Sunday, 22 July 2018

F**k business

Before his latest piece of self-promotion, Boris Johnson had been in the news for making an interesting remark - "Fuck business" - in a conversation about the attitudes of corporates towards Brexit. Though it's a few weeks back now, it seems this remark was largely seen as yet another example of why Johnson was so unsuitable as foreign secretary. It was also seen as significant in terms of how far the Conservatives have fallen out with a previously supportive corporate world.

But as we know, Johnson is rather keen on swimming with the popular tide, so I wonder if actually this remark is more evidence of how the politics of corporate support have shifted dramatically in recent years. Put another way, where once in recent history politicians would have worn corporate support as a badge of pride, now many prefer to define themselves in opposition to business.

I thought this was shifting a few years ago. Some interesting YouGov polling in 2015 found that while a substantial minority of voters thought that Ed Miliband was too hostile to business, more of them thought that David Cameron was too close to business. Of course Miliband lost, but I'm not sure the attempts to get business to speak out against his "Marxist" ideas were as damaging as similar interventions might have been in the past.

An interesting factoid in that YouGov polling was that more UKIP voters (20%) thought that Ed Miliband was too close to business than for any other party (screenshot below). 



This might reflect the fact that, at the time, UKIP was picking up ex-Labour voters. It also shows (if it wasn't obvious already) that there is a strong anti-corporate vibe around the radical Right. 

Of course we saw hostility to corporate influence come up repeatedly in both the Scottish independence and EU referenda, with corporate interventions characterised (not unfairly) as the voice of "the elite" and "Project Fear". I think in both cases it hit home. It's notable that Dominic Cummings of all people says that the cynicism about corporate motives, heightened by the financial crisis, was an important tailwind for the Leave campaign.

Since Jeremy Corbyn has taken over as Labour leader, our policy positions have gone further to the Left (though not actually that far, in my opinion). Labour routinely makes a point of defining itself in opposition to and a challenger of corporate interests, which would have been unthinkable in the 1990s and early 2000s. The Conservatives have tried to ape this, though climb downs such that over worker representation on boards shows that they still find this difficult territory.

This is unlikely to change any time soon. As I've blogged before, polling for the Legatum Institute has shown that on a range of issues the public hold views on corporate/economic issues that are left-wing by today's standards. Perhaps they always held these views, and the 1990s political settlement simply didn't acknowledge them. But now they are certainly in play, and the position of business within politics is radically different to even a few years ago. It's notable that some investors are alert to this.

Boris Johnson might be a self-serving, shallow politician. But he is not stupid. His reported remark is probably a marketing initiative, not a gaffe.

Shareholder primacy and utilities

A theme I think anyone with an interest in corporate governance should keep an eye on is the way that the interests of investors in a firm in relation to others are portrayed in financial media and elsewhere.

Under the 1990s model it was common to see the point made that actually we are all shareholders, so we have an interest in the performance and management of companies. In the policy world a lot of emphasis has been put on enhancing the powers of shareholders as a way of balancing managerial power. At its most optimistic this stream of work sees the public as somehow having control over investee companies. These sorts of ideas have been influential for around 20 years in some markets.

However, increasingly we see recognition that life is more complicated than this, that interests within the firm compete, and that it's not necessarily a good thing that investors come first. The latest version of the UK Corporate Governance Code is a mild tilt towards a more "stakeholder" view of the firm. I would envisage a further shift when Labour gets back into power.

This piece in today's Financial Mail is worth a read in this light (the same story is on the front of tomorrow's Mirror). In common with what we saw with Thames Water, the interests of "shareholders" are counterposed with those of customers/consumers.  
Professor David Hall, a water industry expert at the University of Greenwich, said water companies should pay out less in dividends and instead use the money to cut leaks by improving their infrastructure. 'The money is available,' he said. 'But it's not reaching the right places – which are the leaks. It's reaching the wrong places – which are the pockets of shareholders.'
Invest in solving leaks, or distribute cash to investors. In the above quote these options are characterised as pulling in different directions. To prioritise one is to damage the other. This is a million miles away from the Mckinsey hot air about there being "no inherent tension" between different interests. (Interestingly Ofwat has a section on its website specifically about "Profits and dividends"of water companies, and its chief exec has had a pop at recent decisions by some companies.)

As I've said before, I think we are going to start seeing this kind of argument a lot more often than we have in the recent past. Obviously this comes with a backdrop of renewed discussion of public ownership of utilities. I think the increasing prevalence in the media of the idea that there are competing interests is will make more radical policy options more achievable. 

Of course, these are difficult issues. It is definitely the case that taking utilities back into public ownership is going to sting our pension funds. It's not obvious to me that there is a investor-friendly middle route. For example, we could look at the UK "owning" utilities through our pension funds directly, stripping asset managers out of the deal and thus reducing costs. I don't think our funds have the scale to do this, nor are they currently structured in a way that would stop them thinking like asset managers. And at some point the dividends vs investment question will come up.

Nonetheless the ground does seem to be shifting.

Saturday, 21 July 2018

Short stuff

Like everyone does, I spent a bit of my spare time yesterday having a quick trawl through the FCA's list of disclosed short positions. Quite often these fishing trips end up leaving me empty handed, but this time I stumbled on something interesting.

I had a look at Kier Group first. Blackrock has a 2.31% position in Kier Group, so first I had a look to see if they had any other relationship with the company. From a quick trawl it looks like Blackrock used to run a DC scheme for Kier. See screenshots below or check this link - https://www.blackrock.co.uk/planinfo/kiermt/document/documents/kiermt/kiermt-pre-july-member-booklet.pdf



However, this piece suggests that the scheme (I think) was subsequently taken over Aegon.

The next thing I did was take a look at the Kier Group share register that is available on Capital IQ to see if Blackrock also has a long position. I had assumed that it would show one since Blackrock runs UK tracker funds that hold everything, but actually it is only listed at the bottom of the register and the number of shares and % holding are negative, disclosed in brackets, matching the position that is disclosed in the FCA list. (NB this is a mistake - Blackrock does have a long position too, scroll down here. Interestingly the long position is smaller than the short).

And when I checked the other managers listed with negative holdings (again listed in brackets at the bottom of the Capital IQ register) sure enough they corresponded with other disclosed short positions listed by the FCA. So far, not that exciting, this just shows that S&P dump disclosed short positions into their shareholder database.

So, the next thing I did was look at Ryanair. I've been looking out for disclosed short positions - the Central Bank of Ireland has a register that mirrors the FCA one, but there's nothing there for Ryanair. This doesn't tell us much, like the FCA it has a threshold for disclosure (FCA reports shorts over 0.5%, though it receives disclosures of positions above 0.2% and I assume it has access to IHS Markit which captures way more). The lack of a listing for Ryanair just means there are are no big short positions in the common stock.

However when I went to the bottom of the Ryanair register on Capital IQ... bingo.


I must have looked at the register hundreds of times, but not spotted this or thought of looking there for shorts. Fair play Capital IQ does link to underlying sources, and the negative Ryanair holding listed comes from an SEC disclosure by a firm called Absolute Investment Advisers. The relevant SEC filing is here, but the important bit is in this section -


There it is, the first short in Ryanair that I've been able to completely nail down. It is piddly, but someone somewhere decided to go short. It made me feel a bit less stupid that although the position relates to Q1 2018, the position was only disclosed when that filing was made in early June. So I'm only six weeks late to the party.

Still it's a useful thing to know if you have access to Capital IQ but don't have the IHS Markit feed of shorting/lending data and want to get some basic info.

Finally, I had another look for an example of a manager shorting a client. Blackrock is an easy target because of its scale, so I just picked another large short position on the FCA list - Britvic, where its position is 1.09%. Again it looks like they are running some DC fund options based on the links below -


Here again it has a long position too of a bit over 2%. Interestingly APG - the asset management arm of ABP, the big Dutch public sector fund - also has a big position. (I've just grabbed this from the FT this morning).


And when you dig into APG's holdings this is not the only big position in a UK stock. But that's for another day...

Thursday, 19 July 2018

Investors and labour - gaps, biases, conflicts

I've had a couple of interesting conversations this week about how a lot of investors (even those with some ESG credentials) actually view workers. So this is a bit of a splurge of thoughts.

A first over-arching point is that is seems like quite a few ESG people only want to talk about the extremes when it comes to the workplace. So, for example, when most investors think about 'labour standards' they are drawn to supply chain issues, particularly in developing countries. Here the issues are stark, and therefore very difficult to overlook even if you can't think of a good instrumental reason to act.

At the other end of the scale, people are quite comfortable talking about the importance of human capital management when it comes to "talent" - so, management and executives. Here investors are comfortable making the case for treating people with respect, paying them properly and addressing discrimination on grounds of gender, ethnicity and sexuality.

But it's the rest of us - those in the middle and lower, who are never going to be senior managers, or board members, but aren't subject to extreme exploitation in the supply chain - where investors don't seem motivated to act. You can see this in the attitude of investors and advisers to things like defined benefit pensions. Although highly beneficial to workers, to many investors they are a risk and cost that doesn't really deliver them any benefit. So they are hardly likely to get behind workers seeking to defend them.

And on the flip side, the 'meritocratic' focus on ensuring that boards are more representative can look elitist. Obviously I'm not arguing that boards should not become more diverse, but if your interest is injustice within companies I'm not sure that's where I would focus a lot of limited resources (the fact that it does get a lot of attention suggests that workplace justice is not a high priority for many investors).

A second related thing that I've noticed that investors frequently suggest, sometimes implicitly sometimes explicitly, that information from unions about workforce practices for the workers in the middle is biased, or not the whole story, or "political". Yet they often seem completely credulous about claims from management in the same companies.

Now, my colours are firmly nailed to mast here. But one thing I have learned working for and with unions over the years is that companies lie. And I mean outright lie. So I am frequently surprised by how willing some investors are to take at face value claims from companies that actually the issues that unions raise aren't significant, or maybe don't even really exist. This seems to me to be quite a deep-rooted bias (in a psychological sense). Possibly it's simply because if you like a company enough to have an overweight active position you're going to have a positive view of the management of it, and discount info that casts them in a negative light. But whatever the reason, it strikes me a spending some time on.

Which leads me onto a third area I increasingly think about - conflicts of interest. If we look at some of the companies where unions have sought to raise concerns, it seems to me pretty self-evident that if workers' complaints were addressed then there would be an increase in labour costs. How significant this impact would be would obviously depend on their margins, but it's not cost-free.

If, as highlighted above, investors struggle to develop and/or believe an instrumental reason for promoting this change (eg it will pay for itself due to reduced turnover/improved productivity) then what exactly should they be doing? In some cases it might be better for workers if they remain uninvolved. Again, more thought is needed.

I do worry that 'responsible investment' has in general glossed over these issues. There has been an unthinking assumption that greater shareholder powers, greater shareholder engagement and "mainstreaming" of ESG are all inherently good things. It's clearly more complicated than that.

Tuesday, 17 July 2018

Ryanair: just a bit of fun

I dug the stats out of the Ryanair annual reports when it used to disclose the split between direct hire and agency flight crew. The first graph has the real data, the second includes projected numbers for 2012-2017 if the direct hires stayed at the same level (in reality there will have been growth, so I'm just mucking around). That results in a 74% agency / 26% direct hire split by 2017. Which has the former too high I reckon, but it won't be miles off (it's about right for cabin crew, but high for pilots, so overall...).

The interesting thing for me is that Ryanair's heavy reliance on agency/indirect employment is actually relatively recent (the majority of Ryanair flight crew were direct hires within the last 10 years), and has grown significantly in recent years. So it has continued to push the barriers on labour practices even as it has grown, rather than these being small/cowboy operator practices that got it started but which might be phased out when it got to scale. (Though that might start to change now). Bear in mind too the funky stuff that has done with pilot 'self employment' in the past few years.



Thursday, 12 July 2018

Ryanair & employment-related disclosures

As a lot of people in my world know, there are a number of initiatives underway to try to improve disclosure by companies of information related to employment practices. This is in response to blow-ups at a number of companies that have had controversial labour practices, such as heavy reliance on contingent/indirect employment.

So it may come as a bit of a surprise that one company that has faced a lot of scrutiny, and more recently some significant problems, as a result of its employment practices actually discloses a bit less data that some investors used to find useful than it used to.

Here is an excerpt from Ryanair's 2011 annual report:


Here is the same section from Ryanair's 2012 annual report:


And here is the same from the 2017 annual report:


Ryanair seems to have stopped splitting out costs for directly and indirectly employed staff from 2013. Although splitting out the costs doesn't tell you a lot more, it does make clear how important the use of indirect employment is to the company. And anyone who follows it closely will know that this is one of the major issues that Ryanair's contract workforce dislike.

It might be something that investors that engage with the company want to have a look at.

Hat-tip: JB

Wednesday, 11 July 2018

"Open vs Closed"

If it's not obvious, let me be clear that I really hate the suggestion that the "real" divide in politics these days is "open" v "closed". In purely linguistic terms it is such an obviously loaded division - doors that are "closed" are bad, a business that has "closed" is dead, a book that is "closed" is unreadable and/or finished. No-one wants to be described as "closed" if the other option is "open", and I suspect everyone gets this on a very fundamental level. If you're read a bit about metaphors the use of spatial terms is a deep-rooted thing, and it's always pretty clear which is better/worse.

Add to this the fact that I am still yet to see advocates of the open/closed way off looking at the world describe themselves as "closed". They are always the open-minded, mobile ones. And I don't see much evidence people who align with "open" see anything to learn from the "closed". Rather the lumpen "closeds" need to be dragged kicking and screaming into the reality of a globalised world. I can't think this is going to end well.

Anyway, in this vein, I recently started reading an oldie by Zygmunt Bauman and it rang very true with me.
All of us are, willy-nilly, by design or by default, on the move. We are on the move even if, physically, we stay put: immobility is not a realistic option in a world of permanent change. And yet the effects of that new condition are radically unequal. Some of us become fully and truly 'global'; some are fixed in their 'locality' - a predicament neither pleasurable nor endurable in the world in which the 'globals' ["opens" eh?] set the tone and compose the rules of the life-game.
Being local in a globalised world is a sign of social deprivation and degradation....
An integral part of of the globalising process is progressive spatial segregation, separation and exclusion. Neo-tribal and fundamentalist tendencies, which reflect and articulate the experience of people on the receiving end of globalisation, are as much legitimate offspring of globalisation as the the widely acclaimed 'hybridisation' of top culture - the culture at the globalised top. A particular cause for worry is the progressive breakdown in communication between the increasingly global and extraterritorial elites and the ever more 'localised' rest.
And a bit I really connect with:
Among all [those] who have a say in the running of the company, only 'people who invest' - the shareholders - are in no way space-tied; they can buy any share at any stock exchange and through any broker, and the geographical nearness or distance of the company will be in all probability the least important consideration in their decision to buy or sell.
In principle there is nothing space-determined in the dispersion of the shareholders. They are the sole factor genuinely free from spatial determination. And it is to them and them only, that the company 'belongs'. [well, not really, but...] It is up to them therefore to move the company wherever they spy out or anticipate a chance of higher dividends, leaving to all others - locally bound as they are - the task of wound-licking, damage-repair and waste-disposal. Whoever is free to run away from locality, is free to run away from the consequences. These are the most important spoils of victorious space war.