Pension Fund Trustee forced out

The news that the Chaiman of the EMI pension fund trustees was forced out for supposedly demanding that EMI tops up the fund shows that the regulation of pension funds is inadequate and creates similar problems of moral hazard as can be found in other segments of the financial service industry. Employees are generally discouraged not too put too many eggs in one basket and avoid excessive exposure to the shares of their employer. That way they avoid being hit by a double whammy should their employer hit trouble. In that case, not only would they risk losing their jobs but their investment would also be diminished at a time when they need it most. (This is a dilemma for all advocates of increased employee share ownership participation). Having one's old-age retirement provision dependent on the fortunes of the employer - over which the average employee has no influence at all - is a risk that should be eliminated in any sensible pension fund legislation. Companies subject to financial engineering that has very little to do with sound management but more with boosting the personal wealth of a few managers at the control - mostly in the so-called 'Private' Equity sector - are most at risk of neglecting the best interest of the pensioners past and present.

Sulzer - another victim of poor takeover protection

The fact that a Russian 'Oligarch' can exercise control over a century-old company like the Swiss Engineering firm Sulzer is an indictment of the system of corporate governance that is allowed by 'free-for-all' takeover rules. While this system may just be acceptable for football clubs (and a simple rule change limiting the votes for each owner to a modest level would be welcome there as well) it is questionable whether the interests of good management and wider stakeholders (employees present and past, customers, the community the company is based in) is really served well by giving individual shareholders too much influence just on the basis of a minority stake in the company (even if it is 31%). Minority governments are bad enough (The UK suffers from this for more than 30 years now) but there is no reason to replicate this in listed companies. If Mr. Vekselberg, for example, thinks he has a superior business plan for Sulzer he could either (1) try to convince the other shareholders and/or management about the quality of his ideas or (2) try to gain control about the majority of the share capital in a supervised auction process that avoids premature squeezing out of Shareholders that see long-term growth potential in the shares and do not want to be deprived of it due to weak takeover controls.

Equal Pension treatment for all employees

In bygone times the majority of the larger companies in the UK offered their employees participation in a defined-benefit (DB) pension scheme. While these schemes produced their share of iniquities (treating early leavers poorly) they offered stability to the workforce and appeared to represent a fair deal for employer and employee alike. A variety of factors which we will not discuss here contributed to the decline in DB schemes during the past 15-10 years. This is contrary to efforts in many other countries to introduce a 'second leg' for retirement provision (in addition to the state pension and private savings which are the third leg). The result is that the majority of employees - and certainly those on middle and low incomes - face a period of penury in their old age. What makes the decline in DB schemes particularly galling to those employees is the fact that the managerial class - and in particular the top executives - escape from this dilemma. Not only are they compensated particularly well during their working life, in addition they also arrange to pay themselves pension contributions that are way above what they are willing to pay for the general workforce. In the interest of good corporate governance it is essential that all pension payments are made on a strictly pro-rata basis based on base salary with no distinction between different types of employee.

Mintzberg: Eliminate Executive Bonuses

We have to make a few observations about the radical view on executive bonuses espoused by McGill University's Henry Mintzberg. First of all we do think that the main problem of all executive incentive schemes is the fact that it is arbitrarily allocating too much glory (and blame) to the CEO of a business. That may or may not be justified - individuals CAN make a massive difference as is demonstrated in sport, art and science. But there is the question of the right degree to which this is possible - and morally justified. Otherwise the US President could demand to be paid a share in the growth of the GDP during his period in office. Our position is that all incentive schemes that benefit the CEO and the top executives should only be those that are made available to ALL employees on equal terms and should be calculated on the basis of base salaries. This should include all perks and benefits (pension, health insurance, share options etc). Not only would this system be equitable and fair, it would also be transparent, easy to understand and not easy to game by top management. At the same time it would probably reduce the gap in compensation between top management and the average employee. This link between pay levels would in all likelihood also put general downward pressure on compensation for top management.

Executive Pay Grab accelerates

A new study by James F. Reda & Associates comes to a surprising conclusion: instead of tying executive compensation more closely to long-term performance the incentive plans tend to put more emphasis on short-term results. This should surprise no one given the sad fact that the majority of institutional shareholders and their industry organisations still take a cavalier attitude to corporate governance issues and at best pay only lip service to it.

Lording it over the shareholder peasants

Not much has changed in German Corporate Governance - Governments of the Left and Right come and go, commissions publish their reports, regulators slumber in their plush offices and collect their secure salaries and pensions (at least no bonuses there!). The farce that just seems to come to an ignominious end with the takeover of Porsche by Volkswagen illustrates all that is wrong with Corporate Governance in Germany - one of the leading industrial nations but still stuck in deep 19th Century ideas of shareholder democracy. The German expression 'Gutsherrenmanier' comes to mind as the most appropriate word to sum up the way that the political and business 'Elites' carve up the control of businesses that are owned by the shareholder community (which comprises not only German investors and savers but also those from many other countries). How is it possible that Volkswagen agrees to pay a price for Porsche that many analysts describe as overly generous and has not been discussed properly with the public shareholders? How can people that have an economic interest in both companies be allowed to be party to the merger discussions? How can a government (The state of Lower Saxony) be part in this questionable arrangement? All we can say: anyone considering investing in German Shares does so at his own peril and should demand an extra premium to be at least partly protected against these shenanigans.

Friends Provident Shareholders to be sold out?

By sheer coincidence (or foresight?) your author bought a few FP shares during the darkest days of the credit crunch. It looked like a nice bet at a time when the banks were shaky and there was no light at the end of the tunnel (yet). So when talk about a 'rapprochement' between the FP board and management and Resolution started again during the past few days my blood started to boil about this sell-out by the shareholder representatives. By looking at the FP chart any idiot (only a strong word will do here!) could see that the share is building a bottom formation and that the shares are still in seriously cheap territory. Of course, news flow is still poor - but otherwise the shares would be flying. So why sell now to a predator? If management is not up to the task it could be changed (again). And the unnamed institutions (and fellow-travellers in the media) that push management and the board to talk to Resolution, are they blind or do they really want to sell out at the bottom (or for a short-term flip if they were lucky and bold enough to buy during one of the downwared spikes in the winter months)? Maybe the Institutional Shareholders are really not the right forum to oversee corporate governance and should be limited to play in the secondary markets.

On whose side is the Takeover Panel?

The Panel has gained an excellent reputation as the ultimate arbiter in many a contested takeover battle in the UK Stock Market and many countries are in dire need of a comparable institution.

But while no one can question the qualifications or motives of those professionals who work for the panel - who probably take a sizeable pay-cut in doing so - we would like to remind readers that the panel is not necessarily the best forum to defend the interests of the shareholders of the involved companies.

In our opinion, the Takeover Panel is too concerned with organising a smooth bid procedure but does not see the wood for the trees. As a consequence, the selling shareholders do not get fair treatment due to a defect in the mechanics of public takeover bids.

A simple look at the good old Supply and Demand Graph that will be familiar to all of those who have done an economics degree will demonstrate that any cut-off (bid-price) that may appeal to a majority of holders short-changes those investors who would only have planned to sell at a price that is higher than the agreed price.

By disenfranchising the shareowners at the upper end of the Supply Curve (e.g. the last 10 or 5% of the holders) the sellers lose what is comparable to a 'consumer surplus' in economic theory. The buyer would have to pay substantially more on the totality of the outstanding shares if he would have to pay the price needed to buy the last 5 or 10% to all the sellers.

The politicians in the UK (as well as in some other countries) have followed the advice (of dealmakers?) and made it easier to 'squeeze out' minorities and introducing 'schemes of arrangement' that penalise shareholders that hold out for a higher price before agreeing to sell out.

All this contributes to explains why the 'Venture' Capital Industry (as much a misnomer as 'Private' Equity) can easily pick off shareholders in public companies and produce good returns. The surprising fact is that the returns of the Venture Capitalists are not much better in spite of this tactical advantage (amazingly, many studies even claim that the risk-adjusted performance lags the broad indices).

Why only now Mr. Pessina?

We read with interest that an 'energetic' Stefano Pessina now 'puts spring in step at Boots'.
The question we would like to ask is why is it only after buying out the public shareholders of Boots that the man in charge of the business is able to manage the company the way he thinks is right. In the article he even admits that Alliance Boots is still being run 'as if it were a UK-quoted company'. We just cannot believe that it is beyond the capability of any skilled top manager worth his salt to manage a listed company properly.
We suspect that MBO's and LBO's are mainly a way to divert the profits of a company to a changed set of owners. If the incumbent management is a beneficiary of a buy-out we urge shareholders - or their agents (the institutional fund managers) to be extra vigilant and refuse to ratify a sell-out. It will always be much cheaper to install new management if the existing management is unable or unwilling to put in the effort to make the business perform well.

Mitchells & Butlers - who looks after the small investor?

It is management dogma at most business schools - and certainly with investment 'bankers' - that corporate activists are a good thing. However, the current activity around Mitchells & Butlers (M&B) raises a few points of principle.

First, newspapers report that a group of investors controlling about 40 per cent of M&B's shares are preparing to 'move on the board' (sic). They are 'understood to be acting separately but collectively' . Now it would be interesting to find out what that is supposed to mean. How can you act collectively and separately at the same time?

The same newspaper report also refers to a 'series of letters and telephone calls' in which the shareholders have 'warned the management' and demanded that management take a specific action with respect to its property portfolio. Some of these shareholders might also be interested in entering into transactions with respect to this portfolio.

This situation illustrates a basic problem with the practice of shareholder activism as a solution to the problem of corporate governance: Any communication among investors creates the danger of conflict of interests. Dialogue with management or other investors gives an investor insights into the business outlook of the business and an advantage vis-à-vis ordinary shareholders that are not privy to this information.

Only full disclosure of all communications between management of investors can guarantee a level-playing field for all investors. In addition, a 'quiet period' after any direct communication might also be useful. A few days after any direct contact (and dissemination of relevant minutes of the information exchanged) should be enough given that most investors have easy access to bulletin boards, corporate websites and newswires.

It would also be helpful if all significant proposals are discussed in an open forum that is open to all shareholders and where all proposals are put forward. It is high time that the owners of a business do not only read in the newspaper when major decisions affecting their investment are taken. The good old Annual General Meeting (possibly supplanted by some sort of electronic alternative) would be the most appropriate forum.