Thursday 31 March 2011

Shareholder voting and ownership data

More excerpts from my recent journeys in spreadsheets. First up, if you pull out the largest 100 votes against management in 2010 in the FTSE100, guess what category of resolution appears most often. Most people, understandably, go for remuneration reports, though you might think director elections are a safer bet since there are lot more of them (only one rem report per company remember).

Actually it's neither. Resolutions relating to share issues were the largest group last year and there were some chunky votes against (ie 20% plus). The interesting thing is that when you cross reference this with publicly disclosed voting, based on the limited sample available (the IMA stats on the extent of disclosure give a misleading impression of what you can actually get out there), it appears that UK institutions weren't leading it. Only a couple of houses seem to take a consistent position on these resolutions and they aren't big enough IMO to account for the votes. On the other hand numerous big houses did not oppose management where big oppose votes were recorded.

Add to this another oddity from last season - a string of large votes against resolutions seeking to change the notice for meetings. I remember seeing a few of these last year and being puzzled by them and there's a reasonable representation of them in the top 100 votes. But so far I haven't found a single institution that discloses which voted against ANY of the resolutions that recorded big votes against. Whilst on average these weren't particualrly big votes against, by comparison they were generally bigger that votes against auditor appointments. My suspicion is that this is an example of US investors following a recommendation from one of the big proxy advisers. If anyone has any better ideas I am all ears.

The other odd thing I found came out of looking at average largest holders. This was a pretty basic bit of analysis based on notifiable holders. What I found was that the average size of the largest holder in the FTSE100 increased substantially from 2006 to 2010. Like other people I have mentioned this to I thought maybe the average is pulled up by some very big investors at the top end (think extractives with controlling shareholders, bank recapitalisations etc). That has had an impact, but it's not the whole story by any means.

I also looked at the proportion of the FTSE100 where the largest shareholder held less than 5%. It halves over the 5 years. Finally I looked at the number of notifiable holders. The number of companies where it is four or less again drops considerably form 2006 to 2010. This is exactly the opposite of what I was expecting to find given the conventional wisdom that the ownership of UK PLC is becoming atomised. I really want to get into more detail with this one as I still can't quite believe it. But what I have seen so far does not bear out the argument that shareholder engagement isn't effective because of diversified ownership.

Labour slumps in the polls after Ed addresses TUC rally thus proving the incredible expert insight of right-wing newspaper columnists


Fair Pensions report on fiduciary duty

This is a really good report, on a really important subject, that's come out of a really well-managed process, and its conclusions are really not what you might expect. I am, frankly, green with envy. It was also an impressive launch event, with Ed Davey from BIS speaking a good turn out from the investment world, including the FRC. Great job all round by Fair Pensions. I suspect that there is scope to get somewhere on fiduciary duty, and now we have some ammo to deploy.

Here's the blurb.
New research by FairPensions calls for an ‘enlightened fiduciary' model for institutional investors to parallel the new duties of company directors introduced in 2006. The report argues that such a provision would provide a valuable ‘nudge' towards sustainable, long term investment to overcome narrow interpretations of fiduciary obligation which emphasise profit maximisation at the exclusion of all other factors, including financial system stability.

According to the report, which was funded by the Nuffield Foundation, intense debates about corporate governance since the financial crisis have paid insufficient attention to the underlying savers whom fiduciary obligations exist to protect.

Christine Berry, author of the report, said that "There's been a lot of talk about the relationship between asset managers and asset owners, but little about the ultimate beneficiaries. There is an urgent need to refocus debate onto the individuals whose money is at stake."

FairPensions, which campaigns for transparency and accountability in finance, argues that current interpretations of fiduciary obligation have lost sight of the core ‘duty of loyalty' to beneficiaries. The complex chains of financial intermediaries involved in today's pension investment have introduced widespread conflicts of interest which are inconsistent with a strict understanding of fiduciary obligation. The report calls on regulators to confirm that asset managers, investment consultants and insurance companies providing pension products are all fiduciaries by law.

Ms Berry went on to say that "From 2000-2009, pension investment returns collapsed to 1.1% per year while funds' payments to intermediaries rose by more than 50%. Against this backdrop the industry needs to ask itself whether it is truly fulfilling its fiduciary obligations to beneficiaries. The current situation simply does not offer enough protection for savers from self-serving or reckless behaviour by their agents." The report, which is being launched with a keynote speech from government minister Ed Davey MP, will call on the government to give savers more say in how their money is managed and to promote long term thinking in order to protect the savings of beneficiaries.

The research also highlights the part that investors played in the financial crisis of 2008. FairPensions points out that, unlike bankers, the people managing pension savings have emerged from the financial crisis with their reputations virtually unscathed despite evidence of their significant role in encouraging risky corporate behaviour in the build up to the crash.

A pizza the action

Sorry for that. Big vote against the remuneration report at Dominos Pizza yesterday.

Wednesday 30 March 2011

House of Lords report on audit

This could be a big deal, some rumblings already!

Tuesday 29 March 2011

Now it's the 'wrong kind of anarchist'

Anyone else notice the little right-wing meme about the 'anarchists' on Saturday's demo that has popped up in several places? Basically the argument goes that of course if these people really were anarchists they would be supporting the cuts rather than opposing them because it would reduce the reach of the state. Ho ho ho.

I find it interesting as it suggests some general ignorance on the part of many 'libertarians' of the right-wing blogosphere about anarchism. First, it is ridiculously easy to see how a libertarian/anarchist could be against the cuts and thus on the march - because they consider the threat to their (or their colleagues) economic livelihood (freedom even) is greater than the potential freedom to be gained. That self-proclaimed libertarians of the Right can't see this is indicative of a wider trend - they just don't get the idea that power at the workplace matters too.

This leads on to my second point. There is, as I've blogged before, a long history of libertarianism in the labour movement, even explicit anarchism. This is, after all, what anarcho-syndicalism was all about. It should not be surprising then that libertarian members of the labour movement choose to support a major mobilisation of said movement against a perceived major attack by a hostile government. Unions are examples of voluntary self-organisation intended to act as a countervailing power to that of employers, be they public or private. There is nothing inconsistent in supporting these orgsanitions when they seek to do their job - defend their members. Again, that libertarians on the Right routinely attack them (even calling for their destruction) I think says more about the shallowness of their own libertarianism than anything else.

Thirdly, none of this is exactly hidden history. If you have read about anarchism in even the most general terms you will be aware that as a political movement (rather than a theory) it has been closely intertwined with the labour movement. I can only assume that Right libertarians only bothered to read the chapters in the Penguin Book of Anarchism about the individualist strain of anarchsim, overlooking the rather larger left-wing version.

This all leads on to my major point - I actually find the Right version of libertarianism we regularly see generally unconvincing. It's partly who they line up with. I have seen quite a bit of left anarchist stuff that repeats the bollox that there's no difference between Labour and the Tories. But our right-wing version seem to find it relatively easy to find common cause with the Tories and UKIP. It's partly that one-eyed view of power. They can see the jackboot behind the smoking ban, but can stare at corporate power and fail to anything troubling about it (or at least never blog about it as far as I can see). And it's also partly their own personal standards. They cheer on the police cracking heads on demos (because the wrong kind of anarchists are causing trouble), and one famous 'libertarian' even favours giving the state the death penalty. I'm sorry but it's not exactly No Gods No Masters is it?

As should be obvious given my political affiliation, none of this is to defend those that went on the rampage on Saturday in any way. But if people who work themselves into a lather about health and safety are setting themselves up as arbiters of who is or isn't a 'proper anarchist' something has gone badly wrong!

Monday 28 March 2011

BIS short-termism review - summary of responses

Available here (PDF). Hat-tip: CL&G.

Efficient markets and political misdiagnosis

You have a good idea for a post and then Chris Dillow goes and writes something better. Well, it's more in the same vein of what I was going to write. Rather belatedly I recently got around to reading Expert Political Judgment, and very good it is too. It's also made me think about a few different but linked issues that I'm interested in.

First up, it made me think about the efficient markets hypothesis. Remember the theory is that the reason that no-one outperforms the market is because markets factor in all publicly available information. No-one has an advantage and therefore no sustained outperformance. Yeah, well, maybe. Looking at what Tetlock found, I have to say I lean towards the simple explanation that the future is unknowable and that as such no-one can consistently benefit from how history actually turns out. I mean if political forecasting is so poor, why should its financial equivalent a) be any better and b) not be affected by exactly the same problem? Just a thought. It also made me think about what might be the equivalent of the simple algorithms that Tetlock shows can easily beat expert predictions in politics. I mean in financial markets is it an argument for 'technical analysis'? It makes me feel a bit ill even typing that, but I thought I'd chuck it out there.

Secondly, it's obviously a great book to remind yourself what a load of guff gets talked about politics, especially when there's a convincing narrative. Right now there are a lot of people coming out with a lot of plausible sounding predictions of the next few years based on what look like pretty small scale events. We get all sorts of theories trying to fit the next few years into a repeat of a favoured period of recent history. For Labour commentators, for example, no analysis shall be complete before one has provided a sage reference to 1983. Voters, you see, will react to any suspicion of a leftwards trajectory in exactly the same way as they did last time (an obvious point - at the next election 30-year-olds wouldn't have even been born at the time of that election). I just wish Tetlock was tracking the comment pages of our national newspapers.

I have my own expert prediction for British politics based on an extensive review of polling data and sweeping historical developments. The next election result will look quite like current polling, unless something dramatic happens and it doesn't turn out like that.

Wot Paul said

Before the big day, there were a fair few voices arguing that nothing would be achieved by demonstrating, and a lot of the post-match analysis is questioning the wisdom of calling / addressing a demonstration in the first place when the whole thing can (er.... will) be hi-jacked by people who have different ideas of how to get things done.

A lot of this came from within Labour circles and within a media who were quite focussed on whether the day would prove to be an asset or a liability for Labour in the great Kremlinologists obsession with Westminster politics.

As if it were the only game in town.
A LOT of Labour-aligned commentary is like this. And it makes a number of assumptions that I would challenge. First, that there is one narrow groove of 'acceptable actions and behaviour' within which Labour must operate and which its advisers must fight to keep it in. Second, that looking at the past tells where that narrow groove is, and will remain, and that all views to the contrary are a route back to 1983. Third, exactly Paul's point, that entire the story of the march is how Labour relates to it, and that march participants are mere supporting cast.

No-one knows how opposition to the cuts will shape up, or the results of Labour's orientation to them. These things are reflexive. Yet to read some commentary you would assume that there is a definitively 'correct' path to follow, and one that spookily looks a lot like what went before.

Thursday 24 March 2011

The wacky world of shareholder voting 2

Aviva is unusual as it voluntary put its CSR report to a shareholder approval vote last year. As an investor this is something Aviva has argued that other companies should do. Whether you agree with this idea or not, and responses to the BIS consultation on narrative reporting suggest that most people aren't yet convinced, I really struggle to see a good argument against companies doing it voluntarily.

Someone, however, disagrees. A not insigficant institutional investor abstained on the vote on the CSR report at Aviva's AGM last year. Not because they disagreed with the content, but because they didn't think it was is shareholders' interest to put CSR reports to the vote.

Tuesday 22 March 2011

Monday 21 March 2011

An uncomfortable free drink

A funny thing happened the other day on the way into work. When I went to pay for my coffee the person behind the counter (who I think is the manager) basically said it was on the house. Or rather, what they actually said was 'I'll buy it for you'.

I assume this was a kind of loyalty reward, as I go in this particular place (which is one of the chains) quite a lot. So presumably it's meant as a 'thank you, regular customer'. Or, if you're more cynical, it could be an attempt to at triggering a feeling of reciprocity.

The thing is, it actually made be feel a bit uncomfortable, especially the way it was described. I know the 'rules' of buying a coffee, and who is supposed to do what. But this experience subverted them. The person I buy the coffee from said that they were buying the coffee. So I ended up with a 'gift' rather than a 'purchase'. I don't know if my uneasiness was a sense of disenfranchisement (at least if I do the buying I am in charge), or just because the structure of the interaction was different to what I expected and the roles played unclear. In a way it doesn't reflect well on me, because it seems I would have rather the employee behind the counter had played the role of 'employee behind the counter' properly rather than attempting to behave like some sort of real person.

Nonetheless if it was meant to make me want to go back it definitely didn't work. I felt a bit like someone sitting in the front row of a comedy show realising that the comic on stage does audience interaction. And that, obviously, is one of the most terrifying experiences possible.

Saturday 19 March 2011

Bonus bashing gone bad

Simon Jenkins had a bit of a pop at the Will Hutton's review of public sector pay this week. The following bit stood out for me:
There is no shred of research showing that bonuses improve performance, nor do firms paying them customarily do better. The incentives thesis saw its nadir in 2002 when Bristol City Academy tried paying students to get higher GCSE and A-level passes. The scheme was abandoned when teachers found that students did not do any better, tending to do well because they liked doing well.
Much as I am critical of the use of bonuses I think this is a bit wide of the mark. There is evidence that performance-related pay can improve performance, for certain types of tasks. And in response to the 'paying for grades' claim as I've blogged before, much more recent work by Roland Fryer has found that actually paying kids for certain outputs can improve their knowledge, vocabulary etc.

(Actually the Fryer stuff is very interesting as he got better results from paying kids to turn up to class and read a set number of books than by actually paying for grades. He classes this as paying for inputs rather than outputs, and speculates that this effect may occurs because don't know how to deliver good grades (it's not a simple task), whereas they know how to turn up and read a book. In addition Fryer was trying to improve poor performance. So maybe we shouldn't expect to see motivation crowding because arguably there's no intrinsic motivation there currently.)

The most common critique financial rewards is that they don't work, or backfire, where people are already motivated (this what motivation crowding and overjustification theories claim). Financial incentives also don't seem to work where the task involved is not straightforward, algorithmic or easily measurable. They also may not work, or can have a negative effect, if the recipient perceives them as controlling. And even behaviourists say that you may need to keep tweaking the rewards/reinforcers for them to work properly. So there are plenty of grounds on which to challenge them.

However, if the job is dull, simple and easily measurable, and the employee/student is not motivated to do it well, then rewards/bonuses may indeed have a positive effect on performance, even if fleeting. How relevant that is is to FTSE100 directors, bankers etc is another question.

Wednesday 16 March 2011

SHARE proxy voting survey

Wow, amazing to see that the SHARE voting survey is 10 years old. I think that must mean the TUC one would be in its tenth edition next year. Anyway, interesting to note that again its an organisation with roots in the labour movement that got there first in terms of researching shareholder engagement.

Download it here.

Tuesday 15 March 2011

Employee reps on rem comms at Serco, Capita etc?

Surely that's a reasonable extrapolation from this recommendation in the Hutton Review?
organisations delivering public services should include an employee representative in the membership of their remuneration committees
The whole text on this is worth a read:
5.11 A powerful way to ensuring that the wider workforce context is considered when executive pay is being determined is through the presence of an employee representative on the remuneration committee. Participation is an important part of a fair process, as established in Chapter 1. The participation of this employee representative will give the wider workforce a direct voice in the executive pay-determination process, and will help ensure that decisions can be justified to all employees. The presence of an employee representative could also improve the quality of executive pay decisions, both by contributing information on the working of the organisation that is independent of its management, and by increasing the diversity of remuneration committee membership. Indeed, employees have an incentive to monitor executive pay and performance since they have so much staked on the success of the organisation – arguably even more than shareholders (as selling shares is typically easier than changing job).

5.12 Employee participation in remuneration committees would be an evolutionary step, and would be consistent with the Government’s wider vision of greater employee power in public services, including through the encouragement of mutualisation and the formation of staff co-operatives in public services. In many public service organisations employees already play a significant role in corporate governance: for example, NHS Foundation Trusts have staff governors on their boards of governors, many schools have teachers serving as Governors, and university governing bodies frequently include academic or non-academic staff members.

The wacky world of shareholder voting

A random snippet (PDF) from my adventures in voting data.

Alliance Trust - whoops we pressed the wrong button.

It voted in favour of an annual Say When on Pay vote at Monsanto's AGM this January. But a note to its disclosure states this was a "clerical error" and "the action should have been in line with management i.e. the 3 years."

Still, that's a decent outcome in my book! It was an easy win on the annual vote in that case anyway, and Alliance Trust's holding is piddly. But it does make you wonder how often votes get cast the wrong way like this.

Sunday 13 March 2011

If voting changed anything...

The exercise of voting rights by shareholders is a key power that the 'owners' of public companies have to influence the managers. The fund management lobby has successfully blocked mandatory transparency in relation to the exercise of these rights for as long as I've been arguing for it (eight years now I think). But the gradual trend towards voluntary disclosure of voting data means that there is more data for geeks like me to play around with.

At work a while back we did a major sweep of asset managers' disclosures to see how they voted at the UK-listed banks in the years up to and including the financial crisis. It's worth being absolutely clear here that if you go back even two or three years the level of public disclosure is pitiful. You swiftly get down to the three or four managers who have been disclosing for years (one of them subsequently stopped due to a reorganisation) so you can't look at a very big sample over an extended period. As such it simply is not possible to put together a full picture of 'ownership' activity pre-crisis. But once you get in 2008 and 2009 the level of disclosure increases and you can get a fair amount of data (still a small minority of all UK asset managers who held bank stocks though).

What we found when digging into the data was a block of about four or five asset managers who rarely opposed management across the period we looked at, with one apparently not voting against management on any resolution at any bank in any year. There was a bit of evidence that one or two managers outside this group took a tougher line once the storm hit, but that block of passivity really troubles me. It's not just the incredibly low level of opposition, but the fact that on the rare occasions when they did oppose or abstain it was on the same resolutions at the same companies. The suggests either a coincidence - quite possible I guess given the low number of votes involved - or some sort of co-ordination, intended or otherwise. By 'otherwise' I mean they could just be following an advisory service recommendation.

Being the saddo I am I keep looking for more voting data. And the more I look, and the bigger the sample gets, the more convinced I am of a number of facets of the 'ownership' of UK PLC as expressed through the exercise of voting rights. First, there are one or two pretty large asset managers that are just a dead weight in the market. They oppose management incredibly rarely (I think I have found one that did not vote against management on any resolutions at any FTSE100 company in 2010), and seem to have acted like this for years. Second, the average level of opposition from asset managers is very low, less than 5% (ie the 'average' asset manager supports 95% plus management resolutions). Third, there is a very small group of managers who are a bit more radical. Finally, given the 'co-ordination' point above, I'm coming to the view that some managers follow the same voting adviser's recommendations (it's either that or they are talking to each other and agreeing to take the same position, but I think the former explanation is more likely). I think this also explains some of the quirky votes we see sometimes (like a big wave of abstentions on one resolution).

For me, this blows away the argument that voting disclosure would lead to dumbed-down voting. There is some really dumb voting going on already - in some cases it looks like someone fell asleep with their finger on the 'vote for management' button. At the moment - because of the lack of transparency - this kind of behaviour is not widely understood. In fact I think very few people even in the corporate governance microcosm are really aware of how rarely many asset managers oppose management. As such it's always been my view that making voting data public would at least make people more aware of who does what. It might still be the case that clients (pension funds etc) don't mind that their managers support practically everything they vote on, because they think voting has little/no value. But at least it would allow such decisions to take place from an informed position. Because there will be surprises. (As an aside I would put money on it that someone somewhere has taken voting rights away from appointed asset managers and given them to a third party with the net result that they now vote with management more often than if they had simply left voting delegated.)

Looking ahead, the more voting data that becomes available the more people like me are going to be able to identify block-voting in the market where (I believe) asset managers are simply following a third-party's advice. Just to give you an example, I have been able to spot errors in my own records of voting data because Asset Manager X was not listed as voting the same way on a given resolution as Asset Manager Y and Asset Manager Z, whereas they had been in lock-step on other votes. Put it another way, you can get a very good idea of how X will have voted by looking at how Y and Z voted. Just to remind you this could affect decisions at our largest public companies on issues like board elections, acquisitions, capital raising and so on. I struggle to see this as the responsible use of ownership rights.

It's this kind of thing that makes me very sceptical of claims that voting isn't that important. This is for the very simple reason that a lot of asset managers don't seem to have given it a proper try, ever. But it also demonstrates how much needs to change if the Stewardship Code is going to make a real difference.

Wednesday 9 March 2011

A regulatory turn, Irish edition

Ireland, you may not have noticed, appears to be making something of a break with 'comply or explain'. The always useful Corporate Law and Governance points out that the Fine Gael-Labour programme for government includes the following commitment:
We will make good corporate governance the law, not an optional extra, and enact legislation to provide for binding code of practice for corporate governance, which will be obligatory for companies wishing to be listed on Irish stock exchange.
A bit of Googling around revealed that this was actually a proposal in Labour's election manifesto, which is interesting in itself. A bit of further Googling turned up this paper (PDF), which sets our Labour's response to the crisis, including what would be covered in a binding code.
Labour in government would enact legislation that would provide for a binding code of practice for corporate governance, which would be obligatory for companies wishing to be listed on the Irish stock exchange.

Labour’s proposed Corporate Governance (Code of Practice) Bill will:

 Provide for the drawing up of a binding code of practice for corporate governance

 End the practice of cross-directorships

 Limit the number of boards on which a non-executive director may sit

 Prohibit the positions of chairman and chief executive of a company being held by the same person

 Prohibit a former chief executive from being elected chairman

 Prohibit non-executive directors from serving on a board for more than seven consecutive years

 Require companies to establish independent auditing committees, comprised of members with relevant expertise

 Require the chairman and chief executive to assume direct responsibility for ensuring good corporate governance and transparency in corporate reporting

 Require non-executive directors to demonstrate the time and skills necessary to contribute effectively to the board

 Regulate the appointment of non- executive directors who are connected to the company’s bank or auditors
Regulating issues like board tenure, combined roles chief execs becoming chairs etc is, of course, a significant shift away from the UK model. It will be interesting to see how much of this actually makes it into law, I wouldn't bet against the whole lot.

More generally this is a big shift in corp gov policy by a sister party. In my opinion Labour in the UK should at least review whether 'comply or explain' is still doing the job here.

Monday 7 March 2011

Sunday 6 March 2011

HSBC negotiations

The splash in the Torygraph today about HSBC potentially relocating to Hong Kong is interesting for a couple of reasons. First, I suspect that there are several large dollops of spin involved here. I mean given HSBC's history and its desire to build up market share well away from the UK it wouldn't be surprising if it decided to relocate its headquarters in any case.

But given their position it's not surprising if they decide to exercise a bit of pressure anyway. The non-denial given to the BBC actually just adds to the uncertainty, which makes me more suspicious that HSBC is negotiating via the media. Nothing new as a tactic, but a reminder certainly that banks feel they are able to dictate terms again. Whilst the reaction of many members of the public will be 'let 'em go', you can bet Osborne got the message.

The second thing to note is the role of shareholders in both stories. In the Torygraph version they appear to have been caught on the hop, one says they were "very surprised" that leaving the UK was being seriously discussed. But in the Beeb version, which uses HSBC's own words, the implication is that shareholders have encouraged the bank down this path:
" light of possible regulatory changes and additional costs such as the bank levy, being increasingly asked by shareholders and investors about the likely additional cost of being headquartered in the UK."
Not great either way. Version one sees the owners of an economically and politically important business being told what to expect, rather than setting the agenda. What's more, their apparent capitulation to arguments put forward by the bank gives you a good indication of the gulf between the views of the 'shareholders' as they are commonly understood in the City (fund managers) and 'shareholders' in the sense of beneficial owners (us lot). Version two is even worse - shareholders are encouraging our banks to relocate to avoid the bonus tax etc - but I suspect it's not very accurate.

Tuesday 1 March 2011

Bonus scepticism

There's a lot more of it about.

Here, here and here.

Reduced service in operation

Blogging light to non-existent for the next week or two.