Tuesday, 27 December 2011

Crone and Myler, DCMS committee, 2009 vintage

Q1511 Mr Watson: When did you tell Rupert Murdoch?

Mr Crone: I did not tell Rupert Murdoch.

Mr Myler: The sequence of events, Mr Watson, is very simple, and this is very clear: Mr Crone advised me, as the editor, what the legal advice was and it was to settle. Myself and Mr Crone then went to see James Murdoch and told him where we were with the situation. Mr Crone then continued with our outside lawyers the negotiation with Mr Taylor. Eventually a settlement was agreed. That was it.

Q1512 Mr Watson: So James Murdoch took the ultimate decision?

Mr Myler: James Murdoch was advised of the situation and agreed with our legal advice that we should settle.

Sunday, 18 December 2011

Timing is everything

Last week the DCMS committee received a letter from Linklaters including the transcript of That Email, which James Murdoch claims not to have read. The letter says that firm "recently became aware" of the email.

Notably this came after Linklaters had sent a letter to the committee on 1st December stating:
The MSC [News Corp's Management and Standards Committee] can confirm that it has reviewed all available documents likely to be relevant to Mr Myler’s request and is satisfied that none throw any further light on the events of May and June 2008.
On a sympathetic reading, having told the DCMS committee that there was no evidence relating to those crucial days in the summer of 2008, the MSC then stumbled upon this email (or, perhaps, was shown it by the police - see below). The email in question is rather relevant, as it suggests James Murdoch was made aware of the implications of the Taylor case (and, of course, he claims he didn't read all of the email).

The thing is, over a month ago, on 12th November, the Daily Mail ran a story saying that the police had discovered some "bombshell" emails that could be trouble for James Murdoch (they actually said that the police might want to question him). And on the evening of November 12th ex-Times editor Andrew Neil tweeted that a source close to Murdoch Snr had told him that they were indeed bad news for Murdoch Jnr.

Brillo Pad's exact words were:
Source close to R Murdoch tells me emails uncovered by police in India (see today's Daily Mail) potentially 'devastating' for James M down.
A source close to Rupe sounds like a News Corp, or ex News Corp, person, and this is someone who is aware back in mid November of "emails" that are "devastating" for James Murdoch. So, unless there are more emails to emerge (which, to state the obvious, would be worse for Murdoch Jnr) it seems reasonable assumption that the transcript disclosed to the DCMS committee last week is one of the "bombshell" emails that the Mail story i November referred to. It's possibly significant that Neil tweeted 'potentially devastating', perhaps indicating the source's view that the evidence could be spun (ie by claiming the email hadn't been read properly).

But the timeline also means that someone close to Murdoch Snr knew about this crucial email a month before it was disclosed to the select committee. Does that mean that Murdoch knew too? More significantly, someone knew about this in mid-November - before shareholders voted on James Murdoch's re-election as BSkyB chair. As I said, the Mail story appeared on 12th November. That was two days after Murdoch Jnr appeared before the DCMS committee. So it is even possible that someone knew about this email before he gave evidence.

There are some big issues lurking here that deserve exploration. In terms of News Corp's internal governance, how is a source close to Rupert Murdoch able to take a view on these emails more than a month before the company's own internal investigation seems to have become aware of them? When did the MSC know? Who knew before then? Was this information known by News Corp before the BSkyB AGM, and if so was it communicated to the board?

Someone, somewhere knew a lot earlier, and they may have allowed BSkyB shareholders to take a crucial voting decision without letting them have access to significant new information. Securities litigation people could have a field day here.

Tuesday, 13 December 2011

James Murdoch: I did not inhale

The DCMS committee has published an email transcript sent to it by Linklaters. Colin Myler emailed James Murdoch ahead of the crunch meeting in early June 2008 to discuss the Taylor case. In the email Myler says "unfortunately it is as bad as we feared" and draws attention to Julian Pike's comments. If you scroll down (one page) you can see Pike's bullet points which include the comment that Taylor wanted to prove that hacking was widespread and that Parliament had been led by the claim that it was just one, rogue reporter.

So the killer info, that James Murdoch claims he wasn't made aware of, was there in an email he was sent three days ahead of the meeting. His answer? Despite responding to the email he did not read the full thing, either then or later. He didn't review an email which Crone described as an update on the Taylor case, before a meeting to discuss exactly that case and whether to settle it.

Pick the bones out of that one.

Friday, 9 December 2011

Whilst you were looking at Europe the regulatory turn happened here

You'll recall, of course, that there is a popular narrative in the UK investment world about stupid Eurocrats meddling in stuff they don't understand. The plebs on the continent are unable to grasp the understated elegance of 'comply or explain', for example, and just want to try and 'regulate' bad behaviour or poor decision-making out of existence. That in turn means we need to defend our model against this threat by demonstrating that a market-driven approach is inherently superior to any silly ideas the EC might come up with.

What to make of this then (another excellent scoop from Sky man Mark Kleinman it has to be said)?
Regulators should be given greater powers to block hostile bank takeovers in order to avoid a future crisis like the one that forced Royal Bank of Scotland’s (RBS’s) into a £45bn taxpayer bail-out, the chairman of the Financial Services Authority (FSA) will say next week.
So we are now at the point where the FSA believes it should be able to block hostile takeovers because of potential systemic risk. This is important for several reasons, when thinking about just how market oriented our system really is. Firstly it means that regulators get to decide on takeovers before shareholders do. You might want to vote to take the cash, but the FSA might block a deal before you get a chance to. Secondly, it clearly implies that regulators think that shareholders may not spot/oppose deals that are extremely risky. Thirdly, it could come to set a benchmark, whether intended or not, of 'FSA approved' takeovers. This is not insignificant.

But there's more:
The report, which runs to about 490 pages, contains recommendations about the future of banking regulation. These include raising the prospect of bank directors being forced to prove their innocence in the event of a future bank failure; being obliged to forfeit remuneration; or toughening laws governing directors’ liability in the event that their bank goes bust.
So, potentially much tougher standards for those involved in the corporate governance of banks, including potentially changing their liability for failures. This goes a bit further than the Corporate Governance Code, doesn't it? An obvious question, and an argument that we'll no doubt hear pretty quickly from the banking lobby, is whether this will stop people wanting to become directors of UK-regulated banks.

And there's more:
In his introduction to the report, Lord Turner, the FSA chairman, argues that in contrast to the boards of other companies, directors of banks should place less emphasis on profit maximisation and more on effective risk management.
What to say? If accurate this is a fundamental challenge to the idea that we should just let businesses, even systemically important financial institutions, pursue their own interests because it ought inevitably to benefit us. It's almost a 2008 vintage mid-crisis perspective.

And there's a bit more:
I’ve learned that as part of its inquiry, the FSA wrote to former non-executives of the bank, including Sir Tom McKillop, the chairman at the time of RBS’s collapse, to gauge whether they had felt intimidated or bullied by Sir Fred’s notably autocratic style. I’m told that none of the former directors responded that they had.
I wonder if any of the large investment institutions, or their representative bodies, have done anything like this? I strongly suspect the answer is no. But, with the benefit of hindsight, it seems like such an obvious thing to do. Another indication that shareholders currently just aren't set up to play the ownership role? Whether or not that is the case, it certainly seems to be true that the FSA is playing an ever greater role in the governance of the businesses under its watch.

This is not an isolated incident. Remember, for example, that the FSA is looking into the Pru/AIA bid, and has apparently told Santander to strengthen its governance. Again these interventions are very significant because inevitably they will carry more weight than shareholders putting on pressure. This is particularly the case when any UK-listed financial institution with any smarts will know that a) there are investing institutions out there that would rather bite their own arms off than vote against and b) even where there is shareholder unease they can paly 'divide and rule'. Doesn't always work, but at least more of a fighting chance than when dealing with the regulator (bear in mind, for example, that neither chair or chief exec went from Pru despite the failed deal).

As I've been banging on for some time, we should not kid ourselves that the UK is purely-driven governance regime and should instead be aware that a more regulatory approach is already on the cards. The more I look at some of the commentary about sticking up for the UK model against EU regulatory interference the less I consider it corresponds to reality, at least in respect of listed financial institutions. And once you let regulators play a role in the governance of some sectors, why not others?

Thursday, 8 December 2011

Corporate governance consequences - unintended, intended and unrealised

One piece of conventional wisdom you regularly hear invoked in the corporate governance world is The Law of Unintended Consequences (LUC). It is usually, though not always, aimed at government intervention over a given policy issue as is (in my experience) usually believed by the user to be a logical smackdown. You might think that if the Government does A to B then C will happen, but actually perhaps D will happen instead. And D is usually Very Bad Indeed.

The LUC has often been prayed in aid of conservative positions on PLC executive pay. You may think that trying to rein in pay is a laudable aim, but what you don't realise is that it could actually cause problems. It could cause executive talent to move into the private equity world or worse move out the UK, taking potential tax revenue with them.

A more sophisticated claim in recent years, that is widely believed in corporate governance world, is that greater disclosure of executive remuneration has served to exacerbate the problem by fuelling the war for talent. Greater disclosure was meant to lead to pay being restrained but in reality, apparently, it had the opposite effect of that intended. It all sounds plausible. And indeed it would be a mistake to not consider how "purposive social action" might result in outcomes other than those intended. Life is very complex and billiard ball models of causation may only rarely fit the facts when humans are involved.

However, there are several problems with regularly invoking the LUC as an argument againbst reform. For one, at the risk of stating the obvious, there are plenty of examples were the consequences of a particular policy intervention are those that were intended. For example, I have yet to hear a plausible negative unintended consequence of the introduction of pensions. Yes, we have to deal the consequences of people living longer, but that is not a result of the provision of pensions. This was a big social reform that has touched millions of lives. What are the big negative results?

Second, there are, of course, positive unintended consequences. It's interesting to note that "unintended consequences" are so often portrayed as a threat or negative outcome that when we hear the term we probably all immediately think in these terms. That is an indication, in my opinion, of how often this argument is invoked in defence of conservative positions. And yet isn't a commitment to free markets rooted in the possibility of unintended positive consequences? After all, It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. Unintended consequences, no?

In policy terms perhaps we could describe the "automatic stabilisers" in the economy as positive unintended consequences. For example, unemployment benefits were largely introduced to address a social problem, but, by maintaining a level of demand when people lose their jobs, they also began to play a role in the economy that wasn't initially part of the plan. (Obviously this will be disputed by some people!)

Thirdly, as Albert Hirschman pointed out, the flipside of unintended consequences is unrealised expectations. By undertaking reform X you expect Y to happen, but it doesn't. It doesn't lead to unintended consequences, but it doesn't have the intended consequences either.

So let's consider executive pay reform in the UK again. Actually greater disclosure of pay was combined with shareholder empowerment - the introduction of an advisory vote on remuneration policy. The intention was that, armed with more information and greater powers, shareholders would act to restrain unjustified executive reward, because it would be in their own interest to do so. Therefore perhaps the bigger story of the last round of major reform in this area - the Directors Remuneration Reporting Regulations - is less the alleged unintended consequence of greater disclosure, and more the unrealised expectation of shareholders exercising restraint over directors in respect of pay.

If greater disclosure of executive pay added to upwards pressure, then why didn't shareholders use their new rights more effectively? Remember, for example, that no remuneration reports at all were defeated in 2007 and 2008. I'm prepared to accept that disclosure may have fanned the flames, though I think the argument is overdone, but then the question for me is why shareholders didn't protect their own assets. Perhaps it's because shareholders don't consider the extra costs to be excessive in the total scheme of things, or even consider that it is simply a cost of doing business in order to attract the best talent. But then can it really be claimed that disclosure has caused unjustified pay growth?

If you do think both that disclosure is a major driver of executive pay growth and that there isn't much that shareholders could have done any different (and these are the implicit propositions some in the investment industry are putting forward, even if they are unaware of it) then this, again, raises a question about shareholder oversight of pay. That in turn may lead policymakers to conclude that an alternative approach is required, a more regulatory approach, or stakeholder model of governance, perhaps.

The thing is, I'm sure this isn't the outcome that those invoking the LUC to oppose public policy intervention expected. One might even argue that it is the unintended consequence of warning about unintended consequences.

Wednesday, 7 December 2011

Phone-hacking in numbers

Another arrest today, and here's a snippet on the scale of the investigation from The Grauniad:
Scotland Yard's phone-hacking squad is working its way through 300m emails from News International. A total of 120 officers and staff are now working on the investigation after 1,800 people came forward to express fears that they may have been hacked.
UPDATE: It's Mulcaire... very interesting.

Monday, 5 December 2011

Flat Earth News... about executive pay

I think I'll look back on the second half of 2011 and think that two issues have occupied a lot of my time - media standards and ethics, and the policy debate around executive pay. I admit to being off the pace on the first. I read quite a few pieces of commentary about the likely extent of phone-hacking at the back end of last year and assumed that a) there was probably something in it but b) it wasn't a really big deal. Like many people, I was wildly wrong.

On the second issue, exec pay, I've been expecting the terms of the debate to shift for some time. I am (pleasantly) surprised at the speed of movement lately, in no small part due to the High Pay Commission, but I did think the nature of the discussion was going to change. I still think this has some way to go. For example, there is still a definite strand in the discussion that seeks to paint the main issue as rewards for failure. This is important, no doubt, and hence the focus on clawback lately is welcome. But I think this the 1990s vintage of the exec pay argument. I think in the next few years it will be much harder to get away with "I have no problem with large rewards if there has been excellent performance" type lines. In a period of austerity I think there will be scrutiny of large rewards per se if they are not shared across organisations.

This is likely to cause sparks to fly, as I think even now the business lobby is only reluctantly signing up to the idea that rewards for failure need to b dealt with more effectively. I think they may keep trying to fight that battle whilst other participants in the debate move on to the question of whether large rewards are justifiable if not shared more evenly across organisations. One to watch I think.

Anyhow, these areas of interest have collided. I recently started reading Flat Earth News by Nick Davies, principally because I wanted to see what he said about phone-hacking (actually not much in the scheme of things). However the book is much more concerned with how journalistic standards have become corrupted by cost pressures. Phone hacking and blagging are good examples of this in practice since they are cheap ways of getting information that journalists want. Nick Davies also explores in some detail the reliance on newswires by many mainstream news organisations (the nationals, Beeb, etc). Importantly that means that often the particular emphasis put on a story by the newswire can affect the coverage of the story in numerous outlets. It also means that an error can be spread through the media system quite easily, since people assume the wires get the facts right and don't check them.

Well today I was off sick so did a bit of work from home instead. I noticed that Nick Clegg's interview on the Andrew Marr Show was picked up in numerous places on the back of his comments on executive pay. The bit that really stuck in my mind was what he apparently said about remuneration committees.

For instance, the FT says:
Mr Clegg said he was also looking at whether to “break open the closed shop of remuneration committees” by adding an employee representative into the group that sets executive pay.
The Telegraph (which embeds the Beeb clip in its story) says:

The government will publish new proposals to "get tough" on excessive pay in January, the deputy prime minister said.

Among likely steps is widening the membership of remuneration committees, which set pay, to include workers.

The Grauniad agrees:

The deputy prime minister said that ministers would publish firm proposals next month, and the government was willing to legislate if necessary on measures that could include forcing firms to let workers sit on the remuneration committees setting pay rates for top executives.

And even the Beeb web story says:

The government is to publish new proposals to curb "unjustified and irresponsible" pay rewards in the private sector, Nick Clegg has said.

The deputy prime minister said ministers would announce plans to "get tough" on excessive boardroom pay in January and may legislate if necessary.

Among likely steps is widening the membership of remuneration committees, which set pay, to include workers.


Remuneration committees, the bodies which set the pay of top executives, were too often "closed shops", resembling "old boys" clubs, and he wanted to "break open" membership of these bodies.

Labour want workers to have a seat on remuneration committees to ensure their voices are heard and Mr Clegg suggested this was one area being looked at.

There's just one problem - he didn't say it. I've watched the clip on the Beeb site through several times now. He certainly says rem comms are too much of an old boys club, but, unless I am missing something, he doesn't even mention employee representation. *(see update at bottom, in full interview he is asked about it).

This is rather important, because there is a big difference IMO between opening up rem comm membership more widely and including an employee representative. They overlap, but the second implies a formal role for the workforce, or its representatives, in this aspect of corporate governance. This point isn't lost on the CBI, which says (PDF):

the inclusion of additional independent members or employee representatives on RemCos would fundamentally change the UK’s corporate governance framework.

So it is kind of important if Nick Clegg does indeed support employees on rem comms, or not. It would be a big statement of intent.

So where has this line come from? Was there more to the interview that the BBC clip doesn't include? Did a BIS spinner get busy after the interview to make sure the press got the message of what Nick Clegg really said? Or did a newswire put out a story that blended together what BIS consulted on (which includes employee reps) and what Nick Clegg, and the error got replicated widely? I genuinely don't know.

But on the face of it it seems that what we have at present is a bunch of national newspaper reports that claim that the Deputy Prime Minister said something which he actually didn't, and which can be easily cross-checked against a publicly available clip of the interview.

*UPDATE: Actually to be fair, in the full version of the interview on BBC iPlayer Clegg IS asked about employees on rem comms. But he just says they have consulted on it. He does not say he supports the idea, that it is likely or give any kind of opinion on the issue.