Pro Governance

UBS - curious selection of new board members

2012-02-03T10:42:00.003Z

What is the 'politically correct' composition of a company board? We are not sure that board members are more than an in-house management consultancy. They certainly are far removed from the real owners of the company and even the fiduciaries in the asset management world have little say in the affairs of a board. But news that UBS has appointed two women to its board - one an academic economist and the other one lawyer - raises some questions. Given the appalling track record of economists (you all know the many jokes about economists, as for example: An economist is a trained professional paid to guess wrong about the economy) one can not be too hopeful about these latest appointments. Don't forget the lawyers though: Q: Why won't sharks attack lawyers? A: Professional courtesy. Maybe selection by eye colour would be more effective. There may be a good cause for more women on company boards but we doubt that giving in those who expect miracles from this will be proven to be right in the long run. Whether or not a bank run by economists (Axel Weber, the incoming Chairman of UBS is another one) only time will tell.
(03/02/2012)

Dual CEO'S - if anything a formula to be promoted

2012-01-31T17:41:00.003Z

The recent troubles at Blackberry manufacturer Research in Motion seem to suggest that dual leadership can be damaging for an organisation (FT). But Rome had two consuls during its rise to dominance, and they were limited in their power to a tenure of one year. Goldman Sachs in the late 1970s and early 1980s had co-chiefs - and that was when the firm laid the foundation to its rise to dominance. The challenge for boards and shareholders is to make sure there is a deep bench of talent - a thing that is sorely missing in many companies, why else would a company ever look for an external candidate for any of its top positions?
(31/01/2012)

CEO pay - Heads I win, tails you (shareholders) lose

2012-01-13T19:38:00.001Z

A perceptive article by Eleanor Bloxham - but sadly it also does not offer a real way out of the CEO quagmire. She is not alone in this and a much more forceful and determined effort is required to stamp out this abuse. By now there are enough learned studies and the time for action has arrived. And anyone willing to get engaged can be sure of one thing - he will not be required to camp out in a tiny tent in the middle of a cold night. The aim is clear, now it is only a question of getting organised!
(13/01/2012)

Cameron vows to tackle executive pay

2012-01-08T12:04:00.003Z

For once we can give wholehearted applause to the British Prime Minister - if he stays the course. As reported elsewhere, it is regrettable that the ABI and the NAPF - these guardians of the investor's best interest - have already put the spanner into these proposals. One should not forget that these organisations are deeply conflicted and their own governance needs to be put under closer scrutiny. Have they ever bothered to find out the opinions of their ultimate paymasters - the people who are insured or whose money they manage?
(08/01/2012)

Should Shareholders control Corporate Lobbying?

2011-12-19T09:26:00.001Z

Given the influence that the Super Rich 0.001 per cent have on the political process in the US (and the UK, Russia etc are not immune either) a strong argument can be made for Shareholders to assert control about the spending by Corporations on lobbying activities.
(19/12/2011)

Top Pay: when are the Investment Institutions going to wake up?

2011-12-12T14:10:00.003Z

How many studies documenting the excessive and sheer uncontrollable rise of top pay in the UK will it take before the main culprits - the fiduciaries commonly known as 'Investment Institutions' start to take their responsibilities more seriously?
(12/12/2011)

Stop creeping takeovers and abuse of minority shareholders!

2011-12-10T12:22:00.002Z

The case of a speculator/investor acquiring a 15 percent stake in Austria's leading Telecom business highlights the potential abuse of special privileges by holders of large or controlling shareholders. With just 15 percent of the shares an investor should not get any special treatment, certainly no 'coffee time' with management as he can get insights into the company strategy that are not available to other shareholders. If anything, being a holder of a large stake should come with special obligations and restrictions. Voting rights should generally be limited - Reuters had a limit of 1 percent for a long time and it did not do any harm to the company. What is particularly sad is the silence on the part of Shareholder organisations and institutional Investors. Anyone who wants to support a campaign to stop similar abuses should contact us. That holders of large - but not even controlling - blocs of shares get preferential treatment when board seats are doled out by management (this in itself is an abuse that needs to be ended as those that are to be supervised select their own supervisors) is another defect of corporate governance that needs to be ended.
(10/12/2011)

Another proposal to curb top pay

2011-12-09T16:55:00.001Z

While well-intentioned this proposal is too complicated and prescriptive - even if one fully agrees with the thrust of the argument. Pro Governance has suggested that top executives should only get bonus and benefit payments that are on the same percentage basis as firm-wide arrangements that cover the whole workforce (bonus, pension, health, share options). While there would still be an escape via excessive base pay to inflate CEO pay this proposal would simplify policing of top pay substantially.
(09/12/2011)

'Imperial' CEO - too dangerous to tolerate much longer

2011-12-06T13:30:00.001Z

News that warnings by a senior manager at MF Global over the bets that Chairman and CEO Joe Corzine made in the bond markets were brushed aside lend support to our demand that no excessive powers should be vested in any one individual at the top of a company. Quite apart from the overdue reform to separate the roles of Chairman and CEO there should also be less emphasis on the CEO. A collegial system with more equal authority (and pay) would be useful to ensure that decisions are taken on the basis of a more rounded thought-process. Succession planning should make sure that every individual can be replaced at short notice. The CEO should also have less authority to 'cleanse' lower-level management and get rid of potential candidates that could endanger his position. No one at the two management levels below CEO should be removed unless fully discussed with the board.
(06/12/2011)

Crackdown on top pay not enough to balance budgets

2011-12-05T19:38:00.002Z

We are afraid that we have to disappoint Mr. Clegg. Of course top pay - esp CEO pay - needs serious attention - and please no more 'studies' or 'reports'. The fish starts to stink from the head, no-nonsense caps on CEO pay as demanded by Pro Governance would instantly trickle down the food chain, esp is the completely misnomed 'private' equity 'industry' would be included and the pay practices in that sector brought out into clear daylight. After all, only the fees cashed in by the promoters are 'private', all their funds come from the great unwashed public and it is not easy to see why compensation in that sector should not be seen in the same light as in listed companies. But I beg to doubt whether pay restraint will bring in much revenue given the hole the public finances are in. As long as politicians with pea-sized brains spend money like confetti (see today's announcement that Public Schoolboy number One 'gives' £41 million of taxpayer money for the unnecessary Olympics Extravaganza) this country's budget - or that of most other countries - will never be balanced.
(05/12/2011)

20 times ratio for CEO Pay?

2011-12-01T13:53:00.001Z

May be fair, but how to get there - that is the real problem. It is all very nice to know that business 'leaders' that live close to each other earn more than those in the wilderness (Financial Times, 1 Dec 2011). But that does not really explain why the owners of the businesses - and even more their fiduciaries, the large investment institutions, including Pension Funds, Insurance Companies and Private Wealth Managers - do not put more and decisive effort into halting the trend towards ever-higher compensation for CEO's and those close to the top of company managements. The absurd situation is highlighted by the fact that the top 40 fund managers globally control such a large share of company equity that they are in a position to write the rules on executive remuneration - and corporate governance in general. No need for any legislation, or waiting for remuneration committees going to work, just call shareholder meetings if top management does not accept changes to the corporate constitution and impose the changes. We will be contacting those Nifty-Forty institutions in the near future to see if they want to sign up to an initiative. Anyone interested in supporting us will be welcome.
(01/12/2011)

Exec Pay: no point holding 'discussions'

2011-11-26T12:41:00.001Z

When it is reported that (UK) fund managers 'target bankers' pay' we doubt the effectiveness of this kind of discreet fireside chat (that also creates a conflict of interest as the participants gain access to information that normal shareholders never will see). The article highlights the key problem with corporate governance - in the UK and even more so worldwide. There is plenty of analysis (Reports, Conferences etc) but very little action. And what action there is is missing the target - by a mile! What is the point of having secret 'discussions' with management or the board. Shareholders OWN the companies, these people are their employees and not some feudal lord who graciously agrees to listen to the complaints of his subjects. Most companies are controlled indirectly - via the fiduciaries of the real investors, i.e. fund management companies, private banks, pension funds and insurance companies. It is they who need to be brought under stricter control and be subjected to a code of conduct that leaves no wiggle room. This should not be that difficult as the business is highly concentrated among a list of 40-50 institutions globally who control a large proportion of all listed companies (and also the misnamed 'private' equity industry that is mainly staked by the same pools of money).
(26/11/2011)

Executive Pay: another proposal, another non-starter

2011-11-05T14:27:00.004Z

The former director-general of Britain's CBI makes a number of proposals in an article in the Financial Times. All these proposals have serious flaws: (1) Publishing a single number for compensation of each board member is nice but pointless - the information is already (too well) known. (2) A budget for top overall executive pay will - even if practicable - achieve nothing. Who sets the budget, what is the right amount of pay for the top manager's group? (3) Bringing in independent outsiders to company boards is another non-starter. Is it not required anyway that the majority of board members is independent? and are board members not in any case required to work in the best interests of the company? So the definition of 'best interest' needs modification. (4) Consulting firms may be a negative factor, but who says that all pay is always bench marked in one direction only? Why not use the lowest comparable pay package as benchmark? after all, good business practice means the minimisation of costs, that should include management pay. Anyone frustrated with the efforts of the 'Great and Good' and self-appointed guardians of shareholder interests should get in touch without delay.
(05/11/2011)

Change of UK takeover rules - more complexity for little gain?

2011-10-31T17:41:00.002Z

New rules regulating UK takeovers have been devised by the cartel is run by industry insiders and while rule is piled upon rule there is little change to the basic flaw in the set-up: the Takeover Panel is dominated by industry insiders that have little or no interest to stop the merger merry-go-round that does little to inculcate British business with a more long-term outlook to business management. In a perverse fashion some participants in the merger game are already plotting to suggest their clients make meaningless 1p bids in order to circumvent the spirit of the new regulations. One has to wonder what the investor's fiduciaries, the major investment institutions that are the overall paymasters of the managements of listed companies will do to prevent such abuses from happening.
(31/10/11)

Another sad end to a 'Private' Equity buyout

2011-10-29T14:02:00.002+01:00

Exaggerated claims about the advantages of the 'Private' Equity business model receive another dampener from news that the former British Printing Company which sailed under the name of Polestar UK for the past years has left the UK Pension regulator (clear text: the British Taxpayer) with a massive bill to safeguard the pension scheme. Where are now the financial acrobats that benefit massively from the 'Private' Equity compensation model, where are the (mostly) anonymous investors who wash their hands when things in the funds they back go wrong?
(29/10/11)

$687 Mio Dollar 'fee' for an M+A adviser

2011-10-21T17:26:00.001+01:00

We often have reiterated that the business or mergers and acquisitions needs to be more closely supervised. Not only do corporate laws and market regulations a good overhaul but the fiduciaries that control most of the major listed equities also need to review their practices. One can say that the top 20 to 30 investing institutions could at the stroke of a pen revolutionise corporate governance as their holdings constitute in effect a controlling bloc in most company registers. When it is disclosed that Olympus paid nearly a third in 'advisory fees' during the acquisition of a British company one is left in disbelief as this is certainly a highly unusual - and extreme - case of corportate governance gone AWOL. Is it beyond the Japanese regulators to clean up their act and once and for all drag corporate practice in Japan into the 21st century? Or is it necessary for international and national regulator to ringfence the Japanese Market in order to protect non-Japanese investors?
(21/10/2011)

One Million Free Shares for new Apple CEO

2011-08-27T14:03:00.001+01:00

Time and again commentators, academics, politicians and fund managers repeat the same mantra: 'We do not mind how much (chief) executives get paid as long as it is for performance'. This cop-out will be tested to its limit by the announcement that Apple has 'awarded' the newly-appointed successor of Steven Jobs the round number of one million shares, currently valued at just under US$ 400 (!!) million. The doubts we always have when hearing that pay for performance is OK is the problem that it somehow implies that there is no upper limit to pay at all. Following this argument the Apple board might as well award 2 or 3 million shares to the chief executive - as long as it is for 'performance'. As usual, the myth of the superhero CEO reigns supreme, the effort of tens of thousand of other company employees are belittled by this form of corporate governance. Even more galling than the fact of this over sized 'award' is the lack of any performance criteria apart from the requirement that the new CEO sits out a period of five and ten years at the helm of Apple in order to be able to claim full ownership of the shares.
(27/08/11)

Pay 'revolts' are pointless posturing

2011-07-16T15:53:00.003+01:00

Another day, another pay 'revolt' - with equally predictable results. Shareholders of Britain's FirstGroup may feel better after 42 per cent of those that voted rejected a 'retention' award for the Chief Executive. ProGov continually argues that all perks and special payments to Chief Executives and senior directors - apart from the level of basic pay - should be banned. This would level the playing field and avoid time-consuming and ultimately futile discussions about any exceptions, special cases and other excuses to line the pockets of those senior executives in an arbitrary way.
(16/07/2011)

Cavalier attitude towards pensioners

2011-06-03T15:52:00.001+01:00

The provision of pensions for ordinary citizens (not the executives and politicians who allow themselves gold-plated schemes) is becoming more pressing by the day in most western 'democracies'. That relying on government-sponsored regulators offers little hope - and even less help - is demonstrated by instances where venture (vulture?) capitalists or those whose primary activity is shuffling around corporate assets can escape from their obligations toward their past and present workers in order to maximise their personal profits.
(03/06/2011)

Cadbury Takeover: Closing the Stabledoor after horse has bolted

2011-05-23T13:51:00.001+01:00

There is no point in British MPs complaining about the 'dismissive attitude' of Kraft's CEO now that the takeover has long since been executed. Better regulation of takeover law and corportate governance is indeed required and would help in cases such at the takeover of Cadbury by Kraft.
(23/05/2011)

Erste Bank doubles compensation of Supervisory Board

2011-05-13T18:14:00.005+01:00

Without judgement on the merits of this particular case we get surprised reactions about the fact that the Supervisory Board members of Austria's Erste Bank will have their remuneration doubled to a total of Euro 750 000 (for the whole unit). This is not accounting for the attendance fees of around Euro 160 000 they received in the last year. A delicate detail is that the head of the Austrian investor's protection association is among those benefiting from this largess. This highligts one of the main problems of good corporate governance: What are Corporate Boards meant to achieve? In the German tradition the Supervisory Board exists to oversee the company management and defend the interests of the shareholders while in the Anglo-Saxon tradition the board is a mixture of executive managers and non-executives that are elected to advise and supervise management at the same time. In both cases the management - and in particular the CEO - plays a decisive role in appointing board members and therefore to a certain extent controls himself! The same can be said for the setting of compensation which procees on the basis of 'I scratch your back if you scratch mine'.
(13/05/2011)

Starbucks CEO Schultz blames 'speculators' for high coffee prices

2011-05-12T11:07:00.000+01:00

Anyone who has visited a Starbucks coffee shop - or any copycat business - will have wondered why the price of a cup of coffee (more often than not served in a cheap plastic cup) is so high. The contribution of the coffee that goes into a cup is minute compared to the price of the finished product. So we were bemused when Howard Schultz, CEO of the Starbucks coffee chain, delivered a rant about speculation in the Commodities Markets. A look at the P&L of the company - and Schultz's extremely generous compensation package - makes it clear that Schultz - and many other commentators - want to pin the blame for high food prices on speculators when long-term economic and demographic factors may in reality be the driving factors behind the recovery of many commodities from a decades-long slump in price.
(12/04/2011)

Insider Dealing brought to light

2011-04-07T10:05:00.001+01:00

The detection of a year-long insider scam by the US authorities may well serve as a deterrent to those tempted to perpetrate such a scheme. But the fact that wire-taps play such an important role in helping to uncover illegal insider transactions is also worrisome. When criminals stop using telephones to communicate with each other it may become more difficult to detect illegal schemes. High-risk sectors of the financial industry are another area where prosecutors find it hard to uncover illegal transactions as they can easily be hidden behind a smokescreen of large numbers of unrelated transactions.
(7/04/2011)

Board Members and Conflicts of Interest

2011-03-25T09:36:00.002Z

News that Peter Brabeck, Chairman of Nestle and member of the board of Credit Suisse has borrowed a total of Sfr 14 million from the bank that paid him a total of Sfr 500,000 last year highlights the potential for conflicts of interests when a board member has senior positions in companies that are doing business together. In the days of the 'Old Boy Network' it was easy and convenient to invite people to sit on one's board as one knew them already and could be confident that they would see their role more as friendly advisor rather than as objective controller. Pro-Governance repeatedly warns that the practice of board members being selected by exactly the people they are supposed to supervise is deeply incestuous. When a board member is connected to a financial institution and a company that is in business contact (as client or investor) the possibilities for abuse multiply.
(25/03/2011)

Pension Risk transfers - who monitors the Risk?

2011-03-24T07:38:00.002Z

A report by Hymans Robertsons documents the trend in the United Kingdom towards shifting the risk borne by companies offering final salary pensions to insurance companies and banks. One can only hope that these companies are ready to survive the next financial tsunami. While they may be more stable in the long run than the companies that originally stood behind the pension obligations one has to wonder who really has the interest of the pensioners at heart. The companies on both sides of these transactions will above all be interested in the short-term boost to their profits, the managements will focus on the boost to their bonuses and will long be gone if ever one of these transfers runs into trouble. And the regulators? I think we all know the answer.
(23/03/2011)

Kick-back Fraud in M+A transactions

2011-02-28T08:11:00.003Z

News that German authorities investigate up to 30 employees of Bayerische Landesbank in connection with the takeover of Hypo Alpe Adria raises an important but often neglected point with regard to Merger and Takeover transactions. We do not even want to delve into the fact that many are value-destroying at least half the time. This has been proven in many academic studies and any experienced investor will have watched in disbelief when supposedly smart managements engage in deals that make no sense for one of the two involved parties. While better corporate governance will help to alleviate many weaknesses of the merger process little attention has been paid to a darker side of this process. As the abuse is incredibly difficult to prove not many instances of outright fraud have come to light over the years. Of course, situations where incumbent management of the takeover target or one of the merged companies is promised attractive new terms in the combined business do not pass the smell test. The practice that option and share awards to management are 'crystallised' and can be cashed in before their nominal due date can also be considered to be a questionable inducement to go ahead with a business combination. Passing on explicit bribes such as hard cash is even more difficult to detect but can never be excluded as long as decisions about major transactions are often made by a small circle behind closed doors. Only the restriction of all decision making to the full body of shareholders - and even then in a process subject to strict regulation - will prevent Merger and Takeover deals from being influenced by corrupt practices.
(28/02/2011)

'Rip Off' referendum in Switzerland shows danger of inaction

2011-02-26T11:11:00.001Z

The long-delayed Swiss referendum about limiting the pay of senior managers in listed companies demonstrates the danger that politicians and politics take over the debate about senior executive compensation. The public's fiduciaries in the fund management business in most countries would be well advised to heed this warning and speed up discussions about how to effectively curb excessive pay that a small group of executives awards to its members year in year out with not change in trend in sight despite growing public opposition and anger.
(26/02/2011)

Merger Rules - Do not leave initiative to Politicians and Courts!

2011-02-25T09:45:00.002Z

A decision by a Delaware Court appears to entrench a company's board to issue 'poison pills' when faced with a takeover bid. Pro-Governance argues for a long time that reforms of the corporate governance system in the US - and most other countries - cannot be left to politicians and courts. We have repeatedly proposed that the rules regulating any takeover or merger proposal should be made subject to changed regulations. The top 100 fund managers in the world effectively control all listed companies as their combined holdings are the largest bloc of ownership. Unfortunately their managements are neglecting their fiduciary duties to the real owners of the shares, the individuals who are ultimately the true owners of all assets managed by banks, fund managers, insurance companies and pension funds. These owners are left without any voice in shaping corporate governance policies which leaves fund managers in a situation where they are only paying lip service to the demands for change in their behavior.

Executive Pay - consultative vote not enough

2011-02-23T09:37:00.001Z

There is disappointment among corporate governance activists in Switzerland who hoped that (purely 'consultative') shareholder votes about (top) executive pay would lead managements to moderate their greed. Novartis Chairman and CEO shows no shame when accepting a 'compensation' package calculated to be worth Sfr 25.3 million in 2010. Apart from the fact that combining the two top offices is already a dubious corporate practice the fact that he gets 'compensated' for accepting a no-compete clause is another slap in the face for shareholders - but also for other employees who generally do not get separate compensation if they have to submit to a no-compete clause in their employment. One should think that someone who certainly has a high degree of intelligence like Vasella would be perfectly able to make a decision whether or not to accept such a clause when accepting his basic pay package. That he gets substantial pay for 'retirement benefits' that are not necessarily aligned with the pension benefits of ordinary employees is another contravention to fair play. Summing up we can say that these 'consultative' votes are a waste of time. We call for binding votes on top executive compensation and demand that all perks (health, pension, share options etc) are made available to all employees on a pro-rata basis related to basic salary. Even better, if top management is prevented from receiving discretionary bonus awards the whole discussion about annual votes on compensation would become superfluous.
(23/02/2011)

Ban Narrow Profit-Share Plans

2011-02-22T19:54:00.001Z

Some corporate governance activists may applaud the decision by Citigroup to set up a profit-sharing plan for a few dozen top executives, giving them a small share of the company's profits over the next two years. (Wall Street Journal). But Pro-Gov opposes this sort of narrow plan that is set up by top executives for the benefit of their own members. It is highly arbitrary and smells of the urge to enrich themselves under the guise of creating 'shareholder value' while discriminating against the overwhelming part of the workforce whose contribution is as critical as the contribution made by top management. In simple words: where would a company be without its workforce? When clever management gurus and their intellectual relatives in the business schools argue that the CEO and a few close associates are the main factor behind the success or failure of a business they may make a valid point. But it is only ONE of several factors and to assume that the remaining employees are just automatons - replaceable at will and as relevant as peasants during feudal times - is not only wrong in fact, it is also a sign of moral bankruptcy. Shareholders - and in particular their fiduciaries in the fund management industry - are called upon to stop these crass and inequitable schemes of enrichment.
(22/02/2011)

Lobbies, Socially Responsible Investing and Democracy

2011-02-22T11:26:00.003Z

News that the Swiss insurance group Zurich Financial Services spent Sfr 35 million on political lobbying during the past decade raises a few important points: where should the limit on such lobbying be? Are the shareholders able (and willing) to control such interference with the democratic process? In an age where socially responsible investing has become a significant factor influencing investment decisions this kind of activity must certainly receive priority attention from investors - many if not the majority are only fiduciaries for the real investors, i.e. private savers in mutual funds, insurance companies, pension funds and the fund management units looking after investment portfolios in private banking departments.
(22/02/2011)

Stock Exchanges - do they still have a role to play in Corporate Governance?

2011-02-19T16:46:00.002Z

Looking at the listings for several major stock exchanges on Allison Garrett's governance blog one has to ask whether stock exchanges do still have a role to play in creating and administering effective corporate governance safeguards. The big boys among them seem to have as their main aim in life the maximising of their profit (and the compensation of the select few at the top of the management pyramid). The rest is a motley collection of sleepy bureaucracies that are not even accountable to their shareholders, much less to the wider community of shareholders.
(18/02/2011)

Merger deals must come out into the open

2011-02-17T10:17:00.005Z

When a US judge harshly criticises a leading investment bank (or should it be commissioned merger broker?) saying the bank "secretly and selfishly manipulated the sale process" to boost its fees (Wall Street Journal) it sheds a rare light on the fact that these significant transactions are usually handled behind closed doors. As we have argued on previous occasions, in the interests of both the selling and the acquiring companies these transactions must be handled in a much more measured and transparent process. Advisory fees are significant - for both parties - and have to be paid whether a proposed transaction is eventually consumed or not. It can also be questioned why a company that is the object of (of often unwanted) attention by a 'suitor' or 'predator' should feel obliged to hire banking, legal and public relations advisers when it is the shareholders who should have the ultimate say over the deal in any case. Certainly it must be in the realm of the possible for management to explain the pros and cons of a merger proposal? One can only hope that this case is seen as a warning by all investment banks many of whom have used similar questionable practices in the past.
(17/02/2011)

NYSE/Deutsche Boerse Merger: Backroom deals no longer acceptable

2011-02-17T09:19:00.006Z

That the US suffers from an excess of litigation is well known. There is also a surplus of shareholders willing to take a chance and sue companies in the hope of getting some financial gain at the expense of the other shareholders. But when a shareholder announces (Bloomberg) that he is going to sue NYSE Euronext seeking to block its planned $9.53 billion sale to Deutsche Boerse AG we have sympathy for his motives.
Mergers always carry the risk that one of the two parties is profiting at the expense of the other. It may be the buyer or the seller but as value is not easy to ascertain it is likely that in the majority of the transactions there is a loosing party. All the more reason to prevent managements from taking hasty decisions. Pro-Gov is against all sorts of 'lock-ins' that make it costly for one of the two parties to abandon the deal if their respective shareholders reject the proposal. The voting system should also be adjusted to avoid a narrow group of shareholders to dominate the outcome of any vote. The quorum should be high enough to prevent the buyer from reaping the equivalent of the 'consumer surplus' - the situation where dispirited shareholders that would have held out for a higher-than-agreed buyout price throw in the towel in order to avoid being left with holdings as a (largely disenfranchised) minority shareholder.
(17/02/2011)

Outcry, Rebellion pointless - only Shareholder action will do

2011-02-15T11:30:00.001Z

It is reported that "many companies could face outcry over executive pay and board accountability during their annual shareholder meetings." (Wall Street Journal, 14 Feb 2011). But these emotional reactions will leave entrenched managements and their acolytes in the boards unmoved as they pocket their disproportionate 'Rewards'. Even worse, when shareholders (usually their lame fiduciaries among the institutional investor community) 'abstain' from voting through these 'compensation' awards they really fudge the issue rather than taking a (controversial) stand in defense of the interests of their clients and investors.
(14/02/2011)

Government to review and demand sex quotas

2011-02-13T10:44:00.002Z

While we are pleased to note that a government review is likely to reject calls for quotas to promote female representation on company boards we are worried that the 'review' will nevertheless 'demand' that FTSE100 companies set clear target and will also threaten more draconian measures if no action is taken. This news raises a number of interesting questions - about corporate governance but above all about democracy and due legal process. Who is in charge of such a 'review' in the first place? What democratic mandate does an appointee (inevitable a Lord suchandsuch) have? What prevents him to simply put his personal bias into a 'review'? How can it be right that a Government can simply 'demand' that its citizens behave in a certain way without having this 'demand' legitimised in democratic fashion? Why should special laws exist for FTSE100 companies and not for all the other thousands of listed or private companies (some of them are larger than their FTSE100 brethren)? And why is the group of citizens most affected by these politically-inspired machinations - all the investor-citizens who risk their capital in order to finance businesses - and their 'fiduciaries' (the major fund management and investment companies) so quiet when it comes to defend its interests? As long as the democratic system is dysfunctional it lends itself to abuse by narrow 'elites' and unaccountable lobbies. But until democratic reforms are achieved the least one would expect is that share owners and business put up a proper fight and stand up for their rights. The very minimum would be a judicial review as arbitrary and discriminatory quotas are an affront to the human rights so many activists are claiming to speak for at present.
(13/02/2011)

EU to curb influence of major Accounting firms

2011-02-12T11:02:00.001Z

Like the rating agencies the big four accounting firms so far have escaped any major regulatory reform. So we welcome the announcement that the European Union plans to present a draft law curbing major auditing firms. While we are no friend of regulation - especially from the EU - we have for a long time argued that the way that listed companies select their auditing firms needs closer scrutiny. The party that really should supervise their activities are the shareholders. Management should have the right to be presented with their findings but should rely on the internal audit departments for their own purposes. Shareholders also should have more influence in deciding which firm is appointed to carry out the regular outside audit. Audit firms should also be changed at regular intervals and not be allowed to carry out non-audit work for their clients.
(12/02/2011)

Why are CEOs rarely fired? - Study of Board behavior

2011-02-10T10:29:00.001Z

An interesting study looks at reasons why only 2% of American CEOs are dismissed in a year.
(10/02/2011)

Banking Pay: US Watchdog had no bite

2011-02-10T07:55:00.002Z

'The government's restrictions on pay at bailed-out banks had little lasting impact because officials soft-pedaled some issues and did much of their work out of the public's view, a congressional panel says. (Associated Press)
(10/02/2011)

Are stock exchanges offering fair play?

2011-02-08T13:31:00.001Z

A small order I placed in an ETF on the London Stock Exchange today showed that even for small orders the markets offer an uneven playing field for the unwary. The second my order had been entered there appeared an offer that was just placed 1 pence inside my limit order. Given that the spread in this 'liquid' ETF was a quite wide 1 per cent between bid and offer there was obviously room for the 'market maker' to offer an improved price compared to my order. While the behaviour of the dealer can certainly no be called front running it still leaves the question why he has not put the better price on the system in the first place. Having my order behind his offered price gives him the opportunity to cover any sale made at his new price by 'lifting' my offer. Given the proliferation of competing dealing platforms also makes it difficult - if not impossible - for the retail investor to be sure that no transaction takes place at the limit price (or above it) which should have included the limit order.
(08/02/2011)

Conflicts of Interest at Proxy Advisory Firms

2011-02-08T10:49:00.004Z

A number of large publicly-listed companies in the United States have started a campaign to counter the growing influence of large proxy advisers such as ISS or Glass Lewis. Pro-Governance has watched their activities also with concern as these outfits are profit-oriented businesses and their motives are not necessarily ruled by altruistic considerations. Pro-Governance misses the lack of any input from the REAL investors, that is the citizens who entrust their savings to fund management firms.These firms are the fiduciaries of the savers and should try to work in their best interests. This means not only to strive for the best possible investment performance but also exercising their duties as shareholders of the businesses they invest in. At present neither the fund managers nor the proxy agencies make any discernible effort to take account of the wishes of their investment clients. At best, Companies and Fund Managers bend to pressure from the media, politicians, the odd activist investor or NGO's. As a consequence it comes as no surprise when the proxy agencies find themselves under fire. Another aspect relating to their operation is the fact that their recommendations are often opaque cop-outs ('We recommend to abstain') or neglected by their clients (in that case it is not clear why they would pay any fees to the agencies as they are obviously a waste of investment clients' money). Proxy Agencies may have a role to play if they operate in a way that is somewhat similar to the operation of political parties. Fund Managers in that case would obtain a proxy from their clients and would receive binding instructions to follow the recommendations of the proxy agency selected by the client to represent his views. Alternatively, Fund Managers would solicit input from their clients directly. While this is impractical for the multitude of proxies that would be required if specific instructions on a company-by-company basis would have to be obtained, it would be perfectly possible to make more effort to obtain the clients preferences on questions of principle. Creating a link with their investor clients would also allow the fund management industry to exert more influence in discussions about corporate governance and regulatory affairs.
(08/02/2011)

AOL buys Huffington Post - Shareholders need more say in M+A

2011-02-07T20:42:00.001Z

The Huffington Post deal is another case that demonstrates that shareholder power must urgently be strengthened. When a company agrees to pay more than 10 times historic revenues (2010 basis) it should be clear to detached observers that it is high time for ALL mergers and significant transactions to require shareholder approval. This will protect the buyers from overpaying and the vendors from being short-changed.
(07/02/2011)

Are all Private Investors Idiots?

2011-02-06T14:16:00.002Z

That seems to be the assumption under which regulators in the EU and FSA publish a raft of consultation documents, guidance notes and draft new laws argues Matthew Vincent in the Financial Times. I would like to add that these diktats lack any democratic legitimacy as they are cooked out by unaccountable technocrats and bureaucrats that are not answerable to the citizens. More and more regulation means higher costs that are ultimately borne by the real investors - the ordinary man on the street who is the paymaster of all fund managers, securities firms and regulatory bureaucracies.
(6/02/2011)

Should Interest be tax-deductible for Business?

2011-02-04T09:12:00.003Z

One aspect in the debate (Dirk Schoenmaker, 'Removing tax advantages of debt is vital') about this question is the fact that by making it less attractive for companies to treat interest payments as an ordinary business expense legislators have create a bias against equity finance. (Listed) companies would have to substantially boost their equity issuance if they no longer could rely on favorable tax treatment of their borrowings. This would mean that the Shareowner culture would receive a substantial boost - especially if investors would at the same time get tax incentives to invest in shares. For example, savings products that are invested in bank deposits are in many countries included in incentive schemes that are intended to reward retail savers.
(04/02/2011)

Facebook Share Issue: Where are global regulators?

2011-02-03T21:52:00.001Z

One amazing aspect of the Facebook deal that is promoted by Goldman Sachs is the fact that global regulators seem to be completely absent - despite the fact that possible questions by the SEC in the United States stopped the placement to US domestic investors. Given the noise made by politicians in all civilised financial markets all over the world about the need for more protection of investors and savers this silence is really DEAFENING and shows how much regulators are behind the curve.
(03/02/2011)

M+A: Success ratio lower than at Russion Roulette

2010-12-31T13:56:00.001Z

The statement may seem to be a bit extreme but investors should be extremely cautious when assessing merger proposals in which a portfolio company is involved. This applies to investors in the bidder as well as in the target company. A win-win situation is highly unlikely and there will be one eventual winner (minus costs such as investment banking, legal and accounting feeds as well as integrating the business). All too often senior management falls in love with an idea or is egged on by advisers who are paid on completion only and therefore have no real stake in the ultimate success of the transaction. 'Independent' board members are anything but independent as they basically are creatures of the chief executive and in most cases nothing but an echo chamber for his 'vision'.
31/12/2010

Treat Private Equity as normal Companies

2010-12-30T15:38:00.002Z

The surge in "pass-the-parcel" deals among private equity firms illustrates that a large portion of any profits created by their activity ends up in the shape of fees in the pockets of promoters, insiders or (accounting, tax, legal and banking) advisers. The claim to be primarily driven by the desire to build businesses for the long-term is negated by the urge to crystallise fees. More often than not these fees are more the result of lucky timing. Hapless private shareholders have been induced to sell their holdings to private equity businesses at the wrong time, i.e. too cheaply. Weak takeover regulations make it very difficult for institutions and retail investors alike to keep their eye on the long-term and as a consequence usually end up the losing side when facing a deadly combination of a determined bidder - often in cahoots with incumbent management that is promised lucrative employment after the takeover is completed. To add insult to injury the same investors are later privileged to buy the same assets from the speculative funds at a higher price. Does anybody wonder why the returns from equity investment have been so mediocre in the past 10 years? If anyone would try to drive a nail through the heart of shareholder democracy he could not do much better than the private equity oligarchs and their acolytes in government, academia and the media. 'Let them eat cake' Marie Antoinette famously remarked. Little did she know about the million dollar parties that private equity moguls hold at the great unwashed public's expense.
30/12/2010

Heathrow Airport Manager 'foregoes' his bonus

2010-12-23T09:56:00.003Z

This statement gives the impression that he was expecting a bonus as a matter of course. No discussion about whether or not he has earned a bonus in the first place (after all, the big snow hit Heathrow before the end of the year, so final numbers could hardly have been determined already). But more importantly, a bonus seems to have become an entitlement, and a very large one on top of that as the bonus often is larger - sometimes by multiples - than the base salary a senior executive - and above all the CEO - can expect to receive. We have suggested on numerous occasions that a bonus for Chief Executives and other senior managers should not be handed out. Firstly because it is very difficult to calculate what part of the overall success of a company is due to their efforts and secondly because it is a slap in the face for all the other employees who make a contribution to the enterprise. Top management should only be entitled to a company-wide bonus system (including perks) that is paid to all members of staff as a percentage of base salary.
23/12/2010

Foreign Listings: A regulatory Black Hole

2010-12-22T20:13:00.001Z

The avalanche companies from countries with were loose regulatory regimes that seek a listing in a prestigious stock market has become quite a torrent in recent years. The authorities confirm that money also talks when the design and implementation of financial regulation is concerned. In search of lucrative fees for brokers and fund managers concerns about the quality of the accounts, legal protection of shareholder rights and corporate governance are brushed aside and the motto is: 'Anything goes!'. We wonder if it would not be wiser to apply regulations with extra severity when foreign companies want to benefit from a financial tradition that has been built up over many years, centuries in some cases? The ability of the courts, investors and regulators to sanction any company in a far-away land that does not play by the rules is minimal. It should also be reviewed if fiduciary institutions (Mutual Funds, Pension Funds, Banks and Insurance Companies) should not be made subject to closer controls, possibly even prohibitions to invest in countries where fiduciary standards are not of a high-enough quality. Only large companies and only those who fulfill the extra level of safeguards that we would suggest should be allowed access to capital markets.

Bank Pay: Special Case of a general Problem

2010-12-22T20:03:00.001Z

As the U.S. considers a new push on bank pay we would like to remind the Solons in charge that the fish starts to smell from the top. So part of the solution to excessive bank pay is reform of ALL top executive pay. As Pro-Governance (Pro-Gov) has repeatedly suggested, the combination of all top executive pay into a simple structure (basic salary and a bonus on a percentage basis that is distributed to ALL employees) would go a long way towards solving this problem. Once top pay is under control the CEO has more of an incentive to reign in compensation. Why do Jamie Dimon or Lloyd Blankfein need a 'bonus', for showing up at the office? As long as the major shareholders, the institutions - who are really fiduciaries for Jo Public - neglect their duties and delegate supervision to regulators, politicians or Stock Exchanges there will no end to this abuse and the saying will remain in force: nothing succeeds like excess!
22/12/2010

Ireland, Hungary expropriate pension funds

2010-12-14T09:02:00.003Z

The idea of putting one's savings into officially-sanctioned pension funds receives another serious setback when EU member states (or better their ineffective politicians) think that the only way they can save themselves from further fiscal and economic disasters of their making is the expropriation of pension funds that to all intents and purposes have been created to provide their beneficiaries with benefits during their years of retirement. Where are the regulators that are so busy sticking their noses into every aspect of our daily lives? Where is justice and democracy?

13/12/2010

No effective Inquiry into high speed trading

2010-12-12T13:03:00.001Z

While a former Goldman Sachs employee is exposed to the full force of the law after having been accused of stealing high speed trading secrets that generated millions of dollars in profits for the investment bank we are kept waiting for a full and public inquiry into the way these codes affect the public market in securities. I fear we will have to wait a (very) long time, be it in the US or elsewhere.

12/12/2010

Abusive Merger Practices: Period of Exclusivity

2010-12-11T14:20:00.001Z

From time to time one notices that a potential bidder has been granted a period of 'exclusivity' by the company that may be acquired. While this practice may appear to be quite innocent it is open to abuse by the presumed bidder. It is also a free gift and there should be a penalty fee payable if the bidder wishes to withdraw from the bid.

11/12/2010

Southern Cross - heavy debtload legacy from Private Equity Days?

2010-12-11T14:04:00.002Z

The merry-go-round that has public companies taken 'private' by speculative funds only to see them floated to the public a few years later often leaves companies in a weakened position. Lack of investment, heavy debt loads and unfavorable capital structures mean that the only winners in this game of 'pass-the-parcel' are the insiders. Case in point: Southern Cross Healthcare, Britain's biggest care home provider, was bought by Blackstone in 2004 from another 'Private' Equity firm only to be floated on the public market two years later.

11/12/2010

The future of Pensions - must reads for the concerned

2010-12-07T18:51:00.005Z

Don't stop thinking about tomorrow by Con Keating

a few tasty morsels of wisdom:

"If the objective of government is the cessation of
provision of voluntary private sector occupational
pensions, it should say so. If not, it should not allow its
civil servants to adopt policies and practices which
ensure that this will occur."

The savings adequacy problemis compounded by the
fact that DC ‘pensions’ are just tax-advantaged savings
schemes which leave the individual exposed to risks
which are unmanageable"

And another paper well worth reading:
Tomorrow's investor: building the consensus for a People's Pension in Britain by David Pitt-Watson

07/12/2010

No improvement in pay practices at banks - study

2010-12-01T10:10:00.001Z

An study commissioned by the Council of Institutional Investors comes to the conclusion that changes to pay practices at major banks in the USA have lead to a deterioration rather than the intended improvement in incentives. The real question now is: if the CII is aware of this situation, why don't its members do something about it? After all, the top 20-30 investment institutions are in effect controlling all major public corporations as their combined stakes often cluster around the 40-50 per cent mark. Pay practices at banks and major financial institutions should be subject to the same restraints as those at any other publicly listed company. We have often suggested simple measures that could drastically alter compensation practices.
01/12/2010

French Takeover regulation a laughing stock

2010-10-31T14:04:00.001Z

Again a canny stock market operator has managed to get himself a sizable stake in a company without paying a premium. Shareholders who sold too cheaply are left without protection in France as the AMF regulatory body is unable to decide on which side of the shareholder governance debate it wants to sit. (LVMH acquired major stake in Hermes)
31/10/2010

U.S. seeks to shield Goldman Sachs Secrets

2010-10-28T10:55:00.003+01:00

"Federal prosecutors in Manhattan this week asked a federal district judge to seal the courtroom at the forthcoming trial of a former Goldman computer programmer accused of stealing the firm's computer code. The trial is set to start in late November." (Wall Street Journal, 27 Oct 2010)

Pro Gov continues to argue that the trading process in listed securities markets cannot be allowed to be dominated by secretive algorithms that are suspected to skim off profits at the expense of public order flow - be it from retail or institutional investors. The NYSE for example used have - and still has - very open rules about 'priority and predence' in relation to the execution of orders. In the age of computers it should also be possible to ensure that clear rules are adhered to - even if orderflow is measured in nanoseconds.
28/10/2010

Shareholder anger at relocation expenses

2010-10-26T11:51:00.002+01:00

Activist investors are turning up the heat on companies that give relocating executives generous benefits to cover the cost of their depressed home values (Wall Street Journal, 25 Oct 2010)

While the issue of relocation expenses may appear to be of minor importance it is an issue that can and should be closely monitored by the investing institutions that are to a large extent the fiduciaries of private investors. It is unrealistic to expect institutional money managers to micro-manage the businesses they are investing in. It is not their job to decide, for example, what goods a department store will have in the showroom for the Christmas season. Therefore calls for investors to 'have a dialogue' with management is an empty gesture. (Apart from the question how managers would have fireside chats with possibly hundreds of fund managers and analysts in the case of large corporations. Equally, fund managers with several hundred holdings cannot be expected to have conversations with all those companies). So the only way forward to improve corporate oversight is to set clear guidelines and rules that investee companies have to meet. Help with relocation expenses depends on business judgement - just like any other form of pay. We at Pro Gov argue that the pay for top management should follow rigid guidelines. If pay at the top is under control the pay further down the ranks would also follow a more moderate path.
26/10/2010

High-Frequency Trader fined in US

2010-10-13T08:16:00.002+01:00

FINRA sanctions Trillium Brokerage Services, Director of Trading, Chief Compliance Officer, and Nine Traders $2.26 Million for Illicit Equities Trading Strategy. This is probably only the tip of an iceberg and investors will not be able to have confidence in the workings of securities markets until high-frequency trading is properly supervised and regulated.
13/10/2010

Who consults the REAL investors?

2010-10-11T15:15:00.002+01:00

Representatives of the Asset Management Industry demand that European Union regulators increase engagement with asset managers with them in order to better take into consideration their concerns when legislating for regulatory changes. The forgotten party, however, are the real investors in mutual funds and pension funds, i.e. the ordinary individuals who supply the savings that are managed by the fund management industry. It is high time that appropriate associations are developed that can speak with authority for the interests of the wider public.
11/10/2010

When is a Bonus not a Bonus?

2010-10-11T08:36:00.002+01:00

If reports that the new CEO of Hewlett-Packard has received - among other 'compensation' - a (promised/guaranteed?) bonus of between 200 and 500 per cent of his basic salary one has to wonder what the meaning of the word bonus is. The practice of making a bonus nearly a fixed/guaranteed part of the salary package for CEO's (and other senior managers) makes a mockery of the word's meaning. It is also a slap in the face for the many employees of a company that make a contribution to the success of a business. When a new CEO joins a well-established company like HP he often is inheriting a business that has been build over many years and owes it's market position to many past and present employees.
11/10/2010

May 'Flash Crash': Blame the Computer!

2010-10-02T14:23:00.008+01:00

While the effort of the regulator in telling the story about the infamous May 2010 stock market 'flash crash' has to be applauded, it leaves the reader with no clear message about what is being done to prevent a similar debacle taking place in the future. The amount of selling unleashed by the presumed perpetrator - Waddell & Reed Financial, courtesy Barclays Capital - is not particularly large given the stupendous amounts of money managed today's 'fiduciaries' on behalf of the investing public. $4.1 billion can easily be mustered by literally hundreds of players - especially given the amount of leverage that is available in the derivative markets. So while we may accept that the flash crash was simply due to inept trading execution we are left with a sneaking suspicion that other 'investors' with a more ruthless killing instinct may just set off the next crash on purpose in order to cash in during the ensuing panic. A similar mechanism was at work in the 2007-2009 credit crunch when speculators drove down the indices in the derivative market for mortgage and asset-backed securities. This created a 'death spiral' in the market for these assets which contributed to the near-collapse of the global banking system. Ironically, 'investors' who were prominent in that game and in some cases made billions out of this dislocation are still feted as heroes by the financial markets and assorted cheerleaders in the financial media.
(01/10/2010)

Who represents the investing public?

2010-09-29T19:23:00.008+01:00

On 15 November 2010 the European Venture Capital Association hosts a conference in Brussels: AIFM directive: What's next? The problem - as is so often the case when industry representatives and regulators meet - is that the investing public, the ordinary investor who is ultimately directly or through his fiduciaries in the fund management industry supplying the funds for all investments, is not represented at all as far as we can see. There are plenty of lawyers and accountants (as usual they smell healthy fee income thanks to an ever-increasing burden of regulation) but who speaks for the real investor who picks up the bill in the end? The organisations which one would hope to step into the gap are noticeable by their absence. Has no one remembered to invite them or can they not be bothered?
(29/09/2010)

Punishments meted out at Companies miss target

2010-09-29T08:24:00.006+01:00

Time and again we note that regulators hand out fines against companies that they have found to be guilty of transgressions. What is usually overlooked is the fact that this means that innocent investors are in effect punished for misdemeanors or even crimes that they were only responsible for in the most indirect fashion. The real culprits are the managers of the companies and in most cases they are able to get off lightly and even carry on in their roles at the same companies. Topical example: Hypo Niederoesterreich vor Millionenstrafe
(29/09/2010)

Whose Gold coins do high-frequency traders pick up?

2010-09-17T14:20:00.005+01:00

With respect to the benefits of shaving three milliseconds from the time an order reaches the market, Ben van Vliet, a professor at the Illinois Institute of Technology, has the following to say (Forbes Magazine, 27 Sept 2010): "Three milliseconds are close to an eternity in automated trading, this is all about picking gold coins up off the floor--only the fastest person is going to get the coins." If a statement like this is not a wake-up call to the regulators all over the world the individual investor (who ultimately is the owner of every penny invested in the financial markets even though the majority is managed for him by all sort of fiduciaries) has no chance to get fair treatment in the investment game. (17/09/2010)

Independent Investment Research under Threat

2010-09-12T10:21:00.004+01:00

We are not able to confirm details in today's New York Times article about the lack of supportfor Dick Bove. BankAtlantic, a Florida bank, sued him, accusing him of defamation after he wrote a report about the banking industry in July 2008, just as the financial crisis was starting to boil over. The bank contended that the report falsely suggested that the institution was in trouble.
But if his claim that several associations that represent stock analysts or the securities industry declined his requests to help him pay his legal bills it leaves a sour taste in the mouth - to say the least. What use are the Securities Industry and Financial Markets Association, the New York Society of Security Analysts and the CFA Institute if they decline to make a stand for independent investment research. To cap it all, they declined to comment when approached by the New York Times. Even worse - the investment bank Ladenburg Thalmann, his then employer, chose to settle its end of the case by paying BankAtlantic $350,000, without admitting to any wrongdoing, and leaving Mr. Bove to defend himself. We are glad to report that Bove won his court case against the Bank but is still left with legal bills totalling $800,000. The stakes in a case like this are high as any successful lawsuit against an analyst would deter critical analyst comments in the future and stifle independent research. (12/09/2010)

Are Media Investors responsible?

2010-09-11T18:51:00.007+01:00

The controversy about the role of the media in the United States leads to the question about the responsibility of investors for keeping the public domain free from distortions of the truth that is only designed to support a political view. Of course, it has always been accepted that a newspaper or other media product is partisan and states which aims it supports. But in a case where a media product aims to distort the facts and make political hay on that basis we doubt that the shareholders can claim innocence - especially if they are institutions that manage the money of the wider public as fiduciaries - pension funds, mutual funds and insurance companies. Socially responsible investment does not just mean to avoid tobacco companies or defense contractors, it also means a wider social responsibility like upholding minimum standards of morality and truthfulness in the public domain.(11/09/2010)

Pensions not secure from political meddling

2010-09-03T11:01:00.005+01:00

Anyone who believes in the politicians' assertions that pension savings are safe from political meddling would be well advised to take note of news that Local authorities here in the UK are considering to use pension funds to finance infrastructure spending. To make matters worse, the citizens are deprived of any means to influence these decisions which could have a major impact of their standard of living during their retirement. We expect political pressure to raid pension funds to increase as the fiscal situation in most countries continues to deteriorate. (03/09/2010)

Individuals think markets are not fair

2010-08-25T09:27:00.003+01:00

The 'flash crash' experienced by the US stock market on May 6 further damaged the confidence of individual investors in the integrity of the markets for equities (Wall Street Journal, August 24, 2010). The lack of disclosure about the way that 'dark pools' and high-frequency trading operate has to be ended if there can be any chance of restoring a level-playing field where individuals again commit themselves to investing in equities. (25/08/2010)

Fund Management Industry: whose interests does it protect?

2010-07-14T15:17:00.003+01:00

A recent squabble between asset managers in France illustrates that the fund management industry sometimes seems to forget whose interests it should primarily serve. The debate relates to the decision by AFG, the French fund management trade body, to allow foreign managers to join the association as 'second-tier' members. The established foreign member firms were always encouraged, even compelled, to operate costly local teams before they were allowed to join as full members. This overt form of protectionism made it difficult for non-accredited foreign fund managers to penetrate the French market to any meaningful degree.
But rather than fight among themselves the industry should be united in condemning protectionist policies as they ultimately lead to higher costs for the investors. (14/07/2010)

Intermix Acquisition: Directors accused of favoring bidder

2010-07-04T15:59:00.003+01:00

We have for a long time argued that investors have to constantly be vigilant if they are shareholders in a company that receives a takeover bid. The interests of the executives and the board directors are not necessarily served by receiving the highest bid but may follow their own agenda. A recent court judgement in the case of the acquisition of Intermix by News Corporation rejects to objection of the directors to the court case brought against them. (04/07/2010)

Spread Betting firm worth more than London Stock Exchange

2010-07-04T15:35:00.004+01:00

Nothing could illustrate the absurdity of tax policies more than the fact that the British spread betting firm IG Index has now a larger stock market capitalisation than the centuries-old London Stock Exchange. As long as governments discriminate against individual investors in equities and even give tax advantages to those speculating on a short-term basis there is little hope for a level-playing field for retail investors. (04/07/2010)

Executive Pensions: transparency not enough

2010-06-25T10:41:00.007+01:00

The National Association of Pension Funds (NAPF) of the UK has written to FTSE 350 companies asking for more transparency over pensions for top executives. Unfortunately the letter does not call for directors' pensions to be cut but argues more clarity is needed so that shareholders can judge awards properly. Pro-Gov instead has long argued that all perks for top management - including pension schemes - should be made available to all employees on an equal footing - with contributions on a strict percentage basis related to basic salary. (25/06/2010)

CVC to give less information

2010-06-25T10:36:00.003+01:00

At a time when regulators and the public call for 'private' equity firms to become more transparent is is curious that CVC has taken steps to reduce transparency. The firm has set up a new holding company in Luxembourg that will allow it to file consolidated accounts. This will exempt it from corporate income tax, business tax and net wealth tax. (25/06/2010)

Crowd calling for head of Prudential Chairman

2010-06-21T13:39:00.002+01:00

We thought from the outset that the Prudential's attempt to bid for AIG's Asian business was a bid too far. Now some major institutional shareholders are said to try to effect changes in the Pru's executive suite.
But under a regime of proper corporate governance it would never have been possible for the management of a company to stray so far from the wishes of its shareholders. Permission to attempt a significant acquisition (or disposal) always be required beforehand. As a consequence the expensive replacement of senior management would also be unnecessary.

Realistic Taxes on Private Equity Managers

2010-06-09T10:07:00.002+01:00

The determined lobbying by the managers of Private Equity against increased taxes on 'carried interest' makes for depressing reading. In a time of general belt-tightening that will hit those on low income hardest the industry should do the honorable thing and admit that the light-touch taxation of the past years was an oversight by politicians and the public. It can be explained by the fact that 20 years ago the industries were tender plants that were hardly visible on the investment scene. Only the past 15-10 years have seen an explosive growth that made it hard to explain why people whose earnings in a good year can be larger than the GDP of many small nations should little tax - or even no tax at all in the case of 'non-domiciled' in the UK.
Carried Interest should never have been treated as capital gain, the only exception could be the returns on the actual cash that has been invested by the managers of the Private Equity Funds. Even there they may benefit from loopholes. They may allot themselves a higher share of the equity interest than is reflected by the amount of cash they put in. The same loophole may benefit the management of the portfolio companies, their equity interest usually differs widely from their actual cash investment. Maybe this tax treatment explains some - or even most - of the ability of the private equity industry to convince managers in public companies to join them (or facilitate their purchase of companies or subsidiaries at advantageous terms). We always had our reservations about the industry's claim of superior management performance. It would be much cheaper for the ultimate owner of industry - the public investors - to simply change management rather than sell out only to later buy the same businesses back at a much higher price.

Tax honesty on Carried Interest for 'Private' Equity

2010-05-24T13:29:00.001+01:00

Managers of 'Private' Equity funds effectively manage money from Joe Public. There is nothing private to it - except the level of secrecy surrounding performance, fees and the compensation of the managers and the executives of the portfolio companies. Sometimes these people invest in funds or portfolio companies - but even if they do it tends to be on terms that favor them, i.e. they amount of money they put in is disproportionately small compared with the terms the public receives. So treating carried interest as a capital gain is to a large extent nothing but the abuse of a tax loophole by the insiders at the expense of the investing public. In addition, many funds - especially international ones - are located in tax havens which further diminishes their transparency and increases the tax benefits to their managers. Boosting efficiency of private industry does not require the private equity business. Installing better management would do the job as well - and at much lower cost.

How to regulate High-Frequency Trading - part 2

2010-05-09T11:57:00.005+01:00

After last week's 'fat-finger-accident' a full investigation into the methods of HFT is required more urgently than ever. This should comprise full public disclosure of complete transaction records so that independent outside analysis would be possible. This would help to find answers to two questions in particular: (1) is the high-frequency trading fair to all market participants (2) who profits from it? As some major firms guard the secrets of their algorithmic trading (Goldman Sachs for example persecutes a former employee who it accuses of taking proprietary information about algorithms) there is a suspicion that things are skewed against the wider investing public - why else would someone try to keep information secret?

A quote from Barron's Magazine may shed further light on this problem: "our market structure has evolved to cater to masters of expensive technology, deployed unfettered by participants whose only concern is to squeeze out every last picosecond and fractional cent." (Sal Arnuk and Joe Saluzzi of Themis Trading).

Prudential: what deal has been agreed regarding capital adaequacy?

2010-05-09T10:32:00.007+01:00

The pension system in this country to a large extent depends on private companies such as the Prudential to supply savers/retirees with a rock-solid guarantee that they will be there when and as long as they are needed. Deals such as the one just announced can at best be described as a stitch-up where the public is left in the dark about the exact terms and no one but the FSA, the quango in charge of protecting the interests or savers, investors and retirees, knows what standards are applied. Even worse, should a disaster occur and the provider get into trouble the government can simply walk away - even if the financial regulator made errors in assessing the financial health of the insurer. That shareholders are also kept in the dark is par for the course. As a German banker once famously said: Shareholders are stupid and insolent: stupid to invest and insolent to expect a dividend.

P.S.: It may amuse the reader that The Times has refused to publish a version of the above comment on its Website. We can only assume that we have touched a raw nerve and that the editors did not want to give the impression that they allow criticism of the authorities to be published on their site.

Does Politics have to get involved in Governance?

2010-04-26T17:18:00.001+01:00

We have repeatedly pointed out the double conflict of interest that restrains institutional fund managers from taking a more active role in reigning in abuses in listed companies. The Institutions are themselves often the beneficiaries of lax oversight (in case they work for listed fund management companies) and also have to tread carefully in order not to be cut off from profitable business by the managements of companies they do - or try to do - business with. Real progress in corporate governance will only be possible if the ultimate share owners - the public - is effectively organised and represented. The longer the representatives of the fund management industry drag their feet over this issue, the more likely will it be that politicians will have to be involved.

UK: Savings no answer to foreign takeovers

2010-04-24T13:52:00.003+01:00

There is a lot of hand-wringing in the UK about what to do to stem the complete sell-out of British Industry. In a week when the state-owned Deutsche Bahn was allowed to take over Arriva this subject has a special relevance. Apart from the absurd situation that a posse of 'Sovereign Wealth Funds' and nationalised industries are already controlling a substantial part of British Industry, the lack of leadership among the political circles can only astound. The main rule maker in matters concerning takeovers, the innocently named 'Takeover Panel', is basically a club that is dominated by the interests of the Merger and Acquisitions Industry. Their representatives round-trip regularly between lucrative jobs in the M+A business and even more lucrative jobs in the same industry after they served two years making sure that the M+A bandwagon runs smoothly and the flood of related 'advisory' fees does not dry up and thus threaten their Christmas bonuses. We have repeatedly pointed out that the rules of the M+A game are stacked against the long-term investor (in both the buying and selling shareholder camp given the fact that more mergers destroy value than create 'value', even in the light of the fact that the - usually negative - ''value' loaded on employees and the taxpayers is usually excluded from any evaluation of mergers). Last not least the fact that even representatives of established institutional investment firms publicly proclaim on business TV that they make the real money only when a company gets 'taken out' (sic) speaks volumes about the culture - or lack thereof - that predominates among the fiduciaries that are responsible for the investments of the ordinary citizen. We do not even want to mention the attitudes inside the 'hedge' fund community where the word greed is the only fit description for their management culture.

Time to restrict 'Private' Equity?

2010-04-13T14:21:00.005+01:00

Once every so often the Wall Street Journal gives space to a voice that does not toe the party line. So it was refreshing to read an article that chimes with our view on the Private Equity business. We always argue that the name Private Equity is first of all a misnomer, it is not 'private' at all as most money comes from the public, mostly through fiduciaries like pension fund managers. The performance and fee structure is highly non-transparent (at least to those who are the real investors and risk takers), maybe that is the reason why the business calls itself 'private'. The PE model also allows compensation for the chosen few at the top of the pyramid to be hidden from scrutiny. There is no justification for this as the investor pool is roughly the same as in public equity. Taking control of whole businesses is also not the idea behind mutual investing on a fiduciary basis. This type of activity can be perfectly executed in the form of an ordinary company - private or listed - and the business should be taxed and regulated on the same basis. Only the lack of organisation on the part of public shareholders, investors and pensioners has allowed the development of the excesses that plague the private equity model. The economy ticked along perfectly well before the advent of the 'Barbarians' and will continue to do so long after this abuse has been checked. It is high time that the fiduciaries which channel easy pickings to the few at the expense of the many take their responsibilities seriously.

False assumptions behind Defined-Contribution Pensions

2010-04-09T15:49:00.002+01:00

While the traditional employment-related pension (for ordinary mortals except molly-coddled public sector employees) is on the way to extinction, the solution dreamt up by the retirement industry (with the connivance of politicians) offers a very poor substitute. To expect people to successfully manage their retirement nest-eggs in the shark-infested waters of the global investment markets would be the same as expecting someone to perform brain surgery on himself. A lot of investment activity is structured on the premise of a zero-sum game where someone's winnings are dependent on the fact that someone else is losing. Most active investment management - and certainly the whole universe of derivative dealing and alternative asset management - is nothing else but a redistribution of wealth. In addition, the running of the casino is extremely costly and puts a serious drain on investment returns.

FSA clamps down on insider dealing - or does it?

2010-03-26T08:50:00.002Z

In recent days the FSA, the British Financial Services Authority, has conducted a series of well-publicised arrests of market professionals suspected of illegal insider trading. This may well be seen as an indication that the authorities have a firm grip on insider dealing but we would caution that clamping down on this practice is far from easy. Small players trading for their personal account may well be netted by increased supervision but the really big fish in the pond are institutions, especially hedge funds, that can easily mask insider trades among the multitude of trades they conduct on a daily basis.

US Lobbies stonewall increased shareholder influence

2010-03-17T09:36:00.003Z

Pro-Gov campaigns for a long time to restrain corporate managements from apportioning a disproportionate share of company profits for themselves. Lobbies like the Chamber of Commerce - who does NOT represent the shareholders of large public companies - and corrupt members of Congress are stonewalling legitimate proposals to increase shareholder influence in companies. It is absurd to exclude the real owners from substantial decisions and it is high time that their fiduciaries - esp the large investment institutions - take more responsibility. Non-US shareholders should also take the gloves off and start making their voices heard - just like some US institutions (and 'activists') have been doing for a long time with respect to non-US companies. Finally, regulators and governments outside the US should support interventions in favor of more corporate accountability. At the moment, the executive 'class' has a free hand to help themselves to the fruits of enterprise that should really accrue to the investors/risk takers.

Lehman, Cerberus and Bawag - Private Equity needs more transparency

2010-03-16T11:52:00.003Z

A news report about the curious connection between Lehman and the Austrian BAWAG bank makes reference to the fact that Cerberus, the 'Private' Equity firm that took over the bank, has brought this investment into the Dutch Promontoria Sacher Holding. The report states 'that there the traces of this investment get lost. It is not known which other large investors besides Cerberus have stakes in the Dutch Holding and are therefore investors in BAWAG.'
While not asking for an outright ban on buy-outs we are for a long time calling for regulations that would force 'Private' Equity Investors to disclose more information about their business. In this case it is not possible for depositors in the bank to make an informed judgement about the ultimate guardians of the institution. The ultimate stakeholders in the unnamed investors (likely to be pensioners and other public savers) are also kept in the dark about the activities of their trustees (management of their funds) as well as the terms and conditions of their investment.
One has to wonder about the tax status of this construction and where taxes are ultimately to be paid.

Tommy Hilfiger: another black eye for public shareholders

2010-03-16T09:43:00.003Z

News that the 'Private' Equity owner of Tommy Hilfiger has decided to flip the company for a tidy profit is bad news for the public shareholders who sold the company in 2006. We do not quarrel with the decisions of some - and the majority - of the erstwhile owners but this is another confirmation that 'SELLER BEWARE' should be written in block capitals on any offer to buy out the shareholders in a listed public company. All-too-often the process does not really reflect the long-term value of the company and rides roughshod over the philosophy of listing a company in the first place. As share prices fluctuate they will invariably most of the time deviate from the 'true value' of the company. This should not be an invitation for short-term speculators to take advantage of the situation. Holding the shares of a business should be a long-term commitment and dissolving the company should only be done in extremis, with the support of the overwhelming number of shareholders and after a price-finding process that does not favor a bidder (be it another company, a 'private' equity firm or management)

Shorts, Lehman and Price Discovery

2010-03-15T15:11:00.004Z

An article in the Wall Street Journal makes the point that short sellers help price discovery and cites the example of David Einhorn's (correct) criticism of Lehman Brothers in Spring 2008.
But what does this article prove? That the world should thank Einhorn for helping to precipitate the collapse of Lehman Brothers? If the short sellers have such a big heart they should just state their concerns and hope that management or the other shareholders - who are the ultimate controllers of a company - act upon the advice. That is at least what one would expect a responsible owner to do. One look at the share register of most listed companies makes it clear that most companies are effectively controlled by the same small circle of large institutional investors (BlackRock, Fidelity etal) and in a rational world it should not be beyond the power of the highly-qualified and well-paid professionals among their staff to be responsible guardians of the investor's interest. These firms are the ultimate force behind nearly all of corporate America (and by extension the World) and they can no longer hide behind arcane regulations or passing the buck to the governments.

Who needs Credit Ratings?

2010-03-07T15:39:00.001Z

Warren Buffet certainly does not need them as he prefers to do his own analysis. We also suggest that investors do their own cooking. The only instances that makes ratings useful for investment decisions happen to be the situations where the consensus and/or ratings appear to cause a mispricing in the underlying security that allows a canny investor to benefit by taking the opposite side of the trade. As long as ratings are based on hard facts, usually numbers found in company accounts or data in national statistics, it is a simple matter of arithmetic to deduce the risk associated with a particular issuer. Where ratings rely on judgement calls they become highly subjective and should not be worth more than any other market opinion. Conflicts of interest exist when ratings agencies are given access to non-public information. As it is not possible for other investors to verify the information themselves, some lazy or naive investors get seduced to put excessive reliance on ratings decisions. This risk is exacerbated when laws or customs give ratings an official blessing - for example by requiring collateral posted with the European Central Bank to be of a certain credit quality testified by a rating.

CEO Pay: Adding insult to injury

2010-03-07T11:23:00.002Z

A report that companies are already trying to circumvent the SEC's new regulations relating to more transparent disclosure of CEO Pay highlights the sorry fact that company managements still see themselves as a class apart that is able to run roughshod over the concerns of their owners and the wider public. The absurd system of 'incentive compensation' allows the CEO of Eli Lilly to get away with a whopping 45 per cent increase in 'compensation' for the year 2009. This brings the total to an eye-watering £20.9 million. But the company's management tries to put a different spin on it by claiming that 'fair value' (to whom?) of the CEO's compensation is only $15.9 million. Assuming that both valuations are correct this demonstrates that compensation for top executives is much too complicated in the first place. We guess that this is intentionally as it opens lots of opportunities to game the system. We wonder whether employees down the pecking order also have such difficulty valuing their pay packages. Both the percentage increase as well as the absolute number of pay for Lilly's CEO illustrate that reform of top executive pay is overdue.

Enron and Greece - where is the difference?

2010-03-07T11:23:00.001Z

We wonder where the difference is between Enron supposedly manipulating its accounting and Greece manipulating its officially reported debt levels. Answers from the regulators please!

How to regulate High-Frequency Trading

2010-03-07T11:22:00.000Z

An interesting article in Barron's highlights the problems surrounding 'High-Frequencey Trading' (HFT). Pro-Gov has for a long time called for a public discussion of this practice. Is it distorting the level-playing field to the disadvantage of ordinary investors? Somewhere the supposed profits that are generated by HFT must come from and we assume it is not just a technological zero-sum game for the market participants that engage in this practice

Simple Solution to CEO Compensation problem

2010-02-21T11:11:00.000Z

ProGov suggests a simple solution to the problem of excessive executive compensation. As the fish starts to smell at the top the problem really is in essence a problem of excessive chief executive compensation. In order to control executive pay all chief executive compensation should consist only of a basic salary and perks (incentive bonus, share options, pension and medical care) that are granted pro-rata to ALL employees of a firm. That way any discriminatory pay that favors the man at the top is prevented. The gaming of option, incentive and pension schemes is avoided. No complicated performance targets have to be designed and policed. It is also morally repugnant if chief executives (and a select caste of other 'senior' executives) help themselves to gold-plated pensions, parachutes etc while the rest of the workforce gets the crumbs that fall off the table. Of course, chief executives may receive base salaries that are (too) high but that will be more easy to monitor and police. Discretionary and discriminatory option awards will be a thing of the past. And Chief Executives will have more incentive to moderate compensation further down the ranks. All incentive schemes and pension schemes should be based purely on a pro-rata basis and exceptional performance pay for individual employees can continue to be freely set by the respective line managers

Babcock/VT: Three Cheers for Andy Brough!

2010-02-19T08:20:00.002Z

Time and again Pro-Gov has warned that many mergers get pushed through at the expense of the selling shareholders. Giving the bidder access to the target's books tilts the favor against ordinary shareholders who are left with less information on which to base their decisions. The same can be said to the tactic of 'sounding out' the major institutional shareholders. All communication should be strictly on a public basis - similar to the regulations for disclosure of information in public offerings (esp in the USA). So we are glad that Andy Brough tries to put a spanner into the Babcock bid - after all, the shareholders of the bidding company are also often reduced to being the unwilling accomplices of a CEO's ambitious empire building.

Compensation: Baseball benchmark sanctioned by Obama

2010-02-11T15:36:00.002Z

When President Obama states that the compensation of CEO's is not excessive when compared to what some sports stars can earn he tacitly assumes that the compensation of sports stars is set in a free market. We want to point out the they benefit from the protection of intellectual property rights. We would argue that this protection may well be to the detriment of the public good and should therefore scaled back.

Lessons to learn from Cadbury takeover

2010-02-10T07:56:00.004Z

When the outgoing Chairman of Cadbury calls for new regulation of takeover bids it leaves a sour taste in the mouth. Presiding over another sell-out and than complaining about the alleged role of hedge funds in the bid smacks a bit of the pot calling the kettle black. We have repeatedly argued that current takeover rules are stacked in favor of the bidding party. Simple rules like restricting the right to vote to a certain percentage and to shareholders holding shares for longer than one year and taxing short-term capital gains on the same level as ordinary income (without any let-out for foreign holders, esp those located conveniently in tax havens like the Cayman Islands) would go a long way to return control of public companies to long-term shareholders. Preventing new owners of companies from dumping excess staff on the social security system financed by the taxpayer would prevent new owners from pursuing a 'slash-and-burn' strategy. The argument that any company that is listed is open to bids does not hold water either. Selling a company as a whole should only be a last recourse and subject to extremely onerous rules. Listing a company means above all that any shareholder should be - and is - able to sell his shares at any time. Anyone investing does so in the knowledge that he can sell again. That does not mean that the company itself should be sold. Investors should hold shares because they think that they will be worth x in a number of years, not because they can flip them in a few nana-seconds (High-Frequency Trading is a new cancer that is spreading rapidly!). The rules set by the Takeover Panel are plainly self-serving as the Panel is basically controlled by representatives of the corporate finance industry that profit handsomely from merger and acquisition activity.

Santander to float Bradford & Bingley?

2010-02-08T12:18:00.004Z

It is just a bit over one year that the shareholders of B&B got expropriated by the British Government and saw control of the business handed over to Banco Santander shortly afterwards. So it may ruffle a few feathers among the investor community if there is talk that Banco Santander may float a stake in B&B or some other holdings in the UK on the public markets here. While Santander appears to be the laughing third party in this sorry affair one would hope that the effort of the previous owners of B&B to get satisfaction in the courts gets a boost from this slap in their face. After all, the situation at B&B cannot have been all that bad. Forensic accountants to the fore! And what about all that talk about 'Human Rights'?

New Look: Thanks a billion!

2010-02-03T08:22:00.003Z

News that New Look will do an IPO - again - is another slap in the face of gullible institutional shareholders who agreed to a buy-out by management and private equity funds in 2004. Now the public will again be asked to pay vast profits to them - courtesy to their fiduciaries in the investment and pension management industry and a dysfunctional market for corporate control.

Thanks a billion public shareholders!

2010-01-30T10:44:00.005Z

That is what the financial acrobats behind the buyout of HCA will not be saying as they cash in a cool $1.75 billion dividend from the company they have taken 'private' only a few years ago. As we continuously argue, there should be a big 'Seller beware!' sign attached to any buyout offer that speculative funds and their collaborators in management make to public shareholders. The trustees of the public shareholders - the major investment institutions - should be held to a very high standard of care when considering any bid, including takeover bids from competing businesses. The valuation and decision process in merger/takeover situations is deeply flawed and tends to short-change the sellers. That employees and clients are also often worse off (layoffs where the burden falls on the tax-payer due to rising costs of unemployment benefits, diminished competition due to increasing concentration) should also be mentioned. It is also instructive to re-read the warning that was issued by law professors at the time of the buy-out in 2006.