Wednesday, 8 October 2014

Getting infrastructure wrong

There was a very interesting piece about the Pensions Infrastructure Platform in the FT the other day. This was the Government's great wheeze to try and tap up pension funds to invest in infrastructure projects.

It's fair to say that the labour movement views this kind of initiative with a mixture of interest and trepidation. On the positive side, there may be opportunities for pension funds to invest in greenfield projects that both deliver decent financial returns and societal benefits. If this was tied up with commitments to good jobs on such projects this would clearly be a desirable outcome.

On the downside, unions have a number of questions/fears. Would such investments really deliver financially, and thus be in scheme members' interests? Is this a better option than the state borrowing at low cost to fund such projects (and potentially create good public sector jobs)? Will the money actually go into new projects, or will funds end up mainly invested in the secondary market for existing projects, including PFI deals?

Well, the experience of the PIP so far seems to bear out a lot of those concerns. In particular it is only picking up existing PFI contracts in the secondary market. As the FT article makes clear, this is a very long way away from the original vision and you have to question what the point actually is, since that kind of "investment" is already available. All in all it looks like a useful lesson in what not to do.

Tuesday, 30 September 2014

quasi-Trot nonsense

Below is one of the silliest things I've seen a senior Labour person say for some time. In response to this bit of Ed Miliband's speech:
‘One Nation Labour has changed from New Labour – businesses have a responsibility to pay their taxes, respect their customers and treat their workers fairly.’
John McTernan wrote (for Progress):
It is a malicious, ultra-left, quasi-Trot smearing of the best British government of my lifetime.
I can understand some people on the right of Labour don't like Ed advancing a marginally more critical view of business, but there is no need to turn into the Daily Mail about it. "ultra-left" and "quasi-Trot"? Seriously? I think Trots, God bless 'em, have slightly different views on solving issues like the power of energy companies than creating a more competitive market.

If John McTernan finds that bit of a speech to be "ultra-left" what will he make of the clear call for class war advanced in this part of an article by Miliband in the Staggers:
The sense of disempowerment can be economic, in workplaces that lack the collective power of trade unions and where employee satisfaction and opportunity are limited. .....In truth, the “Third Way” discussions of the 1990s were too weak in addressing issues of economic power, in the workplace and elsewhere. 
That's David Miliband, of course.

Sunday, 28 September 2014

Inequality, ownership and control

I've blogged recently about some of the ideas Roy Hattersley proposed in respect of the governance and ownership of business. In my opinion this deserves revisiting both because the proposals are still valid and because of the way he argues for them. They also closely coincide with my own views, which have emerged after a fair bit of time trying to do lefty stuff in the field of governance and ownership.

Funnily enough, it seems like there is something is in the air. A week or so back the latest Fabian Review came out, and it came with the latest of their great series of pamphlets. It is by Kate Pickett and Richard Wilkinson, better known as the authors of The Spirit Level and titled A Convenient Truth. As the title suggests, the pamphlet talks about the threat from climate change and, as you might expect, the negative effects of inequality are an important part of the story. What you might be surprised by is what they focus on as reform proposals. The core idea is the democratisation of business (industrial democracy if you like) and the proposals that flow from it include the extension of employee ownership and employee representation in corporate governance.

Actually they did talk about this in The Spirit Level too, but it's part of the book that has seemed (to me anyway) overlooked to to date. Not any more though, here the extension of employee ownership and voice at work are the main event, and this advanced as a way to tackle inequality. This, of course, slots in well with the idea of focusing on predistribution, or as they put it:

Our response should be to build effective democratic constraints permanently into the economic system. We need to develop policies to extend democracy into the economic sphere in ways which are consistent with, but modify the effects of, the market. 
I think you could build a consensus around this kind of stuff (note the IPPR put out a great report covering very similar ground). It's always struck me as incongruous (and a weak point for the Right) that in an era when we're encouraged as citizens, users of public services and consumers to take more power into our own hands that the workplace is off limits. I think the Left could make this argument. On the capital P political level governance reform and encouraging employee ownership doesn't cost money. And these proposals can be advocated appealing to various desirable outcomes - sharing wealth, spreading power and improving employee morale/productivity.

My one big gripe about this discussion in general is the absence of a role for unions in the mix too (though the Fabian pamphlet does highlight the correlation between inequality and declining union power). Again, if you want to try and tackle inequality without having to get the state to do all the heavy lifting then encouraging stronger unions is the most obvious way to achieve this. This would also help underpin the other reforms from within the workforce.

Nonetheless, interesting and encouraging stuff.

Monday, 22 September 2014

Unison applies capital strategy in Care UK dispute

I've blogged previously about the Care UK dispute. Given the company and its private equity owner Bridgepoint Capital's reluctance to behaviour like the responsible employers they claim to be, it's a smart move by Unison to go to the pension funds. Bridgepoint has some major public sector pension funds in both the US and UK as investors, I wonder how impressed they are? News of this dispute has spread globally, it will probably get a mention in Canada this week where the PRI has its annual conference (Bridgepoint being a PRI signatory).

Anyway, the piece in The Independent on this is well worth reading.

Tuesday, 16 September 2014

Why voting against directors matters

A couple of excerpts from Power Without Property by Adolf Berle
Concentrated economic power, whether held by private organisations and directed by their chiefs, or by the State and its chiefs, raises at once the question of "legitimacy".
Why be concerned with "legitimacy"? What difference does it make? Power comes to rest in the hands of specific groups; why not accept the fact, dealing with it merely as a fact? The answer is deeply rooted in immemorial custom and human experience. Power is a fact; but it also a fact that the human mind apparently cannot be wholly or permanently inhibited from asking certain questions. Why should this man, or this group, hold power - instead of some other, possibly more attractive, individual or group? The human animal has always endeavoured to answer his own question: power lies there because the holder is entitled to it by some test or standard. This carries a necessary corollary: the holder can be deprived of it if demonstration is made that there is no title or right in his possession of it.
[A]t present... the men vested with economic power - because they hold a position in a corporate or other economic organisation - got it by a method which the community recognises: through prescribed or accepted process or ritual. Boards of directors of large corporations are recognised as representing the stockholders because they have received the votes of holders of a sufficient number of shares to elect. The ritual of their election is ordinarily casting of a ballot for them, at a stockholders' meeting held for that purpose. It is not an impressive ritual... This is a far cry from the ritual coronation of a king, claiming power by inheritance and the grace of God, and assuming it in an abbey or cathedral by dramatic ceremony. Yet the rationale of the stockholders' meeting and of the coronation is the same. In both cases the ceremony is intended to affirm that this man or this group legitimately holds powder under accepted conditions. It is designed to induce (as indeed it does) general acceptance that the power has been well and truly located in the specific individual or individuals involved.
Whatever blah asset managers come out with to explain why we shouldn't read too much into voting decisions, ultimately if you vote for a director you reaffirm in public their right to power. Looking at Sports Direct, for example, the company has strong grounds for arguing that - by reference to the legitimising function of the AGM - the current board has no need of change. If you voted for the re-election of the current board don't be surprised if you get more of this kind of thing.

Saturday, 13 September 2014

Different interests in executive pay

There was a sorta, kinda interesting piece about executive pay in City AM the other day. Interesting in that it clarifies where mainstream corp gov thinking has got to, and that, in my view, it demonstrates some of the continuing confusion and/or obfuscation embedded in it.

Essentially the argument is that a really basic approach to executive pay (Level 1) is to try and fix it (as in a fixed ratio), cap it or tax it. A slightly more sophisticated approach (Level 2), it is argued, is to muck about with incentives. But what really sophisticated pay reformers (Level 3) should be looking at is long-term delivery of awards. So the big idea proposed is longer term vesting of awards.

As the article says: "Level 3 thinking thus focuses on the structure of pay."

As I say, I think this is actually where the corp gov mainstream is at - for example, it's basically the line that Fidelity has been pursuing. The focus on "career shares" is in a similar place. The core assumptions are: the most important issue is structure not scale, performance-related reward is an inherently good thing and long-term awards incentivise long-term performance.

So far, so obvious. And I disagree with all of it.

The thing I particularly want to focus on is the idea that reforming things like vesting is more sophisticated, and that other ideas (examples given in the article include fixed pay ratios and higher taxes) miss the 'real' issues in executive pay. The intro of the article makes this sort of argument -
EXECUTIVE pay is a high-profile topic which almost everyone has an opinion about, and many believe the entire system is broken. But despite being well-intentioned, many suggested reforms may not be targeting the elements of pay that are most critical for shareholder value and society.
Much of the debate is on what I call a Level 1 issue – the level of pay. The European Commission is contemplating a binding vote on the ratio of chief executive pay to median employee pay; proposals to raise taxes – most prominently made by Thomas Piketty – are a response to seemingly excessive pay levels.
While both measures address income inequality, it’s unclear that they would do much to improve firm value. Levels of chief executive pay, while very high compared to median employee pay, are very small compared to firm value. For example, pay of £5m is only 0.05 per cent of a £10bn firm. That’s not to say it’s not important – a firm can’t be blasé about £5m – but that other dimensions may be more important.
In response, I think this fundamentally misunderstands what the debate around executive pay actually involves. The simple reality is that different groups want different things and, in my opinion, it's hard to achieve all of them. It may be that - within the area of executive pay policy - there aren't proposals that reduce inequality AND increase firm value, or at least that have much impact on both. We may have to choose between them, or choose where we want to put most emphasis. It may well be true that wealth taxes, pay ratios and the like won't increase firm value (there may be better ways to achieve the same ends too, but that's another issue). But equally in the proposals that are put forward by the corporate governance mainstream I see nothing that will reduce income inequality, or even seeks to. I think it would take some work to claim that long-term vesting is going to have an impact on it, for example.

Therefore to assert, as many continue to do, that the 'real question' in executive pay is structure, not scale, is not sophistication, it's a failure or refusal to listen to and acknowledge other voices. If I have a particular concern about income inequality then it's simply false to claim the 'real issue' in executive pay is structure (or, in the article above, to claim that other dimensions than scale matter more). Not to me it isn't.

In fact, in essence, aren't those those who argue that the 'real issue' in executive pay is structure simply asserting the interests of one set of stakeholders - shareholders, but in reality principally asset managers - over others? If other stakeholders have a different view - like that the pay gap is more important than performance linkage - this does not necessarily mean that they are missing the big picture, they simply have different priorities. So to argue that the thing to focus on is structure boils down to saying that the interests of those who want such a focus should win out.

As I've blogged before, much of the corp gov/RI community is obsessive about 'win win' outcomes - what might also be called painless reforms. There is also a tendency to see dissent and disagreement as something to be avoided if at all possible. Well, one area where you can get a bit of consensus - at least between big business and big finance - is that we should be focusing on reforming the structure of pay, and less on absolute levels. By mainstream corporate governance standards, because both the CBI and asset managers can reach agreement in this territory, it is self-evident that this is where sophisticated reforms lie. (I also share Roger Bootle's view that saying focus on structure is a smart way to change the conversation, and shift it away from scale.)

It's more likely, in my view, that where it's easy to find a consensus on executive pay that's because not much is being challenged. The CBI, for example, are quite happy to bang on about 'rewards for failure' because in the narrow sense they mean it (big pay-offs to departing directors of failed/failing businesses) there aren't that many cases and you'd have to be a real corporate shill to defend them. However, go even slightly further down the same track - clawback - and you find much less support. I think the reason it is possible to reach consensus on 'sophisticated' reforms to exec pay like greater performance linkage and long-term vesting is because everyone knows the fundamentals don't really get touched. If anything I'd expect exec pay to rise a bit to offset the fact that recipients will further discount awards that are now even further in the future.

The consensus is possible because the corp gov mainstream is only trying to iron things out between directors and asset managers. Hence issues about pay disparity within firms, and rising inequality don't get a look in. If they did, consensus would be a lot harder to achieve, if at all.

Many people in corp gov dislike these issues 'becoming politicised' (as if they were not inherently political issues), usually meaning it's a bad thing that politicians and policymakers are getting interested and/or drawn in. But at least politicians are used to dealing with conflicting interests and trying to reach a compromise between them. They are used to situations in which for one objective to be achieved, or one interest to be served, another is thwarted. Sometimes everyone is left unhappy, and you just have to settle on the least worst set out outcomes. But at least compromise isn't bought at the price of simply deciding asserting the primacy of one set of interests. The sophisticated consensus envisaged in Level 3 thinking is only achievable because so much else is left off the table, and other interests ignored.

To return to the idea of levels of thinking about executive, to me Level 1 thinking is demonstrated by the argument that the structure of executive incentives should be the limit of corporate governance policy. To me greater sophistication, Level 2 and up if you like, involves acknowledging that different stakeholder interests in this debate do not always overlap, and therefore we may need to make trade-offs, perhaps significant ones. This should be the start of the discussion, not something that we try and gloss over for the sake of a sterile consensus.

Thursday, 11 September 2014

Sports Direct, hits and misses

Yesterday was the AGM of Sports Direct, one of the more 'colourful' UK public companies. It has recently been attacked for a poor approach to pay at both ends of the scale.

The company has been defeated several times in attempts to introduce an incentive scheme for Mike Ashley, hugely annoying shareholders not called Mike Ashley in the process. A scheme was passed - with a 40% vote against - earlier in the summer, though Ashley subsequently declined to participate in it. Many shareholders - and representative bodies like the NAPF, ABI and IoD - have argued that the pay issue reveals that there are real governance failings at the company. In short, Mike Ashley acts like it's his company alone, and the board don't stand up to him.

Meanwhile Sports Direct has also come under attack for its use of zero hours contracts. It is believed to be the employer with the largest number of workers employed on these terms, and the contracts also make it hard for staff to do other jobs to make up the hours. Hats off to Share Action for making the trip  up to Shirebrook to raise this issue at the AGM. And it looks like Sports Direct's problems are expanding on this issue.

The voting results from the AGM tell their own story. Just looking at the headline stats, the remuneration policy attracted the largest vote against - about 12%. But when when you strip out Mike Ashley's controlling stake it's a very large vote (40%+) against - the Telegraph think a majority of non Mike Ashleys voted against, though that looks wrong to me.

Much less impressive, however, is the vote against the chair, Keith Hellawell which looks to be about 20% of the non-Ashley vote. There has been extensive criticism, both public and private, of the Sports Direct board. A strong vote here would have been an important signal that governance needs to be improved. But, yet again, the focus has been kept on pay, surely the symptom not the problem in this case. It remains the case that asset managers - unlike a number of asset owners - don't use their legal rights to challenge incumbent directors even where there are serious concerns.

No doubt some will claim, as they always do, they are putting pressure on privately and that we shouldn't read too much into the votes. Well, in a situation where we have a cowed board and a domineering controlling shareholder I think that is a strategy that is doomed to fail (and perhaps those adopting it are well aware of this). There is still a big gap between public declarations about stewardship and what happens in practice at problem companies. If you are a pension fund trustee, I would urge you to find out how your asset manager voted on this one.

PS. This example also reminds me of why folks using the example of controlling shareholders to argue against requiring a 75% threshold to pass rem policy really missed the bigger picture. Cases like Sports Direct are surely going to be more common.