Tuesday 30 November 2010

Annual board elections snippets

Hagreaves Lansdown had its AGM last week, and the final resolution on the agenda was to amend its articles to introduce annual board elections. Here's the result (99.9% in favour). It was the same result at smallcap Ricardo a couple of weeks back (even though the change to annual elections was bundled with something else from memory).

So whatever else is going on out there, no-one seems to be voting against companies seeking to introduce annual elections through changes to their articles.

False Economy

Ace new initiative alert! Here's the site.

Sunday 28 November 2010

Interesting comment from the ABI

On this Walker u-turn business:
Some City investors are concerned that if only RBS and Lloyds were forced into disclosure, they would be placed at a disadvantage to rivals. But the Association of British Insurers, which represents holders of about 15% of shares on the stock market, said it supported industry-wide disclosure.

"We were in favour of more transparency at the time of the Walker review and remain so," an ABI spokesman said.
So we're getting to the situation where the Tories (because it clearly is the blue half of the ConDems driving this) are making it harder for investors to get the information they want. The only reason for this seems to be because that's what the bankers said was best (and David Walker is employed by ...errr... Morgan Stanley).

Saturday 27 November 2010

Good line on Osborne's capitulation to the banking lobby

From The Grauniad:
This is a government that thinks nothing of revealing how much is paid to which senior civil servant – but will not even demand the vaguest details of City pay.

Thursday 25 November 2010

Walker Review u-turn

As we all know, the ConDems appear to have gone a bit limp when it comes to remuneration disclosure at the banks. The argument is that the UK can't go it alone although, as I've blogged previously, Sir David Walker didn't seem to think this was necessary. That is not until the government changed and he might need to earn some corn in the ..err... banking industry.

Never mind, our investment industry will surely push the banks to disclose the data anyway. After all, if you go back and look at what institutional investors and their representative bodies said in response to the Walker Review, most of them supported disclosure of 'high end' below-board remuneration at the banks, and they did so without qualification. No mention of the need for international agreement.

In particular presumably we can expect the ABI to lead the charge since they said that the relevant Walker recommendation was already in line with their own guidelines, and they even suggested more info would be required. Here's what they said:
We support disclosure of high earning groups within bands. This is consistent with our existing remuneration guidelines. We do not believe it is necessary for individuals who are not main board directors to be named. The breakdown should include a category comprising other benefits in case there are large benefits in kind or innovative methods are used. It should also cover those who are classified as consultants but whose main individual income derives from work undertaken for the business. Banded reporting, however, should be accompanied some descriptive analysis enabling shareholders to understand the underlying policy and approach, including where appropriate by business segment. In particular, this analysis should include confirmation from the board that remuneration took account of risk and was aligned with the business model.
Individual ABI members also backed the relevant recommendations without qualification, so surely we can assume that they will be pushing for proper disclosure...

Wednesday 24 November 2010

PC gone mad is PC gone mad

A bit more from Mr Sunstein:
[T]he very phrase 'political correctness', as used by some conservative critics, has an impressive and somewhat pernicious ingenuity. The phrase suggests that certain political commitments are not a product of serious reflection but instead are a form of unthinking dogmatism - just a matter of following the crowd. The phenomenon of left-wing political correctness is real, and it is a real problem. But the use of the phrase to discredit certain thoughts and ideals can be a clever way of imposing informational and reputational pressures. Ironically, many of those who refer to political correctness, and deplore its presence on university campuses, are themselves participants in an insidious form of political correctness. They participate in group polarisation as well, stirring one another into extreme caricatures of contemporary university life; and they do so while congratulating themselves on their independence and bravery.
Spot on.

Monday 22 November 2010

Conformity and rewards

One of my books currently on the go is Why Societies Need Dissent by Cass Sunstein, which is rather ace. There is a lot of very useful material in there is you're interested in a more behaviourally-informed view of governance. Just a quick excerpt below about one of my favourite subjects - the impact of financial incentives on behaviour. In this instance Sunstein is looking at how incentives affect conformity of opinion.
When people stand to make money if they are right, the rate of conformity is significantly decreased if the task is easy. People are less willing follow group members when they stand to profit from a correct answer. But there is a striking difference when the experiments are changed to make the underlying task difficult. In that event, a financial incentive for correct answers actually increases conformity. When the question is hard, people are more willing to follow the crowd if they stand to profit from a correct answer.
It's just a snippet, and there are plenty of other bits in the books that give pointers to how people can, and do, overcome the pressure to conform. Nonetheless it does seem to provide grounds for another argument against the merits of performance-related pay. Unless we think running a company is a simple task. And maybe it tells us something about benchmark-hugging in the investment world too.

PS. As I thought the book lends a bit of weight to my argument that it would be better if more investors went public with their concerns.

What Walker said last year

The blurb below is from the original July 2009 Walker Review consultation document. Notice that he explicitly acknowledges that 'going it alone' on remuneration disclosure has drawbacks, but he concludes that other concerns - shareholder oversight and public interest - outweigh this. What has changed then to justify a change of policy? Is it just 'business as usual'?
It is then for consideration whether new disclosure provisions should be put in place to cover remuneration in this “high end” category to provide an indication of numbers of executives within it, with detail in specified compensation bands. Possible reasons for reservation about this include the fact that principal shareholder focus is most likely to relate to how interests are best aligned through appropriate incentive structures than to absolute levels of remuneration. There would also be some risk that the signalling influence of such further disclosure could exacerbate upward pressure on remuneration through intensifying the competitive process, in line with the view that disclosure of board level remuneration has probably exerted upward ratcheting influence of this kind.

There can be no question of turning the clock back in this respect, but great care will be needed to assess the likely, in some degree predictable though obviously unintended, consequences of further disclosure in this area. In any event, in this as in other related matters (such as the later discussion in this chapter on the gap between the highest and lowest-paid employees) there would be a proper concern to avoid tilting the playing field against UK-listed entities through requiring a degree of further disclosure going beyond what is likely to be required in their principal competitors.

There is, however, precedent in the US, Australia, Hong Kong and elsewhere for disclosure of the remuneration of a specified number of the most highly remunerated at the top of the “high end” category. And given the recent experience in which
inappropriate remuneration structures contributed to the severity of the crisis phase, there would seem to be legitimate shareholder and wider public interest in disclosure in relation to this “high end” category of executives which have large business and risk-related responsibilities. In this situation, and despite the reservations described above, it would seem justified to seek appropriate but anonymous disclosure of the total remuneration cost for all in this category.

Coalition succumbs to banker lobbying

There's a great bit on Mark Kleinman's blog here about George Osborne giving in to pressure from the banking lobbying and delaying implementation of the Walker Review recommendations in respect of remuneration disclosure. It's also on the front page of the Pink Un.

Here's Kleinman's take on it:
Two months ago, George Osborne’s spokesman could not have been more explicit.

“The chancellor is committed to implementing Walker,” he said in September. “He is not going soft in any way and that includes implementing the pay bands.”

That statement was in response to a newspaper report suggesting that Osborne was losing his nerve on forcing banks to disclose the pay of employees earning more than £1m.

Fast-forward ten weeks and “going soft” is exactly what the Chancellor has done.

He has confirmed this morning that implementing the report by Sir David Walker is best done only in co-operation with international colleagues and that without such co-operation, there is little chance of the Government forcing the disclosure rules upon Britain's banks.

For those not surprised to see the ConDems go weak at the knees (this excludes those people who said there would be no difference in corp gov with a change in government....!) I'd say also have a look at David Walker's bit in the FT comment section. He does rather make Osborne's argument for him, but the more interesting bit is the section where he basically argues that shareholder oversight is ineffective because of the lack of below-board disclosure. Would be interesting to see if any shareholders are pushing for below-board disclosure and, if so, what they think of the u-turn.

Friday 19 November 2010

Thursday 18 November 2010

That full George Osborne article on Ireland

It's still available on The Times website here. Some great stuff in it:
The new global economy poses real long-term challenges to Britain, but also real opportunities for us to prosper and succeed. In Ireland they understand this. They have freed their markets, developed the skills of their workforce, encouraged enterprise and innovation and created a dynamic economy. They have much to teach us, if only we are willing to learn.

Wednesday 17 November 2010

Blaming the EMH or not

I was reading a review on Amazon of the Roger Bootle book I mentioned t'other day. In it one reviewer said that the Madoff scandal was a result of the efficient markets hypothesis (EMH). I was rather taken aback by this, as the EMH is essentially a theory about how markets respond to information and what flows from this in terms of investors' ability to 'generate' superior returns (I prefer 'channel', actually, since it is the underlying companies actually doing the work). Madoff was, quite simply, a giant fraud and I don't see what a theory about how markets assimilate information has to do with that.

I was midway through posting a comment in response to the review when I read it properly and realised the reviewer was making a slightly different point. This was that the implication of the EMH is that other people are already processing the relevant information and/or doing research, and therefore there's no point doing the legwork yourself. This has merit in broad terms as an attitude to investing in developed markets. Unfortunately the reviewer stretches this to cover investors like Bramdean failing to do due diligence on Madoff, which I think is pushing things a bit far. Nonetheless the broad point is that a theory that says you can't beat the market because lots of other people are trying to and thus markets are efficient leads people to take their eye off the ball. I think there's something in that in broad terms.

But in the specific case of Madoff it doesn't really make any sense. Because if you read Nicola Horlick's infamous words about Madoff, one of the things she says is that he was very good at calling the market and therefore delivering sustained returns. Surely a real believer in the EMH would be deeply troubled by such a finding - because it directly contradicts the theory! Sustained outperformance should not be possible because markets are efficient.

In reality I don't think active asset managers (those who aren't shysters) believe in the EMH, at least in strong form, because they believe they can add value. The pitch of the likes of Nicola Horlick is precisely that they can do what the EMH says shouldn't be possible. That lack of belief in the implications of the EMH in turn lead Horlick to stick her clients' money in what she thought was a hedge fund (as I've said before, IMO it was no more a 'hedge fund' than Nigerian email scams are 'investment opportunities').

And if we take the broader point against the EMH seriously - that it leads people to do insufficient checks/research - how widely does this apply? If I buy a dodgy secondhand car because it's solid by what looks like a legit dealer and I assume they have done the legwork is that the fault of the EMH too? If not, why not?

None of this is to defend the EMH as a theory, and I do not underestimate the impact of ideas on behaviour. But it's worth thinking through what precisely the EMH did influence, rather than blaming it for behaviour that may have had other drivers.

How institutional investors vote

It's interesting to note that the only place (as far as I am aware) that you get can any comparative analysis of how UK institutional investors exercise their voting rights is from the labour movement, or more specifically the TUC. If the model of shareholder oversight that we all subscribe to is so important, it's interesting to ponder why it is that only trade unions dig into the data.

I'm glad that's the case in some respects, as it potentially gives the TU movement greater authority to speak on these issues than others. And notably this is also the case in a couple of other markets (US and Canada). Still it's a surprising quirk for a market that is supposed to believe in this model.

That observation aside, what does this year's survey (PDF) tell us? The real story, as the TUC points out, there's a real split in investor voting. Some investors (asset managers, principally) are much more likely to vote in favour of management than others. In the sample some investors voted for 70% plus of all management resolutions, and another group voted for under 40%. That's a pretty sharp divide, especially given that these were 'contentious' resolutions (as evidenced by the voting results companies disclosed).

Needless to say this also reads across types of issues. Those investors most likely to vote in favour of management were more likely to vote in favour of remuneration policies and for directors' re-elections. The names that crop up most regularly on the 'vote with management' side of the graph are the likes of M&G, Hermes, Fidelity and SWIP. One of the things I did was compare this with some analysis we've done on investor voting on shareholder resolutions on ESG issues, and notably the same types of names appear as voting against such resolutions.

In summary this suggests to me a relatively simple conclusion - it's a house style. Some investors pitch themselves as more pro-company in their voting than others. That's all fine and dandy and their choice of course. I suspect some (all?) would probably say that other aspects of engagement are more important. My personal view is that this puts a lot of weight on the ability to get movement from companies just by meeting with them or writing to them. In addition my own experience of engagement is that some of the 'wins' claimed to justify voting with management are pretty meagre. But we can agree to disagree.

There are some important caveats. It's not a big sample of investors, because some asset managers still refuse to take part in the survey. And it's not a particularly large sample of votes. Having done some fairly extensive voting analysis at work, I think that more respondents would have revealed a larger group of asset managers who vote in favour of management a lot. So unfortunately those who do respond are somewhat punished by those who don't!

The final question we ought to ask is whether the TUC could have produced this analysis without asking managers to voluntarily provide the info (ie relying on public disclosure). I spoke to Janet, the TUC's policy officer on this stuff, about this yesterday and she said definitely not. Yet the investment industry still claims that a voluntary approach is working. Ho hum.

Tuesday 16 November 2010

Pensions geeks & politics

Just a quick reflection on today's TUC trustee conference, where Lib Dem pensions minister Steve Webb spoke. I've been going to this conference in different capacities for years. It was the most hostile (in a typically restrained way) reception I've seen the conference give to any minister to date. This despite the fact that a) it's quite a specialist conference and usually respectful to speakers and b) Steve Webb has a good reputation in the pensions world.

The main issue of contention was - as you might imagine - the CPI/RPI change. To be fair Steve Webb tried to defend his previous statements, and the guy knows what he is talking about. Nonetheless the audience was not sympathetic. And talking to delegates at the end of the conference, it was notable that mention of the Lib Dems generated a more hostile reception than the Tories (who many TU members expect to be b***ards). This is a pensions conference remember.

TUC fund manager voting survey

The TUC's annual survey is out, see here and here. Will try and blog properly later, one of the most notable factoids is that, of all the respondents, Hermes was most supportive of management on the resolutions on which votes were sought.

Monday 15 November 2010

The value of fund management

I picked up a cheapo second-hand copy of Roger Bootle's The Trouble With Markets recently, and rather good it is too. Definitely one of the better examples of the 'crisis publishing' genre. Here's a nice little snippet about investment management, about whose merits he (like John Kay) is rather sceptical.
Hedge fund investors and other investor do provide some service to society by improving the efficiency of the market. And some of the great investors have been decidedly activist in the management of the companies in which they invested their money, thereby helping to counteract the passivity of the investment institutions. But a huge wedge of investment activity is purely speculative in nature. And the size of rewards does not correlate with the contribution of their activities to society, Such investors belong somewhere close to lottery winners. Meanwhile there is surely a legitimate question about quite how many lotteries a society should have - and indeed how large the prizes should be.

But this I don't mean to suggest that investment success is always down to luck; rather the activity does not add a great deal to society's overall welfare but redistributes it from others to the successful investor. The genius of the great speculative investors is to see what others do not, or to see it earlier. That's all. This is a skill; of that I have no doubt. But so also is the ability to stand on tiptoe, balancing on one leg, while holding a pot of Earl Grey tea above your head, and successfully pouring the contents into a cup that is seven feet below you on the ground, without spilling a drop. I am not convinced, though, of the social worth of such a skill, still less of the wisdom of encouraging the brightest and the best of our society to try to perfect it.

Yet that is what we have done with financial markets. It is commonplace for successful businesspeople to look on the activities of those in the public sector with disdain since what the latter do, they think, is merely redistributing wealth, rather than creating it, thereby imposing a burden on those who do create wealth. This view is not without some justification. However, the irony is that some of the activity that takes place in the public sector is genuinely creative, while the large part of what goes on in financial businesses, owned and managed by the private sector, is completely about distributing wealth - with large parts of the loot going to the practitioners.

A couple of interesting company AGM results

A smallcap called Centamin Egypt had to pull a share scheme ahead of its AGM last week because of the investor backlash (or more specifically the fact that it lost the vote). See, voting against works!

Minerva also failed to pass a special resolution (this is part of the long-running spat with KiFin) and saw a 43.5% vote against its remuneration report.

Thursday 11 November 2010

Money is not our god

Repeat after me.

Workfare & behavioural insight

Just a thought about the IDS 'work or lose your benefits' approach. Has any of this been run past the famous 'behavioural insight team'?

The reason I ask is over the past couple of years I've become a bit of a geek about work and motivation, which would seem to be a key area where behavioural insight might apply. It seems to be a pretty robust finding that if you give people a degree of discretion about what they do and how they can do it they are much more motivated than if you tell them what to do and are prescriptive about how to do it. This is all that intrinsic motivation/self-determination stuff that Deci etc have been on about since the 1970s.

More broadly the labour market in general seems to work ok (in terms of motivation) in the sense that people have (or believe they have) a choice about what job to do. What that may mean in practice, according to this guy, is that even if you end up in a dull job for low pay, you may well end up convincing yourself that it can't be that bad because a) you are still doing it and b) you chose it. Elimination of cognitive dissonance and all that.

So what happens if you end up forced to do a certain job or face being financially penalised? I can't believe that it's going to be a big plus in terms of a sense of self-determination. The approach IDS is taking seems, from my admittedly superficial lunchtime take on it, to tick the wrong boxes about getting people motivated about work. And that in turn affects general satisfaction with life.

Now people might still argue that it's more just for those on benefits to have to work for them, and that this outweighs any question of whether they are motivated about work or not. That's a political question. And maybe the cognitive dissonance process will lead people (over time) to think 'this isn't so bad'. But surely if you have a 'behavioural insight team' this is exactly the sort of issue you ought to run by them. Wonder if it happened in this case, and if so what they said.

Tuesday 9 November 2010

Ireland's approach to BOFI governance: comply or get suspended

Major hat-tip to CL&G, though we knew it was coming this is a significant development. Effectively Ireland's version of a Walker Review type process has resulted in a regulated approach to the governance of banks and other financial institutions. BOFIs are told what structures they have to have in place and face sanctions if they don't comply.

Obviously Ireland's approach isn't simply going to be copied by other markets, some of which will feel that a 'comply or explain' approach has much more flexibility that both financial institutions and their owners value. But let's be clear this further undermines the idea that a market-driven approach is the best way to go.

High Pay Commission

Is now up and running. This will be interesting to watch. Some interrogation of how investors have actually used their voting rights would be very useful!

Monday 8 November 2010

An smallcap pay revolt

Quite a big vote against the remuneration report at Kofax last week, with a bit uder 32% voting against. Definitely one of the bigger ones for some time, but seems to have gone unremarked, presumably because it's a smallcap.

Friday 5 November 2010

Workers' capital - the blog

Just a quick plug for the blog run by the Committee on Workers' Capital. You can find it here.

Thursday 4 November 2010

Speaking out

It's a common argument amongst some institutional investors that concerns about investee companies are best expressed privately. This is an argument that has also been deployed against disclosure of voting records. I have always felt that it is self-serving, but I increasingly think it is also just wrong.

By failing to speak out publicly, investors can create the impression that there are no concerns at a given company. It's the self-censorship of dissent and can therefore lead to a public assumption of apparent consensus (I'd almost go as far as to say it's analogous to banning shorting). It's a bit like a bubble in positive sentiment, without publicly expressed concerns it may simply grow bigger.

It's notable that Cass Sunstein has been making the argument for years that it's important to express dissent. And obviously in corporate governance there's a clear consensus that boards need to exhibit the ability to facilitate open challenge. Yet for some reason when it comes to investor dissent it's almost a point of principle of some to not speak out - even where publicly expressed dissent may help others find their voice.

Anyway, I'm going to start this soon. Expect to see a few excerpts appear...

91% of voters don't agree with Nick

Lib Dems down to single figures.

Tuesday 2 November 2010

Letting the bankers get away with it?

An interesting piece in The Grauniad about the Coalition appearing to draw back from action on bonuses. I'm particularly interested by the implication at the end of the piece that all the Walker Review recommendations might not be implemented. I'm personally not surprised, but I'm not a ConDem supporter, but I do wonder what those folks who told me there would be no great difference in policy if there were a change of government think about it.

FRC rejig

I had previously thought that the cryptic reference to reform of the FRC in the Bonfire of the Quangos list related to the ULKA transfer. Not so. Have a look at this response to a written question from Lord Myners:
Financial Reporting Council
Asked by Lord Myners

To ask Her Majesty's Government what plans they have for the Financial Reporting Council; and what are the implications of those plans for the proposed hosting of the UK Listing Authority. [HL3030]

The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Baroness Wilcox): The Government consultation on the future of financial regulation, which, among other things, included the consideration of whether the UKLA should be merged with the FRC or remain within the CPMA markets division closed on 18 October. The Government are currently considering responses to the consultation, and no decisions have yet been made.

This is quite separate from potential changes to the funding and governance structures of the FRC and its operating bodies to make the FRC even more efficient and flexible, on which the Government will be consulting in due course.

Monday 1 November 2010

Not quite, Pesto

Via Touchstone I came across Pesto's blog on the IDS and IoD surveys of directors' pay. This bit stuck out:
But it is also probable that what we're witnessing in the pay disparity is another manifestation of the agency problem: irrational decision-making at listed companies which stems from the gap at listed companies between owners and managers.
Actually these days there is a lot of discussion about remuneration between the managers and the owners (shareholders) and many would argue, often for very different reasons, that this takes up too much time. There's a vote every year on pay policy, and often on new incentive schemes too, so shareholders have the tools to make a difference, if they choose to. The reality is that pay rebellions are rare and average oppose votes low - we reckon about 6% against a rem report this season, with the median a bit over 1%, and well under one in five companies registering 20% and up against. Shareholders in general, it seems, do not have a problem with exec pay.

What's more, those eye-popping IDS figures are driven in large part by bonus and incentive schemes. That is the performance-related bit of the package that is there because of fear of agency problems. It's supposed to align the interests of owners and managers. So the very thing that creates the bad headlines has a) been advocated by investors and b) been legitimised repeatedly by shareholders through whopping majority votes in favour of all but a handful of remuneration policies.

So arguably from a shareholder point of view nothing is wrong. But if we do think something is wrong then maybe what we see is not an agency problem - but an agency theory problem. The application of an inaccurate model has resulted in perverse outcomes. Just a thought.

UPDATE: Charlie points out Will has a rather ace post up on the same kind of issues.