Wednesday 29 August 2012

Barclays pay vote updated

Fidelity and Henderson opposed too.

FOR - Goldman Sachs, Standard Life
OPPOSE - Aberdeen, AXA, F&C, Fidelity, Henderson, Investec, JP Morgan, Jupiter, Kames, Legal & General, M&G, Royal London, Scottish Widows

I think that's about all the voting data there is out there for now. Obvious big one missing is BlackRock, which has no 2012 data available yet. But if you look at the list above it's pretty clear that mainstream UK institutions largely voted against. So maybe US & other overseas investors swung this. Given that ISS recommended in favour it seems likely that there were quite a few US votes in favour.

Monday 27 August 2012

Decline of the ownertariat

The whole time I've been interested in share-ownership there have been competing views about what we are actually faced with and what can be achieved. Depending on how seriously you take the word 'ownership' in respect of shares, or rather depending on what you think you own, your view can be quite different. Obviously I'm most interested in how the Left, and the labour movement, can respond and even within that subset of the responsible investment world there seem to be two different conceptions. These are greatly simplified below -  

A more defensive/tactical approach - there is influence in the shareholder-company relationship that can affect working people one way or another. If we get organised we can counter some of the negatives, and even utilise that power in support of other objectives.

A more optimistic/strategic approach - ownership of companies via shareholdings is important and can be democratised. Through systemic change we can reconfigure financial markets to take account of ESG issues in a socially and financially beneficial way.

I suspect that many people shift from what I've called a tactical approach to a strategic one over time. For example, you might start off thinking about some specific employers, and how you can work on the company-shareholder relationship to influence them. From there you start thinking about whether we can broaden out the way that 'ownership' works, and how to ensure that all such relationships take account of employment issues.

Personally, though, I've gone in the other direction. I have shifted from quite an expansive view to a more limited one, and this tends to inform how I see ideas and activity within this field. I find it difficult to see much share-ownership as being ownership in a real sense, and I struggle to see how this will change in a way that can be channeled in a progressive (barf) direction.

For example, it's notable that one idea currently doing the rounds is that of more concentrated portfolios with bigger stakes. The arguments for this seem to be a) that diversification only reduces risk up to a point (a few dozen stocks I think?), after which it tails off b) oversight declines with larger portfolios (obviously) and c) a smaller number of larger stakes increases the financial self-interest in picking the right companies and ensuring they do well.

This is all sounds alright doesn't it? It does, of course, rather undercut the Universal Owner theory that has been very influential over recent years. This claims that since really big investors own everything they can't escape externalities, so they need to be concerned about all companies. But if we going down the route of concentrated 'ownership' portfolios this is no longer the case, right?  

It also looks like a case of Back to the Future. When I first got into this stuff (as a journo, a million years ago) taking large active positions was the reason that bog-standard (ie non activist) asset managers would give for not focusing on corp gov. We know the company really well, if we had concerns about the board we wouldn't invest etc etc etc.

And, more generally, doesn't this model also look a lot like mainstream activist funds? Particularly if part of your big strategic aim is to argue all this stuff from a business case perspective, I don't see what is new? From a strategic perspective of trying to get the market to work better this might make sense, but it might make the life of those taking a tactical approach more difficult. Odey Asset Management has a big, long-term slug in BSkyB - how useful were they in trying to get the board to take the hacking stuff seriously?

Finally, these days I am also less comfortable with suggesting that pension funds and other savings represent a way for the public to 'own' companies. Leaving aside the point about whether shareholding = ownership, it's important to recognise that a) many working people have never been in pension schemes and b) of those that are many are in unfunded ones - NHS, Teachers, Army etc. In the private sector DB schemes with trustees (many of them union members) are in long-term decline. The DC schemes that are replacing them have the opposite effect to that of DB ones on shareholding - atomising rather than aggregating it. In addition most are contract-based rather than trust-based, so member oversight, weak as it often is in DB schemes, is non-existent in DC schemes.

In light of all that, I think that - at least for the time being - Lefties who are interested in this stuff are better advised to focus on the tactical rather than the strategic. When all the stars are in alignment, shareholder-focused activity can be very effective, however equally there are times when you can achieve little. It's not obvious to me that redesigning the pension system, corporate governance, company reporting etc to make shareholder challenge more effective is a good use of limited resources. This is particularly the case if a) 'shareholders' are NOT analogous with working people as a whole and b) as a result we can't rely on shareholders to do the right thing.  

Tuesday 21 August 2012

Votes on remuneration reports this year

Some very quick observations, based on having compared changes in voting results at specific companies.

Average oppose vote is definitely up by a fair bit, but the average abstention % is slightly down. It's a small shift but may confirm a) what I've heard from people that some managers have reduced/stopped abstaining and b) what I've seen when looking at voting records of UK institutions comparing 2010 and 2011.

Most of the big defeats do not seem to reflect long running concerns, in the sense that in the previous year the level of opposition was low. The exception is WPP, where there was a big vote against last year. Still the increase in opposition to tip it to a defeat this year was pretty big, but not in the same league as the others.

Flipping it around, two of the defeated companies last year saw big drops in opposition this year. One of last year's losers saw the biggest drop in opposition in the group of cos I looked at.

More performance pay/motivation stuff

Hat-tip to Ciaran for this one, right up my street
Modern remuneration systems for executive directors include substantial elements of performance based pay. The idea behind this is that by rewarding executives for performance their interests become aligned with those of the company’s shareholders, thus bridging the principal-agent gap. Executive remuneration through performance based pay has become an explicit corporate governance tool that is supposed to improve the governance of companies. Others have argued that the governance and design of performance based pay system is often poor, as result of which the principal-agent problem actually increases. This paper argues that even if we can improve the governance and design of executive performance based pay, it cannot be made to work because people behave differently than performance based pay assumes. Research revealing our bounded rationality, bounded awareness and bounded ethicality shows that we simply cannot handle executive performance based pay. Regulation will not solve the problem, what is needed is a paradigm change, a refocusing of attention by shareholders, non-executive and executive directors. Such a paradigm change requires a deconstruction of the current myths surrounding performance based pay and the creation of new remuneration narratives. 

And another interesting paper from John Hendry (who has done some great stuff previously on investor and executive conceptions of shareholders as 'owners')
Informed by agency theory, the dominant theory and practice of CEO pay both exclude non-monetary incentives and treat money itself as pure exchange value. Drawing on the economics of non-monetary incentives and the sociology of money, we use qualitative evidence from UK FTSE100 CEOs, to challenge and supplement this perspective. We conclude that for these CEOs even incentive pay acts more as security than as incentive and that the monetary (exchange) value of pay matter less than its symbolic values and significantly less than peer group recognition and respect, personal achievement, job satisfaction, and the challenge of beating corporate competitors.

Wednesday 15 August 2012

Barclays pay vote round-up

Being the sad man that I am, I've been collecting asset manager voting decisions on Barclays' remuneration report at this year's AGM.

Here are the scores on the doors so far -

FOR - Goldman Sachs, Standard Life
OPPOSE - Aberdeen, AXA, F&C, Investec, JP Morgan, Jupiter, Kames, Legal & General, M&G, Royal London, Scottish Widows

Will update when I get more data. Interesting thing to note is that some hefty UK institutions voted against. So where did all those votes in favour come from?

Wednesday 8 August 2012

Quick point on levelling down

Just a quick point on pensions policy. I've been following the debate on greater compulsion to save for retirement for about 15 years (!). During this time the claim has been repeatedly made by various organisations that complusion, or latterly auto-enrolment, will lead to levelling down.

Typically by this critics mean that while more individuals may save, the average amount of saving may go down (for example, as firms cut back pension contributions to match the minimum required). A further point that has been made is that whilst auto-enrolment may boost pension saving, this could simply represent displacement of other saving. So the overall savings rate might be unaffected.

Well, now we get the chance to test the these predictions (which, needless to say, look a bit like 'Hirschman specials'). My own view, having read a bit about the Aus experience, is that we may well see a bit of shifting of savings (towards pensions, away from others) but we'll also see a net gain. If we don't see an overall increase in saving the critics will have had a very important point proven. But equally if we do then I hope journos who ran 'auto-enrolment will result in levelling down' headlines will go back to those making the claims to get their explanation.

Thursday 2 August 2012

Help me with my maths

Given that in the investment community people only really take an idea seriously if it has some maths to back it up, it must be possible to produce a model showing why proposed 'innovations' in incentive scheme design are likely to deaden motivational effects. As is obvious, I don't think this outcome is a bad one in the short-term, because it hollows out performance-related pay generally. But it would be very valuable to be able to show what the actual effects are.

What I mean by this is as follows. If we are pushing the measurement period for performance awards out, and thus delay the awards being made, then this will mean that recipients discount the value of them (the PwC paper is good on this). If we require executives to hold shares awarded at least for their duration of their period at the company making the award, surely there will be a similar discounting effect. And if we are going to also say that clawback will apply to performance awards too this means that even if awards are made, and sitting there for a number of years before the recipient can cash them in, they are not actually a "sure thing". Again, this must make them discount the value of the award? In combination this could be pretty significant (again, PwC put some numbers on discounting, and they are pretty big).

It must be possible for someone to set out a relatively simple equation explaining all this? I am amazed that people seem to be unthinkingly accepting the proposition that long-term awards combined with longer holding periods 'solve' the incentive problem and create 'alignment'. As spelled out in a previous post, I think what the combination will actually do is nullify behavioural/motivational effects (which is fine, but then why make the awards in the first place). But it would be very useful to set this out in a more formal way.

Any ideas?

Wednesday 1 August 2012

Andy Haldane on corporate corporate governance

Will Davies has a great interview with Andy Haldane up on Open Democracy. Go and read it. Here's a chunk on corp gov.

AH: Any institution – it could be a bank, it could be a building society, it could be a non-financial corporate, it could be the Bank of England, any decision-making body – is likely to benefit from a greater plurality of thinking around the table. It could be from different experience or from a different intellectual toolkit. I think the experimental evidence on that is very strong. But this plurality does come at a cost. And the cost is that it may on average lead to slightly slower, slightly ‘inefficient’ decision-making. Because it then has to be slightly more consensual and the scope for decisive action is slightly diminished. But that is more than offset by the benefits of not making catastrophic errors. What you lose on the swings you more than make up for on the roundabouts, when you avoid catastrophic errors, which are much more likely in non-plural governance settings. So I think the case in favour of plurality is very strong. 
My second point, which is slightly more specific to finance, is that we have seen a particular form of singular, non-plural decision-making emerge. In UK Company law, the primary responsibility of management is to shareholders. And we’ve also seen managers of those firms being remunerated in a form which aligns their interests with those of the shareholders through payment in equity or equity-like instruments.
Within banking and finance, this has led to a corporate governance structure in which those owning maybe 5% of the balance sheet – i.e. the shareholders – have the primary, some would say the exclusive, power in controlling the fortunes of the firm. There is no say from the debt-holders or depositors or workers or any sense of the wider public good which we know to be important in banking and finance. We also know that those firms are working on time horizons which in some cases are really quite short. So to think that this will necessarily lead to the best outcome, even for the longer-term value of the firm, is questionable given the governance model. 
The piece I did last year was to try and understand how it was that banks ended up with the corporate governance structure I’ve described. What was it? At each stage it was a sensible reason. But it led to a corporate governance structure that looks pretty peculiar, given where we started off 150 years ago. So what I mentioned about structures and incentives – an important thing about that is who runs the firm and how they run the firm. I think corporate governance in the way I’ve defined it is super important - more important than regulation in getting us into a better place.