Monday, 30 September 2013

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).     

Thursday, 26 September 2013

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...     

Wednesday, 25 September 2013

Majority of UK shares held overseas

Too tired to dig into this one tonight, will try tomorrow, so here's the ONS blurb

Key Points

  • The Ownership of UK Quoted Shares Bulletin provides estimates of ordinary shares holdings in quoted companies in the UK by sector of beneficial ownership (the beneficial owner is the underlying owner, the person or body who receives the benefits of holding the shares, for example income through dividends. See Annex A for a more detailed discussion).
  • At the end of 2012, the UK stock market was valued at £1,756.3 billion.
  • Rest of the world investors continue to hold significantly more shares (in terms of value) than any other sector, with the gap between rest of the world ownership and the next highest (individuals) widening in 2012. Rest of the world ownership stood at an estimated 53.2% of the value of the UK stock market at the end of 2012, up from 30.7% in 1998 and 43.4% in 2010.
  • UK individuals owned an estimated 10.7% by value at the end of 2012, picking up slightly from the record low in 2010 and halting the downward trend seen in recent years.
  • Unit trusts held an estimated 9.6% by value at the end of 2012, continuing the strong growth seen in recent years
  • Other financial institutions held an estimated 6.6% by value at the end of 2012, significantly down on the levels in 2010, following strong growth in earlier years.
  • Insurance companies held an estimated 6.2% by value at the end of 2012, continuing the fall seen in recent years.
  • Pension funds held an estimated 4.7% by value at the end of 2012, down from 5.6% in 2010, and significantly lower than the levels seen in recent years.
  • Shares are increasingly held in multiple-ownership pooled accounts, where the beneficial owner is unknown. These accounted for an estimated 59.4% of the total holdings by value at the end of 2012, up from 44.9% at the end of 2010. Multiple ownership pooled accounts have been allocated to sectors using further analysis of share registers, updating the analysis conducted for the 2010 results.
  • This Bulletin incorporates some revisions to the 2010 data published in February 2012.

Whose money is it anyway?

It might make sense to reserve judgment on the mechanics of Labour's proposed freeze on energy prices until a) we see the details and b) Labour is actually in government.

Invesco Perpetual, however, apparently want to get stuck in right away though, and have launched a public attack on the policy. The asset manager is a big shareholder in Centrica and a big-ish one in SSE. It is using its position as a major shareholder - which it has only because it invests other people's money - to make what it must know is a very political point.

Mind you, it's worth noting in passing that it doesn't seem to think it is accountable to the ordinary punters who pay the portfolio managers' wages. Its Stewardship Code statement shows that it doesn't think you have the right to know how it votes at the likes of Centrica, SSE etc.
Whilst comprehensive records of IP’s voting instructions are maintained, IP does not report specifically on its voting activity. Whilst being mindful of its fiduciary duty and the interest of all investors, IP believes that automatic public disclosure of its voting records may have a detrimental effect on its ability to manage its portfolios and ultimately would not be in the best interest of all clients.
You're obviously not to be trusted to be told what it does with your ownership.

What's more, if you're an employee in the energy sector in the UK, Invesco Perpetual may actively threaten your employment prospects. In the most incredible part of their outburst they tell energy companies to downgrade the UK and consider investing elsewhere or not at all.
He said that Centrica should consider halting investment in the UK.
“[We would] encourage them when thinking about investment to significantly downgrade the attractiveness of the UK and significantly upgrade the attractiveness of investing elsewhere or returning cash to shareholders,” he said.
Any Labour/union etc controlled pension funds might want to check if they use Invesco as a manager...

Britain's asset management industry can do better than this!

Tuesday, 24 September 2013

Time to put corporate governance somewhere else?

I've been blogging quite a bit about corporate governance reform lately, particularly employee representation. One of the things that I've been thinking about is how odd it is that the UK Corporate Governance Code sits under a body that is primarily focused on audit and accounting issues - the Financial Reporting Council (FRC).

This isn't to say that these issues aren't important - they clearly are, and investors are paying more attention to them than in the past, in my opinion. What's more the FRC's own role is subject to more scrutiny than I can remember previously. I think this reflects a few concerns - the debate about IFRS and True & Fair, the perception that the FRC is too close to the accounting industry, and the fact that auditors seem to have got away with not spotting that the banks were about to fall over.

However, the thing that strike me is that something as important as the way that companies are owned and managed simply isn't an accounting/auditing/financial reporting issue at all. For historical reasons the Code sits under the FRC, but I question how appropriate this is. It's particularly problematic given that the governance of the FRC itself is skewed towards financial reporting. It consists of directors, asset managers, accountants etc. Yet in the governance of companies I would argue that the three main groups that need representation are management, labour and investors. So where are the employee representatives?

I know that the FRC used to have a TU rep on it (it was Ed Sweeney from Amicus for a while when I was at the TUC), but it no longer does, and, to be honest, I would query the value of putting someone back on the organisation as it stands. This is because the large bulk of the work that the FRC does relates - as its name tells us - to financial reporting issues. A lot of this a lot of the time won't be stuff where employee representatives would have a view. Yet it is bizarre that because employee representatives may not have much to say about financial reporting they are excluded from the governance of a body which has responsibility for the far bigger issue of corporate governance.  

Therefore perhaps the UK Corporate Governance Code should either be put somewhere else or a committee purely focused on the Code should be created on which labour is represented alongside management and shareholders - and no-one else. Accountants, corporate lawyers etc could still provide evidence to such a committee, but since they are not one of the core groups involved in the governance of companies, I don't see that they have any right to representation. This would reverse the bizarre situation we have now where the accountancy industry has representation, but those that work in the companies the Code applies to - and have a very significant stake in them - do not.

Saturday, 21 September 2013

Labour, responsible capitalism and corporate governance

The fact that Labour has kicked off a debate about 'responsible capitalism' is one of the most interesting things that has happened on the centre left for some time. Issues that were not discussed for a long time are now back in play. My interest, as always, is on the elements of the discussion that relate to things like company ownership, corporate governance, pensions reform etc.

As people will be aware, Labour is committed on paper to employee representation on remuneration committees, which, given the sterile debate in mainstream corporate governance here, is regarded as 'radical' by many people in my corner of the world. I say it's a paper commitment, as until we see Labour in government and taking the proposal forward we have to be wary of possible backsliding (because there is likely to be a wave of GC100-style lobbying against it).

That said, it should be noted how often this policy is referred to and by whom. Obviously Ed has spoken about it, and on the policy circuit I have heard several shadow BIS ministers reaffirm it without any qualification. Just in the last couple of days I have seen various people, such as Jon Cruddas, write or talk about it. I assume Labour has already road-tested the policy with business people (and had largely negative feedback), so the fact that the leader and shadow ministers still regularly mention it is hopefully a signal of intent.

More generally, this (relatively small) policy commitment has a background of renewed interest within Labour circles in corporate governance as a political, rather than technical, concern. The early Blue Labour emphasis on co-determination came first, but a number of policy groups are now actively considering corporate governance reform, albeit as part of wider analyses (of workplace democracy/empowerment, addressing low pay, rebalancing the economy etc). I think I'm on pretty safe turf to say most people looking at these issues think putting employees on rem comms is ok, but broader employee representation is what Labour should really be aiming at. As I've blogged before, I agree. If we're going to shed blood reforming corporate governance, we might as well make it worthwhile fight. Putting employees on rem comms only now seems to me like an enormous missed opportunity.

It is worth noting, too, that there is some discussion emerging about the role of shareholders and some of this is quite smart. Sonia Sodha has a really interesting piece in the All Of Our Business publication that came out with the latest Fabian Review. What I like about it is the recognition of how shareholder capitalism really works - most 'shareholders' are intermediaries (asset mangers) whose interests may be rather more short term than those of either companies or end asset owners. In practice, she says, it looks more like 'corporate management capitalism' than accountability to shareholders and is also (rightly) sceptical about the practical impact of the 'enlightened shareholder value' language in the Companies Act 2006. In terms of reforms, she talks about both putting employees on boards and giving greater voice to long-term shareholders through enhanced voting rights but also of the need for collective representation of employee, saver and consumer interests. I think there is something worth exploring here - I have wondered whether a sort of 'Beneficiaries Association' could be established to represent ordinary punters' interests as shareholders (and employees?).

That Fabian publication is also worth a read because it has some polling on various potential 'responsible capitalism' policies and how they relate to respondents' own interests. Just under half (49%) of those polled say that putting employees on boards could improve their own "living standards and future prospects", with very few (7%, there's your Right-wing libertarian vote no doubt!) saying it make it worse. That's not bad at all, though slightly more (53%) back widening directors' duties to require them to consider social/environmental/community concerns. (As an aside I note that the editorial also takes it for granted that "Companies should serve the interests of a wider group of stakeholders, and not just shareholders...")

Maybe this will all come to nothing, and it will be "stakeholder capitalism" all over again. But it is clear that a proper debate about corporate governance - going beyond the narrow range allowed in the 'corporate governance community' - is underway within Labour. With the flaws of 'actually existing shareholder capitalism' exposed by the financial crisis, but the UK corporate governance establishment demonstrating a remarkable degree of complacency about the current regime, this could be an interesting time if Labour does win in 2015.

Tuesday, 17 September 2013

Two quick links

1. The High Pay Centre's report on interviewees with German employee directors (and shareholder directors) is well worth a read. Think we're seeing the beginning of a proper discussion of the merits of employee representation in corporate governance.

2. The NAPF has put out a nice report summarising the 2013 AGM season. One notable point for me is that we are definitely seeing more shareholder pressure around audit issues.

Sunday, 15 September 2013

In defence of conflict and argument in corporate governance

The more you dig into public policy work undertaken in corporate governance, the more obvious it is what a narrow range of opinion is expressed. In reality, a relatively small number of organisations and individuals dominate, much networking goes on between them, and significant differences of opinion are hard to detect. I am not making a conspiratorial point here, but rather highlighting a simple fact that on important issues about the governance of companies a relatively small number of voices count, quite a few of them talk to each other, and they tend to say the same thing.

To people within the system this no doubt looks unproblematic. Why wouldn't organisation A talk to organisation B about policy isssues, especially if they are usually on the same page about things? From here it really isn't a big leap to base your consultation response on one written by another organisation, or to copy and paste chunks from your sector's representative body and stick your company's letterhead on the top. Given that there are 'common sense' and 'obviously right' positions on most issues, is there really anything controversial about this?

I do think there is a deeper problem here. The repeated emphasis on 'consensus', and avoiding 'unintended consequences' resulting from even the mildest reform, leads to an incredibly small c conservative approach involving little real debate. As I've blogged before, the public expression of dissent - even in an area as important at the way companies are run - is actively discouraged. Where dissent is expressed, through the exercise of voting rights, this is often characterised as a failure, rather than an entirely legitimate disagreement, or even a potentially creative moment. 

My personal view, which I don't expect to be at all popular in corporate governance land, is that UK corporate governance has become very insular and uncreative. The constant characterising of consensus as desirable and conflict as problematic in practice leads to an instinctive defence of the status quo whatever the issues. For example, a move away from unitary boards (or even to employee representation on unitary boards) would be considered 'extreme' by the terms of the soggy UK consensus we have currently. This is despite the fact that other successful nations have such systems. Similarly, 'one share one vote' and equal treatment of shareholders are unchallengeable beliefs, despite the possibility that in some circumstance there might be better alternatives. Or just look at the wave of conservative opinion unleashed in response to relatively mild proposals put forward by the Competition Commission - and look at how many different groups it encompasses. Investor groups on the same side as the corporate lobby, the Big Four and the FRC. It only makes sense if there really is a 'correct' stance to take, rather than some rather contestable claims about the dangers of change.

I would prefer to see more argument and more conflict. In another field I think that it would taken as read that the existence and discussion of a diverse range of views was a desirable thing. In contrast in UK corporate governance, no chance is missed to admininster the anesthetic of consensus. The results are complacency (certainly about the superiority of our model) and the bizarre sight of investors repeatedly arguing against an extension of their own rights.

I'll end with a quote from Colin Crouch's latest book which is relevant.
"We often manage to achieve positive-sum outcomes between markets and compensating measures for them, but not usually through coherent planning. Rather they come through conflict and confrontation... The interests served by intensifying markets and those served by protections from it are usually different, and they are usuallydistinguished by different degrees of income and wealth. It is probably as well that things remain that way, for conflict and contestation increase our chances of finding new solutions to problems - and of evading rule by benign dictators who claim to be working for us all."

Friday, 13 September 2013

Demoralising incentives

One of the books I've taken a punt on recently is Practical Wisdom by Barry Schwartz and Kenneth Sharp, which is a psychologically informed take on developing virtue (or as the strap line says "the right way to do the right thing"). Barry Schwartz is probably known to some as the author of The Paradox of Choice (well worth a read) but he's also obviously quite interested in Edward Deci type views of motivation.

Practical Wisdom has a whole chapter in it on the problems of relying on incentives to get people to do the right thing (incidentally, the book is also critical of relying on 'rules' to achieve this). None of this will be that new to anyone who has been following the intrinsic motivation vs behaviourism debate, but it's interesting to see it put in the context of a discussion about professional virtue. And the point that the authors are keen to make is that incentives can de-moralise decisions, as in undermine or eliminate the moral content (a version of motivation crowding).

He gives a couple of examples. One is the famous Israeli daycare centre one, where the introduction of a fine for picking kids up late led to an increase in people picking their kids up late. The argument here is that the fine enabled parents to reframe the fine as a payment for a service (an extra 15 mins or whatever of childcare). The other example he gives is of an experiment where people were asked by a stranger to help load a sofa into a van, with some of the subjects offered a payment and others simply asked to do it as a favour. Again this is a way that the application of an incentive can reframe the way  a person views a situation, and if an action becomes seen as a transaction they may be less willing to undertake it, unless the rewards are large.

Unsurprisingly, I find this compelling, and it underlines why I think, for example, trying to use financial incentives to improve corporate oversight of ESG issues may be a bad thing (rather than simply ineffective). However, it also makes me think about the use of fines to 'punish' companies (am thinking Pru /AIA deal as an example). It's possible that fines may become seen by executives as a reasonable cost to endure - or, more damagingly, a reasonable payment to make - to ensure that they can undertake the action they wish to in the manner they desire.

Wednesday, 11 September 2013

Tax avoidance and fiduciary duty

Good work by the Tax Justice Network, who commissioned a legal opinion on directors' duties in relation to tax. There's a really irritating bit of 'common sense' blah about company tax avoidance, that (when argued most strongly) suggests that directors have a fiduciary duty and responsibility to shareholders to minimise the amount of corporate tax paid. Anyone who has bothered to read the section of the Companies Act on directors' duties will surely have been left scratching their head at this claim as such duties are drawn very widely. Nonetheless the pro tax avoidance interpretation is still the most commonly heard one.

As such, this is really helpful.
This morning the Chief Executives of every company in the UK's FTSE100 index will be receiving a letter from Tax Justice Network drawing their attention to a legal opinion prepared for us by the prestigious law firm Farrer & Co.

The opinion provides an unequivocal and authoritative view on whether or not company directors have a duty to their shareholders to avoid tax: no such duty exists in English law. The legal opinion is available here. A press release accompanying this legal opinion is available here. The Guardian newspaper has written about this here.

Although this legal opinion in itself only directly applies to the UK, it potentially has wide international relevance, as we have noted before.
It's important to note that this doesn't mean that companies shouldn't undertake tax avoidance, it simply makes clear that they directors are not in any way compelled to do it. I suspect this will have a similar effect to the work Freshfields did for the PRI a few years back on fiduciary duty and consideration of ESG issues in investment strategy. It doesn't overnight change anything, but it helps cut away at some of the arguments that are used to bolster unthinking defence of the status quo.

Monday, 9 September 2013

Another Fidelity/Conservative snippet

Doing a bit more digging around on links between the Conservative Party and Fidelity, I came across this piece on Open Democracy (from last March) which lists peers' financial interests related to healthcare reform. It includes a little bit on Lord (Bob) Edmiston -
Lord Edmiston: Shareholdings in Bupa Finance plc where Baroness Bottomley is a director. Bupa provides health insurance, private hospital and care group in direct competition with the NHS. Shares in Fidelity International Ltd, which acquired Telehealth Solutions Ltd in 2011. Telehealth has partners in the NHS and private health-care - and has several contracts with the NHS.  Telehealth is rapidly expanding and works to give people treatment from home, and is seen by Health Secretary Andrew Lansley as a way to save the NHS millions.
A quick look on the Electoral Commission register of donations shows that Lord Edmiston (who became a Lord in 2010) has - like Fidelity - been a big Conservative donor in the past, giving them £250,000 in 2004, though donations have been rather smaller lately (£9,000 in 2011). He also famously lent the Tories money. In 2006 he was also revealed to be one of the members of the Midlands Industrial Council, a business group that funds the Tories. These financial links to the Tories meant that a few eyebrows were raised when he became a peer.

But how did he end up with shares in Fidelity International? I found this profile piece from the Birmingham Post in 2011, which looks like part of a list of top regional business leaders. In it there is reference to a sale of properties to Fidelity:
His business – the IM Group – had a difficult recession in both its car import business and property interests, affecting the value of the business. Net assets of the two sides of the group amount to around £280 million.

The Coleshill-based business sold a portfolio of properties to Fidelity International in August, and that sale realised £22.7 million. The buildings are let to 13 tenants, including Severn Trent, Allied Dunbar and Staffordshire Police as well as a range of industrial clients.
So it's possible - note: possible, I am just guessing here - that shares in Fidelity were part of the deal.

For the sake of completeness, note that Lord Edmiston's parliamentary profile does not list shares in Fidelity in his register of interests. So presumably he sold them.

UPDATE: if you scroll down here, you can see that Lord Edmiston's interest in Fidelity was deleted in 2011.

Thursday, 5 September 2013

New cut and paste lobbying tactics?

I've blogged at length about PLCs using generic text in their consultation responses. I think I've scored a few hits, given the nature of some of my blog traffic, and judging from some responses since I started blogging about this. But you can't keep a sneaky tactic down.

The Competition Commission is currently on the receiving end of a full-on lobbying effort to try and prevent some of its proposals on shaking up the audit market being implememted. I've noticed in the latest responses more come from individual PLC directors rather than companies. No doubt concerned individuals want to speak out. But it is somewhat surprising that some do so using some identical sentences.

For example, open this submission and this one, then search for the word "deep", or "reside". Because by pure coincidence, both individuals believe "It takes time for an audit firm to gain the deep understanding of a group" and that "The new auditor would not immediately be able to judge where in a complex group the major audit issues reside".

Funnily enough, in that second submission above, the respondent is concerned that "the transition [to a new auditor] would inevitably adversely affect audit quality initially". The same point was made in this submission, where the author is concerned "that the transition to a new auditor will inevitably adversely impact audit quality in the first and possibly second year". Both respondents believe the Commission's proposal for mandatory tendering after five years would have "damaging consequences and should be dropped".

This is just what I found in half an hour of free time on paternity leave. Imagine what else is out there. 

Wednesday, 4 September 2013