NGOs and capital market campaigning

There's a very interesting piece by Rory Sullivan here. I agree with a lot of it.

Labour and capital in practice

Given the perspective of my blog - basically a labour/Labour take on issues relating to ownership, shareholding etc - the recent noise around the National Express AGM, and the campaign it is part of, is rather interesting. This is a bit of a splurge of thoughts...

The principal claim made by US unions, the Teamsters in particular, is that in its US schoolbus business, Durham School Services, there is an anti-union culture. Furthermore they argue that the company's failure to engage with unions has knock-on negative effects on things like morale, safety etc. The Teamsters have been raising concerns about Durham for a few years now, and have made a number of trips to the UK, during which they have met investors. I think most people in the UK RI community are (or should be) aware of the issues the Teamsters have raised, whether they agree or not.

This year the Teamsters adopted a more shareholder-focused strategy and called on the company to improve the oversight and reporting of human capital issues. In lieu of this, the union called for a vote against the company's report and accounts at its AGM. Ultimately there were combined oppose votes and abstentions of about 5%. It doesn't sound like a lot but most of these votes go through with 99%+ in favour. About 3% of the vote against came from LAPFF members, who supported the call for improved oversight and reporting.

An interesting development in the run-up to the AGM was that Jim Sheridan MP wrote out to National Express shareholders on behalf of the Unite parliamentary group supporting the campaign. He also attended and spoke at the AGM. That s something I haven't seen before and may be a sign of things to come.

At the AGM both the chair and chief executive were clear that, while mistakes might be made, the company did not have an anti-union stance. The chief exec said a couple of times that he respected the right of employees to join unions. However the chair said the company would not adopt a position of 'neutrality' and would seek to put the other side of the story.

The chief executive suggested that its rival First Student, part of First Group, had suffered more problems since reaching a national agreement with the Teamsters. The clear implication here was that the company suffered a drop in performance that was closely correlated with union recognition. (I recently heard a mainstream asset manager make exactly the same point, which may show that the company's line is getting a receptive hearing). The chair made the point that labour relations in the US were different and more combative. He said the company took a view that was, basically, "when in Rome..." and would not seek to apply UK standards in the US.

So, what to make of all that? I personally think the company does take an anti-union stance in the US, and this message was, if anything, amplified at the AGM. The company may state that it respects the right of employees to join a union, but it is not within its gift for the situation to be otherwise. It might as well state that it respects the right of employees to vote for their choice of President. Whether it "respects" such rights or otherwise those rights will continue to exist because they are enshrined elsewhere. So what matters is how the company seeks to influence the exercise of that right.

Some of the documentation produced by the company in the US (which has been circulated to investors by the unions) is clearly intended to dissuade employees from joining unions, and subtle it ain't. The company's defence has been, broadly, that such material is within the law and that the unions are aggressive too. As noted above, the chair stated in the AGM that the company would not take a neutral stance. (He also said, in a semi jokey way, that the existence of unions was in a sense a reflection of management. In an ideal world unions wouldn't exist because companies would treat employees properly.) If seeking to suggest to employees that joining a union is costly/pointless/undesirable is not evidence of being anti-union, what is? Just because such a stance may be undertaken within the law does not change the nature of that stance.

If any investors were listening properly, what they will have heard is that the company does not want unions in its US operations if possible because that's the way the industry works there. In addition, the chief exec's comments suggest that the company thinks a formal agreement with the unions could harm its business.

I guess the interesting question is how the RI community views all this. As I mentioned earlier, the unions' claims about Durham are well-known. And the company has now set out its position pretty clearly, and publicly, at the AGM. The chief exec has, essentially, made a business case argument against agreeing a deal with the unions. Does a responsible investor consider this the end of the story - if you can't make a business case for not dissuading employees from joining a union, does that make such behaviour unchallengeable? Or, alternatively, is an anti-union stance unacceptable, even if it may provide a business advantage?

As I have written before, I think labour issues are hard for the RI community to address exactly because there are no easy answers here. Too often the assumption is that there is a win-win, especially if we can claim the company will see the benefit from doing the right thing "in the long term". After more than ten years in this field I'm sceptical about the value of such an approach, I think we might benefit from also asking more often "is the company's position good enough?"

Labor and Monopoly Capital

This is one of the most interesting books I have read for a long time. Obviously I don't share the author's Marxist view of the world, but for a book that came out in 1974, there is a lot of good/relevant stuff in it. The subject is the nature of work in 'monopoly capitalism'* and a particular emphasis is the way that technology can serve to deskill the workforce. Here are a few snippets.

"The mass of humanity is subjected to the labor process for the purposes of those who control it rather than for any general purposes of "humanity" as such... Machinery comes into the world not as the servant of "humanity", but as the instrument of those to whom the accumulation of capital gives the ownership of machines... [I]n addition to its technical function of increasing the productivity of labor - which would be the mark of machinery under any social system - machinery also has in the capitalist system the function of divesting the mass of workers of their control over their own labor."

...

"The complexity of the social division of labour which capitalism has developed over the past century, and the concentrated urban society which attempts to hold huge masses in delicate balance, call for an immense amount of social coordination that was not previously required. Since capitalist society resists and in fact has no way of developing an overall planning mechanism for providing this social coordination, much of this public function becomes the internal affair of the corporation. This has no judicial basis or administrative concept behind it; it simply comes into being by virtue of the giant size and power of the corporations, whose internal planning becomes, in effect, a crude substitute for necessary social planning."

....

"In the period of monopoly capitalalism, the first step in the creation of the universal market is the conquest of all goods production by the commodity form, the second step is the conquest of an increasing range of services and their conversion into commodities, and the third step is is a "product cycle" which invents new products and services, some of which become indespensible as the conditions of modern life change and destroy alternatives... In the end, the population finds itself in the position of being able to do little or nothing itself as easily as it can be hired done in the marketplace by one of the multifarious new branches of social labor...

It is characteristic of most of the jobs created in this "service sector" that, by the nature of the labor processes they incorporate, they are less susceptible to technological change... Thus while labor tends to stagnate or shrink in the manufacturing sector, it piles up in these services and meets a renewal of the traditional forms of pre-monopoly competition among the many firms that proliferate in fields with low capital-entry requirements. Largely nonunion and drawing on the pool of pauperized labor at the bottom of the working class population, these industries create new low-wage sectors of the working class, more intensely exploited and oppressed than those in the mechanized fields of production."

* just a reminder that Colin Crouch's book on neoliberalism is really good on what "actually existing capitalism" looks like - big firms do tend to dominate, and significant barriers to exist in many important industries.

Back from beyond / pay votes

I've spent the last week in and around a yurt in Cornwall, hence the total lack of blogging action. But I have a couple of (hopefully) interesting snippets/posts to come.

Also, having had a quick read through a few AGM voting results I think it is safe to say that Shareholder Spring 2: The Revolution Continues has not happened. The two (pay) votes I was particularly keeping an eye on were RSA and the Pru. The former because of the dividend cut, the latter because of the FSA fine and criticism of the chief exec. The Pru saw an 11.6% vote against well down on the 33% against last year. RSA saw an even lower vote against at 9% (up from 6.5% last year). 

The lack of action is not surprising to me or, I suspect, most people in the corp gov/RI microcosm. As I have blogged previously a) this is what we should expect based on previous experience (am thinking here of the way pay votes declined in the run up to the crisis after an initial spike) and b) we already have some indication of how a drop off in votes against would be explained by the mainstream of the investment industry.

For what it's worth I think that if votes against pay are down across the board this season this may have been an error of judgment by the UK's institutional investment community. People might start to ask what the point is of giving shareholders a binding vote on pay if they aren't going to use it. I recognise that the dynamics of shareholder engagement over pay are more complex than this. However, that isn't how it looks and arguably one of the important considerations currently is that shareholders are seen to tackle executive pay.

Ideas matter

A those people who have persisted with my blog outpourings for some time will know, I've become quite interested in the effectiveness (or otherwise) of performance-related pay. Looking back through my own archives I can see that I started seriously blogging about this about three and a half years ago (about the half the life of my blog ago!). So back in Jan 2010 I thought there were the first stirrings of interest in the investor community about the motivational aspects of incentives.

As I've tried to make clear in my own burbling on this topic, the idea that performance pay may not be effective - at least beyond basic tasks - has been debated for some time in psychology. Of course the main burst was in the 70s with Deci et al, but you can go further back to Frederick Herzberg, Douglas McGregor etc for older theorising about motivation at work that might lead you to query incentive pay. This stuff is well known in its own field (and in HR probably) yet has been almost invisible in corporate governance until now.

Unfortunately, agency casts a very long shadow in my microcosm, and with it comes a very basic economic theory of motivation. Essentially it boils down to the idea that people - managers in agency theory - will basically shirk, or pursue their own interests, unless they are 'bonded'. Contracts, and incentives, can be used to achieve this, with the ultimate aim being behavioural control via these tools to ensure managers are aligned with shareholders.

This stuff still has a real hold on many corp gov people. People who are basically well-meaning think they can achieve something worthwhile by incentive design - either ensuring that managers are controlled or, by bringing non-financial targets into the mix, trying to encourage them to ensure social and environmental factors are taken seriously. In my experience it can be very difficult to get people to shake off these ideas, call it ideology, hegemony or whatever, but for a long time performance pay has been seen as A Good Thing in corp gov land.

However, I do think my optimism of a few years back was well placed, and there are increasing signs that the supertanker is turning. Only today I received something from the Hay Group including a discussion piece on the pros & cons of financial incentives. This follows the work PwC have done in this area - which is genuinely sceptical IMO - and I know that Towers Watson held a client seminar on the same sort of topic (which they wouldn't let me go to).

Perhaps not unrelated, at the same time there has been a steadily increasing level of interest amongst some investors in the motivational questions about pay. Most pleasing to me has been the (still rather small!) number of conversations I have had with corp gov people where they already know the outlines of the criticisms of performance pay (eg that it works for simple, measurable tasks). This was not the case until recently.

Of course, what really matters is practice, and the test of this ultimately will be whether companies shift away from their reliance on performance pay. That is going to be a battle. But I do think that the ideas here are changing, and that is why we are starting to see remuneration consultants talk about them. I think we're going to be seeing more policy discussion of this stuff, so lets hope this is start of a significant shift away from performance-related reward, and the excessive pay it results in when applied in the boardroom.

Big vote against FTSE100 pay

Despite heavy pre-match billing, Shareholder Spring 2 hasn't really taken off yet, much to no-one's surprise. We had quite a few AGMs last week, and I couldn't really see much of note at any of them.

However, today we had a decent one - a 39% vote against a one-off share award to the chief exec at Randgold Resources, see resolution 17 here. That's sizeable in any year. So, if you were the company how would you react? A) Acknowledge the scale of the revolt and state that you take investors' concerns seriously or B) try and claim it as a win?

Judging by what they said to The Guardian, the company has opted for B)

"Considering that several of the proxy agencies advised shareholders to oppose the award the board is gratified that a large majority of shareholders recognised the merits of the award."

Votes against management are (not) a sign of failure

An argument you hear trotted out with reasonable frequency by people on the investor side of the corporate governance relationship is that we shouldn't get too hung up on votes against management because they are often/ultimately a sign of failure.

According to this view, what we should be aiming at is ongoing dialogue between companies and shareholders, primarily out of the public eye. If there really isn't a way to resolve a disagreement then, regrettably, a voice against may be in order.  

Having worked in this field for quite some time now I think this is a really troubling way of looking at the world. Imagine if we applied this approach in politics - votes against our MPs and councillors are a sign of failure, what we should be aiming at is seeing our representatives re-elected (like they are at PLCs) with 99% in favour. Anything less must mean the process of being ruled has failed. Or, closer to home, what about relations in the boardroom? Presumably we should be aiming at unanimous decision-making, and any dissent within the board is a sign of a problem. It sounds ludicrous doesn't it?

In any field where power is exercised there is - or should be - dissent. We should value the expression of such dissent, not characterise it as a problem. You do hear this from politicians, some worry when there isn't a coherent opposition facing them to challenge them. Similarly, surely investors recognise that boards where there clearly isn't internal challenge are not what they want. So why consider that the expression of dissent by investors, using the most appropriate signal they have - the vote - is a bad thing?

Sometimes people just disagree - they have different views/beliefs etc - and their opposing viewpoints cannot be reconciled. In such a scenario it is entirely right for one party to signal "I disagree with you". At some point we may have to find a way to deal with the competing claims, but for one party to simply state "I disagree" does not represent a failure.Consider, for example, Church groups who take a moral position on the level of executive pay. If they vote against the remuneration report of a company where they think pay is too high is this a sign of failure?

In my opinion, in all these sorts of cases the idea that our aim should always be to reach a consensus is a bit silly in theory, and disempowering in practice. I personally think that in these environments we should always expect tension (because we are dealing with the exercise of power) and this is actually a good thing. In contrast, "consensus" may often really mean "acquiescence". I think if we look at the limited exercise of power by shareholders in recent years it is the times when they didn't vote against which are by far the most troubling.

Votes against management are, first and foremost, a sign of dissent and dissent in the environment in which corporate governance people work is a good thing. It is when there is a widespread lack of dissent that we should get worried.