Sunday, 8 November 2015

Liam Byrne's speech: a bit wrong, a bit sketchy, a bit interesting

Via Chris Dillow, I picked up this speech by Liam Byrne. It's interesting to read someone who obviously disagrees with Jeremy Corbyn try and come to terms with the new centre of gravity in Labour. It's worth noting, too, he uses the term "neo-liberalism" early on, language which most Blairites usually take to be an indicator that the person using it is out of date/an idiot/a Trot/all of the above.

But what I want to look at is what he says about short-termism and corporate governance, and what he argues for as reforms. I think some of it is off-target, but it's interesting to see what a Labour moderate is saying on these issues.

Actually, the diagnosis is pretty much the same old same old. Companies focus on the short term too much, prioritising dividends and share buybacks over internal investment and employee remuneration, whilst executives still coin it in. (Larry Fink of BlackRock is cited here as someone who is concerned about these developments.)

The reasons for this are that "our asset owners are simply too short term". Note he says asset owners rather than asset managers here. He goes on to say that our pension funds are part of the problem though, rather contradicting this point, he also says they are too small compared to other countries' funds and that they don't actually own many UK equities. He goes on to note that average holding periods for shares have fallen, and so the argument is essentially shareholders are too short term, and pass this attitude on to investee companies.

More interesting is what he says about corporate governance and company law, where Dominic Barton of McKinseys gets the obligatory nod. The section on UK law is quite surprising. He argues that section 172 of the Companies Act on directors'  duties enshrines the interests of shareholders above others, and essentially embeds "shareholder value" as an operational objective. Of course, the idea of that section was to enshrine "enlightened shareholder value" as an objective - the idea that playing fair by your employees, creditors etc was not in conflict with meeting the interests of shareholders. So it's interesting to see a Blairite advance this criticism. For what it's worth I agree that it basically does promote the interests of shareholders, certainly in comparison to the 1985 version below which put employee interests up their with those of members (shareholders).
"the matters to which the directors of a company are to have regard in the performance of their functions include the interests of the company's employees in general, as well as the interests of its members".
Whether directors' duties actually influence directors much is an open question. I have noticed that some companies use this to defend themselves - for example Barclays has used directors' duties to defend its decisions on both bonus pools (top of page three here) and tax avoidance.

“It is our fiduciary obligation to our shareholders - and it is the fiduciary duty of lots of our clients to their shareholders - to manage tax in an efficient way.” (from here)
So, the important bit: solutions. Looking at the shareholder side of the relationship Byrne's main big idea is... dual class shares. He notes that both France and Italy have passed laws providing greater voting rights to those who hold them for the long term, but he argues for going further. 
'Dual class shares' would allow us to go further - enabling the original founders and early venture capital supporters to control voting power.They’ve become de rigeur for the hottest tech initial public offerings, from Facebook and LinkedIn to Zynga and Groupon.
They’re allowed in the US and on the Continent. Why not here? 
(For info, I think the comment on tech companies is a straight lift from this FT article).

This bit of the speech is technically wobbly. I think I'm right in saying that Schroders still has a dual class share structure (though from memory they have voting and non-voting shares) and that UK-listed companies can still issue different classes of shares. As a comparison, I had a discussion with a BIS official several years back about differential dividends and was told company law didn't stop PLCs from introducing them, they just chose not to. The fact is that most UK companies got rid of dual class share structures, and would avoid adopting them now, because most institutional shareholders didn't like them. 

This is the problem with reforms of this nature, if the shareholders themselves don't change their attitude on the concepts of "one share one vote" or equal treatment of shareholders then simply permitting such structures (which as I say I think the UK does) wouldn't make much difference. Shareholders would oppose their introduction. We can see this opposition in the response Generation & Mercer got to their proposals on loyalty rewards or, a more practical case, when DSM tried, and failed, to introduce a loyalty dividend a few years back.

It's also important to note that shareholders didn't like dual class structures because they believed that they entrench management. Giving founder shareholders a shield against external shareholder power is certainly a double-edged sword. For example, Rupert Murdoch is a founder shareholder who benefits from a dual class share structure. One might argue that this does indeed allow him to take a long-term view, for example in his investment in Sky, but the flip-side is that it makes it practically impossible for independent shareholders to bring about change when things go wrong. We couldn't get James Murdoch off the News Corp board in 2011 despite having a clear majority of non-Murdoch shareholders onside. Another founder shareholder is Mike Ashley at Sports Direct - do we want him to have more power? 

I only say this to point out that a) we have been here before and b) there are decent reasons to have concerns about dual class structures. I'm certainly open to the idea that shareholder rights could be qualified, but it's important to be aware of the pitfalls.

Secondly, Byrne argues for a change in directors's duties and the purpose of companies. Again, what is actually being called for is a little unclear, so I'll just quote from the text:
I think we know that today’s corporate governance laws aren’t working in the national interest.
They’re not helping us think long term, or maximise investment, or pay our workers fairly for what they do.
So it is surely time for a review of corporate governance where we create the freedom for managers to think long term - that means giving greater weight to those who can't diversify their risk away: creditors, and workers past and present.
We might even go a step further and insist that directors have a fiduciary duty to declare the purpose of their business and enshrine a fiduciary duty to maintain that purpose in the company’s proceedings. Along with, Id suggest, reporting on how theyre doing closing the gender pay gap. 
This language sounds encouraging - giving more weight to the views of workers is obviously a good thing - though it needs to be spelled out how this would be achieved. The rest of this section seems to be suggesting something similar to what I think Colin Mayer suggested in Firm Commitment and something John Kay has also talked about - each company could set out their own purpose (i.e. we want to be the best widget manufacturer) rather than subscribing to a generic shareholder value objective.

Taken together Byrne's proposals, whilst a bit sketchy, are a fairly explicit turn away from shareholder primacy. That is interesting in its own way, given where Labour policy was on this stuff over the past 10 to 15 years.  However, I can't imagine much positive change in corporate behaviour resulting from the changes put forward.

In fact, the big problem is that on their own these proposals would principally have the effect of shielding companies against shareholder pressure. In other words, this would reduce one restraint on corporate managerial power, however weak and conflicted that restraint is. My own views here are pretty obvious - I would favour an increase in the power of those who work for companies, through board representation, perhaps tied to equity ownership but not as a pre-requisite. These kinds of changes would provide an alternative countervailing power within the firm. But this doesn't get a look in, and unions only get one mention - in relation to their weakness in the private sector.

Without introducing something along these lines I fear that simply reducing shareholder power would shift us more to a "benevolent dictator" model of corporate governance. In case you think this is over-egging it, endorsing an explicitly authoritarian governance model is exactly where another "big name" ended up on these issues:
Given the shareholder-management divide, the autocratic-CEO paradigm appears to be the only arrangement that allows for the effective functioning of a corporation. We cannot get around the authoritarian imperative of today’s corporate structure. (Alan Greenspan, from his biography The Age of Turbulence)
This approach implies a belief that, unrestricted by the bone-headed pressure of financial stakeholders who cannot and will not think long term, or employees who can't see beyond their own pay check, corporate leaders would finally implement the right strategies for their businesses, with the right levels of investment, employment and so on. Well, yeah, maybe. And perhaps this is where Blairism reasserts itself - the faith in corporate leaders as those who "create wealth" and know how to run stuff properly, if only we'd let them get on with the job.

So, a bit more thinking/talking going on with Labour that touches on the deep issues within corporate governance and ownership but, like David Sainsbury (who also used the term neo-liberalism), whilst Byrne acknowledges the evident flaws in the current model, the changes proposed in response are pretty small scale tweaks. They could even be counter-productive.

I think the renewed interest in corporate ownership and governance on the UK Left is unquestionably a good thing, and, as Byrne's contribution makes clear, the 1990s policy framework that Labour did so much to develop has pretty much reached the end of the road. But we are still quite a long way from having an alternative.

For what it's worth, my own view is that Labour must go beyond the soggy "consensus" on short-termism that exists in the comments of those such as Dominic Barton and Larry Fink. We will end up with the same old blah about amending the structure of executive pay and the need for less frequent reporting that will make no real change. Whenever there is a consensus amongst the powerful on what the 'real' problem is you can bet that this means that other options and viewpoints are being sidelined, and that the consensus 'solutions' will be pretty painless to them. If recent events in the Labour Party have taught us anything, it must be that the last thing any of us need right now is a lack of ambition, or to calibrate our ideas based on where we think the "sensible" consensus is amongst corporate leaders or advisers.  

Tuesday, 27 October 2015

Caledonia Investments update

Just keeping this one warm. As it stands, the Electoral Commission register of donations continues to list two donations from Caledonia Investments PLC worth £4000 in the financial year to 31 March 2015. As previously noted these were not disclosed in the company's annual report and were not covered by previous authority granted by shareholders (Fidelity voted in favour, natch) to make such donations.

As it stands, the FRC has told me that the company has "confirmed" to them that it did not make the donations. The Electoral Commission has told me that it is in discussions with the Conservative Party about the donations. On this basis of the info I currently have, I assume that the donations were wrongly logged by the Party, possibly because they were made by the Cayzer Trust (though I'm just speculating here). Otherwise, if the donations were made by Caledonia, I think company law has been breached.

Thursday, 15 October 2015

Behavioural insight as a weapon

I've blogged on an off over the years about behavioural economics and what lefties can usefully learn from it. It seems like the surge of interest on the Left in the UK in this area has subsided a bit compared to a few years back. But I'm sure the same is not true of the Tories. The Behavioural Insights Team (or 'Nudge unit') is now a company arm's length from government, but is still beavering away on all kinds of topics.

They popped into my head today when I was thinking about the Trade Union Bill. From a behavioural perspective a lot of elements of this Bill seem to do the wrong thing in terms of engaged membership. For example, take the remove of Deduction of Contributions at Source (DOCAS). This removes the ability of potential union members to have subs deducted via payroll, and will require unions to sign them up individually by direct debit.

This is the opposite of what the Behavioural Insights Team advises in other areas. For example, in this 2013 paper on increasing charitable giving (which can still be done via payroll deduction!) they say: "One of the most important lessons from the behavioural science literature is that if you want to encourage someone to do something, you should make it as easy as possible for them to do so."

Getting rid of DOCAS makes it more difficult for employees to pay union subs. So we might reverse the message and say: if you want to discourage someone from doing something you should make it as difficult as possible. Seen in this way, the DOCAS proposal makes a lot of sense - if behavioural science is being applied with the objective of discouraging employees from joining unions.

Or look at the proposal on the political levy. Here the shift is from an opt-out to an opt-in model, with the added requirement that members are required to opt in again after five years. In behavioural terms this is changing the 'default'. Again, it's useful to quote the Behavioural Insights Team itself. The text below comes from the doc "Four Simple Ways to Apply Behavioural Insights" (my emphasis added):

1.1 Harnessing the power of defaults
We have a strong tendency to stick with the ‘default’ option, which is the outcome that occurs if we do not choose otherwise. Understanding the default and how it can be changed can significantly improve uptake of a service.
Some of the most famous policy examples from the behavioural economics literature relate to changing the default option. For example, when individuals are automatically enrolled onto pension schemes but can choose to opt out, they are much more likely to end up with a pension plan than if they have to actively opt in (see Box 1.1).
Similarly, organ donation schemes can be set to automatically enrol people. Or tax systems can be put in place that automatically deduct individual’s income tax without an individual having to take any action (as in the UK’s Pay-As-You-Earn system). In these examples the default option can be a very powerful tool for encouraging different outcomes. But because of the power of these particular policy tools, they will also require careful consideration of what might be acceptable politically and to the public at large.
If we look at what is proposed in relation to the political levy we might look at this line in particular:  Understanding the default and how it can be changed can significantly improve uptake of a service.

Currently the political levy default is opt-out, encouraging members to stay in (but having the option to leave). But it is being shifted to opt-in which will encourage members to stay out. What's more the added requirement of a 5 year re-approval of your own decision if you do opt in adds another encouragement for members not to participate.

Once again we see that the policy makes sense - if we reverse the objective. The Tories want less take-up, not more. I think they do indeed understand that the default is a very powerful tool, and they are using this knowledge by changing the default (to opt-in) in order to significantly reduce the take-up of paying the political levy. To use the Behavioural Insights Team example of pensions, if this approach was applied by a pension scheme - you have to actively join, and have to choose again after 5 years - we would assume the sponsor didn't want people in it.

To me it's pretty obvious the Government knows exactly what it is doing with theses interventions - making it harder for employees to join unions, and making it harder for them to pay the political levy. What is significant is that these policies are well-designed from a behavioural perspective if the objective is to reduce union membership and weaken union political activity. What we see here, then, is behavioural science being used as a weapon by the Right against the labour movement. We need to learn a lesson here.

The only question I really have is whether the Behavioural Insights Team was consulted or advised on the Bill, and I can imagine that it wouldn't look good if it emerged that the Government was using psychological tactics to weaken unions. So I was interested to see one stray reference to "behavioural insight theory" in the BIS paper on balloting (para 79 on page 16 here).


Monday, 12 October 2015

Taxpayers' Alliance and corporation tax

There is a fantastic quote from the Taxpayers' Alliance in this BBC story about Facebook that makes explicit the trouble they have as a "taxpayer" body commenting on this issue.

"Taxpayers will be justifiably confused and angry about this tax bill. But Facebook is right to say that it is complying with UK law, which shows that the problem lies with our complex tax code, and that is what politicians should address as a matter of urgency. We have to ensure our taxes are simple to eliminate loopholes, and that taxes are low to increase our competitiveness, so that companies choose to base themselves here."

So taxpayers will be justifiably angry that Facebook is paying so little tax, but Facebook is right to pay so little tax, and our politicians need to make sure that corporation tax is low so that companies like Facebook operate here. Pick the bones out of that one as they say. The lack of a clear message from an organisation whose messaging is usually very straightforward (and effective) should tell you that they struggle with this issue.

The bottom line, as most people know, is that the TPA is a right-wing pressure group masquerading as a body that represents taxpayers. Ideologically its position is that low taxes, including low corporate taxes, are good. Which is fine, but that means they find it really hard to articulate a position on corporate tax avoidance that is both in line with their real views and doesn't muck up their populist campaigning stance. Really when they see Facebook paying (chuckle) £4327 in corporation tax the TPA don't see a problem, because the company is simply 'optimising' it's tax planning in line with the law. But they know they can't say that out loud because (rightly or wrongly) most actually-existing taxpayers will think Facebook is taking the piss. Hence you get that tortured quote above.

Friday, 9 October 2015

Sports Direct chief exec faces criminal charge over USC collapse

Even since I blogged earlier things have got worse for Sports Direct. The Grauniad broke the news that the company's chief executive Dave Forsey is facing a criminal charge over the USC collapse.
David Forsey, the chief executive of Sports Direct, has been charged with a criminal offence relating to the collapse of its fashion retailer USC.
The 49-year-old businessman is accused of failing to notify authorities of plans to lay off warehouse staff in Scotland, around 200 of whom were given just 15 minutes notice by USC’s administrator in January that they were losing their jobs. Forsey was sent his summons in July and his case is scheduled to be heard at Chesterfield magistrates’ court next week.
The UK Insolvency Service said: “We can confirm that criminal proceedings have been commenced against David Michael Forsey. He is charged with an offence contrary to section 194 of the Trade Union and Labour Relations (Consolidation) Act 1992.
“The investigation into the conduct of the directors is ongoing. The inquiries are at an early stage and given the criminal proceedings it is not possible nor would it be appropriate to comment any further.”
This also reminded me of these comments from one of Sports Direct's major investors shortly before last month's AGM.
[A] top ten Sports Direct institutional shareholder has privately accused the retailer’s critics of having a “fundamental illiteracy of capitalism”.
“Unions and capitalism are not a natural fit but it is important to remember that Sport Direct has not broken any laws," the City investor, speaking on the condition of anonymity, told The Telegraph.
Well, now it looks like Sports Direct may have broken the law. What is more, I can't believe that anyone who has followed this company can be surprised by this development. The warning signs have been there for a long time, was simply a question of when they would trip up. In fact, the entire commentary from the mystery investor in that Telegraph piece is worth reading just to remind yourself of the education job people in the labour movement working on capital stewardship have to do. Some of these asset managers just don't seem to understand capitalism...

Sports Direct: you can't say you weren't warned

Sports Direct is back in the news, for all the wrong reasons. This week alone we have seen the following:

  • A BBC documentary revealed that ambulances were called to Shirebrook dozens of times in 2013 and 2014 because of employee illness. Some of these were clearly life threatening.
  • A couple who supplied workers to Sports Direct - at Shirebrook again - have gone on trial accused of modern slavery.
  • A group of former workers at Sports Direct's USC business have been awarded a protective award of 90 days pay after they were fired with 15 minutes notice. The parter representing them attacked Sports Direct for "disgraceful and unlawful employment practices".    

Sports Direct is a FTSE100 company, meaning that it's almost certainly sitting in your pension fund's investment portfolio. There are warning lights blinking here - both on employment practices and corporate governance - so Sports Direct's shareholders have a real responsibility to tackle it. No-one can claim they haven't been warned.

Monday, 5 October 2015

LGPS fund merger on the way

Blurb below from Osborne's conference speech today. Directly linked to infrastructure investment, not sure if the intention is to invest back in the local region, which might raise a few issues...

At the moment, we have 89 different local government pension funds with 89 sets of fees and costs.
It’s expensive and they invest little or nothing in our infrastructure.
So I can tell you today we’re going to work with councils to create instead half a dozen British Wealth Funds spread across the country.
It will save hundreds of millions in costs, and crucially they’ll invest billions in the infrastructure of their regions.