Tuesday 31 July 2012

Corporate charges for phone hacking?

An interesting piece appeared on The Guardian website tonight about possible charges against former News International directors under the Regulation of Investigatory Powers Act (RIPA). Section 79 of RIPA (below) specifically refers to the criminal liability of directors relating to crimes committed by the "body corporate". Section 79 got mentioned in a few news stories when the hacking scandal exploded last July, but there hasn't been a lot of focus on it since. Then the culpability of News International directors did briefly get an oblique reference in Sue Akers evidence right at the end of the Leveson Inquiry hearings.

I suppose the three people you might think most at risk, in descending order are Rebekah Brooks, Les Hinton and James Murdoch. Brooks is suspected of knowing about hacking, but I suppose there's a question as to whether it's worth hitting her with a corporate as well as individual charges. Les Hinton was CCed on the Goodman letter where he sprayed about the allegations about others' involvement in hacking (others who are now, it ought to be noted, being charged under RIPA). And Murdoch obviously signed off the Taylor settlement and then failed to notice any wrong when the Guardian splashed on it in 2009.

There's enough there to worry a few people. More generally, I suspect that a corporate conviction under RIPA might go down quite well with News International hacks who feel they have been thrown to the wolves to save the management (and one director in particular). It would also demonstrate that we are serious about corporate culpability. Worth keeping an eye on.

79 Criminal liability of directors etc.(1)Where an offence under any provision of this Act other than a provision of Part III is committed by a body corporate and is proved to have been committed with the consent or connivance of, or to be attributable to any neglect on the part of—
(a)a director, manager, secretary or other similar officer of the body corporate, or
(b)any person who was purporting to act in any such capacity,
he (as well as the body corporate) shall be guilty of that offence and liable to be proceeded against and punished accordingly.
(2)Where an offence under any provision of this Act other than a provision of Part III—
(a)is committed by a Scottish firm, and
(b)is proved to have been committed with the consent or connivance of, or to be attributable to any neglect on the part of, a partner of the firm,
he (as well as the firm) shall be guilty of that offence and liable to be proceeded against and punished accordingly.
(3)In this section “director”, in relation to a body corporate whose affairs are managed by its members, means a member of the body corporate.

Sunday 29 July 2012

Undead performance-related pay

The more I think about it, the more I think that a couple of recent developments in respect of performance-related reward for executives indicate a significant shift in opinion about motivational assumptions.

First up, if you read the Kay Review section dealing with pay it's pretty obvious that John Kay is a skeptic. He openly questions the value of paying bonuses, and draws attention to the way that performance-related reward might crowd out professional standards and/or attract the wrong kind of people. He seems to share the view that beyond a certain point, it really isn't about the money for many people. I don't mean that he thinks they don't care how much they are paid, but rather that tweaking reward systems isn't going to achieve a lot.

The Review's proposals - only pay extra reward in shares, and make executives hold them for a very long time - seem to me almost intended to do the opposite of the formal role of reward schemes. Kay is concerned about the potentially negative behavioural effects of short-term rewards, so he suggests we push the performance period right out. In other words, let's amend performance-related reward so that it has no immediate  effect.

You might think I'm overselling this, but at the Review launch last week, Kay was pretty strong on the way that we discount for the future. It really isn't much of a leap from this to the pay proposals.  If we defer the reward for 'performance' way into the future, it is unlikely to be valued much by the recipient and therefore won't exert much pull on executive behaviour.

In fact, if you accept my broader argument that performance-related pay is underpinned by a behaviourist psychological perspective then you ought to think that - from that viewpoint - pushing the reward way into the future is the wrong thing to do. Behaviourists argue that the reinforcer needs to be applied soon after the behaviour it is intended to reinforce. To state the obvious, if you only get your shares after you've left the company that isn't going to reinforce an action that you might have taken years earlier.

That's why I think that Kay's proposals may actually be a compromise designed to defuse the behavioural effects of performance-related reward within the existing system. I wonder whether Kay thinks such schemes are largely a waste of time, motivationally speaking, but has got the clear impression that there's not much appetite for scrapping existing practice. I have no direct evidence for this view, but otherwise the combination of the narrative about bonuses and the actual proposals on pay don't quite add up for me. And by the by, there's a great quote in Obliquity where he says carrots and sticks only work where you're employing donkeys and know exactly what you want your donkeys to do. I personally do not think that shareholder-focused remuneration systems can ever meet those requirements. I don't think John Kay does either.

In the same vein as Kay, Fidelity have come out with a proposal for "career shares" whereby directors would be required to hold at least some of their share-based rewards they receive until retirement.  Again, this must surely deaden any motivational effect of the awards. How can rewards of this nature have any greater motivational effect than providing a pension?

If, and it's still and if, we see executive reward develop in the way envisaged by Kay and others we will end up in a really odd place. We will continue to be providing performance-based pay, which has developed with the explicit aim of controlling/directing director behaviour, but it will be designed in a way that seeks to avoid any immediate behavioural effects. Performance-related reward will be in large part hollowed out - the schemes will still exist but without actually performing their supposed function.

In such an environment I think that "fairness" will start to become a bigger argument for performance-related reward (I've touched on this before). In fact Alfie Kohn made the point throughout Punished By Rewards that there is a moral argument buried in performance-based reward - if you do something well then you should get a reward, regardless of whether it motivates or reinforces. I suspect we're going to start seeing that line of argument supplant claims about motivation and/or alignment. But whilst companies and rec comms might use it as a way to defend performance-related incentives, arguing that executives deserve rewards might be quite a tough sell in an economy flat on its back with high unemployment.

Of course, all of this would be much easier to see, and easier to challenge if you disagree with it, if the motivational assumptions that sit behind various pay reform ideas were spelled out. But they very, very rarely are. As a result performance-related pay will likely continue to be widespread - and unthinkingly advocated - despite the fact that schemes aren't doing anything, in a motivational sense.

PS. Obviously I'm aware that some people attach an amazing "aligning" quality to the value of shares but it's not obvious to me why motivational effects should be any different to cash-based rewards.

Thursday 26 July 2012

TPA spin on unions

You may have noticed that the Taxpayers Alliance recently published its "name and shame" report on the pay of trade union general secretaries. What caught my eye was a piece in the Telegraph by the TPA's now chief executive Matthew Sinclair. It's a useful demonstration of their approach. For example:
In their latest returns to the Certification Officer, 36 trade unions have reported that they gave their general secretaries or chief executives pay and benefits of more than £100,000. That compares pretty well with the private sector. According to the Institute of Directors, the average basic pay of a managing director in a small company (turnover up to £5 million a year) was £70,000. At a medium-sized company (turnover up to £50 million a year) it was £100,000. And even in a large company (with a turnover up to £500 million a year) it was £128,000.
Let's initially just focus on the stats he quotes. There's a nice piece of sleight of hand in there. Many union leaders have "pay and benefits of more than £100,000" and this compares well to the private sector. Ok, so in order to compare presumably we'll look at pay and benefits in the private sector? Er... no. The comparison is actually with average basic pay. Guess what, if you and I are paid the same, and you compare my pay and benefits with your pay I will have a bigger figure. Matthew does compare one union leader's salary with the IoD figure, but further down in the article he only gives the total figures for three other union leaders. They clearly aren't the same type of figure as the IoD one. I suspect most readers won't notice the changes in figure used in the article, and will simply compare the two.

You might also question how valid the comparison is in any case. The TPA have looked at 36 union leaders, but there are more than 36 TUs. I assume all they have done is pull out the examples of those whose pay+benefits are over £100k - ie they've left out union leaders who don't fit the picture. They then compare those cases they seem to have selected on size with the IoD average figures. Comparing selected specific cases with averages, what could go wrong? Guess what - I could pick out some highly-paid IoD members who earn more than the average IoD member.

Finally, is the TPA even comparing like with like in terms of roles? The GS of a trade union is surely the equivalent of a chief executive or managing director of a business. If you're looking at an average of all directors, surely you need to compare with a comparable figure for unions - ie include at the least all DGS and AGS positions. If you can't do that then surely the TPA should compare union GS salaries with MD/chief executive salaries, not the stat for all directors.  

UPDATE: Matthew replies on Twitter that he is using average fig for managing director, so I was wrong about the last point. Not going to delete it as a) I should have spotted it (it's in the text) and b) I put up the incorrect claim so I should be accountable for it.

Monday 23 July 2012

The Kay Review

It's got some great stuff in there. You can download the final report here.

Being a saddo, I find the most intersting stuff is about the nature of ideas that underpin existing market practice. I don't have time to do a proper overview so thought I'd bung up a few snippets I like.

Like this:
Regulatory philosophy influenced by the efficient market hypothesis has placed undue reliance on information disclosure as a response to divergences in knowledge and incentives across the equity investment chain.
 And this:
Anthropomorphisation of ‘the market’ in phrases such as ‘markets think’, or ‘the view of the market’ is common usage. It should hardly need saying that the market does not think, and that what is described as the view of ‘the market’ is simply some average of the views of market participants. ‘The market’ knows nothing except what market participants know
 And this:
measures to make the market more ‘efficient’, in the technical sense implied by the efficient market hypothesis, may have the effect of making the market less efficient in the broader and more important sense of achieving better resource allocation through better corporate decisions.

And the best line in the Review:
we see the sell-side analyst as a dispensable link in the chain of intermediation

A blast from the past

Paul Myners, October 2009:

I question the absence of an organisation in the UK that speaks solely on behalf of institutional investors without a commercial interest, as opposed to a tangential activity of trade associations.
The most appropriate arena for this to take place would surely be an industry-wide institute operating with close ties to the academic institutions also engaging in the debate. I have in mind something similar to the Council of Institutional Investors. But no such organisation exists in the UK.
Such a body would focus exclusively on promoting understanding and best practices in stewardship and good governance, unfettered by any other loyalties or priorities.
To date the only significant effort to address this challenge was the creation of the Institutional Shareholders Committee Forum.
This is composed of various constituent member bodies including the ABI, AIC, IMA and NAPF.
The terms of reference for the ISC are to provide a conduit through which members can share views and, where appropriate, co-ordinate activities on any matter likely to affect the interests of investing institutions in their role as investors.
However, in practical terms the ISC has struggled to deliver tangible results.
This should not come as a surprise.
The forum is a coordinating mechanism for trade bodies who themselves operate primarily to promote the interests of their own industries – there is no one organisation in the UK that speaks solely and exclusively on behalf of institutional investors without commercial benefit as an overriding goal. This, in my view, is a deficiency.
To compound this disconnect, the ISC is a loose collection of trade associations rather than member firms, and as such is two degrees removed from the operational nexus of the industry.
The committee has rarely met and has not evolved. It is controlled by industry trade bodies; it has no budget or permanent secretariat.
Trade bodies clearly and correctly operate primarily in the interests of their own fee-paying members. This may or may not accord with the interests of end investors but it is a fact of life that parties selling services to others for gain are not necessarily always going to have entirely shared interests with their clients.

Friday 20 July 2012

Fidelity update

It's been a while since I've blogged about the Fidelity-Tories interface, so here's a quick round-up of cash donations etc since May 2010.

Direct cash donations from Fidelity to the Tories (you need to search for 'FIL' as the donor name on the Electotal Commission register) declared since the election stand at £150k. This compares with £300k donated in the year up to the election. Fidelity also donated £50k to the No campaign in the AV referendum last year, though obviously that was not a Tory-only campaign.

Fidelity also continues to employ Sir John Stanley as a consultant at £1,800 a pop. He's declared 23 days consulting with them since the election, totalling £41,400. In comparison, median annual full-time earnings are now abour £26k. According to the register of members' interests, the payments are for "attending meetings as necessary and advising on business opportunities and risks". To put in context, Sir John is MP for Tonbridge and Malling, and Fidelity's HQ is (still, I think) Tonbridge. So you may not think it's unreasonable that he works with a large local employer.

Finally, Fidelity has also sponsored a meeting of the Conservative business liaison group the Enterprise Forum:

Thursday 12 May 2011
Pension Reform
Breakfast Briefing
Steve Webb MP - Minister of State for Pensions
Kindly sponsored by Fidelity International

Again, to be fair all kinds of organisations get involved in this kind of activity, though I wonder if Fidelity also supports similar Labour events? 

Thursday 19 July 2012

Voting disclosure bits and bobs

I've had a bit of interest in my recent blog on voting disclosure stats, so thought I'd follow up with a bit more detail.

We looked at all the asset manager signatories of the Stewardship Code, which was 175 at the time. On the best reading at that point, we classed 50 (29%) as disclosing. However of that 50 only 27 (15% of all Code signatories) disclosed a full record, ther rest either report only oppose votes and abstentions or just stats. I could run through the argument why disclosing only votes against or abstentions isn't good enough, but it's easier to just point to an example of an output under such as system. 

Also under the voluntary regime you get a major timelag in disclosures. Two of the biggest asset managers don't have any voting data on their websites later than Q2 2011, a third is at Q3 2011. This means that right now can only do a partial analysis of of voting in 2011 even based only on the minority that do disclose.

There are errors a plenty in disclosures too. One very large asset manager's disclosure for Q1 2012 only has the first page up (of 150+ that were supposed to be uploaded). Another manager reports that it voted both for and against the G4S attempted acquisition of ISS. Another manager has its voting decision on one key AGM missing. I've also seen a manager post up the same quarter's data twice  (ie its Q2 disclosure was actually its Q1 disclosure repeated) and it was for Q2 in the UK which is the most important bit!

It's fair to say that the industry has been fairly resistant to the idea of mandatory disclosure, and has put quite a bit of lobbying effort in the past to frustrating it. Some people may remember that when the Companies Bill was debated in the Lords the Tories and the Lib Dems combined to vote out the clause relating to the reserve power. I vaguely recall an IMA lobbying brief being read out pretty much verbatim by one Tory (can't remember if it was in the Lords or Commons). I suspect the politics of this issue have shifted somewhat now though.

Meanwhile the band of proponents of reform has gradually grown, and the principle of public disclosure (if not the need for mandatory disclosure) has basically been won. I think to be historically accurate The Co-op Asset Management set the ball rolling by starting to disclose in 2002. We started campaigning on it as an issue at the TUC around the same time. (Interestingly, the main reason we got stuck in at the TUC was because the industry was very unco-operative in response to the first fund manager voting survey. If they had played ball it might not have become a campaign.) More recently Fair Pensions has pushed the disclosure issue hard.

So, after ten years, we've got patchy voluntary disclosure. I hope we don't have to wait another ten years to finish the job properly.

Friday 13 July 2012

What about the workers?

Thanks to a couple of people out there in the real world who sent me a link to this ace-a-tronic HBR article on the flaws in shareholder capitalism. A lot of it rings very true with me, especially the way that agency theory has warped thinking in corporate governance (and obviously I would extend this to the failure to think through performance-related pay). At the very end of the article the authors get around to setting out why and how things could be different:
Paying too much attention to what shareholders say they want may actually make things worse for them. There’s a growing body of evidence (for example, Rosabeth Moss Kanter’s “How Great Companies Think Differently,” HBR November 2011) that the companies that are most successful at maximizing shareholder value over time are those that aim toward goals other than maximizing shareholder value. Employees and customers often know more about and have more of a long-term commitment to a company than shareholders do. Tradition, ethics, and professional standards often do more to constrain behavior than incentives do. The argument here isn’t that managers and boards always know best. It’s simply that widely dispersed short-term shareholders are unlikely to know better—and a governance system that relies on them to keep corporations on the straight and narrow is doomed to fail.

Given how many unintended and unwelcome consequences have flowed from the governance and executive pay reforms of the past few decades, we’re wary of recommending big new reforms. But we do think that giving a favored role to long-term shareholders, and in the process fostering closer, more constructive relationships between shareholders, managers, and boards, should be a priority. So should finding roles for other actors in the corporate drama—boards, customers, employees, lenders, regulators, nonprofit groups—that enable those actors to take on some of the burden of providing money, information, and especially discipline. This is stakeholder capitalism—not as some sort of do-good imperative but as recognition that today’s shareholders aren’t quite up to making shareholder capitalism work.
This is pretty close to my view of the world. Shareholders will always play a significant role in the governance of companies, but we should be aware of the limitations of shareholder oversight. It may work best where the shareholder has a big stake and limited overall portfolio, and so can do the monitoring job properly. And it may be restricted to a relatively small set of issues where all shareholders (not just the handful of more enlightened corp gov/RI investors) are on the same page. That, evidently, will only be a small minority of remuneration policies as an example.

There's a bit of a danger that calling for more 'shareholder engagement' is seen as a way to look like problematic issues at PLCs are being tackled, without actually doing much. Certainly some people felt that back in 2002 the Government was given shareholders a vote on executive pay to avoid having to get stuck in directly (despite all our noise in opposition about Cedric the Pig etc).

I suspect that we're going to start seeing more commentary in the vein of the HBR piece. Just as one example, I can remember Robert Peston writing a piece (when a print journo) about how shareholders had it in their power to tackle governance abuses. Reading his commentary on the (bleurgh!) 'shareholder spring' suggests that he's rather changed his mind about shareholders being either willing or able to do so.

I've written (a lot I know) about how I think regulators will come to be a bigger voice in governance, and this is clearly happening in the financal sector already. But I would like to believe that there could also be a renewed focus on employee involvement in the governance of companies. People in the UK corporate governance world typically hate this idea, but then they hated the idea of annual director elections and binding votes on executive pay and they happened anyway.

There are some signs of movement. A piece in the FT this week suggests the new Socialist Government will move on employee representation on boards and rem comms as part of its efforts to tackle executive pay. I also note that incoming TUC GS Frances O'Grady has already flagged up employees on rem comms as a reform the labour movement is interested in. And, of course, Labour has committed to implement the High Pay Centre's proposals, which include employee representation on rem comms. Just by nature of the fact that people are discussing the idea means that it's become a bit more conceivable that such a reform might be enacted. It's no longer quite so shocking.

I am, against my better judgment, starting to get my hopes up.

Thursday 12 July 2012

That regulatory turn

I know I've bleated on about this at length before, but it's pretty obvious now that in the financial sector regulators are going to play an important role in corporate governance. For all the moaning about regulatory interference from the EU, it's happening on our doorstep.

One or two of you may have noticed that there's been a change of personnel at the top of Barclays, with the Diamond geezer getting the heave-ho. What is also clear is that his exit was strongly encouraged by the Bank of England (with Lord Turner's support it seems). This was despite the fact that 'shareholders' had told Marcus Agius that Diamond should stay.

Barclays is now on the hunt for both a chief exec and a chair. I think it's fair to say there's a bit of a split opinion amongst shareholders on the latter, with a fair bit of support for Mike Rake to step up (though again some anonymous 'shareholders' have told the FT they want an external appointment). But it may simply not be up to them. As The Grauniad points out today, the FSA will have a say in both appointments:   
As the events of the past fortnight have shown, the FSA has the final say, not the shareholders. It makes finding a chairman and chief executive... even tougher.
Apparently corporate governance is OK to leave to shareholders, until something really serious is at stake.

Monday 9 July 2012

Fighting without facts

I think when we finally, finally get to the bottom of the Barclays Libor stuff, it may look rather different. Just a quick reminder, last week there was a version of events that suggested that whilst Barclays had sought to massage its submissions this was in part because the Government encouraged it to. The evidence for this was that a) Paul Tucker had talked to Bob Diamond about Libor b) Diamond referred to "senior figure in Whitehall" in his phone note and c) Shriti Vadera having shown enoigh interest in the Libor rate to commission a paper on it. Add to this the fact that we now know what Barclays did, it becomes obvious doesn't it? The Government was "closely involved", or whatever Osborne said.

The thing is, there are some gaps in the theory. For one, being concerned about Libor, and how Barclays appeared, is not the same as telling Barclays to fiddle its figures. Secondly "senior figures in Whitehall" sounds more like officials than ministers, who, presumably, are "senior figures in Westminister". Perhaps Bob didn't get the distinction (and he wasn't clear on this point in front of the selecrt committee). We don't really  know. More broadly, it appears that "Whitehall" concern with Barclays and Libor could have stemmed from a concern that the bank might need taxpayer support to survive, rather than any desire to fiddle the figures. In sum, it's possible that the version of events that was being spun last week is quite a long way from the truth.

Weirdly, despite the lack of clarity over what actually went on there's already quite a bit of commentary about the Osborne/Balls fight and what it means. To be clear, even Osborne now admits that Balls was not involved in whatever it is that might have happened (although it might not have happened). A political narrative is being created out of events which we aren't even sure of. Commentators are giving advice on the scrap, without looking back to what is being fought over.

Sunday 8 July 2012

Why Bob Diamond had to go

"The real world of human interactions is simply too messy and ambiguous a place ever to be governed by any predefined set of rules and regulations; thus the business of getting on with life is something that is best left to individuals exercising their common sense about what is reasonable and acceptable in a given situation... But occasionally an infraction is striking or serious enough that rules have to be invoked, and the offender dealt with officially. Looked at on a case-by-case basis, the invocation of the rules can seem arbitrary and even unfair... and the person who suffers the consequences can legitimately wonder "why me?" Yet the rules nevertheless serve a larger, social purpose of providing a rough global constraint on acceptable behaviour. For a society to function it isn't necessary that every case gets dealt with consistently, as nice as that would be. It is enough simply to discourage certain kinds of antisocial behaviour with the threat of punishment."

Duncan Watts in Everything is Obvious.    

One of the things I've found most surprising about the Barclays/Libor news, is the way that a (smallish) number of people have reacted to Bob Diamond's departure. It's been charaterised as a victory for "the mob", unjustified by what has actually happened.

In defence on this position it seems unlikely that Diamond himself was personally involved in any activity that was illegal. It's also a bit of a stretch to say that he was responsible for creating the culture that led to activity concerned (for what it's worth I think the cultural problem is an industry one, and you can bet it isn't just a dozen dodgy traders, as Diamond suggested). What's more perhaps Barclays has been unfairly damaged by airing its dirty laundry first.

And yet, I am completely unconvinced that Diamond going was anything other than the right outcome, and it might do a bit of good. One of the most unpleasant aspects of recent corporate and political scandals has been the unwillingness of those at the top to take responsibility. I don't just mean the evasive language that is ever present these days - "I am sorry that others did wrong", "Mistakes were made (but not by me)" etc. Rather it's those cases - Jeremy Hunt and James Murdoch spring to mind - where the individual at the centre of events refuses to quit, even though they are damaging the reputation of the organisation they run.

The power of business within politics has increased significantly in the last few decades, and many businesses now play a very political role. Yet the impression you get is that business leaders are less accountable than when they had less political influence. I think this is in large the nature of large businesses as organisations - there is no form of democratic accountability, we have only the weak accountability to shareholders in PLCs. Despite having attained political power, business leaders give the impression that they aren't and don't need to be accountable to anyone, and that forms of accountability that exist in other parts of society serve only to frustrate efficiency if applied to business. As a result business leaders can typically shrug off calls to quit that can be very damaging in the political sphere.

I think this is increasingly problematic for the public legitimacy of business, especially now that businesses are seen as politically influential, but it's potentially explosive for the banks. As recent polling shows, bankers now rank below politicians and tabloid journalists in terms of public standing. The mental thumbnail sketch most people probably have of the banks and the crisis is that they were either stupid or corrupt in the run-up, then took our money to survive, and now want to carry on as if they had just been through a couple of slightly rocky years, but without fundamental change. Therefore I personally think the actions and attitudes of the banks (and Bob Diamond's "the time for apologies needs to be over" was typical) have been dangerous.

It seems likely that Diamond was actually taken out by Mervyn King, perhaps with Lord Turner's support, rather than falling on his sword. But in a sense it does not matter, the symbolism does. The public - and the industry - need to see that even those at the top of the industry are indeed accountable. It might not be a flawless process - but then what is? The important, and over-riding point is surely pour encourager les autres.    

Wednesday 4 July 2012

Battle stats

If you're at all interested in the politics, as well as the policy, of governance then it rapidly becomes clear that ability to develop and articulate a good argument is usually preferred to evidence. As I've posted previously, there's a lot of 'common sense' about corporate governance reform that is invoked, usually against further changes, but a lot of the time actual evidence to support arguments is missing.

I'll be quite open about the fact that I'm as guilty as anyone on this front, and spend quite a bit of time thinking about the best way to argue a position (or position an argument!) rather than looking for the evidence whether that position is a valid one or not. In fact, if you've read Jonathan Haidt's The Righteous Mind you'll know that there's a strong case for saying that evolution has led our minds to be better at defending positions we want to take, rather than the cool, detached we think we use to get us to particular positions in the first place.

In this battle, stats become important weapons to be deployed in order to advance, or prevent reform.

For example, here's Baroness Wilcox in the Lords recently: 
We welcome the close engagement of institutional shareholders and their willingness to use their voting powers. We want this to be sustained and shall continue to monitor disclosure levels. Evidence suggests that more institutional investors are disclosing their voting records and that up to three-quarters of those investors are now disclosing their votes. We will consider further action if the number of investors volunteering to disclose their voting records does not continue to increase.

Vince Cable took the same line in the Commons and it sounds good doesn't it? With three quarters of institutional invetsors disclosing their votes there is no need for Government to blunder in and upset a welcome, voluntary trend to disclosure.

There's only one problem.The stat quoted does not reflect the true position. I know because one of the few issues where I have repeatedly gone at looked at the actual evidence is disclosure of shareholder voting records. Based on my own research I think there are approximately 50 asset managers that disclose some level of voting data, and there are, by comparison, over 170 asset manager signatories of the Stewardship Code. So at best I would say a third - of asset managers - disclose some data.

But actually that oversells the position. Because of those 50 odd disclosers only about half disclose a full record. Some only report oppose votes and abstentions (I won't repeat why this isn't enough here) and some only put headline stats up, which are basically useless. The number of asset managers disclosing a full record is less than 30. And this is after a decade of pressure for transparency.

Some will counter that most of the big managers disclose. True, but they don't all disclose a full record, and they don't all disclose in a timely fashion. Off the top of my head I can think of two very well-known asset managers for whom we still don't have votes on James Murdoch's re-election as chair of BSkyB in November. In one case the most recent data available is from last summer.

The reality is that the stat - quoted by the Government as evidence of why they don't need to make voting disclosure mandatory - is based on investment industry research. This, not surprisingly, is looking for the best possible result so will prefer to quote the number of managers who disclose anything, rather than those who disclose a full record. It is also drawn from respondents to a survey, rather than looking at all asset managers.

I don't mind the industry trying to put a gloss on disclosure levels to try and prevent mandatory disclosure - proponents of reform can generate their own stats to push the argument in the other direction. But let's be clear both that this is not untainted  'evidence' and that it is being deployed to defend a predetermined position (essentially the same as the industry's) that intervention is not required.

Sunday 1 July 2012

Performance pay theory

A couple of snippets from a book from 2000 called Rewarding Excellence that includes a focus on performance pay. I don't agree with quite a bit of it, and am posting simply to set out a mainstream textbook view.

"[I]ndividuals can be motivated both by organisationally given rewards and intrinsic rewards they give themselves. [There is not] a cancellation or interference effect between the two kinds of rewards. Rather...the greatest amount of motivation is present when individuals are doing tasks that are intrinsically rewarding to them when they perform them well and that provide important financial and recognition awards for performance."
"[I]f goal difficulty gets too high, individuals may see a low probability of achieving the goal. This in turn will destroy the connection between their effort and the receipt of a reward. This doesn't necessarily mean that individuals will never try to achieve hard goals. It does suggest, however, that if they are going to be achieve hard goals, two conditions need to exist. First, the connection between achieving the goal and the reward needs to be clear. Second, the amount of reward, either intrinsic or extrinsic, that is associated with goal accomplishment needs to be large. When there is a low probability of achieving a goal, or the rewards are small, it is almost certain that individuals will not put forth effort to try to achieve the goal."
"To summarise, motivation is a function of reward importance and the degree to which rewards are tied to a particular kind of performance or behaviour. The implication of this is that organisations can motivate individuals to perform in particular ways if they develop a line of sight between important rewards and performing in that way."