M+A: Success ratio lower than at Russion Roulette

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'.

Treat Private Equity as normal Companies

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.

Heathrow Airport Manager 'foregoes' his bonus

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.

Foreign Listings: A regulatory Black Hole

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

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!

Ireland, Hungary expropriate pension funds

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?


No effective Inquiry into high speed trading

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.


Abusive Merger Practices: Period of Exclusivity

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.


Southern Cross - heavy debtload legacy from Private Equity Days?

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.


The future of Pensions - must reads for the concerned

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


No improvement in pay practices at banks - study

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.

French Takeover regulation a laughing stock

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)

U.S. seeks to shield Goldman Sachs Secrets

"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.

Shareholder anger at relocation expenses

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.

High-Frequency Trader fined in US

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.

Who consults the REAL investors?

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.

When is a Bonus not a Bonus?

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.

May 'Flash Crash': Blame the Computer!

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.

Who represents the investing public?

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?

Punishments meted out at Companies miss target

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

Whose Gold coins do high-frequency traders pick up?

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

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?

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

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

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?

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

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

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

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

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

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

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

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

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?

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?

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

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?

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

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?

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

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

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 firms and their 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

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

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?

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

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?

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

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

Babcock/VT: Three Cheers for Andy Brough!

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

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

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 nano-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?

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!

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!

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.

Capital One - Scandalous pay for CEO

Capital One - not surprisingly - declines to comment on plans to pay its CEO an outsized pay package. Pro-Gov argues for a long time that all perks for senior management - stock options, pensions, health care plans and longterm incentive plans should be on a company-wide basis only. The amount should be strictly pro-rata to the base salary. It is high time that the trustees of the ultimate shareholders - institutional investors - take a more aggressive approach to top management 'compensation' (for turning up in the morning?).

How to restrain political spending by US Corporations

The recent narrow vote of the Supreme Court may have opened the floodgates for unrestrained political spending by corporations in the US. As big money has already too much influence on the political process as it is, there is justified concern about the outlook for democratic debate in the country. We suggest that corporations should only be allowed to get involved in political debate if they receive an explicit mandate from their shareholders. This should be issue-specific. As individual shareholders are a minority on the shareholder register it would be necessary to make institutions (including hedge funds!) responsible to the ultimate investors. This would mean that they in turn would have to obtain a mandate from their investment clients.

Absurd costs of Lehman bankruptcy

News that advisors working on resolving the Lehman bankruptcy raked in nearly $600 Mio through 2009 demonstrates that the bankruptcy process is in dire need of reform. The lead consultant seems to have gotten away with charging more than $ 1 Mio for each of its members of staff working on the case. Who protects the creditors? who approves these outrageous fees?