This week I went to a fashion show at the Edinburgh College of Art. There were endless unlikely materials; a good deal of odd cutting; not quite as much in the way of cashmere and tartan as you might have expected; the kind of significant pockets of mediocrity you always expect; and some moments of blinding brilliance.
But after all the students had shown their work and the last oversized spiky jacket had left the stage, one thing stayed in my mind: a pair of relatively simple (it's all relative in student fashion) trousers by Caroline Nadzanja. I'm still thinking about them. You will think this a spurious connection, but looking at a week's worth of data from the financial markets is a bit like going to a fashion show in the McEwan Hall.
There's a lot of it; it's generally been made overcomplicated by the well meaning; and it needs to shake down in your head before you can separate the odd hats from the well-cut trousers, if you see what I mean. Anyway, for me this week the data trousers weren't the GDP numbers, the Japanese consumer confidence numbers, or any of the happy house price numbers being churned out by the property industry to kick off the spring selling season.
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Instead, it has been a slightly less topical number that is sticking in my head: the chief executives of America's 327 largest companies now get paid, on average 354 times those of the average US worker, according to the US version of the TUC. In the UK the multiple for top company (FTSE 100) chiefs is lower at 185 times but, by any rational judgment, it's still pretty high. It is also up from 40 times only 15 years ago.
You might think this doesn't matter, but it does. It matters because at these levels it is socially divisive; but it also matters for core economic reasons. Andrew Smithers of Smithers & Co has written extensively on the subject, pointing out that the bonus culture be that described by pure bonuses or by complicated long-term incentive packages has horrible distorting effects.
Bonus awards tend to be "highly convex", (beat a target and you win big), something that pushes management to focus on beating the various metrics which determine the speed of their rise into the ranks of the super-rich. Think share prices, earnings per share and return on equity.
These are all numbers that can be improved by keeping profit margins (and so prices) high, even at the expense of future market share; by share buy backs; and by the postponing of investment of plant and equipment.
The results can be seen all around you in the UK, says Smithers: higher consumer prices that you expect in an intensely deleveraging environment; higher employment than you might expect (if you are penalised for investing in plant and equipment, you hire labour when you need to raise output); and lower investment than you might expect given the cost of capital. None of this is good for productivity (which, guess what, is collapsing) and it isn't much good for long-term economic growth either.
But the super-high-pay problem matters for shareholders too. Ive written here before about how there isn't much point in buying equities in China on the basis that they are cheap for the simple reason that they aren't equities as we know them. We buy equities on the basis that they give us share in an asset that we hope represents growth in the productive part of an economy and all the rights that come with owning that asset. Chuck state ownership and corruption into the mix and the equation changes rather.
You could make the same argument about Russia (I'll come back to this another day) and GMO's Edward Chancellor has done so on Italy, which has the worst long-term equity market returns of any developed economy.
The bonus culture doesn't exactly represent any degree of kleptocracy, but the effects aren't as dissimilar as you might think. Buy a dodgy company in what we still like to call an emerging market and you might find rather too large a percentage of the returns go to the founding family. But as a clever young fund manager pointed out to me at lunch this week, buy shares in a nice Western company and you might find that too large a percentage of the returns, one way or another, goes to management rather than shareholders. This in turn handicaps the long term performance of the company.
If something is bad for the economyand bad for shareholders you'd think someone would do something about it. And a start has been made. A few big shareholders are starting to vote against remuneration packages, and lobby groups are emerging. But it isn't enough yet particularly given that the indolence of the fund management industry when it comes to corporate governance is hardly a new thing.
I have on my desk a review of book published in 1965, called The Silent Partners, which begs managers to use their ownership to "be a progressive force on industrial management". So here is something for everyone who is hoping for solid long-term equity returns to do this weekend: write to your fund manager, asking him what he is doing to make sure the companies he is investing in have your financial interests above those of their managers. That should keep him busy for a while.
