Wednesday 28 August 2013

The Fidelity/Conservative connection

I was Googling around on Fidelity and the Tories last night and came across this story from 2007. What caught my eye was this comment -
“We do not comment on our political donations. We do not endorse political candidates and generally we take a non-partisan approach with politics.”
I still think the "non-partisan" claim is hilarious, frankly, but the bit that struck me was that line about not endorsing political candidates. As far as I am aware this is true. But Fidelity does have a Conservative MP it employs as a consultant who seems to be paid pretty much every month.

Sir John Stanley's register of interests is here. Here are the Fidelity contributions:
2. Remunerated employment, office, profession, etc.
Consultant on financial services to FIL Investment Management Ltd (formerly known as Fidelity Investment Management Ltd), Oakhill House, Hildenborough, Kent TN11 9DZ.
£1,800 received for attending meetings as necessary and advising on business opportunities and risks. Hours: 7 hrs. (Registered 23 May 2012)
£1,800 received for attending meetings as necessary and advising on business opportunities and risks. Hours: 8 hrs. (Registered 27 June 2012)
£1,800 received for attending meetings as necessary and advising on business opportunities and risks. Hours: 6 hrs. (Registered 20 July 2012)
£1,800 received for attending meetings as necessary and advising on business opportunities and risks. Hours: 5 hrs. (Registered 21 August 2012)
£1,800 received for attending meetings as necessary and advising on business opportunities and risks. Hours: 6 hrs. (Registered 2 October 2012)
£1,800 received for attending meetings as necessary and advising on business opportunities and risks. Hours: 5 hrs. (Registered 29 October 2012)
£1,800 received for attending meetings as necessary and advising on business opportunities and risks. Hours: 5 hrs. (Registered 21 November 2012)
£1,800 received for attending meetings as necessary and advising on business opportunities and risks. Hours: 7 hrs. (Registered 24 December 2012)
£1,800 received for attending meetings as necessary and advising on business opportunities and risks. Hours: 6 hrs. (Registered 29 January 2013)
£1,800 received for attending meetings as necessary and advising on business opportunities and risks. Hours: 7 hrs. (Registered 22 February 2013)
£1,800 received for attending meetings as necessary and advising on business opportunities and risks. Hours: 8 hrs. (Registered 25 March 2013)
£1,800 received for attending meetings as necessary and advising on business opportunities and risks. Hours: 6 hrs. (Registered 16 April 2013)
(Note Fidelity now appears as 'FIL' rather than 'Fidelity' both here or when making donations).

I think in the old days we used to describe MPs who were supported by individual unions as "sponsored"...

GSK cut & paste

The Competition Commission has published (here) all the responses received to its 'provision decision on remedies', or, in ordinary language, the proposals it has settled on. Reading  through the responses you get the sense of the corporate establishment (to borrow a phrase) standing athwart history, shouting "stop".

My interest is whether there has been any more cut & paste going on in consultation responses. I had hoped we might shame PLCs into at least writing their own responses, especially after The Indie picked up on what was going on. Certainly a few of the PLC names I usually look out for don't seem to have photocopied the GC100 talking points this time, but there is one exception.

Compare what GSK has to say with the GC100. I can't cut and paste from these two doc currently, but look at the text on mandatory tendering and look out for the phrase... ahem.... "risk adverse box ticking". Or look at the last sentence of the responses to remedy 4 where both the GC100 and GSK question "do not understand" how a shareholder vote on audit committee reports would "promote increased competition in the audit market".

Monday 26 August 2013

Incentives and educational outputs

I've blogged previously about Rolan Fryer's interesting work on the use of financial incentives to improve students' test scores. The short version is that tying rewards directly to grades doesn't seem to work, but tying rewards to some 'inputs' that might lead to better grades (good attendance record, number of books read) can have a positive impact. I personally think his previous work fits ok with a motivation crowding/over-justification view of reward and motivation, since if you're, for example, paying kids to turn up to school then you're probably dealing with low motivation in the first place.

Last night I came across a paper published last where Fryer and others look at the use of financial incentives for teachers with an important behavioural tweak. Here's the abstract:
Domestic attempts to use financial incentives for teachers to increase student achievement have been ineffective. In this paper, we demonstrate that exploiting the power of loss aversion—teachers are paid in advance and asked to give back the money if their students do not improve sufficiently—increases math test scores between 0.201 (0.076) and 0.398 (0.129) standard deviations. This is equivalent to increasing teacher quality by more than one standard deviation. A second treatment arm, identical to the loss aversion treatment but implemented in the standard fashion, yields smaller and statistically insignificant results. This suggests it is loss aversion, rather than other features of the design or population sampled, that leads to the stark differences between our findings and past research.
The first thing to note about this is that there's a clear win here for a more behaviourally-informed approach to the use of incentives, as the conclusion is that loss aversion has a very strong effect. So pyschology matters after all... In fact early in the report there is another section worth flagging up:
To increase teacher productivity, there is growing enthusiasm among policy makers for initiatives that tie teacher incentives to the achievement of their students. At least ten states and many more school districts have implemented teacher incentive programs in an effort to increase student achievement (Fryer forthcoming). Yet, the empirical evidence on the effectiveness of such programs is ambivalent. In developing countries where the degree of teacher professionalism is extremely low and absenteeism is rampant, field experiments that link pay to teacher performance are associated with substantial improvements in student test scores (Duflo et al. (forthcoming); Glewwe et al. 2010; Muralidharan and Sundararaman (forthcoming)). On the other hand, the only two field experiments conducted in the United States have shown small, if not negative, treatment effects (Springer et al. 2010, Fryer (forthcoming)).
This, to me, is not really surprising. If motivation is low, incentives (financial or other) may well be able to push performance up. But where motivation is already there (eg teachers earning a decent salary and who believe in what they are doing) I can't see much of a role for performance-related pay.

However, Fryer et al's paper put an important new spin on this. Apparently you can make performance-related reward work for teachers, if you make it sting. Because let's be clear what we are talking about here - the theory of loss aversion tells us that we 'feel' losses about twice as much as we feel gains. The unpleasant feeling generated by a loss is twice as strong as the pleasant feeling generated by a gain, no doubt for some important evolutionary reason. So this research seems to show that we can get a slightly better result out of teachers by, basically, making them feel bad when their students don't do well. Or, in reality, we make them feel worse - I assume quite a few teachers don't feel great when their students don't do as well as they could.

Is this a reasonable way to pay teachers, or indeed anyone? It's certainly unusual. The only comparable thing I can think of is clawback. But, as far as I am aware, this usually applies to performance-related rewards that have already been made which turn out to have been based on performance that was either illusory or deliveered through unsustainable or unethical behaviour. I'm not aware of people in the City being awarded an upfront bonus and then losing a certain element of it if they don't hit their targets.

I have no doubt that a loss aversion based incentive system would have a strong behavioural pull, and for exactly that reason I would be nervous about it being applied in the City, where gaming the rules and a willingness to cut ethical corners to hit targets is... ahem... not unknown. Could it have a similar effect in the educational sector?

But more generally, this approach to paying teachers (or indeed anyone, really) simply feels really wrong to me. Holding out a reward and then taking it away again if you don't get the performance you want seems to me better suited to dog training than education. It is quite clearly an exercise in behavioural control, and I expect it would immediately be seen as such, and therefore be very controversial if ever actually put into practice. Clearly everyone wants teachers to teach well, but just because we might get better results by using financial incentives in this way doesn't mean we should (it's notable that the one example of a loss aversion based bonus scheme cited in the paper is in a Chinese factory). I think it has the potential to do a great deal of damage.

One final thought, the PwC research into executive incentive pay has an interesting element to it. PwC suggest that most execs (like the rest of us) don't really like variable pay, and the implication is that, therefore, actually existing executive pay is fudged to take account of this. I suspect if loss aversion based incentives ever become 'a thing' something similar would happen. After causing an initial massive stink they would be gradually reformed till they softened the behavioural bits that a) made people upset and b) were the sole reason for introducing the schemes in the first place. 

Thursday 22 August 2013

Snippet on exec pensions

This is an oldie from last month, but LCP's report on exec pensions has an interesting little nugget in it. Where FTSE100 directors are given cash in lieu of pension, the median value of this as a percentage of salary has increased from 25% to 30% in two years. It's turning into into a nice little lump of cash, and no-one seems to be making any noise about it. Is there any reason - other than the malign influence of peer group comparisons - why the increase in % of salary has occurred?

Wednesday 21 August 2013

Interesting AGM result

From last Friday, BATM Advanced Communications. This is from their RNS statement -
BATM Advanced Communications Limited (LSE: BVC; TASE: BATM), a leading provider of real-time technologies for the networked telecoms and medical laboratory equipment markets, announces that at the Annual General Meeting of the Group held earlier today, Resolutions 1, 3, 4, 5 and 8 were duly passed, and Resolutions 2, 6 and 7 were rejected.
Resolution 2 was their remuneration report, and resolution 7 was their remuneration policy vote. So I think this is the first company to lose both votes? They also got knocked back on resolution 6, which sought to make a one-off bonus payment to one of the directors who, I believe, had also received a "one-off" payment the year before.

Thursday 15 August 2013

Fidelity still funding the Tories

Another £25,000 donated in April, search for "FIL Holdings Ltd" on the Electoral Commission site.

As I blogged previously, Fidelity have changed the name under which they make donations several times. Surely not embarrassed?

Even more cut & paste lobbying: non-audit work

I've had a look back at responses to the Auditing Practices Board consultation in 2009 on auditors undertaking non-audit work, quite a controversial issue for corporate governance types, as some recent votes demonstrate. Once again, I can see the GC100's influence on PLC submissions.

Here's what a chunk of the GC100 submission:
We do not believe that the provision of non-audit services by accounting firms to their audit clients currently impacts on confidence in the independence of auditors. Provided a company’s audit committee applies, or explains its reason for not applying, the Combined Code and develops and implements a policy on the engagement of the external auditor to supply non-audit services, which follows the FRC’s Guidance on Audit Committees, the provision of non-audit services should not impact on the independence of the auditor employed by that company.
In fact, we believe that there are instances when the use of its auditor for non-audit services is positively advantageous to the company and its shareholders, and does not compromise auditor independence. With the auditor’s detailed knowledge of the company’s business, the non-audit service can be provided more effectively. Further, we believe that in many instances, appointing another accounting firm would be very inefficient and may expose the company to greater risks as the accounting firm lacks the detailed knowledge of the business which the auditor has.
In addition, engaging an auditor who has detailed knowledge of the company’s business is beneficial to management as (depending on the nature of the non-audit work in question) it prevents them from needing to spend time briefing a firm unfamiliar with the business before it can commence the non-audit work, provided there are suitable provisions in place to ensure that the auditor’s independence is maintained. As a consequence of engaging the auditor, the company saves fees and the non-audit work can be undertaken sooner, which is advantageous to both the company and its shareholders.
I've highlighted a few key phrases. You can either whack them into Google yourself, which should result in some individual company submissions coming up, or here are few of my own excerpts.


“there are instances when the use of its auditor for non-audit services is positively advantageous to the company and its shareholders”
“there are instances where appointing another accounting firm could be inefficient and might expose the company to greater risks…”
Xstrata
“We believe that in many instances, appointing another accounting firm would be very inefficient and may expose the company to greater risks as the accounting firm lacks the detailed knowledge of the business…”  
Standard Life Plc/Standard Life Investments
We believe there are instances where when engaging its auditor for non-audit services, within the terms of the policy, is advantageous to the company and its shareholders… As a consequence of engaging the auditor, the company may save on fees and the non-audit work can be undertaken sooner.”

Cut & paste lobbying links

LAST UPDATE: 15/8/13

In case anyone else is interested in following this stuff up, here is a bunch of links to my previous blogs, and (where still available) directly to responses that have similarities.

Blog on PLC responses to BIS consultations on exec pay.
Blog on PLC responses to Competition Commission work on audit.
Blogs on IIC/mandatory rotation/"costly and disruptive" here, here and here.
Blogs on FRC consultations, here, here and here.

Unfortunately it's not possible to link directly to the submissions to the BIS consultations, where there were loads of generic responses on the exec pay reforms, but I have the PDFs if anyone is interested. I'll update the list below and re-post each time I find something new. 

Competition Commission audit provisional findings
GC100 submission
GSK response
SABMiller response

FRC Corp Gov Code/Audit Comm/Stew Code consultation (2012)
Hundred Groups response (all three)
Rolls Royce response

GC100 (all three)
BT response (all three)

ICGN (CG Code & Audit Comms)

IMA (CG Code & Audit Comms)
ICAEW (all three)

ICGN (Stew Code)
Hermes (Stew Code)

FRC Corp Gov Code (2010)
Logica
Sainsbury's

APB auditors and non-audit work (2009)
GC100 submission
Severn Trent
Xstrata
Standard Life Plc/Standard Life Investments
 

Tuesday 13 August 2013

South London bus etiquette

OFF-TOPIC!!

My bus journeys home to Peckham (which I sometimes live tweet, you lucky people) have given me a new perspective on social behaviour. The thing that has particularly interested me lately is "seat swapping".

Quite often the 78 (or the South London Comet, as it is not known) is quite busy. This means, inevitably, you end up sitting next to someone, rather than getting a whole double seat to yourself. But what happens when people get off the bus and a free double seat opens up? What I have noticed is that, quite often, people move to the free seat. I am talking here about individual people, not two people traveling who want to sit together.

One way of looking at this is that it seems a bit rude to move. It's like saying that at the first opportunity you want to stop siting next to person you are currently sitting next to. The implication could be, even, that they smell a bit. For these reasons I have always felt a bit rude engaging in the South London bus journey equivalent of Runaround. I also don't really remember this happening much in the past. But it's definitely the case that it happens all the time now. In fact I bet I see it on pretty much every journey.

My own situation is also complicated by the fact that I take the bus to almost the end of the route. Once you get past Rye Lane the top deck, where I usually sit, is really empty. Which means that if I started off sitting by someone and I don't move it feels a bit weird. Of all the seats I could be sitting on on a virtually empty top deck, I'm sitting next to you. See the problem?

So, I'm slightly embarrassed to report, I have joined the seat switchers. What's more, because it feels a bit weird, again, to move seat late in the journey I tend to do this fairly quickly when granted an opportunity. Interestingly (honestly) I feel that the herd-like nature of humanity means that we may be reaching a tipping point on the 78 where the default position is to switch, rather than to stay where you are. So I think I can see, right in front of my eyes, a norm changing.

Fascinating stuff, I'm sure you will agree.

Monday 12 August 2013

Saturday 10 August 2013

Max Horkheimer quote

Quite like this-
[G]reat words, even the religious and national words, including freedom, lose their meaning. They function as elements of convention rather than of conscience. The more they become everyday currency, the less they are taken seriously. A while back I received a well-meaning pamphlet on educational reform, with the request that I go through it very carefully. On the first page the word freedom was used thirteen times. In my answer I said that if I should find the word honesty used thirteen times in a business advertisement, I would surely buy nothing from such a store.

Section 79 of RIPA

Just a reminder that under section 79 of the Regulation of Investigatory Powers Act directors can be held responsible for breaches, even if they were not aware of them (ie due to negligence). There has been speculation in the past that directors of News International could be caught by this, and that the police might be interested in pursuing this.

Presumably, though, the cops want to wait for the individual cases to go through, as they involve direct RIPA breaches (phone hacking!), before following up by exploring corporate charges. So next month's trials could have some bearing on this.

Also worth noting that when the Met were asked specifically about the issue of corporate charges, at the Leveson Inquiry, News Corp's co-operative stance was highlighted. See this Guardian story on the Section 79 problem for News Corp. the reason I mention this that in that recent Exaro scoop of the secret Rupert Murdoch meeting some of the things he says include that a) he regrets being so co-operative and b) the company has started being more difficult in dealings with the police.

Given that its very unlikely (now) for anyone to get hold of an email/recording of a current senior News Corp exec explicitly admitting that they knew what was going on, these sort of things take on more significance. And, of course, if people start pleading guilty next month the whole thing takes a new turn.

Stock up on popcorn.

Friday 9 August 2013

A bit more on that audit consultation

Hmm....

ICGN
However, some of our members are concerned that these points could add to clutter without necessarily adding any meaningful disclosure. It could also result in standardised reporting on the process followed as opposed to more informed disclosures on how reliable the information is.
IMA
However, for boards to be required to state “the basis on which” they believe the annual report is so and provides users with information to assess the company’s performance, business model and strategy is likely to add clutter without necessarily enhancing transparency. Such disclosures could also become standardised on the process followed, as opposed to being informed disclosures on how reliable the information is, and certain of our members consider they would blur accountabilities and responsilbities between directors and auditors.
ICAEW
Disclosures regarding the basis of the board consideration may become boiler plate and add clutter to the annual report if companies provide a generic description of processes, without necessarily enhancing transparency.
ICGN
Though we stress, it is the full board that maintains the liability and accountability for ensure the integrity of financial reporting and for the annual report overall. Proposals for the committee to advise the board on the entire annual report could be seen as a delegation of power. It also places a further burden on the audit committee and does not take into account that some companies have committees that deal with particular aspects of the annual report such as risk committees
IMA
IMA considers it important that the audit committee does not undermine the role of the unitary board and its responsibility for the annual report overall. This proposal could be seen as a delegation of power. It also places a further burden on the audit committee and does not take account of the fact that some companies have committees that deal with particular aspects of the annual report such as risk committees.
ICAEW
The board already has full oversight responsibility for the accounts to give a true and fair view with or without the challenge from the audit committee. We wonder if this new requirement will be seen as placing an additional burden on audit committees and confuse the concept of the unitary board.
IMA
In summary, we consider the existing main and supporting principles under C.1 that: the board should present a fair, balanced and understandable assessment of the company's position and prospects in relevant reports, should be sufficient.
ICAEW
On that basis, we suggest that the existing main and supporting principles under C.1 should suffice: the board is responsible for presenting a fair, balanced and understandable assessment of the company's position and prospects in relevant reports.
IMA
We also support the enhanced communication over audit tenure, the period since the last tender, and the tender and selection processes. This information will be helpful for investors in assessing the frequency with which companies change their auditor.
ICAEW
Furthermore, we support enhanced communication over audit tenure, the period since the last tender, and tender and selection processes. The nature of this information is straightforward and should help meet the information needs of investors to assess the effectiveness of the external auditor.

More cut & paste lobbying

I've been digging around in consultation responses again at work and, unsurprisingly, have found yet more examples of PLCs putting very similar answers in. More worryingly, I can see what looks like an example of a corporate governance body doing a bit of cut & pasting too.

First the corporates. Here's a bit of the GC100 response to last year's FRC consultation on the Stewardship Code covering shareholders' use of proxy advisers - 
we believe that material institutional investors (holding above 1%) who have signed-up to the Stewardship Code should disclose the extent to which they rely on the services provided by proxy advisors. Furthermore, material institutional investors should be required to engage directly with issuers prior to lodging their votes in the event that they intend not to support the company’s resolutions.
Here's BT on the same point -
we believe that  institutional investors who have signed-up to the Stewardship Code should disclose the extent to which they rely on the services provided by proxy advisors. In addition, institutional investors with a material holding (i.e. a voting interest of 1% or above in a company) who have signed up to the Stewardship Code, should be required to engage directly with issuers prior to lodging their votes, to the extent that they intend not to support the company resolutions
And this is from Smith & Nephew -

a requirement for shareholders holding in excess of 1% to engage directly with the issuer if they intend to vote against or withhold their vote.
This is just one example from an initial skim. I have found that there are usually more bits of identical text, I just haven't had time (yet) to do a proper comparison.

Also, here's a bit from the Hundred Group's response (representing FTSE100 FDs).

A requirement that investors should not rely on the services of proxies where they own a significant holding in a company – we suggest a threshold of 1% of the voting capital
Not the same text, obviously, but the policy idea (1% threshold for being active engaged) is the same which may, or may not, be significant. 

The FRC also consulted at the same time on audit committee guidance. Here the similarities in the text are a lot clearer. Again these are just snippets from an initial search

GC100

In reality, a “fair, balanced and understandable” approach is already the default position for companies when publishing their annual reports. The rationale for this proposal still does not appear to be clear
BT
...in our view, a “fair and balanced” approach is already the position companies take in preparing their annual reports. The rationale for this proposal still does not appear to be clear.”
Hundred Group

[This] may lead to the unintended consequence of creating an implied reliance by other Board members on the Audit Committee’s review and hence reduce the scrutiny of the Annual Report by other Board members with relevant knowledge and expertise.”
Rolls Royce

We consider that it may have the unintended consequence of creating an implied reliance by other board members on the audit committee’s review and hence reduce the scrutiny of the annual report by other board members with relevant knowledge and expertise.
As an aside, it's sort of interesting, isn't it, that different PLCs choose different representative groups' text? (I am assuming that the GC100/Hundred Group responses come first, not the PLC ones).

When I get a bit of time, I'll go into more depth on all these. To be honest, I'm getting a bit enured to this now. From what I have seen this is happening across the board, to consultations on governance issues ranging from the FRC, to BIS, to the Competition Commission and who knows where else. I think we have to work on the assumption that PLCs are happy to adopt a party line, and throw their individual weight behind it rather than just relying on their representative groups. This bothers me, as we all know how twitchy politicians get about annoying PLCs.

Finally, there are couple of investor groups at it too. Here's what the International Corporate Governance Network had to say about "fair, balanced and understandable" reports -
ICGN members agree with the Code’s main principle that the board should present an annual report that is a fair, balanced and understandable assessment of the company’s position and prospects. As mentioned under Code provision C.1.3, the directors should also consider the basis on which they consider that the annual report provides the information necessary for users to assess the company’s performance, business model and strategy. Requiring boards to state these points in the annual report also reinforces these responsibilities. However, some of our members are concerned that these points could add to clutter without necessarily adding any meaningful disclosure. It could also result in standardised reporting on the process followed as opposed to more informed disclosures on how reliable the information is. There are also many types of user. The primary audience of accounts should be the holders of ordinary shares, as the providers of the risk capital and bearers of the residual risk.
And here's what the IMA said on the same point -
It is important that an annual report is fair, balanced and reasonable. However, for boards to be required to state “the basis on which” they believe the annual report is so and provides users with information to assess the company’s performance, business model and strategy is likely to add clutter without necessarily enhancing transparency. Such disclosures could also become standardised on the process followed, as opposed to being informed disclosures on how reliable the information is, and certain of our members consider they would blur accountabilities and responsilbities between directors and auditors. There are also many types of user. We maintain that the primary audience should be the holders of ordinary shares, as the providers of the risk capital and bearers of the residual risk. Whilst reporting is expected to meet a growing set of needs and some consider it should also be aimed at other stakeholders, such as creditors, employees, bankers, customers and suppliers, these other stakeholders are protected by contractual and other rights that are not shared by shareholders.
Got to say the fact that the concern expressed about "standardised reporting" is almost identically worded did make me chuckle.

And a bit more. ICGN -
The company’s interaction with the external auditor should be overseen by the audit committee of the board on behalf of the shareholders. The audit committee seeks to assure itself and shareholders of the quality of the audit carried out by the auditors as well as overseeing their independence. Whilst audit committees may have a responsibility to advise the board on the financial reporting framework and controls adn assurance over that framework, it remains the board’s responsibility to whether the annual report is fair, balanced and understandable. The annual report should also provide the information necessary for users to assess the company’s performance, business model, strategy and business risks. Though we stress, it is the full board that maintains the liability and accountability for ensure the integrity of financial reporting and for the annual report overall. Proposals for the committee to advise the board on the entire annual report could be seen as a delegation of power. It also places a further burden on the audit committee and does not take into account that some companies have committees that deal with particular aspects of the annual report such as risk committees
IMA -
IMA considers it important that the audit committee does not undermine the role of the unitary board and its responsibility for the annual report overall. This proposal could be seen as a delegation of power. It also places a further burden on the audit committee and does not take account of the fact that some companies have committees that deal with particular aspects of the annual report such as risk committees. The audit committee should remain within its remit and focus on financial reporting, controls around that reporting, and the role and work of the internal and external auditors. It should report to the board to enable the board to exercise its responsilbities but only on these matters. Similar concerns apply to the related proposals in the Guidance to Audit Committee.