Government to review and demand sex quotas

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

EU to curb influence of major Accounting firms

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

Why are CEOs rarely fired? - Study of Board behavior

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

Banking Pay: US Watchdog had no bite

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

Are stock exchanges offering fair play?

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

Conflicts of Interest at Proxy Advisory Firms

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

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

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

Are all Private Investors Idiots?

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

Should Interest be tax-deductible for Business?

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

Facebook Share Issue: Where are global regulators?

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