U.S. Firms Brace For U.K.-Style Shareholder Revolt

LONDON (MarketWatch) — Corporate boards in the U.S. should brace themselves for mounting dissatisfaction with executive pay in coming years, as the current “shareholder spring” in Europe likely will spill across the pond for next year’s proxy season.

Prominent U.S. companies like Citigroup Inc. /quotes/zigman/5065548/quotes/nls/c C +3.20% and NYSE Euronext /quotes/zigman/421745/quotes/nls/nyx NYX -0.69% have already felt the echo from the European revolts, although the scope for shareholders’ anger remains to be seen in the U.S.

“The fact that there have been large pay outs when shareholders haven’t seen any returns makes people angry. People don't want to pay for bad performance and now share prices are down, but it doesn’t seem to have enough effect on executive pay,” said Peter Butler, chief executive at Governance for Owners, a U.K.-based investing firm that promotes shareholder engagement with corporations.

Banks have so far made up the majority of companies in the firing line this proxy season, as shareholders have seen investments in the financial sector slashed by economic uncertainty and turmoil on financial markets.

Proxy season refers to the months of the year when corporate executives face their shareholders at an annual general meetings, giving investors a chance to raise questions, put forward proposals and vote on issues such as compensation.

“All issues about pay are linked to banks being too big to fail and it is tax payers money being used. When banks are taking risks with tax payers money people don’t like that — and that’s totally justified,” Butler said.

Reuters
Andrew Moss, former chief executive officer of Aviva, stepped down following one of the biggest pay revolts ever suffered by a British company.

I don't know what it is but it sure as hell ain't capitalism.

Price fluctuations are a sign of market inefficiency(*). Speculators who buy low and sell high serve to reduce price fluctuations, and thus improve market efficiency. A sequence of transactions which nets a speculator(**) $1,000 profit will reduce waste elsewhere in the market by at least $1,000, and possibly by quite a bit more. Since the only way an honest speculator can make $1,000 is by reducing market waste by that much, the total amount of money to be made by speculators in a market will be limited by the amount of waste which would occur in their absence.

(*) Since perfect efficiency is in reality unobtainable, inefficiency does not imply sub-optimal efficiency. In an optimally-efficient market, there will be some price swings, but not enough to make speculation worthwhile.

(**) One who merely buys and sells, without attempting to influence the markets via solicitation, politics, etc.

Sometimes speculators will end up selling things for a lower price than they paid to buy them. Such speculators, in addition to losing money, increase the amount of waste in the market. When speculators play with their own money, however, the damage they do to the market is generally limited; the more money a speculator loses, the less money that speculator will have to play with.

Markets work wonderfully when speculators are required to use either their own money, or money which is freely entrusted to them by people who retain the ability to move it elsewhere. Government "bailouts" and other intervention, however, can radically alter markets and cause them to melt down.

If speculators engage in sequences of transactions which will, on average, result in them selling things for a lower price than they pay for them, such transactions will, on average, both harm the market and make the speculators lose money. Speculators will thus avoid performing such transactions. If, however, the possibility of "bailouts" shifts the speculators' expectations so that they can expect, on average, to make money even if they, on average, sell goods at a loss, speculators will have no reason to avoid them.

Politicians who promote bailouts either don't realize, or don't care, that markets can only function if those who make bad bets are forced to pay the costs. A bailout which turns what would have been losing proposition into a winning will attract speculators to the marketplace. Unlike speculators who must face the full consequences of market losses, and whose presence benefits the market, the newly-attracted speculators will, on average, harm the marketplace. Further, while the number of non-protected speculators drawn to the market will be limited by the fact that they will reduce waste, and thus reduce the amount of money to be made by additional speculation, the protected speculators will increase market waste, thus attracting more speculators.

As bad as all that is, though, things can get even worse. Markets can function well under good rules, and can often function decently even under bad rules (in many cases, by doing just what is necessary to achieve the supply and demand patterns the people imposing the rules wanted to avoid). Markets cannot function remotely efficiently, however, when the rules themselves are the largest unknown. The reason so much money is sitting on the sidelines in today's marketplace is that nobody wants to make investments today that might, for no "natural" reason, be rendered worthless tomorrow.

You're quite right in saying that today's bizarro-world is a far cry from anything resembling "capitalism". The real problem, though, lies not with the speculators, but with politicians who refuse to let the market carry out its natural function.

"The stock market is extremely disconnected or cushioned from reality. That leads me to believe it is simply a sham and an irrelevant measure of economics. If the stock market truly reflected the economy, these last four years would have seen some correction. "

Financial Collapse At Hand: When is "Sooner or Later"?

The Treasury bond market is also helped by the fear individual investors have of the equity market, which has been turned into a gambling casino by high-frequency trading.
High-frequency trading is electronic trading based on mathematical models that make the decisions. Investment firms compete on the basis of speed, capturing gains on a fraction of a penny, and perhaps holding positions for only a few seconds. These are not long-term investors. Content with their daily earnings, they close out all positions at the end of each day.

High-frequency trades now account for 70-80% of all equity trades. The result is major heartburn for traditional investors, who are leaving the equity market. They end up in Treasuries, because they are unsure of the solvency of banks who pay next to nothing for deposits, whereas 10-year Treasuries will pay about 2% nominal, which means, using the official Consumer Price Index, that they are losing 1% of their capital each year. Using John Williams’ (shadowstats.com) correct measure of inflation, they are losing far more. Still, the loss is about 2 percentage points less than being in a bank, and unlike banks, the Treasury can have the Federal Reserve print the money to pay off its bonds. Therefore, bond investment at least returns the nominal amount of the investment, even if its real value is much lower. ( For a description of High-frequency trading, see: http://en.wikipedia.org/wiki/High_frequency_trading )

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