It will be hard to better this week’s example of the Alice-in-Wonderland world that is today’s fixed interest market. Last Tuesday, the Bank of England bought in £1.18bn of long-dated UK government stock. On Wednesday the Treasury sold £1.25bn of long-dated UK government stock. On Thursday the traders opened the Krug to toast the taxpayer.
You need a heart of stone not to laugh at this ridiculous charade. The BoE pretends that it is boosting the economy through Quantitative Easing, while the Treasury pretends that it is financing the government’s deficit. Those in on the game hope that the technical complexities of the market will prevent the rest of us from spotting that the government is trading with itself, paying a handsome bung to the professionals in the middle.
This is expensive enough for the taxpayer, but in today’s zero-yield world, it is positively ruinous for company pension funds. Trustees have been bullied by their actuaries into believing that shares are nasty, risky things, while government debt is “risk-free”, even if “reward-free” would be a better description at today’s prices. Only investment-grade bonds will do to match the company’s liabilities.
Such bonds are rare and return hardly more than government stocks. Companies could issue many more of them (for the pension funds of other companies to buy) providing low-cost capital for expansion. Few are doing so. We are faced with the paradox that while money has never been so cheap, boards seem unable to find anything constructive to spend it on. They are reduced to purchasing their own company’s shares or buying up other companies to reduce competition.
Both activities provide a short-term boost to profits and fat fees for their advisers. Andrew Smithers, a wise veteran observer of markets, has a rather less cynical answer to this reluctance to borrow. Noting that unquoted companies invest at twice the rate of comparable quoted companies, he blames the bonus culture that has infested British boardrooms.
No self-respecting group of directors would be seen nowadays without their remuneration consultants. If those consultants say the boss is overpaid, they are likely to be replaced by a firm with more imagination.Aided by complexity and a little corporate mumbo-jumbo, the consultants can almost guarantee high rewards, come what may.
Today’s CEO, over-rewarded and over-worked, knows that his time at the top is short, and behaves accordingly. Incentivised to maximise earnings, executives will avoid the short-run hit to profits that longer-term investment inevitably entails. This, Mr Smithers believes, also explains why productivity growth has stalled.
Describing the executive pay problem is easier than solving it. Longer-term incentive plans can even be counter-productive if they encourage the CEO to accept a headhunter’s offer, complete with compensation for leaving his plan early.
Bonuses paid in shares which must be held for, say, a decade would help align the interests of the executives with longer-term shareholders. This might even encourage our CEO to borrow at today’s rate and invest for tomorrow’s profits. It would certainly have more impact than near-meaningless cuts in interest rates, or this pointless round-tripping in the gilts market.
One dam thing after another
The running sore that is the Samarco dam disaster for BHP Billiton was painfully displayed last week. Perhaps fortunately, there were other sores which contributed to a monster $7bn of impairment charges, from slumping metal prices and writedowns of oil assets. These latter are painful, but healing, while the $2.2bn for Samarco looks like a down payment.
Andrew Mackenzie, BHP’s chief executive, learned something from BP’s experience with the Macondo oil blowout, by taking personal control of the aftermath. He should have learned rather more. BP was eventually forced to cut the dividend, long after doing so would have helped the politics of the catastrophe.
Had Mr Mackenzie announced the suspension of payments promptly, it would have been a concrete sign that he did indeed feel the villagers’ pain. Never mind that the dividend looked unsustainable at the time, the move would have garnered goodwill when it was badly needed. As it is, the previous “progressive” payout plan has since been scrapped, replaced by a (much lower) meaningless mixture of “minimum payment” and “additional amount”. A special prize, then, for anyone who can calculate the forward yield on BHP shares.
This is my FT artcile from Saturday