Sunday, 8 November 2015

Liam Byrne's speech: a bit wrong, a bit sketchy, a bit interesting

Via Chris Dillow, I picked up this speech by Liam Byrne. It's interesting to read someone who obviously disagrees with Jeremy Corbyn try and come to terms with the new centre of gravity in Labour. It's worth noting, too, he uses the term "neo-liberalism" early on, language which most Blairites usually take to be an indicator that the person using it is out of date/an idiot/a Trot/all of the above.

But what I want to look at is what he says about short-termism and corporate governance, and what he argues for as reforms. I think some of it is off-target, but it's interesting to see what a Labour moderate is saying on these issues.

Actually, the diagnosis is pretty much the same old same old. Companies focus on the short term too much, prioritising dividends and share buybacks over internal investment and employee remuneration, whilst executives still coin it in. (Larry Fink of BlackRock is cited here as someone who is concerned about these developments.)

The reasons for this are that "our asset owners are simply too short term". Note he says asset owners rather than asset managers here. He goes on to say that our pension funds are part of the problem though, rather contradicting this point, he also says they are too small compared to other countries' funds and that they don't actually own many UK equities. He goes on to note that average holding periods for shares have fallen, and so the argument is essentially shareholders are too short term, and pass this attitude on to investee companies.

More interesting is what he says about corporate governance and company law, where Dominic Barton of McKinseys gets the obligatory nod. The section on UK law is quite surprising. He argues that section 172 of the Companies Act on directors'  duties enshrines the interests of shareholders above others, and essentially embeds "shareholder value" as an operational objective. Of course, the idea of that section was to enshrine "enlightened shareholder value" as an objective - the idea that playing fair by your employees, creditors etc was not in conflict with meeting the interests of shareholders. So it's interesting to see a Blairite advance this criticism. For what it's worth I agree that it basically does promote the interests of shareholders, certainly in comparison to the 1985 version below which put employee interests up their with those of members (shareholders).
"the matters to which the directors of a company are to have regard in the performance of their functions include the interests of the company's employees in general, as well as the interests of its members".
Whether directors' duties actually influence directors much is an open question. I have noticed that some companies use this to defend themselves - for example Barclays has used directors' duties to defend its decisions on both bonus pools (top of page three here) and tax avoidance.

“It is our fiduciary obligation to our shareholders - and it is the fiduciary duty of lots of our clients to their shareholders - to manage tax in an efficient way.” (from here)
So, the important bit: solutions. Looking at the shareholder side of the relationship Byrne's main big idea is... dual class shares. He notes that both France and Italy have passed laws providing greater voting rights to those who hold them for the long term, but he argues for going further. 
'Dual class shares' would allow us to go further - enabling the original founders and early venture capital supporters to control voting power.They’ve become de rigeur for the hottest tech initial public offerings, from Facebook and LinkedIn to Zynga and Groupon.
They’re allowed in the US and on the Continent. Why not here? 
(For info, I think the comment on tech companies is a straight lift from this FT article).

This bit of the speech is technically wobbly. I think I'm right in saying that Schroders still has a dual class share structure (though from memory they have voting and non-voting shares) and that UK-listed companies can still issue different classes of shares. As a comparison, I had a discussion with a BIS official several years back about differential dividends and was told company law didn't stop PLCs from introducing them, they just chose not to. The fact is that most UK companies got rid of dual class share structures, and would avoid adopting them now, because most institutional shareholders didn't like them. 

This is the problem with reforms of this nature, if the shareholders themselves don't change their attitude on the concepts of "one share one vote" or equal treatment of shareholders then simply permitting such structures (which as I say I think the UK does) wouldn't make much difference. Shareholders would oppose their introduction. We can see this opposition in the response Generation & Mercer got to their proposals on loyalty rewards or, a more practical case, when DSM tried, and failed, to introduce a loyalty dividend a few years back.

It's also important to note that shareholders didn't like dual class structures because they believed that they entrench management. Giving founder shareholders a shield against external shareholder power is certainly a double-edged sword. For example, Rupert Murdoch is a founder shareholder who benefits from a dual class share structure. One might argue that this does indeed allow him to take a long-term view, for example in his investment in Sky, but the flip-side is that it makes it practically impossible for independent shareholders to bring about change when things go wrong. We couldn't get James Murdoch off the News Corp board in 2011 despite having a clear majority of non-Murdoch shareholders onside. Another founder shareholder is Mike Ashley at Sports Direct - do we want him to have more power? 

I only say this to point out that a) we have been here before and b) there are decent reasons to have concerns about dual class structures. I'm certainly open to the idea that shareholder rights could be qualified, but it's important to be aware of the pitfalls.

Secondly, Byrne argues for a change in directors's duties and the purpose of companies. Again, what is actually being called for is a little unclear, so I'll just quote from the text:
I think we know that today’s corporate governance laws aren’t working in the national interest.
They’re not helping us think long term, or maximise investment, or pay our workers fairly for what they do.
So it is surely time for a review of corporate governance where we create the freedom for managers to think long term - that means giving greater weight to those who can't diversify their risk away: creditors, and workers past and present.
We might even go a step further and insist that directors have a fiduciary duty to declare the purpose of their business and enshrine a fiduciary duty to maintain that purpose in the company’s proceedings. Along with, Id suggest, reporting on how theyre doing closing the gender pay gap. 
This language sounds encouraging - giving more weight to the views of workers is obviously a good thing - though it needs to be spelled out how this would be achieved. The rest of this section seems to be suggesting something similar to what I think Colin Mayer suggested in Firm Commitment and something John Kay has also talked about - each company could set out their own purpose (i.e. we want to be the best widget manufacturer) rather than subscribing to a generic shareholder value objective.

Taken together Byrne's proposals, whilst a bit sketchy, are a fairly explicit turn away from shareholder primacy. That is interesting in its own way, given where Labour policy was on this stuff over the past 10 to 15 years.  However, I can't imagine much positive change in corporate behaviour resulting from the changes put forward.

In fact, the big problem is that on their own these proposals would principally have the effect of shielding companies against shareholder pressure. In other words, this would reduce one restraint on corporate managerial power, however weak and conflicted that restraint is. My own views here are pretty obvious - I would favour an increase in the power of those who work for companies, through board representation, perhaps tied to equity ownership but not as a pre-requisite. These kinds of changes would provide an alternative countervailing power within the firm. But this doesn't get a look in, and unions only get one mention - in relation to their weakness in the private sector.

Without introducing something along these lines I fear that simply reducing shareholder power would shift us more to a "benevolent dictator" model of corporate governance. In case you think this is over-egging it, endorsing an explicitly authoritarian governance model is exactly where another "big name" ended up on these issues:
Given the shareholder-management divide, the autocratic-CEO paradigm appears to be the only arrangement that allows for the effective functioning of a corporation. We cannot get around the authoritarian imperative of today’s corporate structure. (Alan Greenspan, from his biography The Age of Turbulence)
This approach implies a belief that, unrestricted by the bone-headed pressure of financial stakeholders who cannot and will not think long term, or employees who can't see beyond their own pay check, corporate leaders would finally implement the right strategies for their businesses, with the right levels of investment, employment and so on. Well, yeah, maybe. And perhaps this is where Blairism reasserts itself - the faith in corporate leaders as those who "create wealth" and know how to run stuff properly, if only we'd let them get on with the job.

So, a bit more thinking/talking going on with Labour that touches on the deep issues within corporate governance and ownership but, like David Sainsbury (who also used the term neo-liberalism), whilst Byrne acknowledges the evident flaws in the current model, the changes proposed in response are pretty small scale tweaks. They could even be counter-productive.

I think the renewed interest in corporate ownership and governance on the UK Left is unquestionably a good thing, and, as Byrne's contribution makes clear, the 1990s policy framework that Labour did so much to develop has pretty much reached the end of the road. But we are still quite a long way from having an alternative.

For what it's worth, my own view is that Labour must go beyond the soggy "consensus" on short-termism that exists in the comments of those such as Dominic Barton and Larry Fink. We will end up with the same old blah about amending the structure of executive pay and the need for less frequent reporting that will make no real change. Whenever there is a consensus amongst the powerful on what the 'real' problem is you can bet that this means that other options and viewpoints are being sidelined, and that the consensus 'solutions' will be pretty painless to them. If recent events in the Labour Party have taught us anything, it must be that the last thing any of us need right now is a lack of ambition, or to calibrate our ideas based on where we think the "sensible" consensus is amongst corporate leaders or advisers.