Baroness Wilcox: The Secretary of State gave a very broad, sweeping statement last week, as my noble friend has already mentioned, which he will be speaking to more and more as the weeks go on. Putting employees on board committees is something that obviously everybody would like to see happen. The closed shop of boards and board committees needs to change and we are taking measures to promote diversity. However, as the Secretary of State made clear last week, bringing people on to board committees who are not also company directors, with the associate responsibilities, is not the way forward.
Wednesday, 1 February 2012
Coalition wants to see employee directors on boards?
There was an interesting exchange in the Lords yesterday on executive pay, and specifically how to ensure employees' views are taken into account. From the excerpt below from Baroness Wilcox it appears that the Coalition wants to see employees represented on boards, but can't just appoint them if they aren't directors. So the solution, presumably, is employee directors....? Not entirely sure this is actually Coalition policy.
Tuesday, 31 January 2012
Timing is everything, part 2
There are some interesting new pieces of written evidence on the DCMS committee website, published today. Following on from the Linklaters email evidence (which suggests James Murdoch knew more than he has claimed) submitted before xmas, the committee has sought to determine exactly when the key June 2008 emails were discovered. (By lucky chance for Murdoch they were submitted to the committee after he faced a shareholder vote at BSkyB).
Anyhow, Linklaters has submitted a not entirely straightforward answer suggesting that a junior reviewer first discovered the email trail "on or about 18 November 2011". The letter also says that the significance of the email should have been recognised immediately. Instead, only when a second reviewer spotted the email was the alarm sounded, on 7th December.
Ok, but then explain how the Daily Mail was able to write a story on 12 November about the discovery of emails damaging James Murdoch? And how did a source close to Murdoch Snr know enough to tell Andrew Neil they were potentially devastating to James at least three weeks before Linklaters realised their importance? Either there are other emails we haven't seen yet, or it looks like someone is telling porkies.
Anyhow, Linklaters has submitted a not entirely straightforward answer suggesting that a junior reviewer first discovered the email trail "on or about 18 November 2011". The letter also says that the significance of the email should have been recognised immediately. Instead, only when a second reviewer spotted the email was the alarm sounded, on 7th December.
Ok, but then explain how the Daily Mail was able to write a story on 12 November about the discovery of emails damaging James Murdoch? And how did a source close to Murdoch Snr know enough to tell Andrew Neil they were potentially devastating to James at least three weeks before Linklaters realised their importance? Either there are other emails we haven't seen yet, or it looks like someone is telling porkies.
Labour/RBS/bonuses
There's some interesting detail in this piece in The Guardian, especially views of Chuka Umunna and Paul Myners. Being someone who is a Labour supporter, interested in corp gov and interested in language/communications I think there are a couple of shifts in message going on.
For example Labour is starting to talk (as Chuka has done) about "rewards for failure and excessive pay", ie there are different problems here. The Tories in particular want to try and hold the debate back to rewards for failure and conflate that with excessive pay. It's important that Labour makes the difference explicit as the Tories are uncomfortable with the notion that top pay might represent (to a greater or lesser extent) rent seeking rather than an optimal market outcome.
Also the language on bonuses seems to be becoming a bit more explicit - ie Rachel Reeves using the line that bonuses are something that should be awarded for really exceptional performance, for everything else you get your salary. This is potentially important as any fule no that the explosion in performance-related reward is behind much of the growth in top pay. I hope we hear more on this. Most working people are expected to turn and do their job for their salary, they can't hope for multiples of salary to do it better. So performance pay of this size is unique to certain bits of the economy.
For example Labour is starting to talk (as Chuka has done) about "rewards for failure and excessive pay", ie there are different problems here. The Tories in particular want to try and hold the debate back to rewards for failure and conflate that with excessive pay. It's important that Labour makes the difference explicit as the Tories are uncomfortable with the notion that top pay might represent (to a greater or lesser extent) rent seeking rather than an optimal market outcome.
Also the language on bonuses seems to be becoming a bit more explicit - ie Rachel Reeves using the line that bonuses are something that should be awarded for really exceptional performance, for everything else you get your salary. This is potentially important as any fule no that the explosion in performance-related reward is behind much of the growth in top pay. I hope we hear more on this. Most working people are expected to turn and do their job for their salary, they can't hope for multiples of salary to do it better. So performance pay of this size is unique to certain bits of the economy.
Monday, 30 January 2012
RBS & power
Well, my last post was overtaken by events in a couple of hours, so just a quick update.
I think the biggest issue sitting behind this is the question of who holds power. When you boil down most of the arguments against the Government taking action on Hester's bonus they seem to reduce to "we can't act" or "we shouldn't act".
In the first case, we can't act because even a small 'win' will inevitably be offset by a large 'loss' - notice the desperation to see some share price impact this morning. More generally I'm starting to think a few people on the Left have developed a sort of Stockholm Syndrome in relation to the City. They are so used to being battered down by the argument that you take the City on at your peril - that the precious talent cannot be challenged or it will leave - that they can't believe that you can actually win a battle of wills. I think some people might even be relieved to see Stephen Hester go, just to confirm their belief that you can't really win.
In the second case ("we shouldn't act"), it's more political. A view held (predominantly) by the right-of-centre is that we have no business meddling in any case. If you want the proceeds of wealth generation by the private sector then business must be left unfettered. At the extreme end intervening to block the award will be characterised as an affront to liberty, a small step on the path to totalitarianism.
The thing is, the politicians clearly believe that the public don't have time for either of those arguments at present. There is a sense that the public want to see the bankers put in their place, they do not want to see the Government give in to threats. In the case of RBS, overlapping both the City and politics, this pressure is particularly sharp. The implicit question is 'who is in charge here?'. And the Government, belatedly and reluctantly, has given an answer.
I think the biggest issue sitting behind this is the question of who holds power. When you boil down most of the arguments against the Government taking action on Hester's bonus they seem to reduce to "we can't act" or "we shouldn't act".
In the first case, we can't act because even a small 'win' will inevitably be offset by a large 'loss' - notice the desperation to see some share price impact this morning. More generally I'm starting to think a few people on the Left have developed a sort of Stockholm Syndrome in relation to the City. They are so used to being battered down by the argument that you take the City on at your peril - that the precious talent cannot be challenged or it will leave - that they can't believe that you can actually win a battle of wills. I think some people might even be relieved to see Stephen Hester go, just to confirm their belief that you can't really win.
In the second case ("we shouldn't act"), it's more political. A view held (predominantly) by the right-of-centre is that we have no business meddling in any case. If you want the proceeds of wealth generation by the private sector then business must be left unfettered. At the extreme end intervening to block the award will be characterised as an affront to liberty, a small step on the path to totalitarianism.
The thing is, the politicians clearly believe that the public don't have time for either of those arguments at present. There is a sense that the public want to see the bankers put in their place, they do not want to see the Government give in to threats. In the case of RBS, overlapping both the City and politics, this pressure is particularly sharp. The implicit question is 'who is in charge here?'. And the Government, belatedly and reluctantly, has given an answer.
Sunday, 29 January 2012
The battle of the bonus
The argument about Stephen Hester's share award has been going on for the best part of a week now. Whilst many people will, with some justification, consider that one person's remuneration is being given far too much attention there are important issues underlying the argument.
First up, let's be fair to the Government. This was always going to be a very difficult issue. It is clearly in everyone's interest that RBS is run by a good team and turned around as quickly as possible. Should the Government apply political considerations even if this meant it might damage the bank? It was always, to steal from Galbraith, a choice between the unpalatable and the disastrous, as most political decisions are. The thing is it's also often not clear which is which.
But the Government has not covered itself in glory through its actions. For one it has changed its line on Hester's award several times. First up the implication was cleary that Cameron wanted a bonus of less than £1m. Coincidentally the share award RBS hit on came in at just under that level. The line shifted though. Some in the Government (Nick Clegg for example) tried to deny that they had any choice, and that there was some kind of contractual obligation to make an award. This was blamed on Labour. This is patently dishonest for several reasons. Directors' contracts typically say you are entitled to participate in a bonus scheme, not that you are entitled to a bonus. In addition, if the bonus was a contractual obligation it is a massive coincidence that the award came in under Cameron's red line. Finally, if the contracts were a problem, why not try and unpick them? This Government has been in power for almost a third of a term. Or alternatively why not vote against the RBS remuneration report last year? UKFI did it in 2009 remember.
Latterly the line has shifted again. Today IDS acknowledged that the contract left it up to the board to decide what to do. Similarly the PM's spokesman has been quoted in a few places admitting that there is no contractual obligation. Now the argument, made by Danny Alexander and IDS, is that whilst the Government could veto the bonus to do so would risk the loss of talent that would in turn damage company. This is more honest, but does of course raise the question of just who is charge - the Government or the bankers. (You might even pose it as 'who governs?').
One thing the Government has not really tried to do is defend the bonus on its own terms - that Hester hit some targets and as such he was perfectly entitled to the award. This is important, because from one perspective that is a valid argument. In corporate governance terms the award isn't that bad. Hester got was offered certain rewards on certain conditions which he met. In fact this is a share award, not a cash bonus, so it achieves 'alignment'. What's the problem? That the Government doesn't try this argument demonstrates the awareness that this goes beyond governance. They know that the public don't buy the argument that a public sector employee (particularly one running a largely nationalised bank) deserves a £1m bonus on top of an already large salary. It is just too easy to make the leap to 'Schools n hospitals' and 'how many nurses would that buy us'?
Clearly the Government recognises that defending the award in terms of being in the interests of the state as shareholder doesn't work well with the public. This is probably because of the context - public sector pay freeze, job losses, 'we're all in this together', possible 'double dip' etc). Hence the overall impression is that the Government would ideally like it if Hester didn't take the award, and would really like it to not be made, but it feels powerless to act. It looks a bit weak, but presumably the Government considers that it would be 'disastrous' to try and tough it out.
The short-term effect of this is that the Government will take a lot of flak. But the RBS case should also make it pretty clear what the limitations are of shareholder engagement when dealing with executive reward in sensitive situations. If it is too difficult for the Prime Minister, with over three quarters of the ownership of RBS in his pocket, to dictate terms to a bank board, then don't expect those with a more traditional (ie dispersed) ownership structure to feel much compulsion to fall into line. This is especially so when most mainstream shareholders don't really buy the argument that the pay and conditions of employees within the business, let alone in the economy at large, are relevant when determining executive remuneration.
So the RBS case demonstrates the problem of conflating mainstream corporate governance reform with action on top pay generally. They are not the same thing. What might be acceptable to shareholders may not be acceptable to the wider public. In the case of RBS the difference is made much sharper because the public own the bank in large part. But same problem is likely to persist at PLCs more generally. The exec pay reforms floated by Vince Cable are good, in corporate governance terms, but they are not likely to tackle the pay gap between boardroom and shopfloor. Which would be fine, had the Prime Minister not sort to portray them as part of a 'responsible capitalism' crusade.
First up, let's be fair to the Government. This was always going to be a very difficult issue. It is clearly in everyone's interest that RBS is run by a good team and turned around as quickly as possible. Should the Government apply political considerations even if this meant it might damage the bank? It was always, to steal from Galbraith, a choice between the unpalatable and the disastrous, as most political decisions are. The thing is it's also often not clear which is which.
But the Government has not covered itself in glory through its actions. For one it has changed its line on Hester's award several times. First up the implication was cleary that Cameron wanted a bonus of less than £1m. Coincidentally the share award RBS hit on came in at just under that level. The line shifted though. Some in the Government (Nick Clegg for example) tried to deny that they had any choice, and that there was some kind of contractual obligation to make an award. This was blamed on Labour. This is patently dishonest for several reasons. Directors' contracts typically say you are entitled to participate in a bonus scheme, not that you are entitled to a bonus. In addition, if the bonus was a contractual obligation it is a massive coincidence that the award came in under Cameron's red line. Finally, if the contracts were a problem, why not try and unpick them? This Government has been in power for almost a third of a term. Or alternatively why not vote against the RBS remuneration report last year? UKFI did it in 2009 remember.
Latterly the line has shifted again. Today IDS acknowledged that the contract left it up to the board to decide what to do. Similarly the PM's spokesman has been quoted in a few places admitting that there is no contractual obligation. Now the argument, made by Danny Alexander and IDS, is that whilst the Government could veto the bonus to do so would risk the loss of talent that would in turn damage company. This is more honest, but does of course raise the question of just who is charge - the Government or the bankers. (You might even pose it as 'who governs?').
One thing the Government has not really tried to do is defend the bonus on its own terms - that Hester hit some targets and as such he was perfectly entitled to the award. This is important, because from one perspective that is a valid argument. In corporate governance terms the award isn't that bad. Hester got was offered certain rewards on certain conditions which he met. In fact this is a share award, not a cash bonus, so it achieves 'alignment'. What's the problem? That the Government doesn't try this argument demonstrates the awareness that this goes beyond governance. They know that the public don't buy the argument that a public sector employee (particularly one running a largely nationalised bank) deserves a £1m bonus on top of an already large salary. It is just too easy to make the leap to 'Schools n hospitals' and 'how many nurses would that buy us'?
Clearly the Government recognises that defending the award in terms of being in the interests of the state as shareholder doesn't work well with the public. This is probably because of the context - public sector pay freeze, job losses, 'we're all in this together', possible 'double dip' etc). Hence the overall impression is that the Government would ideally like it if Hester didn't take the award, and would really like it to not be made, but it feels powerless to act. It looks a bit weak, but presumably the Government considers that it would be 'disastrous' to try and tough it out.
The short-term effect of this is that the Government will take a lot of flak. But the RBS case should also make it pretty clear what the limitations are of shareholder engagement when dealing with executive reward in sensitive situations. If it is too difficult for the Prime Minister, with over three quarters of the ownership of RBS in his pocket, to dictate terms to a bank board, then don't expect those with a more traditional (ie dispersed) ownership structure to feel much compulsion to fall into line. This is especially so when most mainstream shareholders don't really buy the argument that the pay and conditions of employees within the business, let alone in the economy at large, are relevant when determining executive remuneration.
So the RBS case demonstrates the problem of conflating mainstream corporate governance reform with action on top pay generally. They are not the same thing. What might be acceptable to shareholders may not be acceptable to the wider public. In the case of RBS the difference is made much sharper because the public own the bank in large part. But same problem is likely to persist at PLCs more generally. The exec pay reforms floated by Vince Cable are good, in corporate governance terms, but they are not likely to tackle the pay gap between boardroom and shopfloor. Which would be fine, had the Prime Minister not sort to portray them as part of a 'responsible capitalism' crusade.
Saturday, 28 January 2012
Tough choices
From Tony Judt's Ill Fares The Land:
When imposing welfare cuts on the poor... legislators in the US and UK alike have taken a singular pride in the 'hard choices' they have had to make.The poor vote in much smaller numbers than anyone else. So there is little political risk in penalising them: just how 'hard' are such choices? These days we take pride in being tough enough to inflict pain on others. If an older usage were still in force, whereby being tough consisted of enduring pain rather than imposing it on others, we should perhaps think twice before so callously valuing efficiency over compassion.
James Murdoch / hacking round-up
Anyone who thought that the big events in the hacking scandal were behind us has probably had a shock in the past week or so.
Yesterday saw GSK announce that James Murdoch won't be standing for re-election at the company's forthcoming AGM. The official line is that this is because his move to the US means he needs to focus attention elsewhere. Maybe, but it's worth noting that just before Xmas the CtW Investment Group (US union shareholder activists) wrote to the company saying he should come off the board. It appears other investors may have queried his position there too.
This morning has seen a string of arrests as part of Operation Elveden. This is the police investigation looking into illegal payments to police. The Telegraph names the people arrested here, and, most importantly, the journos involved are current and former employees of The Sun. Notably one of those named worked closely with Rebekah Brooks. Those interested in this issue might also want to take a look at what the current Sun editor told the Leveson Inquiry about whether any illegal payments had been made to police.
Going back to last week, and there have, of course, been some settlements relating to phone-hacking. Again there are some important details in the mix. First, the claimants alleged that directors at NGN (the bit of News Intl that published NoTW) were aware of illegal activity, misled investigators and destroyed evidence. Secondly, there was an important allegation relating to email hacking (Harold Shipman's sun). (Separately, again in evidence to Leveson, it has been admitted that in one case The Times ran a story that was stood up by hacking someone's email account). As many people will know, the gossip is that computer hacking could be story of 2012, so these could be the first chinks in News Corp's armour on this front.
Looking ahead, obviously there is a lot of focus on the DCMS committee report. It would be interesting to know whether the pre-xmas email evidence relating to James Murdoch's knowledge has affected opinion on the committee. Also, it's worth remembering that Murdoch was asked specifically (by Tom Watson I think) whether he was aware of any allegations of computer hacking. He said no. So when did News Corp become aware of the claims relating to Shipman and the case involving The Times?
Finally, obviously GSK wasn't the only non-family business where James Murdoch is a director. He is also on the Sotheby's board. Expect to see more attention focused there in the coming months, not least, no doubt, by the US unions.
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