Friday, 18 November 2016

Has UK corporate governance swung to the Left?

Continuing on from the theme of recent posts on workers on boards, despite some of the pushback from expected sources, what is really striking is how much corporate governance policy has shifted towards policies largely articulated by the Left in recent years.

Workers on boards is the most obvious example. It is an important policy for the labour movement in general, supported by major unions of different political orientation, the TUC as the national centre, and the Labour Party. As I've blogged previously, it's also supported by the Greens, the nationalists and the Lib Dems.

This was a policy that was on the fringes of the corp gov debate for years. Now it has been consulted on once already by government (by BIS, as was, under the Coalition) and is about to be again, plus it's being looked at by the BEIS committee. Something will change, and even if the govt cops out this time the door is open for the first time since the 1970s.

I've also blogged before about disclosure of intra-company pay ratios. Again, this has been pushed by the TUC and others for a long time. It was resisted for a long time, partly on the basis that the info wasn't any use to shareholders. Now both investors - like Hermes and Legal & General - and the asset management trade body are pushing for ratios to be disclosed. It is therefore very likely to happen either through voluntary company disclosure or, if that doesn't happen, intervention.

This is tied to a shift away from the assertion that what matters is structure rather than scale in executive pay. Pressure over the scale of executive pay hasn't just come from the Left, though it is more prevalent on my side of politics. And it was an initiative of a Left think tank (Compass) that led to the creation of the excellent High Pay Centre. Investors weren't supportive in the past - not that long ago most asset managers would argue publicly that overall amounts don't really don't matter, it's performance linkage that is most important. They don't do that any more. Perhaps this is just tactical silence, but it takes a "brave" corporate governance wonk to argue for prioritising structure over scale in the current environment.

There is also a consensus building around the need for equal treatment for workers and execs in relation to pension provision. This is one of the most unjustified aspects of exec pay in my opinion. Once more, the pressure for change had for many years come principally from unions, though there was a joint NAPF-LAPFF letter to companies about it a few years back. Now both LGIM and Hermes explicitly call for a move to equal treatment (See page 5 here and page 3 here).

Getting into the guts of executive pay, there is also growing scepticism about the value of performance-linkage on its own terms, because of the growing evidence about the mixed results of incentive pay. This one is perhaps harder to claim for the Left, though its use in the corporate governance context has again tended to come from my side of the fence. We have now seen both rem consultants and the CIPD produce interesting work on this topic. This report from last year is worth a read for example. I don't think the message has entirely got through. After all, a really behaviourally-informed approach to exec pay (and exec psychology more generally) should put LESS emphasis on long-term reward and more on the short term. But that's for another day.

We might also look at the way that policy is shifting away from disclosure as a tool. Until relatively recently it was the default position that all we need to do to correct a problem like exec pay is make more information available to market players and they will sort it for themselves. Pensions policy has shifted away from this (in large part due to the influence of behavioural economics). Corp gov is playing catch up, but the idea that it's just a disclosure/transparency problem is pretty much dead.

And finally the big one: shareholder primacy. For the whole time I've worked around corp gov this fundamental approach has been taken for granted by most people in investment and assumed to be non-ideological. But it has been increasingly attacked from the Left as a poor way of granting rights, distributing rewards and framing decision-making. The TUC again has done great work here.

As I blogged at the time, shareholder primacy was explicitly questioned during the parliamentary commission on banking standards. At the time some of those giving evidence acknowledged the weaknesses in the model, including the IoD, but the govt did not act. But since then a number of high-profile people including Andy Haldane and John Kay have also been critical. As I blogged quite a lot in the past, we've also seen regulators take a more interventionist stance in respect of financial organisations in a way which raises the question of whether shareholder primacy really exists in that sector in a meaningful way now.

What we may also be starting to see is a loss of faith on the part of people who work for investing institutions themselves. On this point, it's worth looking at the submission from Guy Jubb (former head of corp gov at Standard Life) to the BEIS committee. He says, for example:
Shareholders, in general, and institutional investors, in particular, should be efficient and reliable agents for accountability and change when boards and directors are failing to fulfil their responsibilities but often they are not. Policymakers and regulators, including the FRC, should re-calibrate their assumptions to recognise the limitations of investor stewardship.
 the nebulous concept of enlightened shareholder value, lacks grit, is unduly focussed on shareholders and fails to provide an effective basis for legal accountability
This is someone who was directly involved in the interaction between companies and investors for many years remember.

When you stand back and look at all of this, it is hard to resist the conclusion that the Left has won some battles, and that the centre of gravity on a range of corporate governance issues has shifted in our direction. I think this one area where the experience of the financial crisis has had much more impact than previously realised, perhaps most of all by exposing the weakness of shareholder oversight.

Whether this heralds a decisive or lasting lasting shift remains to be seen. What happens on the question of worker representation in corp gov is pretty critical in my view. Policy wonks may give up on shareholder primacy without shifting to a stakeholder model. Previously I would have said we were moving into a more regulatory governance model, but the shocks from Brexit, Trump and who knows what next may make this look like too much of an "insider" solution.

Nonetheless, in the whole on the policy front it definitely looks like we've made some progress from the Left. Onwards and upwards!

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