Saturday, 16 April 2016

Corp gov reform: do something meaningful or don't bother

I blogged previously about Liam Byrne's intervention on company law etc. More recently Liz Kendall has written something for Progress that slightly touches on the same turf. There is one sentence of significance for anyone interested in left-of-centre views on company law, corp gov etc -
We need to change the system so shareholders who hold on to their shares for longer are rewarded with greater rights.
As I wrote previously, while I'm not opposed to look at differential shareholder rights we need to be aware of the downsides. Greater rights for long-term holders strengthens the position of Rupert Murdoch at Sky, Mike Ashley at Sports Direct, and index-trackers. Plus I am realistic - there would be practically zero support for this reform from mainstream investor and corp gov bodies.

Which raises the bigger question - what's the point? If Labour is going to intervene in company law issues, potentially aggravating issuers and/or investors in the process, I see no value in pursuing something so utterly weedy. I really question whether differential rights for shareholders would have any meaningful impact on the short-term pressures on companies (this is leaving aside the deeper issues of whether companies really are too short-termist, and, if they are, whether shareholders are to blame). So really what's the point?

I ended up feeling the same about putting employees on rem comms, which has much more going for it as something for Labour to champion in my view. If we're going to aggravate executives by introducing another voice into corp gov, why not put employees on boards? Just putting on the committees that set exec pay seems like a massive missed opportunity (and just giving employees a role in execs' pay seems even more likely to wind them up while not giving employees an influence over bigger issues).

So, in my view, Labour should either start floating some significant reforms that might change the direction of travel, or stop talking about it. I see no point in talking up short-termism and its effect on corporate priorities as a major public policy issue and then coming out with featherweight responses.

There are things that Labour could move that could be distinctive, change the corp gov settlement in the UK and start tackling market distributions. Reinvigorating collective bargaining, promoting employee ownership and representation on boards, changing directors' duties (something Byrne did touch on), enfranchising asset owners (rather than managers) and stripping out investment costs are some obvious things. But these need to be pushed together as a package of reforms with serious intent.

Picking a couple of individual, inoffensive (and ineffective) policies just to do *something* around company law because some companies moan about short-termism is not worth the effort.  


Unknown said...

Its not at the Corporate Governance end that's the problem. First you have to end active fund management by requiring trustees to prove to their members that it is as cheap as passive. Which is what the DCLG are doing to the LGPS pools. Then you need to require trustees to produce a voting policy that is consulted annually with beneficiaries rather than just letting managers vote the shares. Then pension funds must report their voting to members. The problem isn't one of corp governance its a problem at the asset owning end and the use of active management.

PaintingWithNumbers said...

Totally agree.

Liz's proprosal (she's a great woman, I'm sure) would be ineffective and just introduce unnecessary complexity.

Tom Powdrill said...

Obv agree with you on active/passive & costs.
Disagree that there isn't a corp gov problem (what's the point of getting asset owners to toughen up voting and consult with and report to beneficiaries if not?). So if Labour is going to do work in this area I'd rather we went to the core, rather than try (again) to fiddle with shareholder rights and ask them to do it. Personal view is that we work with shareholders as a powerful influence on companies because a shareholder primacy corp gov model is the hand we have been dealt. But I'd rather Labour challenged the model.

Unknown said...

What's the Corporate Governance problem? Define it and then offer an alternative!

Tom Powdrill said...

I'll chuck back at you - why do you want asset owners to control voting rights and have policies developed in consultation with beneficiaries if you don't think there is a corp gov problem? What's the point?

PaintingWithNumbers said...


Primacy of shareholders is one strand, but not the only one, I believe to be problematic with the current corporate governance model.

The divorce between ownership and control is an already recognised phenomenon in the literature. But even if this shortcoming was overcome, a divorce between shareholder interest and worker interest would continue to exist.

A solution? To change company law to compel boards of directors to have elected worker representatives as board members so that investment and operating decisions can be more closely aligned to the interests of the workforce.

As a side point, but nonetheless relevant, I would also amend the financial reporting regime to compel the publication of a Value Added Statement in a firm's corporate report. This would assist with transparency vis a vis how the wealth produced in a year is allocated between the firm's various stakeholders.

Unknown said...

The ultimate owners of companies are the pension fund beneficiaries - not trustees, not custodian banks, not fund managers. Yet between them are layers and layers of intermediaries.

That means they have no chance of shaping their views on how their companies should be run. That is why the Law Commission stressed the need to consult us on 'non-financial matters'.

That is why that end of ownership chain needs reform. I am simply asking what governance changes or rather corporate governance reforms you'd like to see under company law?

I am not a fan of putting a worker on a board they will simply get outnumbered and corrupted, or chosen from a small sample. Perhaps something like the German arrangement with a supervisory board maybe.

I get the value added statement.

What else?

PaintingWithNumbers said...


Not worker (singular), but workers (plural) on a particular company's board. Company law can be drafted so that the number of workers on a board are not outnumbered. Moreover,company law could require worker reps to be elected by the company's workforce. Incidences of rogue worker reps (eg those pursuing agendas not mandated by their voters) should be minimised by the legal power of recall given to the company's workforce.

Yes, the German model of co-determination is very appealing. However, that is a two tier system whereas the UK model is a single tier board model.

You ask "what else?". Putting workers on boards is quite a fundamental reform which I expect (and hope)would have many ramifications. From such a reform many modifications to the manner in which companies operate would flow. That is why I advocate it and why it is resisted so fiercely by defenders of the status quo.

Were a 2-tier board to be introduced by UK company law, as per German codetermination, then the shareholders could also be given the same legal rights as the workforce to elect its reps. So worker reps and shareholders could sit on the same supervisory board in equal number with ties broken by some agreed mechanism. At the moment, company law grants only limited rights to shareholders to appoint or remove directors. Hence it is directors calling the shots, not shareholders.

If shareholders chose to stay inactive after being given enhanced rights, then workers coud be allocated the seats on the board which would otherwise have been allocated to shareholders.

Tom Powdrill said...

Yep, I'd agree with all of that.

Obviously day-today we have to operate within a shareholder primacy model because that is the UK's chosen corporate model (though PLCs could voluntary have worker representation if they wanted - I think FirstGroup is the only PLC that has a worker director and they have just the one). Under this model shareholders alone are granted control rights (even though legally they aren't owners) so shareholders are an important and influential group that unions need to work with.

But I think we should challenging the model itself. The prioritisation of shareholders over other stakeholders doesn't do us any favours either in specific cases or overall (i.e. returns to capital vs labour).

John Gray said...

since there is a less than zero chance of the present government doing anything like this until it is kicked out then the AMNT Red lines may the best way forward for now (or possibly even the only show in town)

Tom Powdrill said...

hi John
you seen my email re: my favourite transport company? (in response to your suggestion at TUSO meeting)

John Gray said...

Sorry this is late but great email Tom. Spoke to Janice tonight. Need to push this