Bits and pieces
Turnout, executive pay, AI analysis, metaphors and other stuff
Turnout at HL lands down
I’ve not really been following the Hargreaves Lansdown takeover, but now it’s done and dusted I thought I’d take a look at…. voting turnout. During the takeover there was the usual bit of speculative trading involving derivatives.
HL is a company that had previously had high turnout - in the mid 80s - in part due to one of the founders being a major shareholder who wants to be actively involved. So here is turnout in the five years 2020 to 2024. For context, I think news of the bid broke in mid-May 2024.
The interesting point here that although turnout dropped a little at the October 2024 general meeting it was still high - many PLCs would be very happy with 78%. That HL meeting was to approve the scheme of arrangement in order to proceed with the takeover. In most takeovers where I’ve followed the impact of derivative positions voting turnout drops significantly, even at GMs required to proceed, which I have always thought looks risky. I’ve seen a number where turnout has been under 50%.
The high turnout in the HL example suggests either investors using derivatives obtained voting rights or waited till the hurdle was cleared to build positions (I’d need to look at the extent of derivate exposure pre- and post-GM to have an informed take). Either way, given that there was a not insubstantial 13% vote against at the meeting that looks like a wise move.
And once HL got through that stage the turnout fell dramatically, to under 50% at the AGM last December. So its final AGM as a listed company went out with a bit of a whimper.
If investors push pay executive up why empower investors?
I spotted this piece at the weekend about likely shareholder support for increased pay at the UK-listed banks. This is, of course, part of wider trend of some market participants arguing for greater executive reward at UK-listed firms.
What is interesting about this is that it is probably the first time since the UK tooled up shareholders with greater rights, such as votes on remuneration, that the consensus in influential parts of the corporate governance policy world has been that executive pay needs to go UP.
I think this will be important for the future. For a couple of decades now the public policy response when faced with rising executive pay has been to chuck the hot potato to investors. Governments of Left and Right have increased disclosure and voting rights to give shareholders the power to restrain companies.
But now investors might use those rights to support companies opening the cookie jar. Therefore if executive pay becomes a political problem again, it’s questionable that policy wonks will consider that shareholder oversight is the way to respond. (Unless perhaps this involves enfranchising the underlying beneficiaries so they can cast votes.) This might not matter for the next five, ten or however many years, until there is some sort of crisis where action becomes unavoidable. But I think the policy response will be fundamentally different.
AI pay analysis
Relatedly, I was playing about with ChatGPT over the bank holiday, and thought I’d test it with my idea that active and passive managers should approach executive questions differently. It didn’t get what I was saying the first time, and interpreted my idea as being that passive managers would be… well… passive. But once I gave it more specific prompts it came out with something really pretty good -
Why Passive and Active Managers Should View Executive Pay Differently
1. Active Managers Can Justify Selective Overpayment
Active investors might support high pay at specific companies where they see outsize upside from key talent.
Since they hold a concentrated portfolio, overpaying a few exceptional executives could deliver alpha if performance follows.
For them, it’s a risk-reward bet — and they can avoid overpaying firms by simply not owning them.
2. Passive Managers Hold the Whole Market — and Bear System-Wide Costs
Passive managers can’t pick and choose. They own all firms in the index or sector.
So if every company increases executive pay to “attract talent,” that becomes a permanent cost drag across the portfolio — with no alpha upside.
In fact, one firm’s executive premium becomes another firm’s benchmark — escalating pay norms market-wide.
For a passive manager, systemic overpayment is a deadweight cost — and there’s no outperformance to justify it.
3. Passive Managers Benefit More From Pay Discipline
Their return comes from total market growth, not relative outperformance.
Therefore, they benefit more from system-level efficiency — including restraint on rent extraction by executives.
Excessive pay that might be rationalized by active managers as “worth it” looks like pure leakage from the passive investor’s standpoint.
4. Pay Escalation Creates Negative Feedback Across the Portfolio
As CEO pay rises, it pulls up costs (and inequality) across the economy, potentially:
Worsening labor relations
Inviting regulatory backlash
Increasing social and political instability — which, ironically, passive investors cannot hedge
Passive investors are unavoidably exposed to the fallout of these systemic risks.
5. Passive Managers Aren’t Paid to Beat the Market — So Why Subsidize It?
Active managers might bet on an expensive CEO turning around a business and justifying the cost.
But passive managers aren’t compensated for outperformance — they don’t need a CEO to “beat the market” because they are the market.
So subsidizing high pay across the board works against their core investment model.
Conclusion
For passive investors, executive pay isn’t just a company issue — it’s a portfolio-wide externality. While an active manager may have reason to accept premium pay selectively, a passive manager should seek restraint, discipline, and standard-setting across the board. Because when all firms overpay, the passive investor pays the bill — with no outperformance to show for it.
I personally think point 4 is the weakest as an investment issue, though strong as a policy argument. But I’d be quite happy if I’d written this myself!
I also tried out arguments relating to investors backing Elon Musk’s enormous wealth and the damage it has caused, but that’s for another day….
Some reading material
Finally, just a few excerpts from books I’ve been reading recently that I thought were worth sharing.
First up, on the subject of metaphors, that I wrote about earlier in the year, his is from Models. Behaving. Badly by Emanuel Derman.
Most of the words we use to describe our feelings are metaphors. To say you are "elated" is to say you feel as though you have been lifted to a high place. "Feeling high" is an out-of-control version of elation. But why is there something good about being elevated? Because in the Earth's gravitational field all nonfloating animals recognize the physical struggle necessary to rise, and when you rise you can see the world spread out beneath you. Being elated is feeling as though you have overcome gravity.
Conversely, when we feel depressed we feel as though we have been pushed down to a low place. Things are looking up, we say, or looking brighter, or less dark. These are metaphors too, rooted in our physical senses. Some metaphors are nested, traveling through several layers to their base. When we say the economy is depressed we are comparing the economy's spirits (another metaphor) to those of a person who feels as though he or she were pulled down by gravity.
Language is a tower of metaphors, each "higher" one resting on "lower" ones that preceded it. Not every word can be a metaphor; you cannot sensibly define every word in terms of other words, or else language would be meaningless. At the base of the tower are words like push and down, two of the nonmetaphorical words and concepts on which the tower rests. Push and down are understood with our bodies, because we are wetware, an amalgam of chemicals rather than silicon chips and computer code, and we experience the world through the sensations that chemicals are capable of. You cannot have lived without knowing what it is to have struggled against gravity or felt the insecurity of darkness. That is how we know that down and dark are bad and up and light are good.
Had life arisen in outer space, free of gravity and light, there would be no perceptible up or down, and hence no depression or elation. You could be disheartened, perhaps, but not depressed. You could feel full or empty but not light or heavy, bright or dark. And you couldn't take a dim view of your surroundings.
Next, and more into corporate governance and competing interests territory, this is from Fictitious Capital by Cédric Durand:
[F]inancial markets have become deeper and more liquid since the 1980s. One consequence of this is the establishment of a minimum profitability norm, whose counterpart is the transfer of risk to other stakeholders. Indeed, if shareholders are able to demand and secure guaranteed returns, they will not take on the risks of entrepreneurship, which they will instead leave up to others to bear. As we know, the others' in question are workers, made to bear these risks through the individualisation of remuneration and an increase in labour flexibility. But they also include suppliers… Over the last two decades, ICT and improved transport have considerably increased the efficiency of the logistics chain. For the ten biggest global companies in this sector, this has translated into an average (mean) one-third fall in the cost of their stock, from forty-nine to thirty-four days' worth of sales between 1992 and 2007. Nonetheless, this saving has not reduced the time it takes them to pay their suppliers, even though the latter have also invested in the logistical chain. We can even say that the opposite is the case. In 2007, the ten main distributors' average (mean) debt to other stakeholders (mainly suppliers) represented forty-three days' worth of sales, as against around thirty at the beginning of the 1990s.
Such is the extent of this development that the capital advanced by suppliers now not only covers the cost of stocks but even substantially exceeds it.
Suppliers provide their own funds to retailers for free and thus boost profitability and the value distributed to shareholders. A hierarchy of capitals is established in which the centre, directly connected to the financial markets, avails itself of a market power allowing it to transmit conjunctural shocks to the firms situated on its periphery and to push up value in order to meet and exceed the returns guaranteed to shareholders. The pressure transmitted through this chain translates into an erosion of wage conditions in sub-contracting firms, which is ever more accentuated the more distant we get from the order-givers.
The neo-institutionalist approach to transaction costs provides a second argument justifying the assertion of shareholders disciplining power? In this view, those investing in firms will be exposed to risk, because the funds they bring to the table are invested in specific assets without much liquidity - that is, ones that are difficult to valorise outside the firm itself. But what about the workers? Their involvement in the company by way of the labour process also implies a specific investment - the investment of their own competences, the corollary of which is the risk of devalorisation if they lose their jobs. The same goes for suppliers, who often make considerable investments in order to maintain their position as sub-contractors. Yet we have no reason to establish a priori that this risk is any lesser than the risk resulting from managers' use of the funds shareholders bring to the table.
This is all the more true given that shareholders have the possibility of freeing themselves from this involvement by way of the financial markets.
Ultimately, the near-guaranteed returns shareholders enjoy in the context of deep and liquid financial markets - as compared to the specific investment made by workers and sub-contractors - imply that they are no more exposed to risks a priori than other stakeholders are.
Quite the contrary. So there is no basis for considering shareholders better incentivised to control the way in which managers deploy the resources available to the firm. The idea that the strengthening of their power should increase efficiency is thus wholly unfounded.
And finally, on the US vs China, this is from The New Leviathans by John Gray:
In America, wealth buys power, while in China power creates and destroys wealth. In China, market forces serve the objectives of government, while Western states have ceded power to corporations that obey imperatives of profit. Both systems are variants of state capitalism, but the relations between capital and the state are reversed.
For market ideologues, Chinese companies buying up Western assets mean China is joining a Western-led liberal order.
For China, such acquisitions are means through which the West can be colonized. When enterprises controlled by the Chinese state invested in British nuclear power stations, they acquired an asset they could deploy in geopolitical conflict.
When companies like Apple and Tesla invest in China, they give hostages to a strategic rival. In its competition with China, Western capitalism is programmed to fail. Only if China's leaders make major mistakes can the West hope to prevail.
If an evolutionary process is at work, there is no reason to think it favours the West. Evolution is natural selection among random mutations. The regimes that prevail will be those that best adapt to the random walk of history. Not the most productive societies but those that best exploit opportunities thrown up by chance are the fittest.