Values, Activists and Oil
Values and governance.
What is the purpose of a company? A popular answer is that corporations are supposed to maximize their financial returns to shareholders, that any deviation from that goal represents a failure of governance, and that managers, who are likely to want to deviate, need to be monitored and compensated to focus them on that goal. This is loosely called "good governance," and some people think of it as having moral value. But other people think the opposite: Shareholders are greedy and soulless and anonymous, there's nothing so great about them that you should want to make money for them, and often the way you make money for them is morally questionable.
Here is a Lucy Kellaway column that contains two of the best pieces of casual-empirical corporate governance research that I've ever read. First, Kellaway got together "a group of managers from two dozen well-known companies," read them their employers' corporate values statements, and asked them to identify their own values:
Out of 24, only five correctly identified their company’s values, and in three cases it was because they had been on the committees that drafted them. The remaining 19 each raised a hand confidently — only to pick out the wrong values.
Ha! The obvious conclusion here is that corporate values statements do not promote values. But the really interesting result is that there are 83 companies in the FTSE 100 with corporate values statements, and 17 without, and:
Over the past 10 years the 17 valueless companies have outperformed the others in the FTSE 100 Index by about 70 per cent.
The obvious conclusion here is that values and shareholder return are in conflict. There is a sense in which this is predicted by theory: If you have some value that you place above shareholder returns, then you will sometimes sacrifice shareholder returns to achieve that value. No one believes that corporate values are actually that; Kellaway reports that the most popular corporate values are "integrity, respect and innovation," none of which are likely to conflict with profit maximization, or even mean anything at all. And of course the results of her first study suggest that, whatever is driving down returns, it's not active pursuit of the stated values. Perhaps it's the time wasted drafting them. Still it is a weirdly satisfying result.
Elsewhere, Gretchen Morgenson complains that Valeant's decisions to make money for its shareholders have been bad for employees and customers and tax revenues and generally everyone other than shareholders:
That’s unfortunately the way the game is played nowadays.
But does it have to be? A company’s earnings are not generated in a vacuum. They are a byproduct of its practices and principles. If investors assessed corporate earnings quality through that kind of lens, they might just help make the world a better place.
Hrmm. Remember it's a market. If I want to buy stock to make the world a better place, at the expense of profit maximization, and you want to buy stock for profit maximization, which of us will be willing to pay more for it? The answer is not a priori obvious but I bet it's you.
Elsewhere in governance, Hong Kong Exchanges & Clearing was considering allowing dual-class shares after losing Alibaba's listing to the U.S., but the idea was rejected by its regulator, and has now been abandoned after opposition from "many large international investors, including BlackRock and Fidelity." As one activist put it, "HKEx has finally thrown in the towel on its attempts to list second-class shares. Corporate governance was already bad enough without making it even easier to abuse minority shareholders." And here is a strange finding that compensating chief executive officers based on total shareholder return does not increase total shareholder return.
Nelson Peltz's "Trian Fund Management LP said it has accumulated $2.5 billion in GE shares since the middle of May—a roughly 1% stake" and is becoming more activist, planning to release a "white paper" today that "calls for the company to steepen cost reductions, consider getting rid of even more of the finance arm and be more cautious on acquisitions," and that of course asks for more leveraged share repurchases. And GE has been meeting with Trian for months, and agrees:
On Sunday, both Mr. Immelt and Chief Financial Officer Jeffrey Bornstein said that they largely agree with Trian’s prescription.
“We are completely aligned on the levers that get us from point A to point B,” Mr. Bornstein said in an interview.
Mr. Immelt added: “We have the clearest path for GE that we’ve had in the past eight years.”
He said that while he disagrees with some of Trian’s points, he is in accord with most. “The repurchase opportunity is right in front of us,” he said.
So if you are meeting with management, presenting your ideas, and seeing those ideas adopted, what is the point of releasing the white paper and announcing that you're an activist? (I suppose part of it is to persuade other shareholders to support the plan? But, like, when have shareholders opposed a share buyback?) I like the model of activist investing as primarily a game of reputation management, in which your actions with respect to one company are in large part about proving that you are tough and serious and value-additive to the next company. If Trian can claim credit for reforming GE, it should, because that's a nice credential to bring to its next, more contested activist situation.
Glencore's big problem today is that its stock was up as much as 72 percent in Hong Kong trading, requiring it to put out a statement saying that "it is not aware of any reasons for these price and volume movements." I mean, you could hazard a few guesses at the reason. Bloomberg points to the fact that "analysts at Sanford C. Bernstein & Co. said concerns around the company’s solvency are unjustified"; the Financial Times notes "a weekend report that the group was open to takeover offers," which I suppose the statement was intended to refute. In any case, this is a fairly nice problem for Glencore to have after the events of last week, when the stock crashed and recovered and ended down just 2.3 percent for the week. Here is a fairly comprehensive case from Craig Pirrong that "Glencore Is Not the Next Lehman."
And here is a story about Glencore, banks and Chad that I do not quite understand. The gist is that banks loaned Glencore $1.4 billion to prepay Chad for four years of oil shipments. The deal was done when oil prices were around $100, and "the deals rely on oil-price projections stretching several years that are intended to protect against losses."
But then oil prices started to tank. This year, Chad, whose economy depends heavily on oil revenue, sought to delay payments it owed via oil deliveries, prompting months of talks to renegotiate terms.
The obvious question is: Who bore the oil price risk in the contract? The implication seems to be that the answer is "not Chad," but that Chad has nonetheless fallen on hard times because it bore other oil price risk. And delivering oil at low spot prices into spot contracts might look more appealing now than delivering oil at high hedged prices into prepaid contracts, because Chad has already been paid on the prepaid ones.
The financial crisis was stressful.
Ben Bernanke's book is out today, and the Associated Press has some highlights. Apparently growing up Jewish in small-town South Carolina was weird; Bernanke's "elementary school classmates asked 'quite innocently, I believe,' whether he had horns." But my favorite story is this one:
During his darker days during the economic crisis, Bernanke found solace in a quotation from Abraham Lincoln given to him by the Fed's parking garage manager. Written on a 3-by-5 card and placed next to his computer screen, it began, "If I were to try to read, much less answer all the attacks made on me, this shop might as well be closed for any other business."
That is so much better than an "I can only please one person per day; today is not your day; tomorrow doesn't look good either" mug, though it would be kind of amazing if the Fed chairman had one of those. I hope the parking garage manager is a major character in the film version of Bernanke's book.
Elsewhere in financial crisis reminiscing, here is an article about how Hillary Clinton doesn't like to blame banks for the financial crisis, and here is a strange claim:
Throughout the 2016 presidential primary campaign, Clinton has taken a markedly less critical view of large financial institutions like Citigroup Inc. than Democrats like Elizabeth Warren and presidential rival Bernie Sanders. Instead, Clinton has placed the blame on “shadow banking,” a term she has used to describe hedge funds and high-frequency traders.
Opinions differ on the causes of the financial crisis, and on the desirability of high-frequency trading, but as far as I know all informed observers agree that high-frequency trading had nothing to do with the financial crisis. ("Shadow banking" did, sure, but that's a broader term, and one that rarely includes high-frequency trading.) But if you did a poll, what percentage of people do you think would blame high-frequency traders for the financial crisis? Like, a lot, right? It just sounds bad, the crisis was a while ago, who can even remember.
People are worried about bond market liquidity.
If it feels like we've been worrying about bond market liquidity forever -- it feels that way to me! -- consider this Bank of England staff working paper on "the liquidity and credit of colonial and foreign government debt in the London Stock Exchange (1880–1910)":
We gather the most comprehensive database of government bonds for the first globalisation era to date to conduct the first historically informed study of the importance of liquidity for colonial and sovereign yield spreads. Considering both liquidity and credit shows that the two markets were segmented: credit was the most important factor in the pricing of sovereign debt, but liquidity predominated in the colonial market, explaining 10% to 39% of colonial yield spreads. This reflected both different market microstructures and bond clienteles, themselves influenced by heterogeneous political, institutional and financial arrangements.
And here are two Citi rates strategists on liquidity and MiFID2:
Liquidity risk gives birth to one of the paradoxes of regulation in fixed-income markets – the aim for more transparency might depress market liquidity and distort the price-finding process, with the ultimate collateral cost of reducing transparency.
Bill Dudley on macroprudential tools. Ken Griffin owns some nice apartments. The most influential people in markets; Janet Yellen is #1. Twitter Names Jack Dorsey CEO. Argentina is paying off some local-law U.S. dollar bonds today, which have "been a great investment for the brave." Connecticut, America’s Richest State, Has a Huge Pension Problem. Municipal bond "analysts who grew up in the state of the issuer award higher ratings than analysts who grew up in outside states" (via). NBA's David Robinson to Raise Money for a Second Private-Equity Fund. The impact of CCPs' margin policies on repo markets. American Apparel is bankrupt. Investors Are Asking Tough Questions About 'Yieldcos.' Crime doesn't pay. Why Don’t Courts Dismiss Indictments? The "Chambong" Lets You Funnel Champagne While Staying Classy. Disney surge pricing. Teens love "Friends."
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