"Licence to Operate. Holding Companies to Account" - LAPFF Conference 2013

Chair of Local Authority Pension Fund Forum (LAPFF) Cllr Kieran Quinn welcoming members to the 18th Annual Conference in Bournemouth this morning. The theme of this years conference is "value for money" and holding asset managers and advisers to account. 

LAPFF is a member organisation of Local Government Pension schemes (LGPS). Its purpose is to promote the investment interests of its funds as well as encourage social responsibility and corporate governance. Collectively it has £115 billion of assets.

Next was an introduction by former Hermes fund manager and joint author of "The New Capitalists" David Pitt-Watson, who is now at the London Business School.  David referred to the changes in Governance that has taken place since The Cadbury Report of 1990.  He called it a "journey not a destination". Companies we own should be doing what we want them to do. At the moment David is writing a new book on Finance.

David made an important final point that it will be no good if you have a good pension but retire in a world that has been destroyed by climate change.

The conference will finish tomorrow lunch time. I'll try and post on as many presentations and speeches as I can.

Our Money, Our Business: Building a more accountable investment system

Yesterday evening I went to the launch of two new reports by ShareAction at the Nuffield Foundation in central London. Chaired by their CEO, Catherine Howarth.

Christine Berry from ShareAction presented on the reports "Our Money, Our Business: Building a more accountable  investment system" and "Engaging savers with stewardship and responsible investment".

Christine argued that in light of pension auto enrolment we need to revisit ideas such as those expressed in the book by David Pitt-Watson, "The New Capitalists", since there will now be a huge expansion of share owners. However, at the moment share owner governance is a "dead duck" and we need to reassert the legitimacy of shareholders as owners. We also need to counter the idea that no one is really interested in what happens to their savings.

Research by the Pension Trust (whose chair Sarah Smart was sitting in the same row as me) suggested that its members were not that interested in whether their fund was invested in the traditional "sin stocks" (such as tobacco) but were interested in environmental issues and labour rights.

The first speaker was Mark Fawcett from NEST who pointed out that in modern day Direct Contribution (DC) schemes, savers are exposed to all the risk then it is likely that members will have to take a more active interest in their savings (whether they like it or not).

Roger Urwin from advisers, Towers Watson, was concerned that the reports were important but maybe heavy on aspiration and light on what could be catalysts to bring about change.

Charlotte Black, from high net worth private investor manager, Brewin Dolphin, thought this was an important issue and could show the good side of capitalism but her 120,000 investors had never used the proxy share voting system she had put in place.

My question to the panel was that we need to have better and stronger representative democracy by a elected trustee based model. Advisers are very important but they do not have the fiduciary duty or mandate that elected member nominated trustees will have. Saying that, trustees do have to raise their game and become better trained and more assertive but they do need support.

(good luck to Christine who is soon leaving ShareAction for a new job.)

Responsible Investment Trustee Training

On Monday I went to a training day organised by the TUC and “Fair Pensions” at Congress House. This course was a “pilot” but it was encouraging that the 25 places were oversubscribed and a waiting list had to be set up. Sign of our troubled times? It was designed for trade union member nominated pension trustees and representatives. There was a good mixture of people from a range of trade unions and pension funds.

There was a series of presentations and workshops. On “busting myths about responsible investment”; “Effective Investor Engagement” (David Pitt-Watson author of the “The New Capitalists”), “Why Funds should collaborate in their Mutual Interest” (UNPRI); Asking Questions as a Trustee: How to do it effectively? And “Making headway on RI: practical ideas for implementation” (By Bernie Doeser and Catherine Howarth of Fair Pensions).

I’ll hopefully come back and in more detail on some of them another time.

Some key issues from the day (in my view) –

Don’t confuse “Responsible investment” with “Ethical investment”.

Major UK asset manager Credit Suisse had a Fair Pensions responsible investment score in 2008 of only 1 out of a possible 36 (bottom of list).

“We can all see what irresponsible investment has done to our funds”...Who could argue with a (do no harm to the wider financial system) clause in your statement of investment principles...what fund manager is going to argue that their decisions will cause harm? (David Pitt-Watson).

It costs nothing to be a UNPRI signatory (a donation is of course welcome). So why is your Pension fund or fund manager not a signatory?

Ask your fund managers (and importantly - potential ones at “beauty parades”) how many staff they have working 100% on responsible investment issues?

The over emphasis on short term 3 monthly fund performance by Pension funds has contributed to the present financial crisis.

Organise, organise and organise. Ironically, basic trade union organising values are as necessary to the effective Capital Stewardship of pension investments as in any bargaining issue. Survey your members, involve them and find out what they think? Report back regularly. Make sure that representatives are properly trained and supported by the union; make sure they have sufficient time off to properly read papers, research and plan. Work with your fellow trustees. Try to win things that are achievable.

Most importantly of all, believe absolutely and utterly that:

1. What you are doing will change things, and at the very least you will help get rid of child labour, environmental damage, overpaid executives, public corruption and unjust or unsafe Labour conditions.

2. Responsible long term investments will enhance the value of your funds and outperform rivals.

Tomorrow Investor – Royal Society Arts

On Saturday I was really pleased to have been invited as an “expert” witness by the RSA to address a “citizen Jury” on pension activism.

I’ll post on this separately but I had an enjoyable day and very appropriately for such a venue, my faith in the basic decency and common sense rationalism of the “great British public” has been fully restored.

I was there because the RSA are launching a new project called “Tomorrow’s Investors”. Last week they held a keynote lecture to mark the event.

“Much of the money invested in company equities is held on behalf of ordinary citizens, often saving for retirement and other major life events. Yet it appears that many of those citizens have little consciousness of their role as owners.

Should investors be more involved with their investments, with a greater awareness and understanding of the broader implications?

Would a greater degree of involvement yield better results – both financially and ethically?Speakers to include: David Pitt-Watson, founder and chair of Hermes Equity Ownership Service; Jasmine Birtles, journalist, broadcaster and finance expert; Paul Myners, Chairman of the Personal Accounts Delivery Authority; and Penny Shepherd, Chair of the UK Social Investment Forum.

Top "Labour & Capital” blogger, Tom P was also there, and has as usual captured the debate wonderfully in this post (see selection below) so I won’t need to add anything apart from a few observations.

I think it's fair to say the real action was the split between the views of Pitt Watson and Myners. David sketched a more optimistic picture, arguing that the democratisation of ownership through funded pensions and other savings had already started to have an influence on the nature of ownership. He gave the example of the success of UNPRI.

Myners was far more critical, arguing that there had been very little real progress. Most institutional shareholders didn't take ownership seriously, SRI barely figured on the radar of company boards (as an influence on them), trustees were still spoon-fed by advisers and still focus on short-term performance despite its irrelevance.

I think the broad consensus from our little group was that although the Pitt Watson view was the one we would like to believe, the Myners perspective seemed to fit more with our own experiences.

I thought that Paul Myners was being deliberately provocative - shock horror. There are still huge problems to overcome, but as David pointed out there has been an enormous change in living memory. I actually think that Myners is actually on on board with New Capitalism although unsurprisingly off message.

Even if he is a "trade unionist" and “someone who wouldn’t join the Labour Party because it is not sufficiently left wing for my taste”. Which is a somewhat unusual statement for the Chair of a Hedge Fund to say? As was his suggestion that stamp duty ought to be increased to 5% in order to encourage long term ownership (not traders).

He advised the unions to concentrate 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”.

We need someone like Myners to remind us how far we have to go. Hopefully, at some stage he may have some slightly more constructive remarks. But I agree (and I am sure that David would as well, but is too polite to say so) that the majority of pension trustees need to be more independent minded and stand up to professional advisers. There again to do this they need support and training. Who can do this other than the unions?

Jasmine Birtles was very entertaining and brought us back to planet earth, she remarked that on her money web site she has worthy features on ethical investment, but no-one reads them. The most poplar stories tend to be “how to get rich without really doing anything”. While Penny Shepherd combated Paul’s negativity and took him to task.

I was fascinated when David pointed out that the BT Final Benefit pension scheme (run of course by Hermes and owned by the scheme) only cost 0.2% in annual charges (I repeat 0.2% pa). While modern DC (defined contribution, money purchase, stakeholder, personal pension - what ever) Pension charge at least 1.5% which could swallow over the years up to 40% of the fund in charges.

Come back DB schemes – all is forgiven.

The Credit Crisis – What you get when you have Capitalism without Owners?

I’ll finally finish off my reports from the recent TUC Pension Trustee Conference with the key note speaker, David Pitt-Watson. Respected fund manager, author of the best selling “The New Capitalists” and life long member of the Labour movement.

David reminded everyone of the economic might of pension funds – no one may rule the world, but pensions own it. UK pension schemes won 20% of UK shares, while a further 20-25% is owned by foreign pension companies. Pension funds also own big chunks of insurance companies who also hold massive holdings of shares worldwide. Some 10 million Brits are a member of a pension scheme. Petroleum giant BP recently tried to calculate how many people benefit from the payment of their dividends into collective funds. They gave up after counting 280 million people worldwide.

The two major problems in the economy are the credit crisis and rising commodity prices. The problem is as severe as the 1970s but so far the system has managed to hold together better e.g. no mass unemployment.

David noted that “turbo charged capitalism” has made huge amounts of money for a small number of speculators such as investors in hedge funds. He notes that most of this money was made using pension fund investments.

How did the credit crisis come about? In the old days to get a mortgage you needed a 30% deposit for a 70% loan over 25 years. Until post crisis, unregulated mortgage brokers were buying up credit loans and selling to pension funds. They valued it not as how much was owed, but how much you could trade it for. Eventually these dud mortgages came home to roost and the crisis ensued.

However, there is a problem here. We own the banks, we appoint managers and accountants. We knew that credit reference agencies who gave positive assessments of these loans were being paid by the people who packaged the mortgages. How did we allow this to happen?

How much is the huge increase in the price of oil the result of speculation using our money to drive up the price?

How big is the crisis? It is very big. You have had banks with £50 billion of mortgages supported by only £1 billion of equity.

How to address the problem? Better regulation? Yes, you need to worry about short selling but remember the most regulated market in the world is in the US.

A better standing point is accountability. Pensions own the world and trustees should represent members. We want profitable companies to pay for pensions but we don’t want to destroy the planet along the way. Trustees should be defenders of beneficiaries.

David pointed out what pension funds working collectively together have done in the past. Such as allowing the production of cheap drugs in developing countries against the wishes of drug companies. Stopping the production of pig iron in Brazil for the car industry which depended upon indentured labour and the destruction of rainforest for charcoal.

David finished by stressing the need for us to act as owners in a sensible pragmatic and principled way to make the economy run properly.

I felt that David was actually pulling his punches somewhat, to let the message sink in. To use Northern Rock as an example. Yes, the Bank of England has hardly covered itself in glory over its lack of regulation over Northern Rock; however who appointed the risk management committee members of that bank? We did, whether we realised it or not. If as the owners of Northern Rock we failed to appoint the right people to manage on our behalf or failed to employ the right advisers to monitor them then who is to blame?

In my post yesterday I made my anger clear regarding directors (the owners of companies or appointed by them) who are not held responsible even for killing workers.

Taking your ownership responsibilities seriously is key. While at the moment it is actually difficult for pension trustees to act as owners it is not impossible. The biggest hurdle I think is actually improving the self-confidence of my fellow trustees/member representatives to actually act more as owners. It is after all their money and they should challenge, probe and test their managers and advisers constantly. Demand accountability and full transparency. Ask the simple, direct questions that owners should ask of the people they employ to manage their money.

Remember the old adage, if you don’t understand it, don’t buy it.

After all, to further misquote Hartley Shawcross “We are the masters now”.

"New Capitalist" is Labour General Secretary

Congratulations to the new General Secretary of the Labour Party David Pitt-Watson. I have meet David a couple of times at pension conferences and have been very impressed. He was our guest speaker at a UNISON conference fringe last year which I chaired (photo: right with red tie). It was called “Trade Unionists are the New Capitalist’s”. Check out David’s book on this subject.

He is an experienced former Labour Party assistant general secretary and successful fund manager for Hermes which runs the huge BT pension scheme (unusually the scheme owns Hermes). He can walk the talk. I suspect that he is taking a big pay cut to do this job (which admit it, is going to be a pretty thankless task at times).

He is just the bloke to sort the Labour Party finances and its campaign machinery in time for the next election. Good Luck David (you'll need it)

West Ham New Capitalists

Last night I was the “guest” speaker at West Ham Labour Party CLP General Committee (GC) at Stratford, Newham, East London, E15.

I had actually agreed to speak on “New Capitalism and a Labour Party Forum” at last months GC, but had completely forgotten to check that this clashed with Labour Party conference. The Political officer and the CLP Executive Committee kindly agreed for me to speak this month instead.

I pretty much gave the same spiel that I gave to East Ham CLP Manor Park & Little Ilford wards in July. To summarise my (and many others) arguments, it is that in Britain ordinary people own a majority of the voting shares of companies listed on the British Stock Exchange and significant other equity markets across the world. These are small investors in pensions schemes, insurance policies, other collective investments and individual share holdings. It is completely wrong, both morally and financially that these investors do not exercise not only their rights of ownership but also their responsibilities as owners for their investments.

If owners do not do this (by and large they do not) then it is vital that within the Labour Party there is a forum to engage and debate this issues and bring them to the attention of the Party.

I hope this post will encourage similar levels of discussion as my last post. Also that Harry Barnes latest grandchild is doing well and he can now rejoin the fray!

Being before an audience of Politicalised East Enders there was of course a fairly lively debate in the Q&A. They were very gentle with me, no doubt because I was also a West Ham GC delegate! However, there was a good debate on my points. Delegates brought up whether this was just a repetition of “1960’s utopianism? or was “New Capitalism” just a reflection that the state does not feel able to regulate or control companies anymore? Were we just following Thatcher’s arguments? Were my facts simply wrong? Is this a repudiation of Anthony’s Crossland’s belief that ownership of capital is not as important an argument as its equitable distribution of income? Financial interests will never give up real power to worker’s capital; workers are just not interested in their superann contributions past pay day etc. There was also a sharp observation that Newham Council appeared to be “back pedalling” on this is issue corporate governance in its staff pension fund. This was repudiated by the pension fund chair.

Good questions: My answer to many of these questions was that while I am personally very optimistic about what we can achieve via “New (or Workers) Capitalism” I recognise that it will be very difficult and that New Capitalism is not the answer to all problems and should be seen as complimentary not an alternative to traditional politics.

However, at least we can try to ensure that our money, our savings, our pensions are not invested in companies that do harm. That companies we own take their responsibilities seriously and do not employ child labour, do not persecute trade unionists nor recklessly pollute the environment in order to maximise short term profits.

That’s a start.

Why the Labour Movement needs to embrace “New Capitalism”.

Back from speaking to East Ham CLP Manor Park and Little Ilford Labour Party wards at the Froud Centre, Newham, London, E12. Spoke about the “Labour Movement and New Capitalism”. It went down pretty well (or they were very polite!). I'm trying to gauge reactions to forming a national Labour Party “Forum” on socially responsible investment and company governance by speaking to branches.

Started off saying that at the end of the talk I hoped to persuade them that they were “New Capitalists”. Then quickly I asked if they were members of pension scheme if so which one, how many have life assurance policies, how many have shares in companies or saving plans that invest in companies? Nearly everyone present raised their hands.

Next I tried to set the scene with some sources and definitions

A lot of what I said is based on research carried out by UNISON and the TUC and that of the book “The New Capitalists” (1) co-authored by David Pitt- Watson and others. David is a leading fund manager and use to be an assistant general secretary of the Labour Party. However, the interpretation (and any errors) is mine.

The online dictionary Encarta defines capitalism. As a “Free market system - an economic system based on the private ownership of the means of production and distribution of goods, characterized by a free competitive market and motivation by profit”.

New Capitalism refers to the fact that “private ownership” element of capitalism has now changed and that today the owners of nearly all British and many international companies are no longer a few wealthy individuals or families, instead they are the many millions of small investors who have pensions, life assurance policies, privatised utility or building society share holdings or collective investments in ISA, PEPS, Unit and Investment Trusts. At least 2/3 of the adult British population have a stake in equities (which is another word for shares). A majority of the shares quoted in the London Stock Exchange is owned by such small investors (1).

My main pension, the Local Government Pension Scheme has 3.5 million members and nationally holds assets worth over £125 billion pounds.

By Labour movement I mean the traditional labour movement family of the trade unions and the Labour Party as well as the Co-operative and other affiliated socialist societies.

New Capitalism is a Labour movement issue not only because of the obvious reason that many of these small investors are trade union members and ordinary working people or pensioners (its our money) but if New Capitalism is not working properly, which I will argue it is not, then this will have a profound negative impact not only on trade union members but also the wider civil and political economy.

For example, my pension fund may be investing my money and that of my fellow trade union members in companies who treat their workforce badly, here or abroad, don’t recognise trade unions and who fail to provide their staff with a healthy or safe workplace. However, at the moment I have no adequate means of addressing this problem. Not in my name, not with my money.

It is also a Labour movement issue that many of the companies we currently invest our money in are badly managed and governed or even some are fraudulent. Instead of creating value for pensioners and investors they can destroy value and threaten the viability of the schemes. For example look at the recent massive corporate failures such as Enron or WorldCom where the life savings of many employees was wiped out, but also of companies who pay over the odds and take over unsuitable companies and lose huge amounts of money. Again how can I assure that the companies my funds invest in on my behalf make sure they are not thieves?

Of course not only is this issue a Labour Movement issue it is also a issue of concern to church and religious groups, many charities and other pressure groups. It is a citizen issue since everyone will be affected and since citizens are the new owners of capital.

If a company that we own decides it is cheaper to pollute the environment in order to maximise short term profits then that is an issue not only for its investors for its workers but potentially everyone in society.

If a company that we invest in deliberately turns a blind eye to its sub-contractors in India using child labour rather than sending them to school in order to make expensive sports shoes cheaply then that is a citizen issue as well as a Labour Movement issue.

I would hope by now people would except that New Capitalism is an important issue for the Labour movement. What I would like to do now is explain what is going wrong and what we can do about it.

What is wrong is that we all might be owners but we are unable to act as owners, unable to unable to carry out our responsibilities of ownership. These responsibilities are actually carried out by a small number of what has been called a small number of “distant and unaccountable players”. Very highly paid Executives, fund managers, international bankers, hedge fund operators and of course a subject that has been in the news a lot lately, Private or is it Pirate Equity?

An American investor once famously remarked that “No-one ever washed a rented car”. Instead of owners taking charge of their companies, we employ (or rent) “managers” to act on our behalf. These managers may have no long term loyalty to the company in exactly the same way as people treat rented cars. We also have shares in this company traded by fund managers who constantly “buy” and “sell” shares. It’s about trading not investing.

Because of this share trading pressure. The chief executives of many of our companies are paid according to often short term priorities rather than long term.

Traditionally because of the lack of effective owner representation on many company boards, we find the Chief Executive often is able to stuff the board with his cronies and favourites which often meant a complete lack of accountability and scrutiny which often resulted in dreadful business decisions been made. Capitalism without owners will fail.

How do we go about changing things? In recent years there have been improvements in governance but not enough. The Labour government has introduced a requirement for all pension schemes to have 50% employee representation. Which is an excellent start? With proper training and support hopefully by the trade unions they should be encouraged to act as owners and ensure that companies that they invest in are properly managed.

Why aren’t insurance companies and other collective investments made to allow independent trade union or citizen representatives on their board? Is it about time to look further into the continental models where staffside representatives are automatically on the boards of all large companies?

Now is there a risk to our pensions and investment if we allow this? Should the only thing that matters to companies being the pursuit of profit?

I would argue that there has been a lot of research that decent well run companies generate more profits in the long run than greedy, destructive and badly runs companies. I think this is commonsense. It has been suggested that 15-20% premium in price and profits where you have sensible governance structures?

The danger to our investments is when we invest in companies where there are no owners taking responsibility.

Will it be bad for the economy if investors start acting as owners and decide to pull out their money from these badly run companies? This question can be answered by going back to what ownership really means. Instead of disinvesting or pulling out your money in bad companies what you should be doing is acting as a responsible owner and turning bad companies into good. In fact arguable you should be looking for bad companies to invest in, so you can change them and make them more profitable in the future.

Finally it important to accept that even the best and pro active “New Capitalism” will not solve all the problems in the world. There is still a vital role for traditional labour movement priorities and activities for achieving equality and social justice.

However, what we should all want is to be effective owners of decent companies will pay good profits, that don’t attack their workers, that recognise and value trade unions, that doesn’t allow kids to work in sweatshops, doesn’t bribe companies or local official (tell that to the British government) and doesn’t overpay their chief executives especially for failure.

(Also in Q&A had a dig at Council for not talking to local UNISON leaders to try and resolve a potentially very serious industrial dispute over the future of the rubbish collection service)

UNISON conference – Trade Unionists are the “New Capitalists”?

Third day (Thursday) of UNISON National Delegate Conference. In the morning there was a row over the Standing Orders Committee report which led to a temporary suspension of business.

Then there was a briefing session on “Equal Pay” led by General Secretary Dave Prentis. Obviously equal pay is a key issue not least because trade unions, full time officers and even their branch activists have had legal action taken against them for allegedly failing to represent their members properly over equal pay agreements. I have heard that bailiffs have been knocking on the doors of branch secretaries at 6AM in order to serve summons on them personally. It was made clear that UNISON would back any branch officers under such an attack. We heard that “no win no fee” solicitors are evening encouraging people to join unions so they can sue them! I didn’t hear any mention of this wheeze the earlier debates on encouraging recruitment. Must remember to give that one a miss.

Baroness Howells gave a sobering and very dignified speech on the Bicentenary of the transatlantic slave trade.

Good debate on fighting the BNP. GLA delegate Alan Freeman made an excellent contribution, ending with something on the lines of “some people may not vote Labour because they can’t forgive Blair, but if they don’t vote Labour and let in the BNP they will never be able to forgive themselves”. This went down very well.

Ironically this debate was followed later that day by a UNISON rule change amendment during which a delegate referred to black people as “coloured” which quite rightly upset many people.

In another rule Change debate a proposal to “bash the NEC” and restrict their right to propose motions was knocked back.

After conference there was an official fringe event “Are we the “New Capitalists?” which I chaired with speakers David Pitt-Watson (see photo right - joint author of “The New Capitalists”, Chief Executive on Hermes, the in-house fund managers for BT and Post office, former assistant director of the Labour Party). Mo Baines, UNISON rep on the Greater Manchester LGPS scheme had to pull out, so National Officer Colin Meech stepped in. There were about 30 people present, mostly UNISON pension trustees or member reps on the Local Government Pension Scheme. I’ll try and write something up properly later about the fringe, but David’s precise and analytical arguments about workers capital and citizen investment were I think pretty convincing.

This is the Synopsis from Amazon about the book (£18.04 including postage.

“Thanks to the rise of mutual funds and retirement plans, the actual owners of the world's corporate giants are no longer a few wealthy families. Rather, they're the huge majority of working people who have their pensions and life savings invested in shares of today's largest companies. These grassroots owners have ideas about value that differ from those of tycoons or Wall Street traders. And corporate directors and executives are coming under increasing pressure to respond. The New Capitalists provides examples - from GE to Disney to British Petroleum - of enterprises whose shareholders have recently wielded their control in ways unimaginable just several years ago. Authors Stephen Davis, Jon Lukomnik and David Pitt-Watson describe how civil ownership will profoundly alter our world - including forcing the rise of a new species of corporation. It has already begun demolishing old rules and habits, laying the groundwork for a new "constitution of commerce." The authors spell out conventional thinking destined for extinction - and fresh strategies companies must implement to survive in the emerging "civil economy." They also outline how investors, advisors, activists, and policy makers can make their voices heard”.

A delegate remarked afterwards that usually fringe events are “for the converted” yet this event was a genuine attempt to discuss and debate new and radically different arguments.

Went for meal afterwards at the Regency Restaurant on the seafront near the Holiday Inn Hotel. A fantastic good value traditional fish restaurant. Recommend it, most of the restaurants around the conference centre are pretty poor (loads of visitors - no repeat business?).

Ended up at the traditional end of conference bash laid on by the Scottish region in the Metropole Hotel (also the joint Southern regions were having a function). The hotel was packed. See picture of me drinking with some members of the “1st Health Brigade” (led by Che Guevara look alike, Commander Mickey Crouch) and London Region Young members Convener, Sarah Lewis (sitting).