Shareholder rebels over executive pay

I would link this post to the headline in the Sunday Times, but it is hidden behind a paywall. The article about Standard Life, the biggest sharteholder in Rio Tinto, criticising "the mining giant for handing bosses generous rewards for hitting 'unchallenging' targets. It follows 41% of votes going against last year's remuneration report. The issue raises some interesting questions;

• Should shareholder votes on the remuneration committee's report be binding instead of just advisory?
• Should public companies treat these expressions of shareholder dismay rather more seriously?
• Does the lack of board responsiveness itself point to serious governance issues? For example are the non-executive directors actually doing their job or are they merely cheerleaders for the board?

As time passes and we see more of this, I suspect there will be a growing consensus for reform. The big problem is that shareholders will rarely vote against the reappointment of directors. By the time a company is performing badly enough to warrant that, the shareholders simply sell and leave a takeover to institute reform. However that discipline does not help when a company is performing reasonably well, yet shareholders are unhappy about outrageous remuneration packages. What is needed is a mechanism that produces more active non-executive directors who are not all part of the club who vote each other outrageous remuneration. It is not even always that directors sit on each other's boards or are personal friends. They just have similar backgrounds and similar interests and believe that high remuneration for pedestrian performance is ok because that is the deal they have themselves received in their day jobs.

This is an argument for boardroom diversity

See Professor Bainbridge on the evils of over-regulation

This is the first time I have ever just written that folk ought to read an article on another blog. And, in turn, Prof Bainbridge is reblogging Marc Hodack but read it. They discuss why excessive regulation stifles the capital markets with no observable economic (or governance) benefits. There is no new data here - just sensible argument. In Europe we may not have Sarbanes Oxley or Dodd Frank but we do have Commissioner Barnier and the EU harmonising/dirigiste tendency, not to forget our very own UK government's tendencies to make too many laws. They all forget the law of unintended consequences. They all forget that, once made, laws tend to become ever more complex and are rarely swept away into the dustbin - however bad they turn out to be.

The film "Inside Job" and corporate governance

Ostensibly this documentary film is just about the ongoing financial crisis that started in 2007. It charts the immediate causes through a lending bubble, although it does not address the causes of that bubble in international trade imbalances and the choices made by governments. That, as they say, is another story. But the real strengths of this particular story is its success in getting interviews with some of the big names in government, regulation and business as well as using public archive sequences to demonstrate the corruption of politics, regulation and academia that allowed this particular crisis to happen.

Of course the film-maker has selected material to present a case but, nonetheless, you hear from the protagonists own mouths their sense of entitlement, their vested interests and their lack of contrition or self-awareness. This is very much a governance issue. The lessons do not just apply to financial services in the USA but hold up a mirror to corporate dysfunction worldwide. We see alpha males (and they are virtually all males), at the top of the tree, who obtain influence over their supposed regulators (in the USA, even becoming the regulators) and, of course, don't see the need for regulation. Their world view of how things work is guided by their own vested interests so, of course, they believe in efficient markets and light regulation and, having captured top roles in academia they shut down debate and marginalise ideas that contradict their own.

One of the best sequences in the film is the interview with Glenn Hubbard, economist and Dean of Columbia University Business School. He was an adviser to George W Bush on deregulation and is member or adviser on many committees, including the Federal Reserve Bank of New York. It asks him about his substantial business consultancies and the conflicts of interests this raises with his academic and government advisory roles. Instead of addressing this legitimate issue of public interest he becomes aggressive and defensive. Asked why an important advisory paper he penned, supporting the strength of Icelandic banks and written just before the implosion of the economy of that country, failed to mention that he had been paid for it, he failed to show any embarrassment. When it was pointed out to him that his on-line cv on the Columbia website wrongly stated the title of this paper as addressing the "Instability" of Icelandic banks instead of the "Stability" he lamely blames a typo and, again, shows neither concern nor embarrassment at the impression this gives of dishonesty.

All this is relevant to corporate governance. The unconstrained alpha male will not always seek self-interest at the expense of the multitude, but it only takes a few to wreak untold damage. We need balances, transparency and accountability to protect the common good.

See the film. Read "23 Things They Don't Tell You About Capitalism" by Ha-Joon Chang. Keep an open and critical mind on both but realise how important good governance is and how easily corruption takes hold of a poorly protected system.

 PS This is a blog about governance not about cinema...however...with the Oscars just announced I feel driven to observe that while Inside Job is a very good film it is nowhere near as original as its rival Exit Through The Giftshop. I guess it won the award because the voters wanted to comment on the message rather than on the film-making.

Our financial services regulation is bonkers

A business associate pointed out that much of banks' proprietary dealing has decamped to Singapore, which made me think about how inept so much financial services regulation has proved to be. It is regulation by huffing and puffing. Instead of thinking and taking measured steps that are designed to have particular effects  the politicians constantly play to the gallery and think about the next day's news headlines rather than careful policy-making. The outcome is virtually guaranteed to have unintended consequences.

So EU politicians rail at hedge funds although they were not actually the cause of recent financial instability; but ok, they could be connected with the next crisis. But financial institutions are flexible. They move abroad to avoid new regulations and new taxes. What good have the regulations and the taxes done? The hedge funds are still funded by EU banks but now they are outside the reach of EU regulators so, instead of having improved the risks we all face, the politicians have pushed them beyond our control.

Similarly with the proprietary trading. It may be carried out by non-bank institutions or outside EU jurisdiction but, if you follow the money trail, it is still, effectively, the same EU banks that are taking the risks and the profits(losses). So the effect has been the precise opposite of what was intended. Madness.