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.