On Agency, Asset Management and Regulation

Questions about Government regulation and agency issues are inherent in political economy as both relate to the operation of markets. Government is involved in setting the rules of the game, so to speak, and agency questions necessarily arise in those organisations where ownership is separated from control. It may happen that, in implementing the rules of the game, an agent is able to exploit its position to enhance its status and invert a principal–agent relationship. It may also happen that, in setting the rules of the game, the Government reinforces a number of deleterious trends in the behaviour of market participants. When both possibilities materialise in a particular area, the implications are potentially very serious. We contend that this is precisely what has occurred over the last quarter–century particularly in the management of UK defined–benefit pension scheme assets. Legislation and related regulatory activities have led inexorably to the adoption by all parties of Benchmarking, which induces herding and short–termism in portfolio management. An associated consequence has been the rise of consultants within the pension scheme nexus from the ex post role of performance measurement to the dominant ex ante role of leading on investment strategy, portfolio structure and style, the selection of portfolio managers and performance monitoring — despite the fact that there is no empirical evidence that they can add value in the first three of these latter areas