Tuesday, 31 January 2012
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.
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
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
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
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.
Friday, 27 January 2012
One answer comes in the latest Harvard Business Review in an article by two professors at Warwick Business School (full disclosure: I am chancellor of Warwick University). They argue that performance pay is both ineffective and distracting, and can encourage executives to take company-killing risks.
Managers waste energy by trying to manipulate the performance criteria in their favour, and neglect other important tasks by focusing their efforts on those activities that will trigger the pay-off, according to the article.
The research also shows that humans are not only motivated by financial gain, and the authors argue the case for non-material incentives – such as awards and other forms of recognition – as a way of strengthening employee loyalty and getting the business humming. They conclude that although variable pay for performance may seem attractive in theory, it creates more problems than it solves.
Wednesday, 25 January 2012
2. One point in favour that could be made is that it would strengthen the hand of minority shareholders where there is a controlling shareholder. If everything stayed the same in terms of voting behaviour, Xstrata would not have passed its remuneration report (I know it won't be the same vote, but...) last year. Or in 2010. Or in 2009.
3. As I flagged up previously, the flipside is that given the increasing amount of overseas ownership of UK shares it could be the cases that a UK PLC could lose a pay vote as a result on non-UK votes. To firm this one up, I can't spot a single UK institution that voted against Hammerson last year when it wanted authority to call meetings on short notice. That vote required 75% in favour too, and I'm pretty certain it was non-UK investors that defeated it (remember Ontario Teachers owns about 11%). One to watch.
4. Again I've made this point before, but if the principle is conceded that you need 75% to pass a pay resolution, why only require 50% for director elections, or acquisitions? So there is a decent 'slippery slope' argument against (for!) such a change.
Tuesday, 24 January 2012
Actually Labour already tried to do something here. Five years ago, in a DTI (remember that?!) consultation on the Companies Act, the following question was asked:
Do you agree that companies need to report more effectively on the way in which they take pay and employment conditions elsewhere in the group into account in deciding directors’ remuneration? If so, how do you think this could be done?From memory there was a pretty negative reaction, and a further round of consultation on a very minor tweak (there's a written statement here). In the end I think there was a tweak to the language to the effect that companies are technically required to state "how" they take employee pay and conditions into account. I think we can safely say the impact was... err... limited.
The BIS summary of responses to the consultation is here. Still no sign of the actual proposals tho, so here' are my brief notes from yesterday's session in Parliament
Secondary legislation later this year to split rem reports into two – a forward looking bit and a bit on implementation
The forward-looking bit will require an explanation of metrics used, any comparison with employee earnings used and how views of employees are taken into account (suggests info and consult regs could be used for this).
The backward-looking bit will require a simple single-figure disclosure for each director, how rewards relate to performance and set out the distribution of pay vs divi v reinvestment etc
NB – no requirement to publish pay ratios.
There will be further consultation on shareholder powers, but looking at a binding vote on future pay policy, also a binding vote on notice periods greater than a year.
Will also look at whether a higher threshold – ie 75% - should be introduced.
Wants to see greater diversity on rem comms, but not going for employee reps. Will look at exec directors sitting on rem comms.
Wants greater transparency on pay consultants and their fees.
Corp Gov Code to say that all companies (might be FTSE350???) should introduce clawback.
Thursday, 19 January 2012
They wrote a letter to the FT and subsequently press released the same points. Essentially Fidelity call for a binding vote on variable pay that would be forward-looking (ie if the company lost the vote payments covered by it couldn't be made). Interestingly they also propose that the threshold for passing the vote should be 75%, rather than the existing 50% on remuneration reports, share schemes etc. Plus they suggest a 'two strikes and you're out' approach whereby the rem comm chair has to stand down if the company fails two consecutive pay votes.
It's worth taking these proposals seriously because a) Fidelity rarely speak out on public policy and b) they are in thick with the Tories (they have donated almost £450K over the past 3 years, with a further £50k bunged to the anti-AV campaign). My suspicious mind wonders if their public support for a binding vote is in any way linked to the fact that Cameron's announcement of the idea fell flat.
That aside, I actually think what they have proposed sounds pretty good (it also demonstrates that, of course, you can make a binding vote work if you put your mind to it). Having had a quick look through historical voting data, it looks as tough over the past five years about 100 companies would have failed to clear a 75% threshold. This assumes that investors would vote broadly the same way with a forward-looking binding vote, which is hugely questionable, but at least gives you an idea. I also reckon about a dozen companies would have failed two consecutive votes (Though bear in mind the Shell rem comm chair went after one defeat). So this would have an impact, largely at the margins admittedly, but certainly a potentially tougher regime (depending on voting behaviour).
One issue worth bearing in mind is the shifting nature of UK share ownership. A 75% threshold would mean that, potentially, a company could be defeated on pay policy by the voting power of overseas investors alone. Not a problem in and of itself, but you can imagine that the focus on... cough... ISS... cough.... could become sharper.
Of course, the other thing this approach would do is introduce the idea of a super-majority for certain issues. But if you need 75% to pass a pay vote, why would takeovers still only require a simple majority? Or director elections? Once the principle is conceded you can see that existing thresholds on other issues would also become open to challenge. (Personally I do find it hard to see why it should be harder to set pay policy than to buy/sell a company).
Tuesday, 17 January 2012
Anyhow, trawling through asset manager voting disclosures recently I came across this from Kames (formerly Aegon). It's their rationale for opposing the remuneration report at United Utilities last year:
We have an issue with the use of “employee engagement” as a metric for measuring performance under the long term incentive plan.Ho hum.
This target is opaque and is already utilised in the annual bonus plan. 25% of the performance is based on this metric and we believe that it is too high for what is effectively a part of the day to day running of a large business.
Saturday, 14 January 2012
[T]here is... an important difference between two concepts of the active democratic citizen, which is not recognised in optimistic discussions. On the one hand is positive citizenship, where groups and organisations of people together develop collective identities, and autonomously formulate demands based on them, which they pass on to the political system. On the other hand is the negative activism of blame and complaint, where the main aim of political controversy is to see politicians called to account, their heads placed on blocks, and their public and private integrity held up to intimate scrutiny. This difference is closely paralleled by two different conceptions of citizens' rights. Positive rights stress citizens' abilities to participate in their polity: the right to vote, to form and join organisations, to receive information. Negative rights are those which protect the individual against others, especially the state: rights to sue, rights to property.
The second mini-snippet is a nice line about privelege, and our modern failure to spot it.
In non-democratic societies, class priveleges are proudly and arrogantly displayed, and subordinate classes are required to acknowledge their subordination; democracy challenges class priveleges in the name of subordinate classes; post-democracy denies the existence of both privelege and subordination.
Thursday, 12 January 2012
First, it acknowledges that the issue is not simply one of "rewards for failure". Everyone can agree that the odd Fred Goodwin type case is A Bad Thing, and so it's easy enough for politicians to say that they disgree with them. It has, until recently, not been agreed that high executive pay is in itself a problem, and widespread one. By talking about "excessive pay and rewards for failure", a small but important shift has taken place, and that means a potentially more radical approach from Labour in the future.
This point is seemingly confirmed by the second thing I liked - the defence of political interest in executive pay. It's easy to forget how quickly the framing of this issue has shifted, even within Labour, so the easiest thing is a direct comparison. Here's Kitty Ussher in June 2008 when she was a Treasury minister:
[W]e will also resist the calls that have been made for direct regulation of executive pay.
Of course, remuneration packages should be strongly linked to effective performance, and incentives should be aligned with the long-term interests of the business and of shareholders – and we don’t support ‘rewards for failure’. [see what I mean!]
And over the last ten years, we have taken steps to improve transparency, and to encourage shareholders to improve accountability.
But I’m clear that executive pay is a matter for Boards and shareholders – not for Governments.
In contrast, here's Chuka Umunna in January 2012 (!):
There are some who say it is no business of government - no business of politicians - to be commenting on these matters. We have no right to interfere in the affairs of privately owned companies is their refrain. I could not disagree more strongly with that statement.That's a big change in tone.
At the heart of my politics is the belief that we are all mutually dependent. This notion is deeply embedded in the values of the Labour Party. Better together. Stronger together.
So to argue that politicians and society at large, should not take an interest in these matters, is to feed the idea that society is here and business is over in the corner there which is dangerous.
Thirdly, this is the first speech I can remember from a politician covering the corporate governance brief where the motivational value of financial incentives for directors has been questioned. This may, in part, be because Labour has agreed to implement all the High Pay Commission's recommendations, and the Commission's full report is a bit sceptical about incentives. Still, it is really valuable that someone with political power is saying stuff like this:
This demonstrates what psychologists have already found – that the relationship between financial incentives and performance is far from simple, and is not even reliably positive.This is broadly what I think, so would be supportive anyway, but it is really encouraging to see a politician willing to at least entertain the idea that there might be more to reform of the structure of exec pay than better carrot design.
At the same time, the heavy focus on the alignment of high powered incentives risks crowding out other, more rounded but equally powerful intrinsic motivations of executives that are just as relevant to the company’s success – the satisfaction of doing a good job, the pride in leading and growing a great company, of winning in the market place, of having the respect of peers, of creating a legacy of sustained and sustainable success.
We are not opposed to performance related pay but it does make you wonder: if a company is so concerned that an executive paid only their salary won’t be motivated to work hard in the best interests of the company, then maybe they have the wrong person in the job?
And that leads on to the last point I would make - that there are a few ideas in here. The suggestion for Swedish-style shareholder representation on nomination committees is pretty radical stuff in terms of willingness to entertain a quite different approach to current UK practice (I think I detect the hand of Paul Myners, as he has pushed this idea). I know it's easier to float radical ideas when you are in opposition and don't have to put them into practice, but nonetheless this speech does seem to indicate that in a pretty important area of policy Labour is willing to do some thinking.
Monday, 9 January 2012
You can find a critical news story in pretty much all the papers today, many of them quoting significant bodies (CBI, NAPF, IMA etc) saying it won't achieve much. You can try the Telegraph, Mail, Indie, Grauniad, Pesto again, Citywire etc etc etc. What's more if press calls today are anything to go by there will be more scepticism about the proposal expressed in the papers.
The main points that have been made are that asset managers (who control most of the votes) aren't bothered about pay, haven't used the rights they already have, and might be conflicted because they are well paid themselves. These are all simple points that the average punter can easily grasp, and it's straightforward enough to present this as Cameron proposing an ineffectual reform rather than tackling a divisive issue. So I wonder if he might lose control of this issue. It's possible that the Coalition will now need to go further if the PM wants to look 'tough' on top pay. Pressing ahead with a binding vote without undertaking other significant reforms is not going to get a good response.
Sunday, 8 January 2012
it is not altogether obvious that turning this vote from an advisory one into one with compelling force would lead to another step change in shareholder engagement with executive pay.
The big uncomfortable fact is that many investors are, by dint of who they are, absentee landlords.
If they are hedge funds and other speculators that hold shares for months, or weeks or even fractions of a second, they could not give a fig about whether a chief executive is paid £4m a year or £5m a year.
Thursday, 5 January 2012
There is a further important consequence of the combination of shareholder maximisation and highly active, short-term markets. In theory, shareholders’ earnings, their dividends, based on profits, are the residuum in a firm’s trading activities, the last claim that is made on a firm after all claims from bond-holders, employees, creditors, investment needs and other requirements have been met. This is the risk-bearing activity at the heart of capitalism that enables firms to be innovative and that justifies shareholder maximisation: if the shareholders must wait until all other contractual claims on a firm have been met then they need to be able to have the final say over how the firm is managed. Also, their rewards from successful transactions must be high, as these must compensate them for the losses that will come from risks that go wrong.
This principle remains valid if a firm goes bankrupt; shareholders have the last claims on any assets. But during routine operations of a viable company it has been heavily compromised by the emergence of profit expectations within today’s highly volatile stock markets. Ideas spread as to what short-term return on profits ought to be available in the market; remember shares are being bought and sold with an eye primarily on the secondary markets. There will therefore be a flight from shares of firms not meeting the prevailing idea of a good return. Such firms become vulnerable to hostile takeover, something which senior managers are keen to avoid, as it often leads to them losing their jobs. Managers are therefore under strong pressure to meet or exceed a target level of return to shareholders. If necessary, investment plans, customer service and employee compensation will have to be held back to meet this target. Once this occurs, distributed profits are no longer a residuum but are an early call on a firm’s earnings. They are ceasing to be rewards for commercial risk, but are being protected from all risks other than those stemming from a collapse of secondary markets (where, we now know, government will protect them anyway).
A share’s vote is part of its value, and enforcement action should be taken against the directors of companies and financial institutions who fail to use their votes in the long-term interest of their beneficiaries.I hadn't realised, though, that he used to work for ISS!
Wednesday, 4 January 2012
Well there's another less than illuminating piece in the FT today on the same subject. As far as I can tell the story consists of news that David Cameron is really bloomin cross about high pay. What's more the Government is looking at a range of options - "nothing is off the table" apparently - and these include, err, some of the options that were in the BIS consultation on, err, exec pay.
So to sum up, the Government wants to do something on exec pay, and it might do some of things that are in the consultation on exec pay, which it launched when it first said it wanted to do something on exec pay. Really, there isn't much there. This looks like the sort of reannouncing of existing initiatives that Labour got away with for a bit but then journos started to loath. I'm surprised the FT went for it.
It's stuff like this that could turn me into a grumpy old man moaning about dumbing down. Coincidentally, it sort of meshes too with this piece in the Economist (hat-tip Mehdi Hasan on Twitter) about media reporting and narratives in the race for the Republican nomination.
the analysis strips away the fiction that the media are a neutral communications channel between candidates and voters, and turns attention towards the real influence that the media's natural biases—the bias towards surprise, the bias towards cliched sentimental background stories, the bias against sophistication or complexity, etcA bias against complexity seems to be punching me in the face every time I watch telly at the moment. I know I'm a bit of a geek about some of this stuff, but I genuinely believe that the average punter could probably grasp the general arguments around executive pay, and some of the pros and cons of the ideas being considered. Instead the lead off is angry Dave and the policy content is restricted to a Nick Robinson-esque* "they might do this, they might do that", laid on the top like a bit of tinsel, rather than being the main focus.
*Incidentally, if you want to see some quality 'virtually content free' news, check out Nick's post on the negotiations over public sector pensions. He essentially said 'the unions are talking to the govt about pensions', plus a bit of 'one side may have the advantage, but so might the other'.