All of a sudden, it’s executive pay time. Here is The Purposeful Company, the product of a steering group of seven grandees, a task force of nine more, plus a dozen contributors, together demonstrating that those getting today’s executive pay have nothing useful to say on the subject, as Neil Austin forcefully pointed out on the FT’s letters page last week.
This followed an earlier suggestion that incoming CEOs should receive only a cash salary, with an obligation to buy shares with part of it, to hold for several years. It’s a fine idea which would make really bad law.
These proposals were merely the prelude to the government’s green paper on the subject. If this document reflects government thinking, there’s not much of it. Employee representation on boards has been dropped, perhaps after Volkswagen’s disastrous governance showed how it works in practice. Calculating the multiple of the average employee’s salary earned by the CEO would produce a mixture of entertaining headlines and perverse results. We already have shareholder votes on pay.
There is one sensible, simple move which could slow down the runaway executive gravy train: make every director’s contract contingent on approval by the shareholders in general meeting.This would strengthen the negotiating position of the remuneration committee with the would-be CEO (“we’d love to offer you more, but the shareholders won’t wear it”) while obliging the directors to justify the contract publicly before it is too late. In practice, the shareholders would rubber-stamp all but the most egregious packages, but it is their money on the line, after all.
Brilliant, but who’s paying?
David Harding would rather you didn’t call Winton Capital a hedge fund, but no other label is a better fit for the $32bn his company has under management. His clients have enjoyed double-digit compound growth, even after fees that have made him rich enough to fund a maths gallery at the Science Museum.
So is his army of analysts just better than (almost) everyone else at picking currencies, bonds and stocks? Well, yes, obviously, but not quite the way you would expect. Like Winton’s even bigger hedgie across the Atlantic, Renaissance Technologies, it involves nothing as vulgar as conventional investment analysis.
Rather than assessing an economy or visiting a business, Winton’s boffins churn data looking for weak mathematical patterns and correlations (everyone immediately spots the strong ones) like whether a currency is marginally more likely to rise on a sunny day, or whether companies that report on Tuesdays see more favourable share price reactions.
Over half Mr Harding’s 450 employees do this, and one estimate is that as much as $450bn round the world is run the same way. For Winton at least, it is wildly successful. It also appears to be wealth created out of thin air. It has almost nothing to do with efficient allocation of capital, or helping business to do better, or anything else which is generally thought to make a country richer.
Providing liquidity is a useful, albeit marginal, activity, and Winton’s wealth looks uncomfortably like the result of a zero sum game at our expense. Still, at least we can look forward to the maths gallery to help us learn how to play it.
Oh for a plastic Swiss franc
Oh no! Those new plastic fivers contain animal fat. The quantity may be less than the print your finger leaves on the note, but we’ll always find something else to worry about. The Swiss now have to worry about the bank nibbling away at their savings, at least those with fat balances. Postfinance is to apply negative interest rates to amounts above SF1bn. The experts at Bond Vigilantes expect others to follow, and for lesser amounts.
The solution, for these unfortunate fatcats, is the SF1000 note, or a small briefcase of them. (The distorting impact on the Swiss money supply is not your problem.) The Swissie has outperformed every major currency, but be careful, lest moth and rust doth corrupt your earthly treasures. If only the Swiss central bank would contact Innovia, the Wigton-based makers of the plastic fiver, to make similarly indestructible notes; we really wouldn’t mind the whiff of tallow.
This is my FT column from last Saturday.