Wall Street Partnerships and Principal Agent Problem
John Gapper has a super blog over at the FT in which he discusses the benefits that might flow from reforming bankers’ pay and restoring the partnership approach to renumeration
“Mr Thain correctly pointed out during the session that the old partnership structure of Wall Street firms, under which partners’ capital was at risk until they retired, produced better incentives in terms of risk management than bonuses based on short-term performance...This is not a bad idea but it might be extended. Why not truly replicate the partnership structure by applying those conditions to everyone who reached “partner” level - senior managing director or the equivalent at a large investment bank?”
This ties in with the idea of changing the behaviour of senior management so that they give great weight to the risks of particular investment and lending strategies and tries to avoid the myopic decision making that has proved so costly before the financial crisis.
The partnership model has applied particularly successfully in the UK with the continued success of the John Lewis Partnership. In March 2009 despite the effects of the retail recession, John Lewis announced that The company it would pay out total bonuses of £125.5m. That is the equivalent to about 13% of salary, or seven weeks’ pay.
A fresh burst of shareholder activism
I admit it - I am a passive investor and have been putting away a fixed amount for the best part of fifteen years into tracker funds and PEPs as part of a long haul towards retirement. I rarely if ever attend AGMs and restrict my activity to following the fortunes specific companies through the pages of the FT. Passive investors lie at the heart of much of the divorce between ownership and control in many modern corporations. But there are further signs of growing shareholder unrest and a desire to create squeaky-bum moments for senior executives at shareholder meetings. The Guardian today carries a lively story of recent gatherings where angry shareholders have taken aim at embattled executives - and they link to the UK Shareholders Association formed in 1992 to support and to represent the views of private (ie. non institutional) shareholders. There are numerous groups springing up many centred on the disaster-zone of the UK banking industry.
Luke Johnson on ownership and control
Luke Johnson’s entrepreneurship column in the Financial Times rarely if ever fails to hit the spot in his colourful and direct style. His most recent piece is simply superb on the fundamental dysfunctionality in the traditional model of corporate ownership and control in some of the bigger listed businesses. A wonderful read for those who want to appreciate the principal agent problem. He makes the case for a switch back to private ownership - taking companies off the market.
“Large public companies are mostly owned by a hugely fragmented shareholder base. Most of us have pension and insurance policies, through which we all invest in equities; everyone owns them and yet no one does. No owner has control, so the hired hands rule the roost. Fund managers meet executive directors twice a year for an hour and expect to understand what is going on. Too often they judge management based on their ability to carry off a presentation rather than their true skills as leaders.”
The remainder of his (highly recommended) article can be found here
Not just for profit - a new breed of social entrepreneur
Underneath the surface of an economy dominated by corporate giants, a new breed of business is flourishing, where profit is not always the bottom line; these are entrepreneurs operating for a social purpose and not just for profit. A social enterprise is a business that has social objectives whose surpluses are reinvested for that purpose in the business or the community, rather than being driven by the need to seek profit to satisfy investors. Rather than maximise shareholder value and distribute dividends, a social enterprise is looking to achieve social and environmental aims over the long term.
This BBC article by Chiyo Robertson looks at the rise of the social entrepreneur - green and good!
Rentokil falls into profits trap
How many of us still teach about conglomerates when teaching the economics of business growth? Rentokil Initial is one of the few remaining genuine conglomerates in British business.
The business which started life as a glorified pest controller has diversified over the years and famously - under former CEO Clive Thomson - clung onto a target of growing by 20 per cent a year until a recent downgrading of expansion prospects.
The Rentokil group now includes business that range from pest control to catering, e-security, washroom hygiene and landscape gardening and conferencing - but a series of botched takeovers and restructuring costs seem to have done them no favours as profits have declined. The BBC reports that nderlying profits for the first half of the year fell 55% to £39.3m.
The Guardian reports on their current difficulties and the pressure for some of their businesses to be sold off to protect shareholder value. The City Link parcel delivery business looks to be under real pressure given the increasingly competitive environment and the impact of sharp increases in transportation costs.
A new era of investor activism?
Matthew Taylor from the RSA considers what might be behind the growth of shareholder activism. Some interesting insights here for students wanting to broaden their understanding of the principle agent problem arising from the divorce between ownership and control in modern businesses.
“We are entering an era of investor activism. There are at least three broad shifts that will compel investors to enter the market as more than merely consumers.”
The Yahoo - Carl Icahn relationship is definitely one worth following!
Revision: Ownership and Control
Is the new breed of shareholder activist an important voice and counter-balance to the power of entrenched management - willing to stand up to poor ethical behaviour and highlight ineffective management? Can they help to overcome the principle-agent problem? Or are they merely aggressive corporate raiders seeking short-term corporate change merely for their own personal gain? This revision note is aimed at A2 economists and covers the topic of the divorce between ownership and control.
Revision note:
Ownership_Control_Activist_Shareholders.pdf
The role of shareholders
How does ownership affect the running of a business. The Bottom Line this week looked at the relationships between senior managers of businesses and the shareholders who own the companies they run. The guests on the programme included Sophi Tranchell Managing Director of Divine Chocolate who is speaking at our Business Conference at the British Library in July.
45 per cent of Divine Chocloate is owned by cocoa growers in Ghana, the idea was first created by the success of the Cafe Direct model. There is one board meeting in Ghana each year along with three in the UK. Most of the cocoa farmers have never tasted chocolate! When people in the supply chain are part owners of a business, continuing to sell rising volumes of the product is the most important incentive, there is little pressure on the business to diversify.
Gavin Slark CEO of BSS has a different ownership structure with Schroders the dominant institutional investor and the programme also includes contributions from Andrew Tinkler CEO of the legendary road haulage business Eddie Stobart. Evan Davis quizzes his guests as to whether investors really understand their businesses. Are managers servants of the shareholders or educators?
The Bottom Line is always available as a weekly download from iTunes and previous programmes are archived on the BBC web site.
Most Popular Topic Tags on the Economics Blog
recession, demand, economics, unemployment, prices, price, inflation, investment, costs, trade, profit, employment, debt, supply, downturn, euro, gdp, confidence, competition, risk, china, capacity, exports, production, incentives, oil, expectations, manufacturing, sterling, housing, pay, food, profits, banks, tutor2u, globalisation, mortgage, property, revision, retailers, slowdown, borrowing, usa, innovation, emissions, dollar, deflation, airlines, supermarkets, entrepreneur, monopsony, efficiency, productivity, google, elasticity, moodle, wealth, aqa, keynes, protectionism, welfare, consumption, externalities, saving, opec, economist, inequality, strategy, depression, competitiveness, economic cycle, tim harford, stocks, depreciation, jobs, monopoly, infrastructure, carbon, credit crunch, poverty, cars, bank of england, eu, vle, environmental, carbon trading, spare capacity, budget deficit, environment, subsidy, wages, market failure, management, regulation, evaluation, output gap, losses, behavioural, government failure, steel, climate change, construction, macroeconomics, imports, oligopoly, japan, bbc, skills, cpi, commodities, farming, newsnight, paul mason, intervention, fiscal stimulus, multiplier effect, single market, currencies, population, stagflation, itunes, contestable, lse, agflation, minimum wage, interest rates, choices, aviation, amazon, quantitative easing, germany, taxes, uk economy, monetary policy, cartel, survey, nationalisation, india, brazil, rpi, pricing, dan ariely, opportunity cost, apple, pollution, oecd, rationality, keynes society, rsa, relative poverty, shipping, iphone, capital, merger, currency, imf, balance of payments, yuan, tragedy of the commons, price discrimination, current account, economies of scale, redundancies, london, savings, facebook, stakeholders, shareholder, behavioural economics, mpc, supply chain, liquidity, takeover, barriers to entry, reputation, income elasticity, poverty trap, microsoft, human capital, hamish mcrae, subsidies, discrimination, roger bootle, federal reserve, robert peston, duopoly, immigration, suppliers, us economy, quiz, gini coefficient, collapse, coffee, obama, pensions, development, national debt, consumer surplus, crowding out, etonomics, eurozone, crude oil, scarcity, labour market, ecb, petrol, taxation, tesco, free, brand, smoking, budget, paradox of thrift, cost of living, transport, labour mobility, liquidity trap, global, speculation, starbucks, recovery, iceland, allocative efficiency, behaviour, surplus, david smith, waste, shareholders, ireland, happiness, growth, information failure, vat, creative destruction, open source, cost benefit analysis, trade deficit, tariffs, northern rock, edinburgh, comparative advantage, ownership, scrappage, robert frank, ocr economics, aggregate demand, freight, diane coyle, kaletsky, royal economic society, eton college, exploitation, labour force survey, government borrowing, utility, fishing, edexcel economics, sony, leverage, marginal cost, tax, paul krugman, information, discounting, animal spirits, peter day, contestable market, anchoring, nissan, zimbabwe, european union, savings ratio, wiki, needs, internet, public sector, evan davis, public goods, heathrow, price war, energy, hotels, standard of living, contestability, hbos, stephanie flanders, twitter, wants, migrants, poland, blog, consumer welfare, aqa economics, devaluation, spain, pubs, milk, foreign exchange, indirect tax, forecast, external shocks, eu enlargement, movies, advertising, enlargement, bond, mervyn king, income elasticity of demand, blogging, ebea, property rights, accelerator, edmund conway, deforestation, house prices, copper, hot money, jim o'neill, ucas, bonds, trend growth, libor, elasticity of supply, carbon tax, income, diesel, income tax, jobless, accelerator effect, law of unintended consequences, bric economies, guardian, youth unemployment, john kay, google wave, fixed costs, deficit, global economy, sub-prime, economic efficiency, exchange rates, vacancies, research, biofuel, renewable, companies, profit margin, price capping, joint venture, price mechanism, natural monopoly, world bank, martin wolf, training, startups, competition commission, gilts, geoff riley, immobility, coal, fairness, producer surplus, congestion, greece, redundancy, social costs, will king, sentiment, base rate, walmart, ageing population, disposable income, equity, corus, collusion, tickets, oil prices, fair trade, dynamic efficiency, obesity, social entrepreneur, russia, real income, res, binge drinking, philip allan, low pay, king of shaves, vehicles, broadband, cash, price fixing, tariff, hysteresis, tata, supply-side, government spending, eastern europe, internet explorer, income distribution, compound interest, contestable markets, positional goods, repossession, economax, general motors, sustainability, students, green shoots, ftse, age structure, frictional, satisficing, logic of life, pay floor, disincentives, yahoo, resources, gillette, liberalisation, blackberry, negative externalities, oft, aldi, migration, economics revision, financial times, fiscal drag, healthcare, asda, market structure, cadbury, credit, ryanair, wheat, market power, winners curse, apprenticeships, hidden unemployment, demography, cyclical, british airways, deindustrialisation, sovereign debt, credit cards, declan curry, nokia, renewable energy, optimal currency area, anti-trust, public good, decoupling, markets, diseconomies of scale, rory cellan-jones, the economist, barclays, economic welfare, tax burden, undercover economist, child poverty, retailing, pension, landfill, schumpeter, veblen goods, enterprise, brics, redistribution, floating exchange rate, gold, unintended consequences, vertical integration, structural, monetary policy committee, nhs, reserve currency, single currency, football, job losses, nairu, costa, nelson thornes, scotland, deleveraging, green revolution, drugs, collaboration, hyperinflation, automatic stabilisers, podcast, o2, motor industry, pay cuts, real gdp, monopoly power, global business, labour supply,All tags
ECONOMICS TEACHER RESOURCE NEWSLETTER
Join over 4,000 other Economics Teachers in the UK and around the world who receive the tutor2u Economics Resource Email newsletter. Get special offers, first news of latest resources, teaching ideas, conferences and workshops.
Recent Threads on the Economics Teacher Discussion Forums:
Posts in: General Economics Teaching
Need help. - Economic Growth
Economies of scale presentation A2
Economic development
International Competitiveness
Keynesian Aggregate Supply
Demand Supply (% VAT Imposed) How to...?
Policy conflict and the Euro
Registering for the tutor2u VLU
Video Case-study - lunchtime prices slashed
Long Exam Example to Use for Revision Please?
