Wednesday, 26 October 2016

The (investment) world turned upside down

These are just a few initial sketchy thoughts, but I see some signs that something interesting is starting to happen in the world of corporate governance, and institutional investment more generally. A couple of years back I blogged a bit about a "regulatory turn" away from shareholder primacy, as, in response to the financial crisis, governments became much more sceptical about shareholder oversight as restraint on corporates and looked for other options. But overt change hasn't happened until now.

The mood music has been right for a while. A few people have clocked John Kay's claim that the era of shareholder value is closing. Justin Fox was riffing on a similar theme a couple of years back. I think we might be now seeing the first policy moves that diminish the relative position of shareholders.

To take a pretty bland example, the abolition of quarterly reporting by companies is the one thing that all "sensible" people agree should happen. Here's the CEO of Morgan Stanley on this theme just yesterday. But, if you think it through, if getting rid of quarterlies does have an impact - through reducing short-term pressure on companies - this means that investors were using the information, for example in response to analysts' takes on the numbers.

So its disclosure was not pointless, the numbers are/were being used by investors, we are just uncomfortable with the impact this was having on companies. So to get rid of quarterlies is essentially tilting the system a bit back towards companies and a bit away from investors.

We can see something similar at work in the emerging discussion over worker representation on boards that is taking place in the UK. To be honest, this has been creeping up the agenda for a while, the shock about it is that it is the Tories who are actually making it happen. If you look back to last year's party manifestos Labour, the Lib Dems, the SNP, Plaid and the Greens all committed to worker representation on boards. This is more than a detail - it shows that there is no political constituency opposed to workers on boards.

However you cut it, having worker and consumer representation on the board of a PLC strengthens the relative position of stakeholders other than investors. I know the government has talked about a further binding shareholder vote on pay in the same breath, but personally I'd take board representation over tweaked powers (that many asset managers probably won't use effectively) any day.

Possibly the most interesting aspect of the workers on boards debate is the relative lack of criticism from business. Perhaps this because no-one wants to be seen to be opposed to the idea now it looks like the government is going for it, perhaps they are sill shocked by the Brexit vote, and perhaps they are lobbying frantically against - or at least for a milder version - in private. But in public in the tone has been pretty mild. This round-up in the FT is very illustrative.

It will be very interesting to see which way the CBI jumps on this. Perhaps its members are willing to tolerate stakeholder representation in return for less shareholder pressure? We do tend to forget in the UK that there are other corporate governance models out there and that they too are capable of delivering successful businesses whose leaders seem comfortable with it. Perhaps, just perhaps, companies will review the merits of the New Industrial Compact that Tony Golding describes emerging in the 80s and 90s (I included his description of it here).

But that's only half the story. Look at what is happening in institutional investment. After years of getting fleeced, our pension funds are starting to look at whether the billions they pay over to intermediaries is well spent. And many are concluding that it is not. Big funds in the UK, US, Netherlands and elsewhere are cutting their exposure to high-fee hedge funds and private equity managers, cutting the total number of external managers and investing more on a passive basis. This is quite a sharp shift from the positions some groups in the UK took pre-crisis. (and I take my hat off to Mr Meech at Unison for making costs and charges in the investment system an issue for the labour movement, and for stirring Labour out of inaction on this too.)

These moves also open up some interesting issues. For example, if our pension funds invest an increasing proportion of our assets passively then they are giving up on the idea that whatever insight asset managers have this is insufficient to generate outperformance. They are simply seeking exposure to the market in aggregate. To boil this down further, our pension funds expect public companies overall to generate returns, but they do not think it is possible and/or worthwhile to pay an intermediary to identify which companies will perform better.

In such a scenario, where our pension funds do not believe asset managers have insight into companies that is worth paying for, there is no reason why our funds should delegate their voting rights. More fundamentally, if they are giving up on the idea of stock picking, there is no reason for a fund's RI policy to be squeezed by the constraints of trying to develop a case for doing the right thing. that is justified by relative performance. Instead, provided that trustees believe that, for example, companies respecting human rights will not damage investment returns, their RI policy could be based on the promotion of international norms. This is much preferable to fashioning some blah about long-term returns to act as cover for engagement that is really about values.

I will chuck out a point here that I have made before too. These are OUR pension funds. They are not the personal fiefdoms of CIOs and other investment staff any more than asset managers. So it is reasonable for us to expect that these policies promote the interests of beneficiaries. It is great that funds are starting to clamp down on wasteful costs and charges that eat into our retirement income. Now lets make sure these funds work in our interests while we are at work in addition to when we are retired. This means as much emphasis on the S as on the E and G, and more focus on workplace issues in particular.

Overall, there is a real opportunity for the Left here if we think big. If confidence is failing in shareholder primacy then we should be on the front foot in setting out what a good alternative is. Forget the tinkering with corporate disclosure & shareholder powers that characterised the New Labour settlement. What does a stakeholder model of the company look like in the 21st century? And what is our vision of an investment system that both delivers a decent income in retirement and promotes our interests in the accumulation phase?

Thursday, 20 October 2016

Sky vs Sports Direct

As most people will be aware, last month the non-executive chairman of Sports Direct Keith Hellawell failed to receive the support of a majority of non-insider shareholders (though he received the support of the majority of all shareholders, including Mike Ashley). This vote was clearly driven by corporate governance concerns.

Because he is designated as an independent director, this triggers a re-run of his election. This time he faces a straightforward for/against vote, and with Ashley's backing will clear it easily. But by triggering the vote re-run (for the first time at a UK PLC) shareholders have given their engagement force, and increased board accountability.

Last week, the non-executive chairman of Sky PLC James Murdoch failed to receive the support of a majority of non-insider shareholders (though he received the support of the majority of all shareholders, including 21st Century Fox). This vote was also clearly driven by corporate governance concerns.

However, because Murdoch is NOT designated as an independent director, there will be no re-run of his election.

A lot of companies with controlling shareholders can be dismissive of minority shareholders' concerns about governance. Being a bit cynical, if I was on the board of such a company looking at these two examples, I'm not sure I would designate my chair as independent. What's the upside?

I think this regime may need a tweak or two...

Tuesday, 20 September 2016

Sports Direct shifts again

Just a quick update, the process of reform at Sports Direct has obviously just started, but some welcome news today. The company has committed to a fully independent review of the business, including employment practices. Whilst it had previously said that it would use its existing legal adviser RPC, now it has agreed to take a genuinely independent approach.

As a reminder, the Trade Union Share Owners resolution called for an independent review of employment practices. TUSO also argued in communication with shareholders before the AGM that RPC should not undertake any review as it was not independent of the company.

Full statement below -

20 September 2016 

SPORTS DIRECT INTERNATIONAL PLC ("Sports Direct" or "the Company")
Independent Review and Workers' Representative update 
Having given careful consideration to concerns raised by independent shareholders, facilitated by the Investor Forum, Sports Direct today announces that the forthcoming '360-degree' review of working practices and corporate governance which was announced on 6 September 2016 and which was to be led by RPC will now be led by an independent party other than RPC.
The Board has made this decision after listening to shareholder feedback at the recent AGM/Open Day and during subsequent consultation with a number of the Company's long-standing shareholders via the Investor Forum. 
The Board will continue constructive dialogue with the Company's independent shareholders in order to reach agreement regarding the specific nature and timing of the review. 
RPC will continue to be a valued legal advisor to Sports Direct, and the Board would like to thank RPC for its work on the existing Working Practices Report, which was compiled to the highest standards. 
The Company today further announces that the selection process for the Workers' Representative on the Board of Sports Direct (as also announced on 6 September 2016) shall be via democratic staff elections, in which it is anticipated that all staff directly engaged or employed by Sports Direct may vote, further details of which will be announced at a later date.

Sunday, 11 September 2016

Sports Direct: time for change

As you may have noticed, Sports Direct had its AGM this week, and meeting was totally dominated by how the board intends to overhaul its workforce practices. The treatment of the workforce at Sports Direct's Shirebrook warehouse has become a national story, and the company has come under pressure from the press (led by The Guardian), politicians (the BIS committee) and investors.

It was a very pleasing AGM for those of us who work on capital strategies in the UK. A resolution filed by Trade Union Share Owners (TUSO) received a majority (52%) of the vote of independent shareholders, despite the board recommending opposition. This is the first time a shareholder resolution filed by unions in the UK has received a majority of the non-insider vote. This has put TUSO on the map, and we hope this is just the start.

A majority of independent shareholders also voted against the chairman Keith Hellawell (something TUSO had called for at last year's AGM), which means that he will face re-election within 90 days. This increases pressure on him to meet the demands of investors, otherwise he could face another embarrassingly large vote against.

The Investor Forum's role has been important here. After a prolonged period of engaging behind the scenes, the Forum decided to go public with its concerns about governance and working practices. It has disclosed that it organised a meeting between the full board and major institutional investors after the AGM. The Forum has also made clear that it wants a genuinely independent review of the company's practices, rather than relying on law firm RPC. So the board is under significant ongoing pressure for real change.

It's important to restate how central trade unions have been to the Sports Direct story. If Unite were not working with the largely temporary workforce at Shirebrook then none of what has subsequently come to light would be known. We also hope that TUSO has played a useful role in making sure that these employment practices have been a central issue in engagement between the board and shareholders.

Therefore it's important that the trade union's understanding of the company is both part of the review that is undertaken, and that Unite's recommendations for change are given proper attention. For example, the abuses that Unite was able to expose are directly related to the nature of employment at Shirebrook. The vast majority of the 4,000-ish workers are on temporary contracts and employed via two agencies, rather than being direct employees. This, plus the now infamous "Six Strikes" policy makes workers much more reluctant to challenge bad behaviour.

Businesses need some flexibility, but even allowing for seasonal changes in demand the size of the workforce at Shirebrook does not seem to change that much, so there is no functional reason why Sports Direct needs to have some many temporary workers. Instead it means that Sports Direct uses precarious work to keep costs down and workers feel reluctant to speak as a result. Therefore any lasting solution to the problems at Shirebrook must involve shifting a large proportion of these workers from temporary to permanent contracts. Sports Direct should sit down with Unite and discuss how to achieve this as a matter of urgency.  

We had a great result this week. Investor pressure, political intervention and serious media scrutiny have given the company a real jolt, and a record result. Now it's important that this translates into real change.

Monday, 5 September 2016

For short-termism in pay and against shareholder empowerment

Everyone knows we should tie executive remuneration to long-term metrics and give shareholders more powers to oversee pay policies, right?

Yeah, except that if we make execs wait for rewards they sharply discount them (if some really put much value on them at all) so we have to pay even more money, so says this guy. I would go further, the implicit psychological model in incentive schemes is behaviourism. If you want more of Behaviour X - profits, share price appreciation whatever - you need to reinforce that behaviour to encourage execs to repeat it, and incentives are the reinforcer. Only, behaviourists seem to think that for it to work effectively you need to apply the reinforcer close to the behaviour you want to be repeated. Making awards literally years after the behaviour that is being rewarded this seems to fall way short. So actually long-term incentive schemes face two big challenges on their own terms, even ignoring the intrinsic/extrinsic motivation debate.

OK, but we all agree that greater shareholder powers to tackle pay are a good idea, right? Well, no actually. What the ICSA say here is spot on - we've tried tooling up shareholders several times in the past 15 years or so. But most shareholders don't really seem that arsed about using them to challenge companies. So why would we expect another round of the same thing to deliver any different results?

“Since 2002 the UK has been pursuing a regulatory approach based on a combination of transparency and voting rights. Despite both elements of the approach having being strengthened since then, it has done little or nothing to prevent an escalation of directors’ fees and bonuses.
“The issue is not that shareholders lack the rights that would enable them to hold companies properly to account, but that they are often reluctant to use them. Looking at the five largest shareholder revolts this AGM season, it is striking that the average vote against the report was 54 per cent but the average vote against the chair of the remuneration committee was less than 1.5 per cent. Unless investors become more willing to use the powers they already have, it may be necessary to consider different – and possibly more radical – reforms.”  

I've said it before, but there isn't any road left for the 1990s vintage corporate governance model. This means both abandoning the fool's errand of redesigning exec incentive schemes, and accepting the reality that most shareholders (asset managers in the main) think most exec pay schemes are OK most of the time - so giving them even more powers won't make any difference. Genuinely new thinking is required.   

Friday, 2 September 2016

Sports Direct AGM on Wednesday 7th September

Next Wednesday see the AGM of Sports Direct take place. Since I last blogged about this it has become clear that a major investor revolt is underway.

The company has been publicly criticised by the Investor Forum (a first), which has called for a thorough overhaul of corporate governance and employment practises, plus related party transactions and so on. The Forum is very mainstream so a public statement of this nature is pretty serious, and an sign of exasperation.

A number of investors and investor advisers have publicly announced their voting intentions, including their support for the Trade Union Share Owners resolution. Amongst those that we know are supporting, or recommending supporting, are Legal & General, LAPFF, Aberdeen, ISS, CalPERS, CalSTRS and Ontario Teachers and PIRC.

These are just the publicly-known voting positions on the resolution, it is very likely that other shareholders are also supportive of the resolution.

If the TUSO resolution gets a strong vote at the AGM this will put serious pressure on the company to undertaken a proper, independent review of its workforce practices. If it can be shown that even major institutional investors believe this is required then the position of Sports Direct workers and their representatives will be enormously strengthened.

So this is a last shout out to union members who are pension fund trustees or have any other role overseeing capital, if you have shares in Sports Direct Please Vote FOR Resolution 19.

Friday, 26 August 2016

Asset managers and Deliveroo drivers

I've been banging on for a few years about incentives and motivation. It's been interesting to watch as the common sense that performance-related pay is A Good Thing has lost legitimacy. However even despite the growing awareness of problems with relying on incentives the practice has continued to expand. Some people in Responsible Investment are enthusiastic advocates, believing that tying ESG metrics to exec pay (for example) would deliver better behaviour. I'm sceptical to say the least.

A couple of recent examples demonstrate why this is a live issue. First up is the news that Neil Woodford and his firm have decided to stop paying bonuses. This decision has been argued in terms that will be familiar to anyone who has been following this debate - relying on incentives to get people to do things can actually encourage some pretty dodgy/damaging behaviour and/or crowd out intrinsic motivation to do the right thing. The Woodford example is particularly striking as it comes from the sector - finance - where reliance on incentives is most extreme. But perhaps we shouldn't get too excited. There's a good blog from Chris Dillow on why others in finance may be unlikely to follow.

And this leads on to the other recent story where performance-related pay was a big factor: the Deliveroo strike, which was ultimately victorious. At its heart was a new incentive structure. Rather than being offered basic flat rate with a small incentive on top, the company was proposing paying couriers entirely on performance - i.e. a payment for each delivery. This is of course simply piece work, and I know other delivery firms have used it, but it is dressed up by Deliveroo as somehow more "flexible" for staff. Essentially this model is 100% performance related.

If I remember rightly, the founder of Deliveroo comes out of investment banking so he is likely to be used to big incentives, and might be perplexed as to what all the fuss is about. It reminded me of a conversation I had with a private equity manager when he was hugely enthusiastic about paying bar staff entirely in tips. Why wouldn't anyone want to be paid like that, he asked?

This adds even more complexity to the incentives discussion - what if some people simply don't like being paid on performance-related basis? This is probably partly context. In the case of Deliveroo couriers, or any low-paid workers, this style of remuneration might simply represent an economic threat. If you can't deliver the performance at an effective rate you could lose out financially and be pushed close to the edge. This, of course, has been a big bit of the piece rate story through time. Rather than offering more to the worker, it just ends up being exploitative, or degrading. (The power dynamics around rich private equity types getting people to work for entirely tips don't feel quite right do they?)

But people also have different intrinsic attitudes to risk, competition and so on. No doubt there's an interplay here. People can learn to behave in a more competitive/self-interested way, and the use of incentives can facilitate this (let's leave aside whether this is desirable or effective, even in profit-driven organisation). But some people won't ever want to have more risk in their remuneration, even if they are well-paid - this was picked up by research done by PwC a few years back. It might actually only be a minority of people (maybe even executives) who like a large variable element of pay.

When you think about it, this is an even stranger part of the performance-related pay story. We are increasingly encouraged to expect to be treated as individuals, with our own tastes, values and so on. So why do companies/sectors employ a blanket approach to remuneration where often faulty assumptions are made about what we want and how we might respond to the use of large incentives?

Personally, I think that we will only get into a more productive discussion about remuneration when we abandon the assumption that "performance linkage" is an unqualified good, and an inherently desirable objective in pay design. That still seems like a long way off.

PS - Even where we have a company that needs entrepreneurial talent, and even where the executive(s) are amongst those that DO like a large variable element, we should not assume this marries well with what performance-related pay "reformers" are offering. I think it is likely that many entrepreneurs are incentivised by relatively short-term success. I think they may have to be a bit "short-termist" in their thinking to get over over all the barriers that face them. I don't think they are likely to be incentivised by share schemes that are locked up for years. But then that's another argument for not adopting a blanket approach.