Saturday 28 August 2021

All or nothing

Something I've been thinking about lately is the tendency to try and force issues or ideas into either/or boxes. I don't why I'm more aware of it lately, but I seem to see it everywhere. Most often it appears in assessments of events - either This Will Happen or This Will Not Happen - which I suppose is an argument in favour of Philip Tetlock's work. But I'm thinking (in this initial bit of burbling) a bit broader.

For example, in discussions about the labour market it's very easy to start talking about it as if it's One Big Thing. For example, currently there is a discussion about labour shortages, which seem to be starting to lead to higher wages in some sectors and increased bargaining power for workers. But at the same time office workers are being told that a shift to remote working is likely to result in a globally expanded total labour force (leave aside the fact that this was always there), so they should hunker down and count their blessings. Needless to say these are very different positions to be in.

Similarly I had a good Twitter exchange recently with the always interesting Duncan Lamont from Schroders about employer incentives to treat workers well. He said, rightly, that there's loads of evidence that this results in better performance, reduced turnover etc. I both know this to be true and found it a bit jarring somehow and I realised that this is because isn't what I see when I look at companies, or at least some companies. 

One retailer I dealt with at work recently basically shrugged their shoulders about high workforce turnover saying it was never likely to change. So even though it is true that there are incentives for employers to treat workers well, these vary in significance. Sectors look different - even employers in the same sector look different. Some employers think they do need to invest in reducing turnover (or training or whatever) others think 'meh'. It's not either or.

That leads into the question of ESG. Duncan also flagged the issue of Tesla, and significantly divergent scores from ESG rating firms. Is it a good stock on ESG grounds or isn't it? There isn't an answer. Last spring Elon Musk argued that Covid was overblown and would be done by April. So convinced was he that it wasn't a real risk that he publicly bullied harassed regulators about health and safety restrictions that resulted in Tesla sites being shuttered and threatened to open them illegally. He's previously been sanctioned by the SEC for some seriously stupid behaviour on Twitter. And I know a bit about Tesla's bad history with unions. Yet, obviously, Tesla has done more than arguably any company to drive the development of electric vehicles.

That means Tesla is concurrently a lot of things, not Good or Bad. And, from an investor perspective, what you put weight on personally matters a lot. I can see a case for divergent ratings - as long as a) the punter understands why they differ (perhaps one puts greater weight on the S) and b) it is also understood that this maybe more about preferences than performance. 

More generally, it's notable that scepticism about the growth of ESG is shared by both Left and Right, particularly the extent to which it's simply a marketing tool for active management. Having recently read a couple of Right-leaning critiques there are elements I find myself nodding in agreement with. For example, I could have written this (and sort of have):

Regulation by governments is not only more efficient but also possesses democratic legitimacy. Proponents claim that ESG is necessary to achieve inclusive capitalism, but political power wielded by a handful of billionaire Wall Street oligarchs provides a pretty good definition of insider capitalism. 

The author is a former (early 90s vintage) Conservative Treasury Spad.

I don't think ESG is the solution to the world's problems. I do have concerns about the political aspects of it that I think have been *hugely* overlooked in the rush to Get Blackrock To Do Things. And it is definitely the case that ESG is used as marketing device. And yet at the same time I think things are improving as a result of companies being subject to more scrutiny of their management of ESG issues and investors challenging them more often. Can't it be both of limited effectiveness, and better that it exists than not?

I feel the same way about behavioural economics. It was a niche field for a long time, then became very fashionable. Lately there has been a very negative counter-reaction. No doubt there is some dodgy research out there that over claims. But again there seems to be a tendency to think it's either The Answer or a giant swindle. It seems more likely to me that as an area of study it has contributed usefully to understanding some things but not others. Some behavioural effects might be basically meaningless, others significant. Surely we can pick and choose.

And finally in Big P politics discussions of why certain leaders or parties are failing regularly fall into really annoying single factor explanations. The 'Red Wall' narrative is a good example. I have no doubt that some 'traditional' Labour voters have deserted the party because they are socially conservative and feel culturally alienated. But I also think that some of these voters are financially secure - both owning houses and having decent pensions - and as such may materially no long have the same interests as when they were at work. 

To paraphrase another Duncan (Weldon) a bit - why do we think home owners with secure retirements will vote Conservative in the South East but not the North East? Currently this is a big cohort of voters that turns out and votes Right.* But those coming behind them may neither own homes or have decent pensions. They may put rather less emphasis on cultural issues and more on economic ones and may skew Left, who knows? But currently much political commentary seems stuck in the rut of 'Red Wall voters won't like this' as if this is the only factor at play. 

Similarly I believe both that Labour lost votes in 2019 because it shifted to a Remain position and that it may have lost more if it had not. 

It's not just One Thing.

(I should stress, by the way, that I am regularly guilty of this way of thinking myself. I just hope that, now I'm more aware of it, I can lean against it a bit.)

*interesting subplot is that this group also seems to the most convinced that we need to spend serious money tackling climate change. But perhaps that's a burden that is likely to fall primarily on working age taxpayers?

Thursday 3 June 2021

Markets without consumers

Last week the FCA confirmed that it will ban the so-called 'loyalty penalty', where existing customers end up paying more than new ones, in relation to house and motor insurance. This feels like quite a significant intervention to me.

It's interesting to note the type of consumers getting fleeced under the existing regime. Broadly elderly and low income are less likely to switch, and therefore more likely to fall victim to 'price walking'. So the policy is essentially favouring these types of consumers over frequent switchers who have benefited from the lower premiums charged to new customers. (This is one reason why I think ESG folks ought to be more interested in competition policy and market regulation.) 

Even on its own terms this type of intervention throws up some interesting questions. It takes some responsibility off the customer for having to shop around, and it means that they don't get financially punished for their inertia. I imagine this is what a lot of insurance customers want, since they don't enjoy having to go through the annual renewal hassle and the product is not one they would choose to buy unless necessary.

But essentially this does mean that we're moving to a market - in the financial services sector - where the benefits of shopping around can be trumped by other considerations. That's OK with me but it's going to trouble others.

On this point I came across this piece from a couple of years back by the always interesting free-market policy wonk Sam Bowman expressing concern about the reduction in incentives to switch provider that result from charge caps and similar interventions. This bit sticks out: 

[C]ustomer switching is good for efficiency overall. Customer switching forces companies to compete with each other and try to find ways of doing business more cheaply. Diminishing the rewards for switching means that fewer people will be willing to shop around, which weakens the incentive these companies have to improve.

This is a pretty standard defence of the merits of competitive markets. It could also be framed as an argument that we want customers to do some work to help providers get better. Do your bit to improve the car insurance market, lazy switchers!

This in turn reminded me of this section on the energy market in this fascinating report on the loyalty penalty commissioned by the CMA.  

Energy is essentially a homogenous good, so it is easy for regulators to determine the optimal offer in the marketplace for a given consumer. Whenever this is the case, however, one may argue that there is little economic purpose to consumer choice. If Ofgem can determine the optimal choice for each customer, why have customers go through this apparently difficult or annoying procedure themselves? Ofgem in a different market design could buy energy from the cheapest supplier and simply pass it on at average cost to customers, thereby keeping competition among energy suppliers alive while circumventing the retail market.

To be honest I find 'shopping' for insurance "annoying", if not particularly difficult, and my experience of numerous insurance 'products' that I've never needed to claim again is that they are "homogenous" too. In practice, I assume like most people, I stick my car details into a price comparison website, play around the filters marginally and then scientifically pick the 2nd or 3rd cheapest because I'm a bit wary of the offer from the firm I've never heard of. 

I'm not dealing directly with any of the insurers and I'm not checking any of the prices. Essentially a privately owned algorithm is doing that for me and somewhere in the system I'm paying for that service. The relationship between the platform and the insurers is already far more important than my individual decision to switch. (In fact, like with Hargreaves Lansdowne and Woodford, I wonder how much the platforms shape customer choice as much as facilitate it.) 

In the big data era it strikes me as extremely unlikely that an ordinary punter, no matter how well informed, is ever going to be evenly matched against companies that have always amassed and crunched data for a living and now have much enhanced computing power to do it. Essentially price comparison sites are our hired guns, battling it out on our behalf because we basically can't do it ourselves. I'm not sure how much individual consumers matter anymore - in terms of their impact on providers - in markets like insurance or energy in this scenario. Their interests are represented by algorithmic proxies. (As an aside, in some free market wonkery consumers seem to be somewhat analogous to the working class for the Left. If only they would realise their true interests they would create real change, but instead they're a constant disappointment despite repeated attempts to organise/activate them.)  

In the medium term, it's possible that scrapping the loyalty penalty is the thin end of the wedge. There is an expectation that premiums will rise for new business to offset the 'cost' of not price walking existing customers. If it looks like some insurers are using this as an opportunity to take a bit extra could we see price caps like those in the energy markets?

Longer term I do wonder if we might head in the direction suggested by the CMA paper. I've already outsourced the job of checking prices to my algorithmic proxy, why do I need to be involved in the process at all? If someone else can do a better job of assessing my needs why bother sustaining the myth of active consumers? In fact, why not, like the CMA paper suggests, make the state our proxy in the energy market? And why not insurance, and what else...? In terms of energy, we could imagine something like the rail reforms recently announced. We might have a Great British Energy as a national buyer that negotiates with the providers on our behalf and in turn we pay bills to GBE every year. (My personal preference would be to take the whole thing back into public ownership but hey).

The insurance market is obviously more complicated, but I do wonder with motor insurance if someone couldn't come up with a way of syncing road tax with basic mandatory coverage. Maybe the 'market' then shifts to extras like replacement car etc. Brings a whole new meaning to National Insurance...

I think there's a lot here.

PS. I think there is an interesting potential coalition in big P politics. I strongly doubt the mix of consumers who are more likely to get fleeced is unique to insurance. Therefore there seem to be some real shared interests between retiree and low income consumers. It's notable that the Daily Mail was very vocal in opposition to the loyalty penalty. That ought to prick up the ears of people with an interest in further reform.   

Saturday 1 May 2021

I am (financial) legend

They all stood looking up at him with their white faces. He stared back. And suddenly he thought, I’m the abnormal one now. Normalcy was a majority concept, the standard of many and not the standard of just one man. Abruptly that realization joined with what he saw on their faces—awe, fear, shrinking horror—and he knew that they were afraid of him. 

Most people know I Am Legend as the Will Smith movie from about 15 years ago. This was actually the third film version of the story I Am Legend, the previous two being The Omega Man (starring Charlton Heston) and The Last Man On Earth (starring Vincent Price). Both of the previous versions were closer to the original story, particularly the Vincent Price version. 

The title - I Am Legend - is the last line of the original story. It is the point at which the central (human) character realises that while he perceived himself as fighting to protect what was 'good' he is now seen (and is literally legendary) as an evil force in a world that has dramatically changed. The same sort of thing is going on in the similarly apocalyptic The Girl With All The Gifts, where again 'normal' humanity becomes seen as a threat to a new population. 

While these types of movies are primarily seen as being concerned with biological threat, particularly the risk of those that are like us to be turned against us/into our enemies*, what I find interesting about them is the shift in perspective. What was taken to be obviously 'good' or 'right' becomes de-centred. Which is a reminder that loads of good ideas are sitting there in sci-fi/horror movies. 

For some reason, these radical changes in perspective make me think about the way that corporations are positioning themselves on social and environmental issues and in politics more generally. When I was a much younger lefty, it was quite obvious that Multinational Corporations Are Bad. They were involved in all sorts of practices that I thought were wrong, their advertising reproduced stereotypes that underpinned racial and sexual inequality, they funded organisations that I disagreed with and involved themselves in politics in a way that I thought was inappropriate. I would have seen people who defended this behaviour as corporate shills. Much of this remains true.

However, with the growth of corporate responsibility, responsible investment and societal expectations of companies (particularly younger consumers) now we see corporations making commitments that many of us on the Left would consider to be welcome. Their advertising stresses diversity and inclusion. There is even some pressure on corporations to involve themselves more in politics, but in support of progressive aims. 

There is now a corresponding backlash from people on the Right against "woke capitalism". From this perspective, corporations are inappropriately adopting social and political positions and even involving themselves directly in politics, with no mandate to do so. There's particular fury amongst US Republicans at corporates weighing in on their gerrymandering in Georgia. But you can also see the backlash in their attitude towards Big Tech, where they accuse Google, Facebook, Twitter etc of abusing their position to limit free speech. To take another particularly weird example Marco Rubio backed the unionisation drive at Amazon on the basis that this would be one in the eye for woke capitalists.

Now a lot of this is gibberish. On the one hand, many of the corporate commitments are paper thin. It's easy to stick a Pride flag on your Facebook page or the #BLM hashtag on your tweets. Just in the last couple of days I've been getting promoted tweets from Centrica on its People and Planet Plan. Given that it has famously just fired several hundred engineers for refusing a significant reduction in pay I can only assume the 'People' bit of the 'Plan' is 'have less of them'.

Similarly a lot of the Right critique is overstated. Corporate objectives are - obviously - still more aligned with political parties that want to keep corporation taxes and labour costs low. A few right-on tweets and ads representing modern day demographics do not outweigh lobbying for more obviously commercial objectives, for example through regulatory changes. In the US it does not look like the spigots of corporate political spending are being closed any time soon, or that the Republicans won't continue to benefit from it.

And it is obviously a good thing that corporates now employ people to think about their social and environmental impact, and ways to improve it. There is no clamour, beyond the real cranks, for a return of advertising that reinforced racial and sexual stereotypes.   

BUT... I do think it's important to tread carefully, and to consider to what extent we really want corporations to play a political role, even if, currently, they may support some positions that we might agree with. 

Corporations as currently structured are not democratic institutions. The directors have considerable leeway to steer them in the direction they choose. The primary countervailing forces are customers and investors. I think a lot of the ESG commitments made by public-facing companies are driven by the demographics of their customer base. I'm sure the same is part of the story of the ESG demands made by investors.

One result is that the progressive positions that corporations adopt are limited to how far directors want to go, tempered by what customers want to see, and what BlackRock and others think is OK. While this might deliver some results, it also has the limitations of philanthro-capitalism. It will be shot through with all the biases of people who come from and work in that strata of society. It is no surprise really, then, that labour-related issues don't get much attention, or that Amazon can talk loftily about climate change while aggressively fighting unionisation.

[There's something else here that I'll come back to another day about the privatisation of political problems. If a position adopted by a company - say to employ workers as independent contractors rather than employees - is tacitly accepted by its customers and its investors (on the basis that customers still buy its products/services and investors still invest), does that mean it's OK? And if collectively we *don't* think it's OK do we really believe it's down to customers and investors to try to solve the problem, say by exiting?]

Another result is that a legitimised political role for corporations makes it hard to argue that they should only adopt certain political positions and not others, particularly if expressed as 'values'. Unless we can demonstrate that 'our' values are better than 'theirs', why is it OK to adopt one stance and not another? 

To reuse a quote from Hayek that I've blogged before: 

"To allow management to be guided in the use of funds... by what they regard as their social responsibility, would create centres of uncontrollable power never intended by those who provided the capital. It seems to me therefore clearly not desirable that generally higher education or research should be regarded as legitimate purposes of corporation expenditure, because this would not only vest powers over cultural decisions in men selected for capacities in an entirely different field, but would also establish a principle which, if generally applied, would enormously enhance the actual powers of corporations."

To go back to the beginning, if you're a not very political member of the public, but there are certain things you believe in - say Brexit for example - and you see corporations weighing in against your position, how do you view it? Would it be any different to how I saw corporations back in the 80s and 90s? And how would you perceive those who defend the political role adopted by corporations?

Personally I do not feel comfortable calling on corporations to weigh in on political issues on its own terms. I can also see how easy it is for the populist Right to turn this into an advantage - 'look at these powerful corporations trying to block things you believe in'. I think that resonates. At some point over the past year I saw some statement from Ben & Jerry's on Twitter about something that Trump had done. Some angry bloke responded to the tweet along the lines, simply: "What the f*** has this got to do with ice cream?" To be honest, even though I obviously agreed with the anti-Trump position, I had sympathy with the response. 

Yet by going along with the 'Get Corporation X to endorse political objective Y' we end up looking like we're on the side of the corporations exerting political power with no mandate to do so. Urgh. 

I chuck all this out there because I feel uneasy about the direction of travel, but I am not sure why or where we go, and I am interested in whether others feel the same. 

* I feel a bit like this about the way some people on the Left seem to view ideas from different viewpoints - they're dangerous, and thus we must limit people's exposure to them, in case they 'turn'. 

Sunday 14 February 2021

Corporate control on the cheap revisited

A few months back I blogged about the role of hedge funds and banks during takeovers and the potential for the combination to have a significant impact on the outcome. Here I just want to add a little sprinkle of detail from the current situation facing G4S.

As things stand, G4S is the subject of two private equity-backed bids, one of which is supported by the incumbent management. Because neither bid has succeeded so far, it is now moving to an auction. 

I've been tracking the derivate positions in G4S built up by hedge funds. Below is an up-to-date list of all the filings I've found. One caveat: I do not know whether any of these positions have been closed out, because I'm not up to speed with filing requirements, so the list below is of the latest disclosed position for each fund, but the starred ones a recent filings (eg Davidson Kempner has not issued a filing relating to G4S since 23 Dec, but PSquared issued one on 9 Feb). To save you the bother of adding them up, total disclosed positions add up to over 36%, recent ones to just under 26%. 

Either way it's significant and the total exposure is bigger than any of the other examples I've looked at, though of course there may be other bigger ones out there. Also the list of funds with exposure has steadily increased - Alpine, Omni and Berry Street all only started producing filings in the past week or two.

The flip side to this, as I've blogged before, is that banks end up holding a lot of stock as counterparties, and if you look at the list of major shareholders G4S discloses on its IR site currently 4 of the top 5 are banks, holding a total of 21.73%.

To simplify to the extent of a truism, this either matters or it doesn't. The banks hold the shares because the hedge funds want derivatives - I don't believe that hedge funds would want/be able to go out and buy a quarter to a third of shares in a target. The combined size of both equity and equity derivate positions is clearly significant, and would be enough to tip a bid one way or another. Why doesn't this get talked about?   

Wednesday 3 February 2021

Getting Blackrock to do things...

Just a quick post. I increasingly find myself thinking that the focus amongst campaigners on trying to move the giant asset managers, and Blackrock in particular, represents a failure to think things through.

There are a number of overlapping aspects to this. First, trying to change the policies of a powerful economic actor without questioning how they got that power, and whether it is legitimate to exercise it, really lacks ambition. We be asking whether we should *allow* an (admittedly enormous) intermediary to exercise influence that derives from other people's deferred pay. Focusing on getting Blackrock to do things is likely trying to change the approach of an unelected political leadership rather than seeking to replace them.

Second, it also serves to reinforce the shareholder primacy model at exactly the time when it is being questioned. Put another way, it seems a bit incongruous to try an enact a multi-stakeholder model of the corporation through the exercise of power by the only stakeholder currently recognised in law. We can't create a new model through the institutions that dominate the current one, something else is required.

Third, as someone who focused primarily on labour issues, I am concerned at the way that investors that go quite a long way on environmental ones - while concurrently voting against the most basic asks relating to worker voice - get treated as 'progressive' forces. I can imagine Blackrock et al getting better on climate, supporting more diverse boards etc and advocating the sort of agenda that corporate liberals are comfortable with starting to get plaudits, even as they fail to act on workplace issues.  

* Actually should probably also include the risk of anti-competitive practices.