Tuesday, 18 July 2017

A new Left alignment on corporate governance

I can't overstate how much I like the report that the IPPR has just issued on corporate governance. I've been boring on for a while now about what I see as the end of the 1990s model of corporate governance for the UK. At the same time there has been some excellent work from the TUC on both the challenges to shareholder primacy and the value of worker representation in corp gov. Plus lots of good blogging on this coming from the Left, particularly from Chris Dillow at Stumbling and Mumbling. And some sceptical voices from inside the system, like Guy Jubb and Chris Hodges.

I think what Mat Lawrence at the IPPR has managed to do is clarify really important, and increasingly evident, problems with the UK corporate governance model. Anyone coming at these issues from the Left from here on in should take Mat's analysis as one of the things they use to orient themselves. We have given the 1990s model, founded on the illusion that shareholders "own" companies, a very good try. We have reached the point that we now have codes to try and get shareholders to act like the model of how agency theory suggests they should act (even laissez-faire in capital markets has to be planned).

Conservatives in all parties talk about how disclosure of executive remuneration has had the unintended consequence of driving up pay levels. Yet they often fail acknowledge that the 1990s compact had two key elements: corporate disclosure and shareholder empowerment. They are largely silent on the failure of that second element. To me (to nick Albert Hirschman's idea) the "unrealised expectation" that shareholders would use that greater disclosure and increased power to act on pay in a way that aligns with the public, or other issues, is of critical importance. I think it's very important/encouraging that the Left acknowledges this point, as this will enable us to move on. I think the Right is still stuck in agency theory textbooks.

As I've blogged before, I think the 1990s model has run out of road. We have tried refashioning the relationship between companies and shareholders to make it work for progressive aims and it has not delivered. When I have a bit more time and headspace I will write my own Mea Culpa. I think the Left is much better advised to view the relationship between companies and investors as a field of activism in relation to specific companies (in the style of Share Action), rather than an area of public policy work. The gains from the latter have not been impressive. We would be better focusing policy work on ensuring that other voices - first and foremost that of employees - get proper representation within the firm, rather than further strengthening the position of shareholders in the hope that they will speak on our behalf.

So, go and read the IPPR report and let's get started on the alternative.

Thursday, 6 July 2017

Nex Group chair costs himself £25,000

Next Group, the successor company to ICAP, just managed to publicly humiliate itself by spending company funds on political campaigns.

The company has its AGM next Wednesday and disclosed in the notice of meeting that it had spent £25,000 funding five Conservative Party candidates facing Liberal Democrat challengers in the last election. This was literally a waste of money, since three of the Tory candidates lost.

Following exposure of the donations by The Independent, backed up by a great comment piece, the company issued a statement that the donations were the initiative of the chairman, Charles Gregson, and that he would personally pay back the £25,000. In addition to the media coverage it was clear that various proxy advisers had recommended opposing the resolution at next week's AGM seeking authority to... err... make political donations, and that a number of shareholders would indeed have voted against.  

And they may still. Because there is something pretty disturbing about this case. A PLC can't make donations without shareholder approval. This will be Nex Group's first AGM, so it had not sought prior approval as Nex Group. But the forerunner company had sought shareholder approval at its AGM last year.

Here's what it put in the notes to the resolutions (my emphasis added) in their notice of meeting:

Authority to make political donations (resolution 12)
Resolution 12 is to approve the making of political donations and incurring of political expenditure by the Company and any of its subsidiary companies of up to an aggregate amount of £100,000 in the period up to the Company’s annual general meeting to be held in 2017. The Act contains restrictions on companies making donations to political organisations or incurring political expenditure without prior shareholder approval. The directors have no present intention to make political donations but, because of the broad definitions of political donations and political expenditure contained within the Act, the directors consider it prudent to obtain this shareholder approval. There has been no expenditure under the corresponding authority obtained at the 2015 annual general meeting of the Company. 
This is important. Many companies seek authority to make political donations, but do so to avoid being caught by a wider definition of "political expenditure" (paying for stands at conferences etc). When seeking these authorities companies typically explicitly state that the authority will not be used to make political donations. As you can see, ICAP strongly suggested this would be the case. But donations were made by Nex Group in any case (assuming Nex used the carried over ICAP authority).

At the least this is a breach of investor trust, and I seriously question why any shareholder would vote for the resolution next week after this has happened. But I wonder whether a shareholder could argue that this is actively misleading - I've seen cases taken over misleading IPO docs for example. Companies rarely completely fold to campaigners' demands immediately, but the fact that the chair immediately agreed to pay the money back out of his own pocket makes me wonder if the board thinks they crossed a line.

More generally, perhaps it is time that shareholders toughened up on the issue of political spending overall. Why not ask for disclosure of any spending that the company thinks falls within the wider definition of political expenditure? It might shake some interesting data out, and reveal things shareholders may be uncomfortable with.

Finally, I can't help but notice that the chair of Nex Group is also a non-executive director of Caledonia Investments, which people may remember had a bit of history of this kind of thing which also ended badly.

Friday, 2 June 2017

Chantal Mouffe interviewed in 2007

“The consequence of the disappearance of a fundamental difference between the democratic parties of centre-left and centre-right is that people are losing interest in politics. Witness the worrying decline in voting. The reason is that most social democratic parties have moved so far towards the centre that they are unable to offer alternatives to the existing hegemonic order. No wonder people are losing interest in politics. A vibrant democratic politics needs to offer people the possibility of making genuine choices. Democratic politics must be partisan. In order to get involved in politics, citizens have to feel that real alternatives are at stake. The current disaffection with democratic parties is very bad for democratic politics… I am really worried by the celebration of the politics of “consensus at the centre” that exists today. I feel very strongly that such a post-political zeitgeist is creating favourable terrain for the rise of right-wing populism.” 

Thursday, 18 May 2017

In praise of conflict (not just the band)

I don't read much political theory, but am very interested in Chantal Mouffe so recently bought this. Just started reading it last night and great to find that someone has properly theorised some issues where I've had my own half-baked thoughts. This stuff should be compulsory reading for those anaesthetised by the "we're all on the same side, all interests align" guff that is everywhere in ESG land.

"[P]olitical questions are not mere technical issues to be solved by experts. Proper political questions always involve decisions that require making choices between conflicting alternatives. This is something that cannot be grasped by the dominant tendency in liberal thought, which is characterised by a rationalist and individualist approach. This is why liberalism is unable to adequately envisage the pluralistic nature of the social world, with the conflicts that pluralism entails. These are conflicts for which no rational solution could ever exist, hence the dimension of antagonism that characterises human societies."


"A well-functioning democracy calls for a confrontation of democratic political positions. If this is missing, there is always the danger that this democratic confrontation will be replaced by a confrontation between non-negotiable moral values or essentialist forms of identifications. Too much emphasis on consensus, together with an aversion towards confrontations, leads to apathy and to a disaffection with political participation. This is why a liberal democracy requires a debate about possible alternatives. It must provide forms of identifications around clearly differentiated political positions."

PS The band.

Sunday, 14 May 2017

Shareholders go quiet on executive pay

Once again, ahead of the UK AGM season we had the now traditional "boards braced for stormy AGM season" story. Anyone who follows this debate will know what I mean. We've all seen several times the claim that a second "shareholder spring" is coming as investors "get tough" and "crack down". This season the reheated story was spiced up with the extra line that the government is considering giving them even more powers.

Of course, the proportion of companies that lose a vote in any season is tiny (very rough guess: less than 2% of the All Share) and the "shareholder spring" itself had only a handful of defeats. So really investors only needed to turn the dial by one notch to deliver a record season. I suggested that getting defeats into double figures, while still meaning 95% of companies get shareholder approval, would send a pretty important signal.

It's pretty clear now that is unlikely to happen. So far there have only been two pay defeats - Pearson and Crest Nicholson - and both were on the advisory remuneration report vote, not the binding remuneration policy vote. This means that, for all the pre-season puffery, no companies have been given a binding direction by their shareholders because of their approach to executive pay. However you cut it, this year's AGM "fireworks" have been duds. 

However, the other thing that is being put about in the business pages is that while, yes, there haven't been the number of defeats people were expecting this is because of successful shareholder engagement behind the scenes. There are couple of examples being briefed of companies pulling resolutions before the vote to avoid defeat, or making big concessions during engagement with shareholders. 

I'm a bit sceptical for a couple of reasons. First, this is a line I have heard quite a lot over the years, primarily from asset managers that tend to vote with management most of the time. So it's not clear to what extent the engagement that has taken place this year differs from other seasons. Second, companies are not stupid. Like any good negotiators, in a tricky situation they are going to go into an engagement with a headline ask, and an acceptable fallback position. We don't know to what extent the agreements that are being agreed between companies and asset managers represent where the former party wanted to be in the first place.

Which leads onto the key point in all this. No-one outside the closed circle of corporate executives, asset managers and remuneration consultants really knows what is going on. Because asset managers prioritise confidentiality in engagement, exactly what deals are thrashed out - and who amongst them is doing the most thrashing! - is not information that is available to the public. I know there are some good people out there who do feel a responsibility to try and bring some of the public concern about executive pay into their discussions with companies. But I know there is a lot of bullshit out there too. I have been hearing the "we are engaging behind the scenes" line from asset managers that I know put little pressure on for about 15 years. 

Many of the people who exercised the votes that approved the executive pay arrangements that are apparently now egregious are still pushing the same (Vote For...) buttons. Are we sure that they have changed? In my experience, many people within asset management continue to hold views on executive pay that are well to the Right of the public (who are often considered to hold very ill-informed views about the value of executive talent). It's not obvious that we should conclude that there has been a real change unless we get some real evidence. 

So I would not advise people (including business journos) to accept the "it's all getting sorted out in private" line uncritically. More generally, I don't think the current position is going to hold for the asset management industry. Executive pay continues to be a subject of public debate, and anger. This season the headline output of what shareholders do - votes - may fall rather short of the pre-match build-up. In fact, it could be interpreted as evidence that shareholder oversight is far too weak a tool. But I don't think arguing that "we're sorting it out in private but can't tell you about it" is going to convince many waverers that actually yet another season where the vast majority of companies got approval is actually OK.

In the current environment does making private deals between corporate executives and major financial institutions, and telling the public they can't be allowed in, over an issue as politically charged as executive pay look like a great outcome? I think shareholders are going to have to become much more open about their engagement and its results, and they really need to think about the public output that voting in favour but engaging privately creates. Even so, I am not sure another season where even people who follow executive pay will have seen very little happen is going to do much to stop the the drift away from shareholder oversight as a public policy tool.

Monday, 8 May 2017

Internal logic versus external stupidity

I've blogged about National Express a few times over the years, mainly in relation to its anti-union activity. But today a story in the FT about its executive pay arrangements caught my eye. I think it's a great example of why performance-related pay is a colossal waste of time, including trying to tie pay to ESG targets.

As many people may know, there was a tragic accident in the company's US school bus business last year in which six young children died. This is clearly pretty much the worst safety outcome a company that transports children can have.

Understandably, therefore, the company has reduced to zero the amount of the chief executive's bonus that is tied to safety. But, he's still going to get the rest of the bonus, which equates to over 150% of salary. Some shareholders are ticked off, and think that the company should not have paid any bonus at all, sensing that a chief executive getting a seven figure bonus in the year when the company suffered multiple child fatalities is not a good look.

To me, this sort of outcome is the inevitable outcome of the performance-related pay delusion. If you set multiple targets for variable pay you are always going to get these kinds of perverse outcomes. If you've hit your financial targets but there have been fatalities then simply not awarding the bits of pay tied to ESG criteria is logically what you should do. But it looks appalling. Applying some common sense has its own problems - for people within business/finance at least. If you scrap the bonus entirely (which is what I think they should have done) then it makes plain what a joke the system is - it is incapable of delivering sensible outcomes.

This isn't the first time this has happened in relation to fatalities involving a PLC. The CEO of Thomas Cook got in a similar mess by giving up some, but not all of her share award. To try and stick to a logical/statistical approach merely invites the question "so how many people would have to die before you didn't take any bonus/share award?". Companies - or investors - that simply hide behind the incentive design look inhumane.

There was a similar example with News Corp when the hacking scandal blew up - with James and (I think) Rupert Murdoch agreeing to give up some, but not all, of their bonuses. And, more generally, when there is a lag between performance and reward (because shareholders have asked that reward be tied to slightly more long-term performance) you get examples when exec awards vest despite performance having subsequently turned bad again.

I know I am well out of step with many ESG people here, but to me the fundamental problem is the insistence on performance-related pay. Quite aside from motivational issues, perverse incentives and the whole question of why the most highly paid need or deserve further incentives to get them to do their job, performance pay generates these ridiculous outcomes. They make sense according to the text book internal logic of incentive schemes but they look terrible to any half conscious actual human being. Instead of wasting even more time trying to tie ESG criteria to pay we should be scaling back variable reward if not scrapping it altogether.

Wednesday, 3 May 2017

New guidelines for assessing company behaviour on labour issues

The Committee on Workers' Capital (CWC) has just published an important new document - the CWC Guidelines for the Evaluation of Workers' Human Rights and Labour Standards.

Its the product of a couple of years' work by a global group of trade union experts from countries including Australia, the US, Spain, Canada, the Netherlands and the UK. It also has the imprint of the ITUC, the peak body in the global labour movement. So if you're an investor or an ESG researcher looking at a company wanting to get a handle on how well it handles labour issues, these are the indicators that you should be looking at.

Press blurb below, the guidelines themselves are here.

Global Trade Unions Release Guidelines For The Evaluation of  Workers’ Human Rights and Labour Standards

Global union initiative will elevate the profile of social issues in the investment chain

VANCOUVER, CANADA, 1 MAY 2017 - Investors will be able to properly evaluate company adherence to robust labour standards and responsible employer relations as a result of a new global trade union initiative.

The Committee on Workers’ Capital (CWC) Guidelines for the Evaluation of Workers’ Human Rights and Labour Standards are a comprehensive set of key performance indicators (KPIs) for investors to evaluate companies’ social performance. The guidelines were produced by trade unions from around the globe in response to concerns that asset owners and other investment chain actors are not equipped with tools to adequately scrutinize social issues such as labour relations in their environmental, social and governance (ESG) analysis.  

The CWC Guidelines were endorsed at a meeting of the Council of Global Unions in February 2017, giving them unique status amongst ESG KPIs as an official document of the global labour movement.

“When companies like XPO Logistics or Sports Direct mistreat their workforce, they create risks for investors,” says Sharan Burrow, General Secretary of the International Trade Union Confederation. “Yet to date the ‘S’ in ESG has been the weak link in investment analysis, and investors have lacked a shared framework to assess companies’ approaches.”

The Guidelines are inspired by key international norms, standards and frameworks including the UN Guiding Principles for Business and Human Rights, the OECD Guidelines for Multinational Enterprises and the ILO Fundamental Conventions. The indicators are grouped in ten themes, which include workforce composition, social dialogue, supply chain, grievance mechanisms, workplace diversity, and pension fund contributions for employees.

 “The CWC Guidelines will help pension trustees, asset managers and rating agencies properly evaluate the social performance of investee companies,” says Burrow. “In addition to improving investors’ ESG analysis, use of the Guidelines will send positive market signals for companies that respect fundamental labour rights. Ultimately, the capital of working people in their pension funds should support the fundamental labour rights that were necessary to create pension funds in the first place.”

The CWC Guidelines were developed over the past 16 months by a multinational working group of trade union specialists from countries including the US, Australia, Spain, Canada and the UK.  The CWC will use the Guidelines to elevate the profile of decent work practices in its work with pension fund trustees and other investment chain actors such as sustainability rating agencies.

For a one page briefing on the CWC Guidelines, please click here.