty extreme approach to incentivisation.

Similarly some of the discussion around compensation feels very optimistic (strange word to use maybe) about the potential to get people to do the right things and think the right way. He obviously was a big influence in terms of the growth of options in compensation - a development many would now query in terms of its positive impact.

There's obviously a lot of sensible stuff in the book, but some of it feels very dated now we know how some of the trends turned out.

Rage Against My Age


There are a lot of reasons NOT to think that the campaign to get Killing In the Name to number one for xmas is a good thing. It's a pretty empty gesture, it smacks more than a bit of musical snobbery, you could just give your money to charity if you want to make a worthwhile point and so on. But let's be honest, they're all rubbish reasons really given the result, aren't they?

Much as I want to be sensible and level-headed about this bizarre 'campaign' I can't get away from the fact that a pretty decent song by a band who are very political (though never been a big fan to be honest) stopped yet another manufactured pop 'sensation' from being number one at xmas. As limited a gesture as it is I can help but feel a little happier because RATM won. I still can't resist the idea that it's a bit of a two fingers, not just to Simon "walking fart cloud of bad taste"* Cowell, but also to rubbish xmas singles generally.

Of course the really sad thing about it is that many of the copies of the RATM track will have been downloaded (let's be realistic!) by middle-aged blokes thinking they are "keeping it real" by preventing teeny pop fans from getting their favourite to the top of the charts at xmas. To which I plead guilty.

* (c) Charlie Brooker

Thursday 17 December 2009

Punched out

The defeat of Punch Taverns yesterday makes it five remuneration reports that have been voted down in 2009. That makes it a 'record' year (the previous highest total was 4). Will be interesting to see which institutions didn't vote against Punch.

Wednesday 16 December 2009

This may have dated a little...

Michael Jensen on remuneration (from this):
Market-based compensation provisions are well suited to control the effort and horizon problems, since the market value of the stock reflects the present value of the entire future stream of expected cashflows... Because the expected payoff to stock options increases with stock price variance, options provide the manager with incentives to invest in projects that increase the riskiness of the firm's cash flows. Options thus help control the managers' incentives to take too little risk. Stock options also help control the underleverage problem. Higher leverage becomes more attractive to the manager since it increases the variance of the equity and thus the value of the options.

Tuesday 15 December 2009

That Robert Shiller paper...

...that I mentioned previously is well worth a read. Shiller seems to have become a popular economist amongst lefties, presumably because he criticises the efficicent markets hypothesis and presents a behavioural take on markets. That's all well and good.

Therefore I recommend folks on the Left having a look at this paper, even though it's an oldie, because if you take him seriously you should also consider his views on speculation (necessary, and often socially beneficial) and attempts to deal with it. He writes very clearly about the problems in trying to tackle speculation (and indeed indentify exactly who counts as a speculator). These are not the easy questions that are sometimes supposed.

As a side issue it's been interesting going back and reading things like this, the Paul Marsh paper and Margaret Blair from the 1990s. It hammers home the fact that these questions about ownership and long-termism being discussed currently are nothing new, and actually they were discussed in more detail previously. And I don't see many new policy ideas either.

Bits & bobs

1. An Independent Commission on Ownership chaired by Will Hutton has been launched. This sounds like it could be right up my street.

2. Dumbest banker quote of the week (on the bonus tax): "We would expect this in Stalinist Russia but not here."

There must be some sort of Godwin's Law equivalent for bankers making this kind comment.

3. Great post from Hopi Sen that has generated some amusing irate comments.

4. It had to happen.

Monday 14 December 2009

Con-gate: the financial crisis and climate change

Interesting to see the way that Righties like Iain Dale have leapt on "climate-gate" to starting "asking questions" about the whole issue of climate change. Despite the way that the Cameroons have positioned the Tories publicly on climate change it is very clear that much of the membership isn't convinced.

I've never been entirely clear why there is such an obvious left-right split on climate change, but it's obviously there. Righties seem to have a tendency to see the whole thing as a con dreamt up by scientists in the pay of Big Government and politicos trying to use the environment as a way to smuggle in an anti-capitalist agenda. There doesn't seem to be much science behind their scepticism in most cases.

As such, you can see that "climate-gate" has given Righties who could never really be bothered to learn about the issue in any detail an easy way out. If you always thought it was some sort of con the revelation that some of the scientists working on the issue were indulging in some shady behaviour is all the evidence you need. It doesn't really matter what the specifics of the "climate-gate" emails were about, there's been some foul play and so that means the whole thing can be considered rotten, and let's start posting up some graphs we don't understand to link the emails to a broader scepticism.

Funnily enough I think we on the Left have sometimes done exactly the same thing in respect of the financial crisis. A prolonged period of growth and the obvious failure of centrally-planned economies forced us to face some hard truths, but recent events make it clear that a lot of lefties were never really convinced of the need to re-calibrate their approach. Then - whammo - the financial crisis and similarly it can look like the whole "neo-liberal" era has been a giant con. Again attention isn't really focused on the specifics - because there have been failures the whole of the last 30 years has been repudiated. And again people start putting together bits they don't understand, or aren't really linked, because they want to blow the previous consensus away.

In both cases I think this reflects (and I speak from experience) an unwillingness to properly learn about the issues. Therefore when an opportunity comes along that both allows us to both rehearse our existing prejudice, and tell ourselves that actually we didn't need to put the effort in to learn about the issue because it was a con all along, we leap on it.

Saturday 12 December 2009

HMT doc on financial services

The Treasury report on the future of financial services (here as a PDF) has a few pages in it looking at the introduction of a Tobin tax. I have to admit I've been taken by surprise by how quickly the UK seems to have swung behind the idea.

The HMT doc is interesting as it sets out some of the headline issues that need to be considered if such a tax is introduced. This is includes potential negative or unintended consequences. The section titled 'minimal distortionary impact' addresses issues like tax incidence for example:
4.24 The incidence of a financial transaction tax must also be considered. Generally speaking, increasing the tax burden on the financial sector must either impact on its shareholders, its employees or its customers. If a transaction tax is to be targeted at the financial sector because of specific characteristics of that sector, then it needs to be clearly ascertained that the incidence of the tax will not in practice fall on end users of financial services within the economy at large.

4.25 Full analysis of the potential economic implications of introducing a transaction tax will help determine the desirability of such a tax, the level at which it should be set if it were introduced and the likely consequences. Clearly a very low rate would have much less distortionary impact than a higher rate while still potentially raising a significant amount of finance.
What interests me is that there is very little in there about economic benefits (as opposed to revenue) from such a tax. Maybe it's the way I'm reading it, but it comes across like the principal attractions are to ensure that the financial sector stumps up and, by extension, that extra revenue is raised for other areas. It doesn't seem like there is a belief that a tax of this sort would result in positive behavioural changes (less volatility or whatever). Fair enough, but that means that a lot of attention will need to be focused on who actually ends up paying the extra, and it implies that a tax would be sets at a low level.

Thursday 10 December 2009

Robert Shiller vs transaction taxes

From Who’s Minding the Store in The Report of the Twentieth Century Fund Task Force on Market Speculation and Corporate Governance (1992)
It appears to be impossible to tax – or otherwise discourage – harmful speculative behaviour directly. One cannot impose a tax on just those who buy or sell stocks for purely speculative motives or as the result of theories of how other people will buy or sell stocks. The tax authorities cannot reliably distinguish them from other people who have “good” reason for buying and selling. Nor can tax authorities reliably distinguish those speculators who are helping keep prices close to their true investment value from those who are effectively moving them away.

Any government policy measures aimed discouraging speculative trading (such as transaction taxes, capital gains taxes with holding period requirements, the short-short rule, or margin requirements) are blunt measures which might work by reducing the number or the kind of people trying to make speculative profits. But while these policy measures might promote the cause intended by their framers, the might just possibly do the opposite of what is intended – moving prices even further from where efficient markets would put them. Even many years after they are instituted, one will not be able to say with any assurance that these measures were helpful…

…People spend considerable time and thought trying to predict what markets will do, and they act with purpose. Policy measures that discourage trade to reduce speculation will be greeted by investors as obstacles to get around in their efforts to maximise returns on their portfolio. These policy measures may lead investors to de-emphasise speculative considerations when they buy or sell, but the outcome is not assured.

Wednesday 9 December 2009

Stock-lending snippet

spotted this on page 50 of the PBR:
The FSA has been reviewing the governance and risk management of stock lending in the market. The Government welcomes this work and will work with the FSA and market participants as necessary to help develop thinking in this area.

Union reaction to the PBR

There's a load on Touchstone, Nigel's post on pensions is useful.

GMB reaction here, Unite here, Unison here.

Tuesday 8 December 2009

Rubbish piled high in the streets - noughties version

I do wonder whether the last two years won't turn out to have been one of those pivotal moments. If so, this may be one of those defining images we look back on.

Yes and no

I generally like Paul Ormerod's stuff, but I'm not overly impressed by this para in his Comment is Free piece today:
And this is to say nothing of the massive social injustice which has been created by the huge gulf between public and private sector pension provisions. From an egalitarian perspective, this is a scandal even bigger than the bankers' bonuses. In the 1997 budget, Brown wrecked private pensions. Gold-plated public sector ones remain unreconstructed.
Yes, I'd agree that the disparity is a scandal, and actually it is a bigger issue than bankers' bonuses. The private sector has decided that it cannot handle the costs and, more importantly in my view, risks of defined benefit pension provision. Employers have massively reduced their commitments to pensions. This is something that does need to be addressed, and quite quickly, or a lot of people are going to be retiring on much less than their parents.

But to blame the current government for this state of affairs is way off target. The single biggest contributor to the collapse in DB pension provision is improved life expectancy, as is widely accepted. Stockmarket falls and new accounting standards brought home to companies what risks they were running. In all of this the level of dividend taxation is not a big factor. That isn't to say it didn't hurt, but to claim the changes in the 1997 Budget (which only took to completion a move initiated previously by the Tories) 'wrecked' private pensions is off the mark. The first big wave of DB closures started after the dot-com bubble burst - ie post-2000. If dividend taxation was the key factor why didn't the effect kick in earlier?

And it's incorrect to claim that 'gold-plated' public sector pensions have not been reformed. You might think that reform has not gone far enough, but to suggest that they haven't been touched is simply... err... wrong.

The killer (no pun intended) is life expectancy. Therefore if Labour seriously damaged the private sector pension system it did it in 1948 by establishing the NHS, not by reducing dividend income in 1997. It's just that we only really started grappling with the implications much later. And personally I don't think that the solution offered by the private sector - significantly reduce pensions - is the right one, or would be acceptable to the public if properly understood.

Disappointing stuff I'm afraid.

3 things

UKSIF/LAPFF/CIPFA study on local authorities and responsible investment is available from the UKSIF website.

Eurosif study on investment consultants is available here.

Good news for Kit Kat lovers.

Fidelity donates £125K to the Tories

Woah! Where did that come from? After a long period of relatively small donations (£25K or £30K a quarter), Fidelity gave the Tories £125K this September. Search for "FIL" under "donor name" here. Maybe it's a sign that they think the Tories have the election in the bag? Who knows.

According to a Bloomberg report it's because: "We see donations as part of our ongoing business activities... We live in a very highly regulated environment. Government has a big impact."

Fidelity has also been getting a few days out of MP Sir John Stanley recently. According to They Work For You he has spent about 3 full days (25 hours) "attending meetings as necessary and advising on business opportunities and risks" since July. To be fair, this might just reflect improved disclosure (he didn't used to disclose either the fee level or the amount of time spent working for Fidelity).

Friday 4 December 2009

Bits & pieces

Apologies to my regular reader (hello Mum!) for the lack of posting. I have spent the past few days at the LAPFF annual conference in Bournemouth. Lots of interesting stuff on the agenda and I think at a day and a half it's probably the most comprehensive conference of its type in the UK.

I'll probably post up some thoughts over the weekend, but just to say that Bob Monks was very good as usual, and I hope I'm that intelligent, enthusiastic and engaged when I'm 76! He was also very positive about what Paul Myners has been trying to achieve.

Anyway, whilst I've been away obviously there has been quite a lot of noise about bonuses. Chris Dillow has a great post on the subject with lots of interesting links in it.

Also hat-tip to Duncan for alerting me to an interesting piece by Pesto on ownership.

And there's a good bit on the Other TPA about the Higher Rate TPA's public sector rich list. Interesting to see how the banks skew the results, yet they still use a year on year comparison.

Tuesday 1 December 2009

Incentives and motivation

Just spotted this piece on Matthew Taylor's blog. One of the things that is most disappointing about the remuneration debate is that it hasn't focused on whether what we do currently actually works. I don't think it does (and by extension that means I don't think that remuneration drove behaviour that led to the crisis) and I think that we operate with incredibly crude assumptions in the governance world. Companies (mainly, but also some investors) often say that good structures don't make bad managers into good ones. True enough, but then why do we think that attaching a big carrot to some very broad metrics will achieve the same? Or turn good managers into great ones, or make people who do the job well because it gives them satisfaction work harder?

More thinking required?

FRC stuff

The FRC has released its proposed new version of the Combined Code, plus the results of the previous review. Obviously it is significantly influenced by Walker. Notably the FRC propose two options on director elections - either annual election of the chair, or of all directors. I reckon we could well end up with the latter, because the former feels like a tilt away from the unitary board, surely?

Some useful commentary from the FRC on this stuff too:
it was argued that voting on the board as a whole was more consistent with the concept of collective responsibility, but there were concerns that it might have a destabilising effect or encourage short-termism on the part of the board and shareholders. The FRC notes these concerns, although anecdotal evidence suggests that this has not been the experience of those companies that have moved to annual reelection of all directors. In those cases the majority of investors have used their votes responsibly.
As I blogged previously, investors who oppose annual elections are - in my opinion - simply taking their pro-management stance too far. So it's good to see the FRC look at the actual evidence of companies that have made the move, rather than taking for granted that the conservative position is the right one.