Some interesting Unite stuff

Unite put out a couple of press releases over the past couple of days that are worth a look. The first one was about strike action at Greencore, or more precisely its plant in Hull. Notably they tied this to the company's AGM and its executive pay.

Greencore CEO enjoys ‘millionaire’s lifestyle’ as low pay strike looms

28 January 2013

Greencore’s blatant disregard of employment tribunal rulings has forced 500 of its workers in Hull to take strike action on Wednesday (30 January) to reverse wage cuts of up to £2,000-a-year, Unite general secretary, Len McCluskey said.

But tomorrow (Tuesday, 29 January) in Dublin, the company’s CEO Patrick Coveney will be seeking to inveigle the shareholders’ annual meeting to give him an enhanced 1.7 million euros pay package so he can enjoy ‘a millionaire’s lifestyle’.

My only extra point would be that they could have pushed for an oppose vote on the rem report (which was passed, though voting figs haven't been released). Perhaps the timing wasn't right for them, but if we're going to be seeing more cases like this, building a shareholder angle in order to up the pressure wouldn't do any harm.

The second one was about RBS bonuses. This one is interesting because it specifically focuses on the key shareholder - UKFI - excerpt below:

Unite, Britain's biggest union, has repeated its call to meet with UKFI (UK Financial Investments Ltd), to urge the organisation to be more proactive in the interests of staff and the taxpayer. UKFI was set up in 2008 by  the government to manage its shareholding in the banks.
 
Unite national officer Dominic Hook said: "Once again, it looks like ordinary bank workers and taxpayers will pay the price for the greed at the top of RBS. It is time George Osborne put his foot down. This is no way to repay the country's patience.

"The RBS division implicated in the Libor scandal is set to reap huge financial rewards, but innocent bank workers in call centres and branches up and down the country are having their jobs cut, pensions slashed and terms and conditions eroded.

"Unite has written to the chair of UKFI to call for an urgent meeting to discuss how UKFI can be more proactive in the interests of staff and the taxpayer."

Interesting stuff.

"sensitive to pay and employment conditions elsewhere in the group"

When the first burst of corporate governance reform that created our present system in the UK took place in the 1990s, one of the issues that was of concern was executive pay. In particular it was felt that companies needed to be aware of how escalating executive reward might be seen if their workforce was facing a tough period.

As a result a little sentence was put into the guidance on remuneration which now appears in the UK Corporate Governance Code. The current version gives the following guidance to remuneration committees:

They should also be sensitive to pay and employment conditions elsewhere in the group, especially when determining annual salary increases.

In addition, if I remember the Companies Act now requires companies to state how they take account of  these factors.

Having read quite a few remuneration reports, I would said that in practice companies deal with both the Code and the Companies Act in a very perfunctory way. This is both in terms of disclosure, where companies often simply state that they have considered the posistion of employees when making decisions (rather than giving details), and actual policy. We've seen some cases of people declining bonuses because of other factors (ie bankers, James Murdoch etc) but you don't really see if because of what is going on in the wider workforce.

Of course in part that was because we were on the way up for a long time. But now we are in a period of austerity, these issues come into sharper focus. There are now plenty of companies where pay and employment conditions are not looking great. So shouldn't we be seeing a real freeze on rem comms?

I think this is worth pursuing further. In particular here are a few issues for left-leaning corp gov types to consider -

Have any companies reported that they are freezing exec pay, or waiving bonuses or other incentive awards because of what is going on with employee pay, or employment levels? What about Lonmin for example?
Have any companies where employees are facing a pay freeze or job cuts decided to delay bonuses, salary rises etc to take advantage of the top rate tax cut?
In light of these issues are any investors voting against remuneration reports because the rem comm hasn't demonstrated sensitivity to employment conditions?

To be honest I suspect some institutional investors have never opposed a company remuneration policy on the grounds that the rem comm hadn't been sensitive to employee pay and employment conditions. That means that there is no real oversight of a bit of the Code that attempts to address the issue of fairness within companies. If investors don't start taking this seriously in this difficult economic environmentthen  I think we can conclude that this bit of the Code is basically meaningless, and as such we should be looking for other solutions.

Against the business case

One of the things that I find most depressing about the responsible investment movement, if it can be described as such, is the enthusiam for 'business case' arguments to address a particular issue/company/whatever. I understand why this happens, and I recognise that some very smart people have done some great work showing how issues that might have previously been seen as 'soft' are actually financially material.

But, personally, I find it problematic for a number of reasons. First, it's a bit of a lock in. Once you've committed to applying a test of financial materiality to whether or not an issue matters, how do you deal with issues that aren't material but would seem to deserve attention from any investor who considers themself responsible? Being a labour-oriented person, this is a particular concern as essentially I believe the share of wealth generated by a firm that goes to labour has declined too far and this should be reversed. It's difficult to make a business case type argument for this - you can talk about staff morale, turnover etc but most asset managers will just be thinking of increased labour costs.

Secondly, in practice this leads to the kind of decisions that seem inexplicable to ordinary punters. Take the re-election of James Murdoch as a non-exec at BSkyB last year, overwhelmingly supported by most shareholders. I suspect this decision was based on factors such as him having already given up the chair, having useful operational knowledge of the business (though of course this makes him non-independent) and it, basically, noy being worth one more heave to get him off the board. Yet his re-election came after he was criticised by both the parliamentary committee investigating phone-hacking and the broadcasting regulator Ofcom and despite there being obvious questions about his version of events in terms of News International's knowledge of hacking.

I guess what is at the heart of what I don't like is that making business case arguments implies that the merits of whether or not an issue can or should be addressed can be established by running a few models. I think these things are inherently political, and always have been. In contrast, one of the things you often hear in the responsible investment/corporate governance microcosm is that we need to be wary of 'politicising' issues or being seen to 'campaign' on them. (I heard a few asset managers express concern about the NOTW/BSkyB stuff being 'politicised', as if there had never been any political element to News Corp's operations in the UK.) As a tactic, or a presentational concern, I see the point. But as a way of thinking about what we are doing I think it is deeply flawed and cedes far too much ground to existing ways of operating within the financial system.

I do wonder if using business case arguments isn't also a bit 1990s. Given what we have gone through in the past few years, a faith in market-based 'solutions' to questions about how firms are run (both in terms of objectives and governance) has taken a bit of a battering. Will Davies' excellent paper on neo-communitarianism looks at what may be happening to broadly neoliberal ideas at the level of public pubic policy. I think this process may also occur at the micro level of corporate governance reform, with proposals being argued in different ways. Lynn Stout and Cass Sunstein have both argued for certain corporate governance ideas in 'behavioural' terms, for example.

Thinking responsible investment, I would also flag up Rory Sullivan's great article from last year where he argues -   

The critical first step is for us to be much more explicit about the goals and outcomes we wish to see from responsible investment. If responsible investment is not about the delivery of social or environmental purposes (beyond investment returns), then I suggest we retire the term ‘responsible investment’, and return to talking about investment (or, at a stretch, ‘enhanced analysis’) and wait for a new generation to take on the challenge of ensuring that the capital markets make a meaningful contribution to the goals of sustainable development.

That sounds about right to me. Mainstream asset managers used to get criticised by SRI types for asserting that they already factored ESG issues into investment decision-making (even though you couldn't tell from the outside). Yet with all the emphasis on business case argumentation, materiality and integration, isn't the responsible investment in danger of ending up not far away from that, but just with better processes for getting there? If the outcomes aren't much different what has been achieved? Incidentally, notice the same trend is at work looking at the slightly broader question of 'ownership'. After years of stressing the universal owner type model, note the renewed interest in concentrated portfolios with a limited number of stocks. Kind of where the mainstream asset management industry used to be before the rise of indexing, no?

Having said all this, it's important to recognise that business case/financial materiality is probably the dominant approach in the RI world currently, and likely to remain so for some time. But it will be interesting if public policy discussions head off in a different direction, as Will suggests, yet much of the RI sector remains wedded to arguing largely in business case mode alone.

NB. I recognise that the RI community is diverse, and some still do take an explicity ethical appproach. But, IMO, this is a clear minority, and the 'movement' in general is closer to the view I set out.

Bourdieu snippet

A bit more on language... 

[D]ominant individuals, the absence of being able to restore the silence of doxa, strive to produce, through a purely reactionary discourse, a substitute for everything that is threatened by the very existence of heretical discourse. Finding nothing for which to reproach the social world as it stands, they endeavour to impose universally, through a discourse permeated by the simplicity and transparency of common sense, the feeling of obviousness and necessity which this world imposes on them; having an interest in leaving things as they are, they attempt to undermine politics in a depoliticised political discourse, produced through a process of neutralisation or, even better, of negation, which seeks to restore the doxa to its original state of innocence and which, being oriented towards the naturalisation of the social order, always borrows the language of nature. 

The Labour debate on corporate governance

More signs that a tilt towards employees is on the cards? This from the Labourlist One Nation pamphlet:

First, we need to rethink the British approach to corporate governance, which gives a formal governance role only to shareholders. Shareholdings are too fragmented and share ownership too diverse in most companies for shareholders to be able to properly oversee how companies are run. The legitimate role of employee representatives and works councils in company decision-making in many European countries stems from the formal role afforded to employees, alongside other interest groups like consumers and local communities, in corporate governance. A requirement to take decisions in the long-term interest of the company rather than the sole interests of shareholders or directors (or even workers) means that diverse interests have to be balanced and comprises struck.

Similarly there is a whole chapter on corporate governance written by Maurice Glasman in the Fabian pamphlet The Great Re-balancing. Here's a chunk -

Corporate governance reform asks a lot of capital. It relinquishes its ultimate sovereignty and recognises the workforce, and a skilled and powerful workforce at that, as a necessary part of the generation of value. It recognises the inability to hold itself accountable and recognises its common interest with labour in disciplining its tendency to be too generous to itself. It also asks a lot of labour, and of the unions. The German and British trade unions took different pathways in 1945. The British trade unions went for the Keynesian state model in which nationalisation, the welfare state, statutory wage settlements and collective bargaining were the mainstay. In West Germany, in contrast, they went for a worker representation model within the economy within a decentralised political system in which labour market entry was regulated by vocational qualification and the financial system was far more decentralised, with regional and sectoral banks playing a far more significant role. While the British model was faster out of the blocks in 1945 it turned out that the German model won the race. They retained far higher trade union membership, lower wage differentials, fewer job losses and a vocational status for labour within the economy. One of the consequences of corporate governance reform is the requirement for trade unions to seek the common good and that is a conversation that has barely begun.

Glasman goes on to argue that we basically need co-determination in the UK.

So, quite a few signals that wonk-ish types in Labour think corp gov reform is big issue, and what they are setting out is break with shareholder primacy. I guess the big unanswered question is what the frontbench makes of all this.

Language, legitimacy and Louise Mensch

One of the issues that comes across when reading about the practical use of language, or its use in social settings, is how much relies on the legitimacy of the speaker, compared to the actual words spoken (or written, tweeted etc). The idea of performativity, which I've written about before, has some of its roots in Austin's How To Do Things With Words. Austin was interested in the way that some speech act achieve something through their being spoken. For example saying "I'll promise I'll be there at 6.00pm" achieves the act of making a promise.

He explored the question of when speech acts like this were successful and when they were not. Austin gave the example of naming a ship. I could smash a bottle of champagne on the side of a ship and say "I name this ship the Queen Elizabeth" but because I don't meet some of the 'rules of the game' for ship-naming (I'm not a member of the royal family or whatever) the act would not be performed. This is even though, on the surface of it, I have met the requirements of performing the act.

As I understand it, Bourdieu, whose book I am reading currently, says that Austin gets things wrong by looking for what allows words to perform actions in language itself (and its use). Instead he argues that the words only work because we have bought into the institutions that allow Act X to be performed by Representative Y, and thus make the ship-naming, or whatever, a successful act. (He also writes a lot of good about how the rules of the game in different types of speaking as undertaken by people from different social classes work, and how this leads people from one group to be silent or clumsy when speaking in a situation governed by the rules of another group. But that's for another day).

I find Bourdieu's take on things pretty convincing, which leads me on, obviously, to Louise Mensch on Twitter. There's something a bit jarring about her tweeting about UK politics, and I think that this is bound up with the issue of legitimacy. A UK MP tweeting about UK politics is entirely normal. Because they are the specialist in that particular field their tweets are entirely legitimate, and what's more they are invested with more power because we consider that they know the rules of their game better than we do. (Note that a lot of political commentary is concerned with what a particular form of words really means, or what impact it will really have, and this is divined by those who 'know the rules'.) 

Of course politics is also participative. Sometimes an ordinary punter can say/tweet something that transcends the rules of the game in the political field, and appears very powerful through doing so. We are reminded, briefly, that politics isn't all about who's up/who's down and 'what does X mean for Y', it's also about politicians taking our views into account and shaping policy accordingly.

But what about Louise Mensch? She has been an MP, but for a very brief period. She did not have a political career before, and may not have one in future, and she no longer resides in the country about which she makes her political commentary. I think these factors combine to corrode her legitimacy to speak as a political expert. Yet equally she is not an ordinary member of the public. She cannot, as it were, 'speak truth to power' as only recently she has been one of the faces of power. What's more, as an employee of News International she has a public voice in our media which is not available to ordinary citizens who reside in the UK. So it what capacity does she now speak?

I think that we must consider that whatever legitimacy she has now comes from celebrity, rather than politics. She was quite well known as an author before becoming an MP (and spent more time in that field), and her public recognition increased once she was elected and, in particular, sat on the DCMS committee investigating phone-hacking undertaken by the company which now pays her as a columnist. So, in a way, she has benefited from the circular nature of modern celebrity whereby one can be famous, and feature in the media, by nature of having been in the media previously and therefore considered famous. In addition, her husband is well-known in the music industry. In combination, then, I wonder if the legitimacy she now has to speak is comparable to someone like, say, Sharon Osborne? And perhaps we should assess her contributions to UK politics taking account of this.


NB. I am taking the p***           

Whose money is it anyway?

Another Mark Kleinman story caught my eye last night. This time it's about anonymous (as always) investors encouraging RBS to a) make a big share award to Stephen Hester and b) defend its head of investment banking. The language used is interesting:

"If Hourican goes, there is little chance of getting a capable replacement. RBS’s investment bank is still very substantial, and he has done an excellent job. We would be furious if the RBS board doesn't stand up to pressure from the FSA and the Government," one shareholder said. "This is nothing more than a random witch-hunt."

Before I set out what bothers me about this let's consider the context. First, the state's stake in RBS is so large that this intervention doesn't matter that much. No doubt non-UKFI investor intervention can be used by the RBS board as a bargaining chip, but ultimately UKFI rules the roost. In addition this intervention takes place in the wider environment that I've described before where shareholders in the banking sector have, in my opinion, dropped down the pecking order, with regulators a more important force now.

So what do I want to moan about (this time)? Firstly, I just don't share the sentiment expressed. RBS is largely state-owned because its board failed to do its job properly, and therefore the taxpayer had to rescue it. No doubt in part the regulatory environment played a part too. As such most punters - people who have a financial interest in RBS remember - would consider it entirely right that the Government and the FSA take a very close interest in what the bank does before we even consider the Libor scandal.

But the fact the Libor issue deomstrated that the banking sector really had lost it way in terms of standards of behaviour surely requires that a clean break with the past is demonstrated. Our anonymous shareholders say "random witch hunt". I say make an example. Trust in the sector is very low in part because of the sense that very rich people in the City have been unaccountable. This may be rough justice (if it happens) but thems the breaks when we've been through a financial crash and the exposure of illegal activity at institutions we trust with our capital.

What really bothers me is who do these shareholders speak for? In the quote above, remember, they are sending a bank a message that they must "stand up to" the Government and the regulator. That's fine if you have the economic interest in the investment in RBS, but what if these are asset managers? They don't manage their own money, they manage our money. So it's not impossible that someone who manages your pension is telling RBS to give its chief executive a big share award and to stick two fingers up to the Government and the FSA.

What's more, I bet you they haven't told you that they are doing this, and they won't report back to you that they have done it. In the world of shareholder engagement it is taken as a good thing that this stuff is kept confidential, so chances are no-one outside the closed circle will ever know who has given RBS this message - even though it's other people's money that gives them the power to say it.

These issues are in particularly sharp relief in the banking sector because a) the state's role is much more direct and b) it's pretty clear what the public think of the sector. The potential disconnect between the views of those with the economic interest and those of the intermediary exercising delegated power are particularly large. But the point applies more generally. If shareholder engagement is going to be portrayed as having kind of 'progressive' element to it then there must be accountability in the system, back to the beneficial owner. Otherwise we can end up faciltating assset managers telling bankers they must have more money and defy the state.

Unrealised expectations of unintended consequences

As is obvious, I'm a big fan of Albert Hirschman (who sadly died just before xmas) and one of my favourite books is the Rhetoric of Reaction, as this is short & punchy take down of 'small c' conservative arguments against reform. One of the points Hirschman made when discussing 'unintended consequences' was that the fixation on them tends to obscure the equally important question of 'unrealised expectations' - things that we expect to happen as a result of a given reform but don't.

As I have bored on in the past, in corporate governance policy debates the threat of unintended consequences (always, by the way, assumed to be negative) is never knowingly undersold. So I thought I would start compiling a list of predicted 'unintended consequences' of a reform that was actually introduced which subsequently never occurred (hence my 'hilarious' title for this blogpost).

Here are three my initial starters -

Reform - July 2000 Amendment to the Pensions Act requiring disclosure of pension fund policy on social and environmental issues.
Predicted unintended consequences - would make trustees the target of single issue campaign groups, would lead to pension funds screening out various types of stocks with a negative impact on the UK economy.
Actual consequences - a few more SRI mandates, though no noticeable increase in screening, more asset managers add corp gov/SRI staff (a positive unintended consequence?), no evidence (none that I am aware of) of funds being targeted because of disclosure of policy

Reform - public disclosure of shareholder voting records (ok, not an out and out 'win' yet, but there's much more data available now)
Predicted unintended consequences - would make asset managers... er... the target of single issue campaign groups, would be a major cost for asset managers
Actual consequences - some media coverage of and trustee interest in actual voting decisions (ie more accountability), negligible impact on costs (based on feedback I have received), more analysis of investor behaviour (ie various surveys)

Reform - annual election of directors
Predicted unintended consequences - would increase short-termism, could lead to entire boards being voted out
Actual consequences - too early to tell? But no examples of whole boards being voted out, and is there any evidence of increased short-termism? 


Any other good ones out there?

A bit of Bourdieu

Up there with socks and slippers amongst my best xmas presents was Language and Symbolic Power, which my mum got me (and which must have an interesting effect on her future Amazon recommendations). I realise that lately I've been reading quite a bit of stuff about the political aspects of language (this book on politicians' use of metaphors is worth a read - Blair v keen on 'journeys'). I think this probably reflects my view that a lot of territory is currently up for grabs, and as such there is a corresponding linguistic struggle going on.

Anyway, back to my current book - although Bourdieu is making a serious point, this bit actually made me smile (apols for any typos).

There is every reason to think that the factors which are most influential of the habitus are transmitted without passing through language and consciousness, but through suggestions inscribed in the most apparently insignificant aspects of things, situations and practices of everyday life. Thus the modalities of practices, the ways of looking, sitting, standing, keeping silent, or even of speaking ('reproachful looks' or 'tones', 'disapproving glances' and so on) are full of injunctions that are powerful and hard to resist precisely because they are silent and insidious, insistent and insinuating. (It is this secret code which is explicitly denounced in the crises characteristic of the domestic unit, such as marital or teenage crisis: the apparent disproportion between the violence of the revolt and the causes which provoke it stems from the fact that the most anodyne actions or word are now seen for what they are - as injunctions, intimidations, warnings, threats - and denounced as such, all the more violently because they continue to act below the level of consciousness and beneath the very revolt that they provoke.) The power of suggestion which is exerted through things and persons which, instead of telling the child what he must do, tells him what he is, and thus leads him to become durably what he had to be, is the condition for the effectiveness of all kinds of symbolic power that will subsequently be able to operate on a habitus predisposed to respond to them. The relation between two people may be such that one of them has only to appear in order to impose on the other, without even having to want to, let alone formulate any command, a definition of the situation and of himself (as intimidated, for example), which is all the more absolute and undisputed for not having to be stated. 

Regulatory turn - more evidence

Mark Kleinman seems to get quite a few stories like this. The big point to me is that this kind of thing is now going on all the time. It's an interesting to note that the Stewardship Code was developed specifically in response to the failure of shareholders to engage effectively with the banks, yet it's precisely in the banking sector where shareholder primacy is being squeezed out by more active regulatory intervention.

The City regulator is leaning on Britain's newest high street bank to strengthen its boardroom line-up following a tussle over the appointment of its billionaire co-founder as its next chairman.

I understand that Metro Bank plans to reshuffle its line-up of directors to assuage concerns expressed by Financial Services Authority (FSA) officials about the elevation of Vernon Hill to become its chairman, which was announced on new year's day.
Insiders say that Ben Gunn, an existing non-executive director of Metro Bank and a City veteran who has run Friends Provident, the life and pensions group, is likely to become the lender's new vice-chairman.
Lord Flight, the senior independent director at the fledgling bank, will relinquish that title but remain on the board as a non-executive director, according to people familiar with the plans being discussed by directors. The proposals are still subject to change, insiders said.
FSA staff are understood to have told Metro Bank that they wanted a more established banking and financial services figure, such as Mr Gunn, to occupy a more senior role on the board.

Motivational assumptions

I've argued before that, given the failure of various rounds of remuneration 'reform', it would be helpful in future if those proposing new incentive schemes set out the motivational assumptions behind them. At present this doesn't happen, and I think this is a big problem since incentive schemes must be based on some ideas about how and why the recipient will respond to them.

Well funnily enough I was reading through some of the written evidence to the Parliamentary Committee on Banking Standards (massive PDF here) and I came across Fidelity's submission, which is focused on  remuneration. Specifically it argues for longer timescales to apply to LTIPs and for a portion of awards to be career shares. However what caught my eye is that they seek to make the case in part by drawing on the PwC research on the psychology of incentives:

We would also like to refer you to work which has been carried out by Pricewaterhouse Coopers which shows that recipients of shares under LTIPs place a high value on certainty with highly conditional awards being valued at a material discount. In the case of Career Shares or ex-ante performance vesting, once shares are awarded they really do belong to the recipient and hence it should be possible to achieve the same motivational effect with a lower quantum of shares. This could make a contribution to reining in the overall size of awards which is another area which needs attention.

As I've written before, the PwC work is really starting to have an influence, even though if you've read any of the behavioural stuff about pay it shouldn't come as any surprise. It's all about who has said it, and here we see a mainstream asset manager citing it. Clearly the ground is shifting.

The only problem is I don't think what they say is quite right. The point about incentives is that the theory behind them (which, I never bore of repeating, is challengeable) is that they reinforce behaviour. As such the awards need to be made around the same time as the behaviour they are seeking to reinforce if they are to have any effect. The further we push the reinforcer away from the behaviour, the less likely it is to have an impact. This is exacerbated by hyperbolic discounting, which puts a lesser value on the award the further away it is. These are the core motivational problems that need to be addressed (as I noted previously, at least BlackRock's emphasis on short-term rewards is consistent with this even if we might not like it).

Fidelity seem to arguing that once the awards have been made there would be no more conditionality (no clawback?) so they would have a strong motivational pull then. But, that whole 'once the awards have been made' is a problem. If it's too far away from the behaviour it is supposed to reward I really do question how much of an influence it can have - even if we can crack the other problem of how to define what the behaviour is that should be rewarded. 

I think we ought to be a bit honest about all this stuff. It may simply be the case that we can't use financial rewards to incentivise people over the long term, perhaps they just don't fit together (we could, of course, use a series of short-term incentives, if we think the long-term is just a series of short terms). For the delivery of long-term objectives we might be better off trying to find other ways of ensuring commitment to them. I think I'm basically convinced incentive schemes are a dead end.

John Thurso, shareholder engagement and the regulatory turn

I've blogged previously with a bit on John Thurso's comments on the effectiveness, or otherwise, of shareholder engagement. It seems like it's something he is warming to. Today I was sent the following section from the banking inquiry's evidence session in late November. But I'm actually posting up a whole chunk as the discussion goes into the question of the role of shareholders compared to that of regulators. All emphasis below is mine.

Q13 Chair [Thurso]: I am sorry, I am going to throw this across. You and I are having a fascinating, almost private, conversation. It strikes me that there is a real problem with the Walker and Kay approach, of saying, “What we need to do is get the shareholders involved lots more”, for the very reason that you identified—the vast majority of large shareholders have less than 1%. This is not like an AIM company where five shareholders will own 75% and can act like owners. This is just a commodity called their stocks and shares.
Therefore, to say, “Let’s get them all involved”, really just adds complexity almost rather than providing any form of solution. I put this to you as a proposition: what one really has to try to do is look to the non-executives to act as if they were the owners and to take that stewardship on board as a primary task, much more than in companies where those owners are able to do that for themselves.
Professor Franks: I am afraid to say that, if that model would work, we would not need owners and we would not need capital markets. I do not think directors can substitute for ownership. If they could, capital markets would have very little role. Forgive me, but I think we have to look for structural solutions. That does not mean that we should not try to improve the governance of banks. There are lots of things that we can do but we have to have the structural changes as our main defence against systemic risk.
Q14 Chair: I am going to open that conversation up to the other three.
Dr Hahn: If we look at what happened in the crisis, there was a consensus between regulators, Governments and shareholders, that for large financial institutions shareholders did not know what was going on and couldn’t exercise governance. Why? Fragmented shareholders and those in a mostly passive investment world—index funds only are the major shareholders in banks. Many of the tasks that are bread and butter to a typical board of directors—choosing new chief executives, approving mergers, dividends, even bonus pools—are now subject to regulation. It is not just in the UK; it is EU-wide and the USA.
There has been a broad acceptance of the fact that shareholders are incapable of understanding what goes on in a complex financial institution. The question always goes to the board, trying to understand what the board should know, could know and what our expectations are of the board. Ultimately, there is a much bigger question, and that is the Andy Haldane question you raised about simpler regulation. Certainly some avenues: yes or no. Realistically, the only institution that can understand the risk that is being undertaken by a bank is its regulator. The regulator gets substantial inside information; it knows a lot more than the market place. The only one that can judge whether a board is monitoring the risks inside an institution is the regulator. We need to figure out in structure how a modern board works with regulation and with shareholder interest.

This is, of course, a bit of a theme of mine. For all the noise around stewardship, my own view is that the lasting outcome of the past few years is that the role of shareholders in the governance of financial institutions has been eclipsed by regulators. Pay, board appointments and even M&A are now seen as legitimate issues for regulators to discuss with banks, and the regulator is willing to step in where necessary. Shareholders get to have a look once the regulator has already kicked the tyres, as it were.

Thurso's comments are interesting as he seems to see shareholders as basically being speculators (hence his scepticism about engagement). But actually we might be about to hit a point where shareholders are, for once, actual investors, as we may well see rights issues this year. As I pointed out previously, the recent ABI report essentially sets out what their members expect if investing in banks, so it looks like they expect to be tapped up soon.

That aside, though, what's interesting about the above exchange is the sense of agreement that shareholders can't really do the job.