Anchoring and pay

I am very pleased. I've just managed to demonstrate the well-established cognitive bias known as 'anchoring' using a sample of well-educated people who work in corporate governance in one way or another (policy, asset management etc).

We gave all audience members a set of questions, one of which was to estimate the average fees paid to a supervisory board member in Germany. Before asking them for their estimate we exposed them to a figure which we explicitly told them was false. One group got a very high figure, the other got a low figure.

The result, as you might expect, was that those exposed to the very high (but irrelevant) figure gave higher estimates than those exposed to the low figure. The size of difference was dramatic - the average estimate with the high prompt was more than six times larger than the estimate with the low prompt.

I'm going to run this on a bigger sample next time. Would be good to use a sample of corp gov people who regularly analyse and/or engage on pay.

Betfair & political donations

Interesting one this. Party political donations are very rare by UK PLCs these days (except Caledonia...) and are usually opposed by institutions (unless they donate too....). As a result most of the time when companies seek authorities wit a political donations resolution a) they are seeking authority to incur expenditure rather than make donations and b) the resolutions pass very, very easily.

Betfair just got a 29.5% vote against its resolution seeking authority to make political donations. This is almost certainly because it did make party political donations. Actually these were in Germany - to the CDU and FDP. Considering that a fair chunk of Betfair's shares are held by directors this looks to have been a very large revolt by independent shareholders.

Company loses binding pay vote, world does not end

Sports Direct was blocked in its attempt to set up a new bonus plan for Mike Ashley (no laughing). The other interesting point about this one is that the plan was proposed with a special resolution, so needed 75% to get through.

As we know from the debate about exec pay reform earlier this year, a combination of a binding vote and a higher threshold to pass is bordering on a Khmer Rouge approach. As such there can be no doubt that a) Sports Direct will be plunged into an existential crisis as a result of this vote and b) shareholders will be hugely disappointed with this outcome. 

Institutional Investor Committee

It's been a while since I blogged about the IIC (version two), mainly because it doesn't seem to have done anything.

The last public statements I can see are from March, on audit (EU proposals) and executive pay (UK Govt proposals). On the former I would say that the IIC position is a lowest common denominator one, as I know there are institutional investors who take a different view. The content also looks very similar to that used in one of the IIC member's own presentations, which makes me think that this could mean it's just one body's position slightly rehashed.

The statement on the BIS consultation on executive says nothing specific on the actual proposals, probably because the key measure - a binding shareholder vote - was (I think) not supported by any of the IIC members. There is, however, some accompanying commentary which is worth a read.

There's nothing since March though. Nothing on the 'shareholder spring' (barf), or on the Kay Review. The latter surely is worthy of comment given that he proposes a new 'investor forum', which would presumably cut across the IIC's role?

Ho hum.
 

Against incentive pay schemes

A new report out from the FSA does a rather good job in showing what the problems are. From the blurb -

• Most incentive schemes were likely to drive people to mis-sell and these risks were not being properly managed;
• firms failing to identify how incentive schemes might encourage staff to mis-sell, suggesting they had not properly thought about the risks or simply turned a blind eye to them;
• firms failing to understand their own incentive schemes because they were so complex, therefore making it harder to control them;
• firms relying too much on routine monitoring of staff rather than taking account of the specific features of their incentive schemes;
• sales managers with clear conflicts of interests, such as a responsibility to manage the conduct of sales staff whilst themselves able to earn a bonus if their team made more sales; and
• firms not doing enough to control the risk of mis-selling in face to face situations.

News Corp news

Their proxy materials are out, with the AGM taking place on October 16th.

A few interesting nuggets. The company is facing three shareholder resolutions - to appoint an independent chair, to eliminate dual class share structure, and to introduce majority voting.

Both James and Rupert Murdoch pick up big bonuses - reduced in light of 'events' but still big.

Andrew Knight is coming off the board.

Olson, Hirschman and shareholder activism

Something that can seem quite odd on first glance is why shareholders expend any effort on issues like executive pay. After all, as I bore on quite frequently, there are a variety of reasons why we might expect them either to not bother, or to be ineffective if they do try. One argument I realise that I personally rarely invoke for shareholder reluctance to get stuck in is the classic collective action problem.

In fact Mancur Olson directly referred to this in relation to shareholders:

Why, then, do not the stockholders exercise their power? They do not because, in a large corporation, with thousands of stockholders, any effort the typical stockholder makes to oust the management will probably be unsuccessful; and even if the stockholder should be successful, most of the returns in the form of higher dividends and stock prices will got to the rest of the stockholders, since the typical stockholder owns only a trifling percentage of the outstanding stock. The income of the corporation is a collective good to the stockholders, and the stockholder who holds only a minute percentage of the total stock, like any member of a latent group, has no incentive to work in the group interest. Specifically, he has no incentive to challenge the management of the company, however corrupt or inept it might be.

To be fair, Olson was referring to individual shareholders, rather than institutional investors. However, given that even large institutions rarely hold more than a few percent the point still holds. In straightforward cost/benefit terms shareholder activism doesn't seem to make any sense, or rather it doesn't seem to make sense to lead it, you should free ride. 

The reason I don't use this argument is because I rarely run up against it when dealing with people in the the corporate governance microcosm. The nearest you get is that some people will sometimes tell you that they don't want to take the lead in engaging with a particular company because they have a very small holding - meaning a fraction of a percentage. But even then they are typically still voting. In practice, then, quite a lot of the time asset managers with relatively small holdings (certainly small enough that they would derive a very marginal gain from any uplift in value) do bother to engage. But why?

Of course some people will suggest we can discern some other interest. Certainly in a few cases assets managers and other providers offer shareholder engagement as a service, so you could argue that they simply do it because they are paid to. But, again, I don't think that captures it. Why the upsurge (as limited as it might be) in shareholder opposition this season? It is clearly not the result solely of the activism of those paid to be activist - they don't have enough power to do it alone (and were presumably doing it already anyway) and in any case we know that some mainstream investors are involved.

One of the best responses to Mancur Olson came from my old fave Albert Hirschman in the book Shifting Involvements. Again focusing on individual motivation, Hirschman says that at certain times the model of cost/benefit analysis changes:

[A]t some stage in our cycle, the benefit of collective action for an individual is not the difference between the hoped-for result and the effort furnished by him and her, but the sum of these two magnitudes! And a further surprising consequence follows immediately: since the output and objective of collective are ordinarily a public good available to all, the only way in which an individual can raise the benefit accruing to him from the collective action is by stepping up his own input, his effort on behalf of the public policy he espouses. Far from shirking and attempting to free ride, a truly maximising individual will attempt to be as activist as he can manage, within the limits set by his other essential activities and objectives.

It's important to be clear that Hirschman's book is about how commitment to public versus private activities goes through waves as punters become disappointed with one, then turn to the other, then back again. Therefore, according to Hirschman's theory, it's only at a given point in the cycle when activism might be its own reward. Nonetheless it does put a rather different spin on how shareholders, and specifically those individuals undertaking engagement activity, might approach it. I don't think this by any means captures the range of motivations, but it does at least point us away from the assumption of a bottom line cost/benefit approach (where activism is a cost) which does not reflect what we see in practice.  

For what it's worth I think the current round of activism is taking place in no small part because some investors at least believe that it is a good thing that it does so, regardless of whether they can show a real financial benefit. Their views about the merits of shareholder engagement are more important than any notional financial returns. One of the things I like about Hirschman is that he looked at how ideas develop over time (The Passions and the Interests being the stand-out example) and the impact they had in practice.  I think that at least currently he can offer us some better insights into what shareholders are up to than Olson.