LAPFF Conference 2010: Diversity by Laura Liswood

Still playing catch up on my posts from last year. I did enjoy Laura Liswood, a senior American consultant with Goldman Sachs, talk on “Diversity”.

Her basic argument is that there is a compelling business case for Diversity. If you add someone with the same background to a group you get some improvement but it you add someone with a different background you get more. Transgender Ben is better than Sister Barbara. Why was Stephen Hawkins able to make so many breakthroughs in physics? This is because most physicists write down their ideas on paper. Stephen does it all in his head. He imagines problems. No linear thinking.

Member of dominant group in our society are thought to be competent until proved to be incompetent. Member of non-dominant groups are assumed to be incompetent until proved otherwise. Compare what happens to women who tell their boss they are pregnant with a man who tells his boss that he has joined TA and could be sent to Afganistan.

Why is it that only 16% of all men are over 184cm in height but 57% of the male top 500 CEO's are taller? There is no research whatsoever that proves leadership ability is due to your skeletal structure. Conformation basis. If you believe women play classical music less well. If you think she may make more mistakes, is less strong and less forceful. When you think this and watch – you notice the mistakes. In blind auditions for orchestra’s behind screens, the number of women has gone up by 20%.

Why is it if you ask 11 year girls what they would feel if they were to become a boy tomorrow they would go ugh but be positive about climbing trees, riding bike and getting dirty... but if you ask a 11 year boy about becoming a girl tomorrow - it is the worst thing ever. Why is there this change from 0-11?

There are two powerful myths in all cultures. One is the heroic journey where they seek to find a Holy grail. They may get in trouble along the way but will come back victorious. This is the plot for 99% of Hollywood movies. The second myth is the rescue or rescue me myth. Cinderella and Sleeping Beauty. The oldest version of the tale can be traced to 9th century China.

The most dangerous weapon you can use is words. Laura became a US reserve police officer after 9/11 (as you do). Words are verbal judo. As a Police officer late at night outside bars she can wind up situations or calm them down. In India if you give long answers to questions you tend to get higher grades. In the USA they say the squeaky wheel gets the grease. In Japan the nail that sticks out gets hit on the head. While in China the loudest duck gets shot. In the West girls are taught by their Grandma that if you can’t say anything nice - don’t say it. Men are more subtlety advantaged. They are subject to positive illusion. Tell a man that he should become a MP and he would answer, "yes, of course I should, why did it take you so long to realise"?

I asked Laura a question about her putting forward a powerful business case for diversity but surely it is essentially a moral and political point. She replied “whatever rocks your boat”.

As you can see from pictures of the conference LAPFF needs to do more about diversity but well done for putting on this keynote presentation.  I suspect that Goldman Sachs has quite a bit of work to do on this matter as well.

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: Roundtable on UK Corporate Governance Code.

“Shareholders were asleep at the wheel before the financial crisis” Phil Triggs (Warwickshire LGPS) agreed with Lord Paul Myners that this was true. Other members of this panel were Alan MacDougal (PIRC) and Cllr Neil Fletcher (NE Scotland LGPS). My notes are not great on this session so I will report what I found interesting and not attribute to individuals.

It was agreed that very few pundits predicted the crash beforehand and many say they did now only with the benefit of 20:20 hindsight.

Check FRC site for further information on the Code. “The UK Corporate Governance Code (formerly the Combined Code) sets out standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and relations with shareholders.

All companies ...of equity shares in the UK are required ...to report on how they have applied the Combined Code in their annual report and accounts.... The Code contains broad principles and more specific provisions...companies are required to report on how they have applied the main principles of the Code, and either to confirm that they have complied with the Code's provisions or - where they have not - to provide an explanation...the FRC issued a new edition of the Code which will apply ..on or after 29 June 2010”.

A problem with this Code is that it is addressing yesterday problems not what we will face in next 5 years? How can we really hold the directors of banks accountable and make sure that their oversight in the future is far more effective?

There is some controversy about how much the “bonus culture” was to blame for the financial crisis? There is evidence - such as the bonus problems within UBS for example. But how do you determine outcomes of behaviour?

There is an increased focus on below board level remuneration as being more important. Many employees in financial institutions are paid far, far more than the Board. Issue of the importance of Board oversight. Do they understand what is going on in their companies? The importance of Board diversity. Lot of evidence that dissent and challenge is good. Get any group of people together and you find if there is an extreme view challenging the consensus this results in a better outcome. Not enough boards challenge in this way.

Can having more women on boards change this? There is no hard evidence. But there are clear different styles of operation when you have more women on Boards. It does result in a change in the “group think” amongst men.

We constantly ask fund managers about their best practice but what about shareholders best practice?

Consensus that the Codes do work and have changed behaviour and practice. Nowadays there is no real discussion about whether or not you need to have independent executive directors for example. There are now very few now dominant CEO’s who don’t brook any opposition. But in the US this consensus does not exist.

Issue of “Governance imperialism” – the UK may be a world leader on good financial governance but is it just a modern form of imperialism for us to tell other countries (particularly ex-colonies) how to run their affairs according to our western norms and values? This is likely to be increasing issue in the future.

LAPFF Conference 2010: Sir John Parker, The role of the Chairman in the New Environment

Caption is from The Independent who described Sir John Parker as a British superhero Clark Kent! He is the Chairman (not Chair?) of FT100 National Grid and former Chairman of Anglo American. Ian Greenwood introduced him with the comment “if the light go out during his speech we know who is to blame”.

Sir Parker believes “always leave things better in any new company”.

Health and safety is his number 1 agenda item (together with Environment). Employees come to work each day and should go home safely to their family and those who use our products should do so safety.

Non-Executive directors must prepare for meetings. Nothing makes him more angry than those who do not. Non-Executives should challenge courageously but support when necessary. They must find out more about the company. Not be arrogant. Those who are arrogant at their 2nd or 3rd only meeting push the seeds of their destruction. They need to be effective and independent minded. Stop the company taking unnecessary risks.

What relationship should a Chair have with a Chief Executive Officer (CEO)? He once took one of his new CEOs out in his 40 foot yacht. This CEO had no experience of sailing. It was rough weather and he told him that he was now going down below to get a cup of tea and that he would let him get on with it. He will only interfere if he asks for help or if he as Chair judges it absolutely necessary.

The only time he will actively intervene is to “turn around” a company in trouble. But there is nothing worse than a Chair who will not let go. Who has a high leadership profile at the expense of the company. Who is too dominate, too dictatorial, too argumentative. A poor listener who ignores the collective wisdom of the board. The Chairman who burns up all the oxygen in the boardroom. Personal conceits are most dangerous. Leave your ego at home. Keep in touch with advisors. Have a good feedback with shareholders. Not only formal but informal. Make it clear that the golden rule for any CEO is “do not surprise me”. It is not nice to watch when the Chair/CEO relationship breaks down. The oversight of executive development is key. The succession planning of the CEO is one of the most important things you do.

(JG: funny enough most of above applies also to the Labour Movement IMO)

Companies have a corporate identity. But you must ensure that the long term interests of the beneficial owners of companies are properly represented on modern day boards. Actively monitor action plans. Remember the Japanese word kaizen “Doing things better tomorrow than we did today”.

(JG) I thought this was very interesting but in the following Q&A I didn’t think he answered some questions as fully as some. There was a good question about his comments on the importance of having competent board but why was there such an imbalance in the number of female directors (never mind Chairs or CEO’s). He acknowledged that there were such problems and pointed out that the organisations he has chaired are making progress in this area.

I asked whether in light of recent cuts in the pay of senior executive in the public sector whether the private sector should follow. Bearing in mind that the pay ratio differential from lowest pay to the highest pay in the private sector was so vast? He at first appeared to blame such differentials on remuneration experts “I hope there is none in the audience” but he agreed that more has to be done. Pay had been affected by what had happened in Banking. As a member of the Bank of England committee for 5 years one of the worse jobs he has done was dealing with the consequences of the banking crisis. (I’m not sure what he meant by this? Perhaps though it is my note taking)

In another question regarding risk he explained how his company at the time didn’t plan at all for the Swine fever outbreak. A risk that they simply did not consider beforehand as needing a plan. They couldn’t lay pipelines or enter farms due to restrictions. This turned out to be a huge risk that they did not capture.

A question from another trade union rep praised him as being a breath of fresh air on safety issues but asked how does he ensure that his positive views goes beyond the boardroom? Sir John answered that one way was that his company board individually considers every single “near miss” safety report from all their company operations all over the world.  Which is pretty good.  In in my experience many employers don't even bother to discuss actual accidents at work which result in injury never mind "near misses".  Rock on Superman!

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.