Focus Group: Bad to the bone

Almost three-quarters of respondents to this month’s Off The Record survey felt recent events, such as LIBOR-manipulation and mis-selling, point to major problems with the culture of banking.

A UK fund put it bluntly: “I am totally perplexed at the level of downright incompetence verging on criminal activity when considered against the backdrop of executive remuneration.”

The remaining respondents felt there were isolated problems, with one Dutch fund urging investors to take some responsibility. “Most of the issues could have been avoided, or at least better controlled, if investors had put more effort into understanding what they were buying. We ask our counterparties a lot of questions and visit them regularly to understand and see what they mean when performing services for us. There may develop too much investor protection, [which] may leave investors in too comfortable a position and [with] a false feeling of safety.”

Almost half of the funds surveyed felt major problems existed within their domestic market and two-thirds in US/UK institutions, although more than two-thirds thought there were no problems, or only isolated problems, within the institutions they deal with regularly.

More than 60% of respondents felt the separation of investment and retail banking was a way of fixing governance problems. Other favoured solutions were global regulation of banking (59%), more serious engagement by bank shareholders (41%), and caps on bonuses and compensation (56%). A Swedish fund said: “Greed is not working. To get a banking licence, variable compensation should be forbidden as a global standard.”

A total of 44% respondents felt the problems go much deeper than governance, and that the whole banking sector needs a moral overhaul.

Half did not think the alleged LIBOR manipulation had had an impact on their fund. A quarter thought it had, but only to a minor extent. The remaining respondents were unsure. Just one respondent planned legal action in connection with this issue.

In agreement with economist John Kay’s recently published report ‘UK Equity Markets and Long-term Decision-Making’, 53% of respondents thought financial markets had become too short-termist. “You need to change the behaviour of trustees to effect a change. As long as we monitor on a quarterly basis, our managers are not going to change their behaviour,” said a UK fund. A Dutch fund added: “Bonuses are based on short-term successes. Long-term effect and risks are neglected.”

A further 35% of respondents felt some parts of the market had become too short-termist, but not all. A Danish fund commented: “As a long-term investor it is clearly a daily nuisance that so much short [term] money is in the market. I don’t think it makes a huge difference in the long term, as good company executives should be able to see through it and still run the company based on long-term strategies, but it adds to the poor reputation of financial market participants as a group.”

Kay’s review recommended that companies should structure remuneration to relate incentives to sustainable long-term business performance. No fewer than 91% agreed with this suggestion. A UK fund stated: “I think the whole remuneration issue in most of our top companies has got totally out of order. The amount of shareholder value destroyed and yet these rewards still appear to be paid, is beyond my comprehension.”

Over half of respondents agreed that long-term performance incentives should be provided only in the form of company shares to be held until after the executive has retired from the business, a third that institutional investors should hold fewer stocks and for longer, and a quarter that mandatory quarterly reporting for public companies should be abandoned.

In total, 82% agreed that the remuneration of asset managers should not be related to short-term performance of an investment fund or firm.

Of the non-UK funds who expressed an opinion, 68% would like to see a version of Kay’s review for their home market, while the remaining 32% did not think it was necessary.

Just over a third of respondents agreed with the statement, “the financial system is rotten to the core”. A Dutch fund commented: “Personal gain, personal power, short-term profits and total neglect of the customer’s interests seem to be the name of the game.”

However, a UK fund that disagreed said: “Don’t blame the bankers for all of it.
Consumers want cheap money and high returns, so the finance sector has created ever more complex ways of making money from and for its clients.”

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