Sunday 27 February 2011


This is genius. Coincidentally there's a good recent example relating to the Davies Review.

Women on boards bring out the bores

One of the great things about the Davies Review of board diversity is that its rather modest proposals (a voluntary target of 25% female representation on FTSE100 boards by 2015) is that it had caused an outpouring of articles criticising the proposals. I think this is useful because a) it helps to read opposing views to sharpen your thinking and even sometimes make you change your mind and b) some of it is simply funny. That said the minute I wasted skimming Cristina Odone's entirely predictable piece on the subject is one that I will never get back.

Anyhow, one of the less compelling arguments against I've seen advanced so far is the one that if there were really anything the link between female board representation and financial performance then companies would already have diverse boards. In short if there is money in diverse boards obviously companies would have them, and shareholders would want to ensure that this happens. All is for the best in the best of all possible worlds.

I think this is mistaken for several simple reasons.

First there is the simple availability of evidence point - companies may not be aware of research suggesting such a link, since it's not an intuitive one.

Second, there could be a problem of interpretation of evidence - for a variety of reasons companies may not accept the validity of such research. Cognitive biases

Third, some boards may think that whilst there could be a link it's not relevant to them (could be an engineering firm where women are a small minority of the workforce so internal appointment v unlikely).

Fourth, companies may consider that even if there is a link between board diversity and performance it is likely so small that actively seeking to improve diversity is not worth it.

Fifth, it could be an entirely rational outcome for both women and boards, based on existing expectations, for the former to not put themselves forward and for the latter to not seek the former out. On these last two points I think Thomas Schelling's modelling on mild preferences could tell you a lot then about how even mild preferences for male directors could have large aggregate effects.

Note none of the above require you to have any cartoony view of sexist boards and directors to lead you to consider that actually they wouldn't necessarily take the optimal approach to diversity. I suppose the question back would be well, yeah, in theory that might be true but in practice companies are efficient and wouldn't allow an obvious defect to go without being addressed. Two v brief points in return -

1. M&A activity. Lots of different studies suggest that a lot of companies undertake many deals that do not create, and often actively destroy, value. This information is widely available, yet companies seem to think that they uniquely will buck the trend. In other words boards repeatedly undertake inefficient activities. Is it really too much to believe they may also get it wrong on gender?

2. Corporate leaders tend to be taller than average. Is this because there is a correlation between height and ability to run a company, or is it because we have a subconscious image/stereotype of what a leader looks like that can affect our decision-making? And if we can get confused about height, it seems reasonable to assume we might occasionally trip up with gender.

Thursday 24 February 2011

Davies Review

Is out, and recommends a target of 25% female representation on FTSE100 boards by 2015. I reckon only about 10% of them meet that now, but many could reach it with just one female appointment. Given typical turnover in board membership this seems pretty reasonable over four years. Big worry would be if they try and meet the target solely through NED appointments who are then given the 'girly' CSR committee to chair.

BIS is quite an interesting dept to follow really, innit?

Tuesday 22 February 2011

The 50% tax rate shuffle

Worth remembering, in light of what we have seen in respect of income tax receipts, that many on the Right predicted confidently that the new top rate of 50% would have no net benefit or a negative effect (in Hirschman's terms that's perversity and futility covered). Watch now as the argument is redefined to say that of course the impact wouldn't be felt straight away, but over time.

Bonuses, still don't work

According to this.

Monday 21 February 2011

Trumpton riots

Totally off-topic, but this popped in my head on the way home from work this evening.

Unemployments rising
In the Chigley end of town.
And it's speading like pneumonia;
Doesn't look like going down.
There's trouble at the fire station;
Someone's had the sack.
And the lads are going to launch a scheme
To get rid of Captain Black.

Tell PC McGarry
To get himself a mate.
And arm themselves with C. S. Gas
They're gonna be out late.
We've had calm conformers in since 1966.
And now subversions in the air
In the shape of flying bricks!

Someone get a message through
To Captain Snort
That they better start assembling
The boys from the fort.
Keep Mrs. Honeyman right out of sight,
'Cause there's gonna be riot
Down in Trumpton Tonight.

All this aristocracy
Has really got to stop.
We'll overthrow the surgery
And kidnap Doctor Mop
And Chicley Militant Socialists
Will storm the market square
And make plans to assasinate
Our autocratic mayor!

Windy Militant rages past
With Corn grinders to war
With windmill sails and bombs with nails
They smash the town hall door.
But Snorty and the boys arrive
With one big erstwhile (?) crew
Whereupon they bring about
A military coup.

Saturday 19 February 2011

A bit more on easyJet

We got a fair few press calls last week about easyJet losing the vote on its remuneration report. The interesting thing is that at least a couple of the journos we spoke to mentioned - unprompted - that the company had told them that the vote was only advisory and didn't compel them to do anything.

This is obviously absolutely true. It's also IMO a pretty clear indication of what the company is going to do in response to the vote - nothing if at all possible. The company's AGM statement made clear that the source of most dissatisfaction, the pay-out to the former chief exec, was a one-off that wouldn't be repeated. Therefore the company's position seems to add up to 'we won't do it again, but we're not forced to do anything'. Given that the vote is advisory and backward-looking their position is pretty solid I would say.

The interesting question is what events like this do for the legitimacy of shareholder oversight of executive pay. If a company can even lose the vote on its remuneration report and still not do anything in response then things start to look a bit wobbly. Add to this the fact that companies who get big (ie 30%-40% plus) votes against usually spin them as 'a win is a win' and the fact that even in the 'record' season of 2009 only five companies were actually defeated. You can see how faith in a purely shareholder-focused system can look misplaced.

New CWC briefing on investing in decent work

Many of you won't have heard of the Committee on Workers' Capital. It's basically a grouping of TU people who are interested in how the labour movement can influence the capital in pension funds and other savings and investment vehicles. It's well worth a look for any of you who share my interest in trying to develop a left-of-centre agenda in this bit of the world. And there are plenty of good, practical examples of what unions can achieve in this area.

Anyway, there's the background the CWC has just produced a second briefing on investing in decent work (press release here - PDF). It is essentially about making trustees and others aware of the dangers of investing in companies that benefit from the used of forced labour. Definitely worth a look.

Thursday 17 February 2011

No nudging so far

There's a snarky little piece in t'Torygraph here about the failure of the much-heralded Behavioural Insight Team to affect policy formation to date, which rather underlines the belief that most Tories regard such ideas as fluff. The line comes from an NAO report, available here, and below is the relevant para.
The new Government has also established a Behavioural Insights Team within 2.14 the Cabinet Office, working alongside the Better Regulation Executive, to develop innovative approaches to achieve social and environmental goals in a non-regulatory way. The Cabinet Office told us that it has not been consulted by departments to date about possible alternatives to regulation at the assessment stage. The team perceived the key benefit to alternative interventions to regulation was the greater flexibility these could provide particularly for small and medium sized enterprises. The Cabinet Office is producing guidance on alternatives including behaviour change, self and co-regulation, and economic instruments. The Better Regulation Executive is also working with departments on supporting the use of alternatives and has published guidance on its website for use by policy officials.

easyJet defeated on remuneration report

First defeat of the year, see RNS here. Largely driven by Stelios, but his 38% isn't enough on its own, so interesting to see who else got stuck in (ABI blue-topped it I think?). Also evidence of the 'Stelios effect' in the huge abstains on David Michels' re-election.

Tuesday 15 February 2011


Incredibly this blog is four years old today. I will do a post reflecting on what's occurred so far, but in the meantime something even more incredible.

Monday 14 February 2011

Cynicism vs analysis

It strikes me that within corporate governance there's a way of thinking that mirrors one of the things I like least about journalism - default cynicism. I dislike it for two main reasons. First because I find it hard work and demotivating to deal with, since you're constantly told that low motives lie behind whatever activity you're considering. Second because I find it a very unenlightening way of looking at the world. If everything, no matter how principled, brave, whatever, can be collapsed back into the advancement of self-interest, then we can't really distinguish between anything, can we?

Where it comes from I don't know, but it seems to be tied up with a desire to see, or perhaps be seen to see, things are they 'really are'. To cut through through the guff, and get down to what people are really doing, and why they are really doing it. Don't fall for all that naive, hopey changey stuff, that's not what these bastards are really like, they are all pursuing their own agendas.

In the governance world, this style of thinking sees low behaviour everywhere. When directors are not shirking, they are fiddling the numbers to ensure their incentive schemes pay out. Well, call me not cynical enough, but I don't buy it. I'm in no way misty-eyed about the executive class, and I'm sure that there is a fair chunk of it that is concerned with material rewards, and that this is a big bit of why they do what they do. But a) it's not all of them, perhaps not even most of them and b) that doesn't mean that they are corrupt and therefore likely to engage in the kind of behaviour ascribed to them.

In fact, in both the political and corporate world I would describe such a default cynical mindset as naive. It will get you through, because you can always come up with a reason why an apparently well-meaning/altruistic/brave action is actually self-interested. And actually looking at game theory and research into cognitive biases (see right at the end of this old post) you can see why such a mindset, once in place, might never get shaken off again. But, as I said at the start, because this view explains everything it explains nothing. In other words its not really affected/informed by experience.

My concrete example of this is executive pay. The cynical view of this says that executive rewards have gone up because directors line their own pockets and, with the connivance of rem consultants, spend their time designing and implementing targets that they know will be easy to hit and thus schemes will pay out. Yet companies were encouraged to make the performance-related bit of reward large - so that they didn't make a lot of money if the company underperforms. And most big shareholders say that they accept that companies need to pay top whack to get the best people. So what's the big shock about what we see? It doesn't really require self-serving executives to emerge. Personally, as is obvious, I think the focus on performance-related rewards is an enormous waste of time, but I don't think it's a 'con' or a 'rip-off'. I think it's fundamentally flawed, not that it's a basically sound model undermined by greedy execs.

And ultimately I think that a cynical view gets it wrong because it put way too much emphasis on the individual and their standards of behaviour (or lack of them) rather than the context. It might be quite an enjoyable worldview to adopt, since it lets us see lots of 'villains' that we can enjoy loathing, but I'm not sure it helps us make sense of what we see in the corporate world. We may not think much of the executive class but, to paraphrase Sam Spade in The Maltese Falcon, don't be too sure there as crooked as they're supposed to be.

AFL-CIO Key Votes Survey 2010

This is the survey that started it all, in terms of TU research into how institutional investors exercise their ownership rights. The 2010 edition is available here (PDF).

Sunday 13 February 2011

Left perspectives on governance

I managed to get along to a meeting of the New Political Economy Network recently on rebalancing the economy. Of most interest was the discussion of corporate governance that emerged as part of the debate. It struck me that the moderate Left (ie broadly Labour) still hasn't quite made up its mind where it wants to be in this field, and I can understand why.

My old boss Brendan Barber from the TUC argued that the UK's current approach to governance - with shareholders the principal player - risks being undermined. Fund managers - rather than beneficial holders - aren't accountable for or transparent about their ownership activity, and the rise of short-term investors means that people who hold shares for a very short time can determine the fate of companies which have been around for decades.

Shadow BIS minister John Denham picked up on this and said he was quite taken with Myners' characterisation of the 'ownersless corporation' and the implications that this had. Obviously this is the problem that initiatives such as the Stewardship Code are intended to address.

But arguing back in the other direction was Karel Williams, who broadly argued that the power of interest groups within the investment chain make it optimistic to put too much weight on corporate governance as an avenue of reform.

These three perspectives do to some extent encapsulate the problem. Does the Left seek to work through the existing governance system in order to encourage more responsible corporate behaviour, or is a different approach required? In the period I've been involved in this stuff I have leaned overwhelmingly to the former. This is because a) Labour was doing a lot to try and make it work (right up to the 2010 election) and b) an acceptance, rightly or wrongly, that this was a more 'realistic' route and c) because I'm not anti-market.

However in the wreckage of the crash you can see why it is tempting to wonder whether a change of direction is called for. After all despite all the shareholder-focused governance reform in the UK we still see bad failures, and the continuing escalation of executive rewards. I'm not at all surprised to see the resurgence in interest in other governance models in this light.

The question I would pose is that of the trade-off. We give up a lot of territory in accepting the shareholder-focused model, do we gain enough in return to make trying to make it work for our ends worthwhile? Obviously it's not an either-or question, but it does make you think about how resources are best deployed.

Tuesday 8 February 2011

The Big Bonus Society

Can't help thinking that the raised banking levy is the sort of political gesture that seems smart only if you're thinking primarily about your opponent's position & likely response (I believe Labour supporters may have been here before on Budget day...)

First up, I don't think it is likely to get anywhere near reducing the public's anger towards the banks, because we all know that bonus awards are imminent. Choosing to raise money via a levy on banks rather than taxing bonuses I suspect will be seen as a cop out, and no doubt will be spun that way too. So a day of coalition 'bank-bashing' will likely be overwritten shortly with bonus announcements. (PS I assume the figures floated for Bob Diamond etc are deliberately inflated in order that they can ultimately be undercut to look like restraint is being exercised - see Goldmans last year for a great example of 'bonus management').

Secondly, there is the not unimportant (to Gideon) banker constituency to consider is all this. They can't be pleased with him pulling this out of the hat at the last minute, especially as it means the existing levy needs to be recalculated, so quite a rise in the next quarter's tax bill. Though I have no sympathy with their position, if I were a banker now I'd be wondering why I should bother playing ball over Project Merlin.

The counterpoint to all this is that Osborne gets to deflect attacks from Ed Balls for a bit. I'm not sure that the short-term benefits are sufficient to outweigh likely long-term effects.

Monday 7 February 2011

AGM snippet

There's an AIM-listed company called Infrastrata which had its AGM just over a week ago. The chief exec saw a vote against his re-election over over 30% and, given turnout, was re-elected with the active support of about 35% of the issued share capital (results available here). Summat must be up?

Shareholders and public policy

Since the financial crisis started one of the things I've noticed is that investors are starting to pay more attention to public policy. There are a couple of things driving this I think. First, there have simply been a lot more public policy issues to contend with, as the number of consultations you feel you need to respond to has increased. Second, some have put forward the not unreasonable argument that you can achieve a lot more through policy engagement - which can raise standards for the market as a whole - than through company engagement.

I agree with this, and I personally find public policy engagement interesting, but it does make you feel like we've turned full circle sometimes. After all, the reason many 'progressive' (sorry...!) types end up in the corp gov/SRI world is because it seems like an effective way to influence companies. Pre-crisis you could see people effectively making the argument that this sort of activity would supplant state/regulatory intervention. Now whilst such arguments are not without merit, you do have to question the force behind them. And the fact that investors are now turning to public policy seems like a bit of a tacit admission that market forces often aren't enough to bring about the changes shareholders want to see.

Sunday 6 February 2011

We're alright, Jack

Great headline to this Indy piece about bonuses in the banking sector. I've made this argument quite a few times in the past that the popular view of banks feels very similar to how the public viewed unions in 70s - too much power and an inability to exercise it responsibility.

The other interesting parallel is the response of the Conservatives since they came to power in both cases when popular hostility was high. In the former case they had no hesitation in taking on the unions and radically reshaping the regulatory and legal framework to rein them in - it was clearly a very significant change in direction. In contrast in dealing with the banks they have even backed away from requiring them to disclose a bit more data. It's even more remarkable when you consider that they would have the Lib Dems onboard in really tackling the banks. Their failure to act with any radicalism, as contrasted with their attacks on the labour movement, does lead even a moderate lefty like me to conclude that there is a large dose of class politics in all of this.

The other thing of note in the Indy piece is this line:
"Our shareholders have been told about the bonuses being paid out and are completely behind us."
The thing to remember about Barclays is that their major shareholders are actually in the Middle East.* In that sense perhaps this isn't entirely surprising. But I suspect that if you asked most of the banks what their (non UKFI) shareholders thought you would get the same answer. If you're expecting shareholder activism to solve the bankers' bonuses problem don't be surprised if the 'solution' is basically to let them pay what they want.

* It's important to remember, as some business journos are inclined to forget, that Barclays WAS recapitalised. To read some business commentators you would assume that Barclays had escaped the crisis unscathed. The only difference between Barclays and Lloyds is the source of the capital. The Barclays board would rather answer to private sector investors than the UK govt, and were willing to dilute their existing UK shareholders' interests to achieve this.

Friday 4 February 2011

Worth a read

Stumbling & Mumbling on workplace democracy. Agree almost entirely, I would only add that I also think it's right in principle.

Thursday 3 February 2011

Worth a plug

The Co-op Party campaign to remutualise Northern Rock -

Short-termism policy

Here's a quick question for you. The recommendation that directors of FTSE350 companies face annual elections attracted a fair bit of criticism from some people. One of the main arguments that was used against it was that it would increase short-term pressure on boards. Only a few months after the annual elections policy was adopted by the FRC, the BIS consultation on... err... short-termism (and other issues) came out. So presumably those that believe that the policy will lead to short-termism will have raised this with BIS, right?

Wednesday 2 February 2011

Exec pay snippets

1. A US company has lost its Say on Pay vote already this season.
2. Remuneration committee reform has been raised in the Lords.

Tuesday 1 February 2011

Universal moaner

I feel like a heretic for saying this, but I am not a fan of the 'universal owner' concept, except in the very limited sense of helping people get interested in investor engagement. To recap the idea behind the universal owner theory is that big investors now own a major slice of the global economy. They might have exposure to all their own domestic market, plus a wide exposure overseas too. They own a bit of companies in all industries, and in many countries, and they gain further exposure through investment in assets like property.

What flows from this picture is the idea that such investors, or universal owners, have a financial self-interest in ensuring that companies do not externalise their costs. And the reason for this is that the universal owner may feel the impact elsewhere in their portfolio. Think about it - what happens at BP doesn't only affect your holdings directly in the company itself but also in suppliers, insurers and all sorts. So it really does make sense for universal owners to look at systemic risks, and encourage companies to be responsible.

Yeah, well, sort of. But there are numerous problems with this description. First up, I'm not sure how many investors actually fall into the category of universal owners. To give you a really simple example, just take a look at responses to the TUC Fund Manager Voting Survey. Although it surveys the UK's biggest companies, every year some of the respondents didn't hold some of the companies in respect of which voting decisions are sought. So even big investors in a big market like the UK don't have exposure to their entire domestic equity market. Surely the situation in overseas markets is likely to be even more like this - they seem unlikely to hold the whole market. And by the way, in the UK the biggest investors are asset managers, not asset owners like pension funds, so the potential for democratic control is... ahem... limited.

Second, what about the bits of the economy that universal owners don't have exposure to. There is actually quite a bit of it. To make a trivial point, you won't have exposure to Waitrose unless you're an employee! But what about companies that aren't publicly listed, partnerships, mutuals, publicly-owned banks etc. It's not an unimportant proportion of the economy.

Thirdly, the theory effectively inverts the rationale behind diversification in the first place. The whole idea of holding the entire market, and spreading your assets globally, is that it spreads your risk. So actually you can even handle a BP crisis without it doing too much damage. Now you can make a valid argument that in reality diversification has limited benefits, and that these reduce pretty quickly once you get past a relatively small number of holdings. But that's not the same as saying that you can't handle a few dogs in a global portfolio.

Set against this, I do think the concept is useful as a way of getting people to think about the extent of large investors' economic exposure, which I think can be quite empowering. In addition, the basic model can appear to give those who need it the cover to make arguments in favour of a more engaged approach to their investments. I think it's this latter point that bothers me most of all. In a sense a flawed theory is being used to encourage people to adopt a certain stance (more responsible investment). It's a pseudo business case if you like.

And I think where I've got to after almost 10 years at this stuff is that it might just be better for some investors to take certain positions because they think they are the right positions to take. Often it's ultimately a political decision, and I think we (those of us who are interested in the politics of ownership) are better off being open about this than always searching for reasons why it's ultimately in our financial self-interest to do the right thing.

Two things about bankers' pay, and one other thing

1. Andy Tyrie has put the cat amongst the pigeons with this letter to the FSA, surely? On the one hand it makes the Chancellor look a bit silly for caving in over disclosure. On the other it also makes shareholders look a bit weedy, because his letter says the committee is concerned to ensure that remuneration policies are in the interests of shareholders. I advise anyone following this to go back and look at what some asset managers said about the u-turn at the time (clue: it wasn't 'we want this info').

Remuneration is a matter for companies and their owners. Except when neither side shows any interest, then it's a matter for a parliamentary committee and a regulator.

2. I said, didn't I say, that we are stumbling merrily towards another fight over bankers' pay. Patrick Jenkins describes this much better than me, here. Anyone seriously think UK banks won't say 'US banks are shelling out, we need to follow suit'?

3. Haven't blogged about the OFT not referring the issue of investment banking fees to the Competitition Commission, because I haven't followed it that closely. But if the OFT has basically said they are a bit of a rip-off but companies and their owners should negotiate better then aren't there market solutions? What about collaborative action by shareholders, perhaps organised through some sort of collective representative body?