Paul Myners LAPFF 2010: The Capital Market Crisis two years on

This report is a just a little late but better late than never...Former fund manager, Chair of Marks and Sparks and Labour Government Financial Services Secretary, Lord Paul Myners, speaking at the Local Authority Pension Fund Forum (LAPFF) conference in December last year. Myners gave his usual knockabout speech, entertaining and serious by turns. Usual caution about the literal accuracy of my hurriedly typed notes.

"This is the 4th occasion I have spoken to LAPFF. I was asked to speak about what lessons are to be learnt after financial crisis. What did we do and where are we now?- what are the governance and stewardship issues?

I should be writing a book about my time as a Labour Minister but I am lazy. At the moment I am studying theology. What caused the crisis? I am not sure? Sub Prime mortgages? The search for yield? Why is yield so important? There is now huge liquidity. China makes loans to us. They manufacture more than they consume which they export to us and get foreign currency back in return. This is still the main reason for the crisis. Nothing has been done about this. With the G20 you get warm words but few parsnips.

I became a minister for the first time in the eye of the storm. 12 days after collapse of Lehman Brothers. It was far worse than I first thought. But we still cannot rule out similar crisis in the future. Chances are lower. We still don’t have ways for banks to fail. We are trying to address problems of individual banks not the system.

People who 18 months ago were saying things must change are now saying well.. we have a competitive industry and should not scare them away. The role in the crisis of auditors not been looked at all. The Tripartite approach failed. My view is that this government is wrong at this stage to be putting forward only regulatory change. I was a Director at the Bank of England for 4 years. It is very good at economic analysis but not as a regulator. Lots of clever people with double firsts but it tends to look down at people from business. The jury is out about whether the Bank has right culture to do this. Macro prudential regulation. Take away punch bowl before the Party gets too riotous? Great idea but in practice....

When Mervin King came to Alistair Darling and I and first mentioned “Quantitative Easing”. None of us knew what it meant. We will not know full effects for 2 or 3 decades. The Governor of Bank of England is right to be not worried about inflation. Interest rates to control inflation is creditable. But to take the heat out of economy? No.

Some good news. The bond market is a crazy bubble. It will burst. Higher interest rates will help your pension funds. Why are advisers buying bonds? Ask yourself has it ever been right to buy UK gilts at 3.5%? Never! but pension schemes are doing this.

Fund managers have no idea what is going on either. I was a fund manager for 20 years. At the time I thought I knew what I was doing - but now I know they don’t. Don’t bother inviting your fund managers to your investment committees. Rather you should spend the time reading the Economist.

Where were the owners in all this? The board of directors at those companies had very little idea, nor did managers – they did not have a good sense of risk. But no one in fund managers industry fessed up – somehow - we didn’t do what we should have done. We were culpable as your agents. We did not engage as we should have done.

David Walker paper is a good report but a very little advance. Remuneration was a core failure for banks. Incentives encouraged them to take risk. They rewarded success but did not penalise failure. Remember that there were 200 Bank of Scotland employees paid more than Fred. The Government have now back tracked. Other recommendations in Walker report will wither on the vine. You, the real owners need (with PRIC and others) to get your act together. Work together to be agents for change. No more owner less corporations. Also you have shares in competitors, suppliers and customers. Only LAPFF speaks for the end investor. Only by mobilisation and shared interests can you see fundamental change in governance. Or run the continued risk of corporate or sectoral failure.

We cannot prove that good governance improves superior returns but we can prove bad governance does result in catastrophic failure. Black swans".

In the Q&A I introduced myself as a trade union rep from Tower Hamlets Pension fund and he immediately remembered us sacking him and Gartmore as our fund manager. He also said that he enjoys this blog! (kind person that he is).  I said he must write his book!

LAPFF Conference 2010: Stewardship Code: Putting it into practice

Tom Powdrill (PIRC) led a panel discussion about putting the Code into practice. David Murphy (NILGOSC), Tony Little (Gartmore) and Iain Richards (AVIVA). The Code came out of the Walker Report and is a response to the financial crisis. Not a fluffy “feel good” report but an attempt to try and prevent a future financial crisis. Can shareholders control companies? If shareholders cannot then look at Ireland were due to voluntary failure there is now a regulatory approach to governance.

David spoke first about his scheme. There are 204 employers, over 80,000 members and £3.6 billion assets. They support the idea that they are asset owners; they are the ultimate owners and should take responsibility for what has gone on in the past. They believe in co-operation and the importance of disclosure. They vote in all markets and report back on investment policy. Be open and transparent.

Tony explained that Gartmore are mainstream investors in 2,500 equities around the world. He was struck by the difference between this report and the UK governance report Cadbury which said this is what good practice looks like and others should aspire to it. The Stewardship Code “horse trades”. This is what you should be doing. Will see what good practice eventually looks like. The EU intervention has been negative rather than positive. They have forced the pace. They want to regulate. His role often is to be candid friend.

Ian said there may be over blown expectations of the Code. It was to resolve the “absentee landlord” problem in the run up to crisis. But there is an issue of resources. They have 7 in his team but this is still limited. Conflicts still exist; there are still misaligned incentives, short term structural problems. There are differences of objectives in engagement. In the UK 13% of shares are owned by pension funds and 13% by insurance funds. But it is only 26% of market. 40% of UK now owned by overseas investors. Concern around the role of the ISS.  An unaccountable organisation who admits looking after its primary audience - US investors. An awkward question is what do fund managers do? They have already signed up to the Stewardship principles. Is it transparent to have such long policy statements? Principle 7 (reporting on what they do) is the most important. There is a poisonous view that all you have to do is delegate everything to fund managers – and job done. This leads to apathy.

Next Q&A. I asked a question about how the new Code will not last be last word on governance and will evolve and change. Panel members have hinted at things that could be done better. What one significant improvement would each of the panel members want to see in any future review?

Tony: it needs to be redrafted and made clearer. The FRC next time should engage more about what is good practice. Iain: that it should be extended across to Europe. Especially with Funds tied to banks. David: he is against further regulation. He is happy with “comply or explain” approach. But it does need to be fleshed out. It’s a bit vague. Not only would he like it extended to Europe but wouldn’t it be nice to have in the US although that is “pie in sky”.

Tom asked does the Code make a RBS (Royal Bank of Scotland) less likely. Tony: No but... Ian – more cynical. Nothing much changed. No evidence that in 5 years time the world will have changed. David: We don’t know what will happen next.

The largely negative response to this question supports my own view that the Code (although an welcome improvement) is just sticking plaster and not the root and branch reform that is needed to stop another Fred the Shred.

Myners to sort out City Fat Cats?

I found the appointment of Paul Myners to become Minister for the City and to serve as an advisor on the New Economic Council particularly interesting. Tom P says “great news I reckon – he knows what he’s talking about and isn’t afraid to be radical”

The Times calls the Chair of the Guardian Media Group, Land Securities, Chair of the Low Pay commission and ex-Chair of Marks and Spencer’s a “respected figure in the City”. While The Telegraph has called him “controversial” which I think is nearer to the mark.

Many on the left will be most upset that he was a director of a hedge fund that made money out of the collapse of Bradford & Bingley. He also gave £12,700 to Gordon Brown’s leadership campaign.

However, there is more to him for those who want meaningful change in our financial systems that may at first appear. He is not at all easy to pigeon hole.

I first came across Paul many years ago when he was a senior fund manager with Gartmore investments. I was a relatively new trade union rep on my pension fund investment committee. The fund had decided to sack Gartmore for poor short term performance. Paul came to a meeting and gave a typically impassioned presentation to our committee about why we should not dismiss Gartmore due to its recent performance and that things will improve in the long term. The Chair of our investment committee however, had already decided Gartmore had to go...... and I went along with things. I don’t think that the replacement fund manager did that much better and has since been replaced anyway, but such is life. It did seem strange to me at the time (and since) that long term investors (pension funds) paid so much attention to short term performance.

I’ve heard Paul speak at a number of events since and he has always shown an edge as a City outsider with an appetite for controversy. Of course he is probably best well known for the Myners report on investment principals.

While I loved his appearance on BBC Question time last year where he said “The arrogant, superior young toffs who lead the Conservative Party, neither of whom have done a serious day's work in their life... David Cameron was executive at Carlton Television which lost over a billion pounds while he was there. I take no lectures from that young man about business competence. ...Nor can we blame Gordon Brown for the sub-prime disaster in the United States of America or the recklessness of bankers.”

At the RSA early this year I heard Paul declare that he spoke “ as a trade unionist” and “someone who wouldn’t join the Labour Party because it is not sufficiently left wing for my taste” but who urged that stamp duty on shares ought to be increased to 5% in order to encourage long term ownership (not short term trading). I assume he is now a member of the Party.

He also advised the unions to concentrate their campaigning on the disparity in Executive pay “the self appointed managerial elite are raping the resources of companies”. So called “independent” external advisers on executive pay are called “Ratchet, Ratchet and Ratchet”. His distaste was clear.

Today we learnt that the former head of failed Bank Lehman Brothers, Richard Fuld, (see picture above right) “earned” $300 million in the last 8 years.

So once the present crisis is over (which eventually it will be) shall the new City Minister take steps to tackle the abuse of executive pay and short termism – and help prevent the next “Great crisis”? We’re wait and see, but I feel that if anyone can have a go .....