Corporate cut & paste: US style

As most people will be aware, the SEC is currently consulting on a rule that would require US corporations to disclose internal pay ratios. (This is something that the UK government thought was not worth pursuing remember.)

As you might expect, the US business lobby are no fans of this rule. And, just like I found in responses to UK consultations on exec pay and other issues, companies are sticking generic responses in to the SEC consultation. Hat-tip to Change to Win Investment Group, who spotted this last week. Compare this response to the SEC and this one.

I thought I'd see if I could find a source, so took a slice of text out of one of the responses and searched around for similar docs. It turns out that the National Investor Relations Institute produced a template letter, here.

US lobbyists seem less ashamed of this though, as the template is freely available on the NIRI site. In contrast, companies have sought to 'personalise' their responses.

Powering down

Blogging will be light to non-existent for a while now, but I shall keep things ticking over...

Oracle defeated, again

There we go, Oracle lost its 'say on pay' vote for the second year running. And remember that Larry Ellison holds a quarter of the company's stock, so it requires a serious level of investor opposition to tip into a majority defeat. Another win for US shareholder activists, and CTW in particular.

CtW Investment Group, an arm of labor federation Change to Win, had urged Oracle shareholders to vote against three members of Oracle’s compensation committee for awarding Chief Executive Larry Ellison excessive pay and the board’s failures to respond to longstanding compensation concerns. Ellison received compensation valued at $76.9 million in the fiscal year that ended in May. Oracle’s stock rose nearly 28% in those 12 months.
After the vote totals were announced, Michael Pryce-Jones, an official from CtW, asked the board whether Bruce Chizen, the head of Oracle’s compensation committee, should step down in light of the consecutive “say on pay” defeats.

Keep an eye on Oracle

I blogged previously about the forthcoming showdown at Oracle (AGM tomorrow). I think this could turn into a bloodbath.

There's an interesting joint statement from CalSTRS, PGGM and Railpen here. They are going for the whole board, as well as the exec pay policy.

 we consider it is in the best interests of our beneficiaries to withhold support from all nominees to the Board at the 2013 annual shareholder’ meeting. Consistent with this view, we further consider that it is in the best interests of our beneficiaries to support the shareholder proposal seeking the appointment of an independent Chairman to the Board and to vote against the advisory vote on pay.

I wouldn't bet against the company losing the 'say on pay' vote AND seeing some directors fail to get a majority vote in favour.

Employees in corporate governance

There's a good blog on employees in corporate governance by Janet at the TUC here. The TUC have published two docs on this subject, one looking at the case for employee representation at board level, and the other looking at existing practice across Europe (this isn't just about Germany).

Interested to hear what any passing corp govsters think about this argument -

Institutional investors such as pension funds and insurance companies hold highly diversified portfolios of hundreds if not thousands of shares; it is simply not possible for the staff of these organisations, however dedicated, to engage effectively with all the companies whose shares they own over all the issues for which shareholders are ultimately responsible. They also hold a much smaller proportion of the UK stock market than was the case just fifteen years ago: UK pension funds and insurance companies combined now own less than 11% of UK shares, down from over 40% in 1998. In contrast, over 50% of UK company shares are now held by overseas investors, whose ideas about how companies are run may be informed by their own national context rather than that of the UK.
An additional problem is the increasing reliance of investors on share trading to generate financial returns , rather than taking a long-term approach to share ownership. The interests of share traders lie in short-term fixes to raise company share prices, rather than long-term strategies to foster sustainable organic growth. There should be no role for short-term share traders in corporate governance.
The interests of workers, on the other hand, lie in the long-term success of their company. It is workers who bear the greatest risk in times of company failure, as they invest their labour, skills and commitment in the company they work for, and unlike shareholders cannot diversify this risk. Putting workers on company boards would help boards to prioritise investment in long-term company success, rather than being distracted by short-term financial engineering, as occurred in the financial sector in the run up to the crisis. Workers bring with them in-depth knowledge of their company and the environment in which it operates, making them well-placed to contribute to strategic and operational discussions that are central to board decision-making.
Indeed, research shows that countries with strong workers’ participation rights score more highly on a range of important measures, including R&D expenditure, employment rates and educational participation among young people, while also achieving lower rates of poverty and inequality.

The IIC shifts position on audit

I won't rehearse the issues around this one as have blogged previously about it. Just to say I think the IIC's update on its audit paper is a step forward. The position adopted by a previous IIC paper did not reflect all investor opinion - which is split on the issue of mandatory rotation -  though the updated version issued in Dec 2012 does acknowledge differing views.

The problem, as I've mentioned before, is that some in the auditing business rather naughtily used the Dec 2012 IIC paper to suggest that the body - and investors generally - were opposed to mandatory rotation. eg -

the UK’s Institutional Investor Committee – made up of representatives of from the Association of British Insurers, the Investment Management Association and the National Association of Pension Funds, which together manage or own £4 trillion of assets – set out in a paper in December 2012 clear opposition to mandatory rotation.

Therefore it is helpful that the IIC makes clear that it "has not reached a consensus on the merits of mandatory auditor rotation."

Full blurb below

Update on IIC Audit Position Paper

UK institutional investors continue to believe that ensuring a high quality of audits is vital in ensuring that markets value and trust the information reported. As set out in the December 2012 paper, investors support the objectives of the European Commission's proposals to safeguard auditor independence and objectivity and to improve the communications between auditors, audit committees and shareholders.
Investors are concerned that, where auditors hold office for long periods, this can affect their independence and objectivity, which are vital in ensuring audit quality. However, the IIC has not reached a consensus on the merits of mandatory auditor rotation.
The December 2012 IIC Position Paper remains reflective of UK institutional investor views on the remainder of the EU proposals.

From here

Beneficiary representation

I think this is a really good idea. Striking that ordinary punters - as savers - have no real voice. A body like this could develop into something really interesting.

Commission calls for a new not-for-profit organisation to represent savers

Posted on Tuesday 22nd October 2013

A hard-hitting report on the distribution of wealth in the UK will today call for a series of measures to encourage saving – even among those on the lowest incomes – and for a new not-for-profit body to represent the interests of savers.
The University of Birmingham Policy Commission report, entitled: Sharing our good fortune: understanding and responding to wealth inequality urges policy makers to do more to help people avoid problem debt.
The report, to be launched in Westminster tonight, states: “In terms of debt prevention, increased levels of saving would clearly help to avoid the need to borrow. Saving is clearly difficult for those on very low incomes but if people can afford to repay a loan, this suggests that they could afford to save.”
Among the recommendations are:

• Automatic enrolment into a savings account for people starting a new job
• A match-saving scheme devised to encourage and reward savings by those on low incomes
• Fresh incentives to increase the amount saved in occupational pensions for those on low and middle incomes
• Increased funding for debt advice and Credit Unions
• The creation of a new not-for-profit organisation to represent the interests of savers

The Rt Revd David Urquhart , chairman of Commission, said: “The debt problem in this country is spiraling out of control. Pay day lenders are preying on some of the most vulnerable in society. The less well off used to save hard for things they wanted but today’s society puts everything on credit and serious problems occur when those loans have to be repaid. We need to persuade more people to save, even if it’s very small amounts and policy makers need to grasp the nettle to reverse the escalating debt crisis.”
Professor Karen Rowlingson, lead academic on the Commission, said: “The gap between rich and poor in Britain today is much greater than people think it is, or want it to be. This Policy Commission calls for a fresh discussion about how to help people reduce debt and build some savings.”
Commission member Dr Paul Cox, added: “An organisation that serves savers’ interests has to be established if value for money is to be secured for the millions of working adults who are starting to save through pension auto-enrolment and their desire to provide for their future.
“Currently, investment products still do not have fixed prices and usually carry a product fee plus a multitude of add-ons that consumers neither agree or are even aware of.  An organisation serving savers that independently challenges these and other conventions can help the benefits of competition pass to consumers as they do in other industries.
“The organisation could be funded through a flat rate £1 charge collected on all UK investment trades over £10,000 or alternatively funds might come from charitable trusts and eventually, ideally, direct debits from savers who would become members.”

Shareholders want a new (non-Murdoch) chair at 21st Century Fox

Friday was the AGM of 21st Century Fox, and once again there was clear support from non-Murdoch family shareholders for the introduction of an independent chair at the company.

FWIW, I am pretty sure this will happen in the next few years. When Rupert Murdoch stands down, or (lets be honest - he's an old man) dies, I can't see the board wanting to appoint Lachlan (James is dead in the water, in my opinion) as either chief exec (Chase Carey will get this I reckon) or chair.

Of course the hacking trials may hasten things if new information comes out.

NEW YORK — October 21, 2013 — Approximately two-thirds of independent Twenty-First Century Fox, Inc. shareholders voted in favor of a resolution calling for the appointment of an independent Chair of the Board at the company’s annual shareholder meeting today in Los Angeles, casting doubt on whether shareholders see their interests as aligned with those of the Murdoch family. The resolution received 29% of the independent shareholders and 64% of all shareholders.

The shareholder proposal to strip Mr. Murdoch of his chairmanship was jointly introduced by Christian Brothers Investment Services (CBIS) and Canada-based British Columbia Investment Management Corporation (bcIMC), with support from the Local Authority Pension Fund Forum (LAPFF) in the U.K.

“The level of family control – Mr. Murdoch owns 40% of voting shares – and the dual class share structure was engineered to keep power in the hands of Mr. Murdoch,” said Julie Tanner, Assistant Director of Socially Responsible Investing at CBIS.  “While it is virtually impossible for a shareholder resolution to “pass,” at Twenty-First Century Fox, this strong result compels the board to take action. Until then, shareholders will continue to voice their disapproval through the few channels available to them.”

“Unfortunately, some of the corporate governance problems at News Corp are just being repeated at Twenty-First Century Fox,” said Doug Pearce, Chief Investment Officer and Chief Executive Officer of bcIMC. “The new company deserves a fresh start, with proper oversight and adequate controls on power.”

“Once again, shareholders have made their feelings clear,” said Kieran Quinn, Chair of LAPFF. “This is the second year running that a majority of minority shareholders have backed the need for an independent chair. We encourage the board to respond constructively to a clear message from the company’s shareholders.”

More corporate cut & paste

Just a bit of fun, try Googling ""it should not be forgotten that the general standard of corporate reporting in the UK".

It should bring up two hits - a response by the GC100 (yep, them again) to the 2011 BIS consultation on narrative reporting, and a 2012 response from Barclays to the FRC consultation on audit committee guidance.

The first says:

Finally, it should not be forgotten that the general standard of corporate reporting in the UK is amongst the best. In its recent annual report, the Financial Reporting Review Panel found that the general quality of corporate reporting to be good, especially by the larger UK listed issuers.

The second says:

It should not be forgotten that the general standard of corporate reportlng in the UK is amongst the best. In its 2011 annual report, the Financial Reporting Review Panel found that the general quality of corporate reporting to be good, especially by the larger UK listed issuers.

Note both versions even include the same grammatical mistake - the second sentence doesn't need a 'that' in it.  

Labour looking beyond shareholder value?

There's a very interesting blog by the FT's political correspondent Kiran Stacey here. He picked up something at PMQs that no-one else seems to have - Ed Miliband apparently criticising shareholder value as an operational objective for companies (or SSE in his example), rather than an outcome of what they do.

In one sense there may not be much new here. Directors' duties as set out in the Companies Act already say they can have regard to considerations like employees, environment etc, though as part of a focus on long-term shareholder value. More broadly, John Kay has written eloquently about the way that successful business deliver shareholder value as an outcome by focusing on doing what they do as well as they can.

But maybe there is something there. As I mentioned in a previous blog, the Fabians did some interesting polling on 'responsible capitalism' policies, one of which was broadening directors' duties to require attention to be paid to other stakeholder interests. I note that the idea didn't do too badly with the punters. Perhaps the re-energised debate on corporate governance going on within Labour is once again turning to stakeholder-ish ideas? 

CtW go after Oracle

Change to Win Investment Group, the investment arm of one of the US union centres, is campaigning for a vote against the executive compensation policy at Oracle, along with votes against several directors who sit on the comp committee. Bloomberg piece here, and the full CtW letter here.

Worth noting that Oracle lost its 'say on pay' vote last year, which inexplicably didn't really seem to attract any media coverage. Larry Ellison's personal stake in the business adds to the normal hurdles you need to get over in order to record a large vote against, let alone a defeat.

CtW have a good track record this year, and were closely involved in successful action to challenge ineffective board members at both HP and JP Morgan. They are a great example of what unions can achieve in when they get active in capital market campaigns. 

Jenkins Committee (1962) on shareholder oversight

Quite like this, given the opposition UK institutional investors have shown to reforms like annual elections, introduction of a binding vote on pay, vote on business reviews etc:

“To say that it is useless to provide investors with further safeguards which apparently they do not want and which, if provided, they will not use is a counsel of despair. Legislation can only proceed on the footing that new powers meeting real needs will, if created, be used.”

 On the other hand...

“It may be theoretically desirable that shareholders should have a more effective voice in the management of their company's business, of which they are the ultimate proprietors. As against this, no company's affairs can be managed properly, or indeed managed at all, otherwise than through a board of directors with a reasonably free hand to do what they think best in the interests of the company.”

Full doc here.

Cohen committee (1945) on shareholder control

Another random snippet. The whole thing is available here.

The illusory nature of the control theoretically exercised by shareholders over directors has been accentuated by the dispersion Of capital among an increasing number of small shareholders who pay little attention to their investments so long as satisfactory dividends are forthcoming, who lack sufficient time, money and experience to make full use of their rights as occasion arises and who are, in many cases, too numerous and too widely dispersed to be able to organise themselves.

JK Galbraith vs shareholder power

From The New Industrial State

"[Management] though their ownership is normally negligible, are solidly in control of the enterprise. By all visible evidence the power is theirs... Some observers have sought to maintain the myth of stockholder power... it is hoped that incantation may save what the realities."

"The typical stockholder does not identify himself with the goals of the enterprise; he does not expect to influence these goals. He has a share in the ownership; normally his only concern is that it return him as much money as possible. If he can get more income or capital gain with equal security elsewhere, he sells and invests there. No sense of loyalty - no identification with the goals of the enterprise - normally prevents his doing so."    

The IIC, shareholder primacy & banks

I might be the only person in the UK, outside the membership of the IIC, who keeps an eye on the website of the Institutional Investor Committee website. And it is worth keeping on your radar. I just spotted that the IIC has put a letter in to BIS warning about the proposed shift away from shareholder primacy in relation to the banks. Not sure if this has had pick up anywhere?    

Anyway, here's an extract:

The proposal to create a primary duty to promote financial stability over and above other interests, including shareholders is, we believe, mis-directed, sets a worrying precedent and could impact upon the investibility of UK banks. Directors’ duties should be consistent for all companies. We do not believe that there is divergence of interests between institutional shareholders and directors, including directors of banks - both wish to see the company succeed. Given that it is shareholders’ capital which is at risk it is very much in their interest that any firm remains financially secure.

For the back ground to this see here and here.

Oligopoly and pricing power

Excuse another random quote from a book about corporate governance and power, but I thought this was pretty relevant given the discussion about Labour's proposed energy bill cap. (It's from this).

Although technical monopoly may be a rarity, markets are commonly dominated by a small number of large producers. In such circumstances by colluding or in virtue of the structural properties of oligopolistic markets, companies are able to obtain variable degrees of protection from competitive pressures. In addition to the relatively small number of producers, other requirements for perfect competition are also unlikely to be met in practice. Thus an uncompetitive market structure may be maintained indefinitely because of barriers to entry and exit; products are not, as in the model, homogeneous but have differentiating characteristics which enable producers to raise prices without causing a total shift in demand to their rivals; and finally, purchasers lack perfect information and hence may pay higher prices than they would if aware of alternative, cheaper sources of supply. The effect of these various imperfections is to cede to companies a zone of discretion in relation to products and prices and the wide range of factors connected with the production process.

This is a mid-90s take, so things have changed. Two quick thoughts on how. First, consumers now have access to much more information, and much more easily (eg price comparison websites) which tilts the balance in their favour. However, we also know more about actual consumer behaviour, and a behavioural economics take on such issues tells us that even with better information and enhanced choice consumers might still not exert much pressure on suppliers (because of inertia, overwhelmed by choice etc).     

Accepting that corporate governance is political

One of the books I have on the go currently is The Political Power of the Business Corporation (hat-tip to the High Pay Centre for putting this one on my radar). There is a particularly good chapter, which I skipped ahead to, on corporate governance. Although I don't agree with  all of it, it's a really refreshing take on the issue. I particularly like & agree with the emphasis on lack of political debate about corp gov, and how in the UK it's been concealed as a minor/technical issue.

Here are a few brief nuggets

The words "corporate governance" are bland, unthreatening and moderately arcane. The issues with which it deals share nothing of those characteristics. Corporate governance deals with possibly the single most important social relationship in modern society, how the historically unprecedented wealth created by 21st century corporations is controlled and distributed.
....

The neglect of corporate governance in postwar British politics is little short of astonishing. For 30 years it was ignored within political debate and for 20 years up to 2012 it was effectively quarantined by the City and the accountancy profession so there was never serious public debate about the rights of corporate boards to control and direct 'their' corporations in the ostensible interests of shareholders.
....

The Cadbury Code and its successors provide the constitution for the large corporation operating in the UK. In an odd parallel with the UK's 'unwritten' constitution it relies on custom, expectations and voluntary compliance. It is primarily about organisation. It does contain norms in relation, for instance, to transparency, independence and conflicts of interest, but it is value-free. It does not articulate goals such as equality, freedom or even efficiency, and it makes no reference to employees, stakeholders or society at large. It is, in fact, an impoverished document that fails to engage with the vast majority of the issues of corporate power and responsibility...