Tuesday, 18 July 2017

A new Left alignment on corporate governance

I can't overstate how much I like the report that the IPPR has just issued on corporate governance. I've been boring on for a while now about what I see as the end of the 1990s model of corporate governance for the UK. At the same time there has been some excellent work from the TUC on both the challenges to shareholder primacy and the value of worker representation in corp gov. Plus lots of good blogging on this coming from the Left, particularly from Chris Dillow at Stumbling and Mumbling. And some sceptical voices from inside the system, like Guy Jubb and Chris Hodges.

I think what Mat Lawrence at the IPPR has managed to do is clarify really important, and increasingly evident, problems with the UK corporate governance model. Anyone coming at these issues from the Left from here on in should take Mat's analysis as one of the things they use to orient themselves. We have given the 1990s model, founded on the illusion that shareholders "own" companies, a very good try. We have reached the point that we now have codes to try and get shareholders to act like the model of how agency theory suggests they should act (even laissez-faire in capital markets has to be planned).

Conservatives in all parties talk about how disclosure of executive remuneration has had the unintended consequence of driving up pay levels. Yet they often fail acknowledge that the 1990s compact had two key elements: corporate disclosure and shareholder empowerment. They are largely silent on the failure of that second element. To me (to nick Albert Hirschman's idea) the "unrealised expectation" that shareholders would use that greater disclosure and increased power to act on pay in a way that aligns with the public, or other issues, is of critical importance. I think it's very important/encouraging that the Left acknowledges this point, as this will enable us to move on. I think the Right is still stuck in agency theory textbooks.

As I've blogged before, I think the 1990s model has run out of road. We have tried refashioning the relationship between companies and shareholders to make it work for progressive aims and it has not delivered. When I have a bit more time and headspace I will write my own Mea Culpa. I think the Left is much better advised to view the relationship between companies and investors as a field of activism in relation to specific companies (in the style of Share Action), rather than an area of public policy work. The gains from the latter have not been impressive. We would be better focusing policy work on ensuring that other voices - first and foremost that of employees - get proper representation within the firm, rather than further strengthening the position of shareholders in the hope that they will speak on our behalf.

So, go and read the IPPR report and let's get started on the alternative.

Thursday, 6 July 2017

Nex Group chair costs himself £25,000

Next Group, the successor company to ICAP, just managed to publicly humiliate itself by spending company funds on political campaigns.

The company has its AGM next Wednesday and disclosed in the notice of meeting that it had spent £25,000 funding five Conservative Party candidates facing Liberal Democrat challengers in the last election. This was literally a waste of money, since three of the Tory candidates lost.

Following exposure of the donations by The Independent, backed up by a great comment piece, the company issued a statement that the donations were the initiative of the chairman, Charles Gregson, and that he would personally pay back the £25,000. In addition to the media coverage it was clear that various proxy advisers had recommended opposing the resolution at next week's AGM seeking authority to... err... make political donations, and that a number of shareholders would indeed have voted against.  

And they may still. Because there is something pretty disturbing about this case. A PLC can't make donations without shareholder approval. This will be Nex Group's first AGM, so it had not sought prior approval as Nex Group. But the forerunner company had sought shareholder approval at its AGM last year.

Here's what it put in the notes to the resolutions (my emphasis added) in their notice of meeting:

Authority to make political donations (resolution 12)
Resolution 12 is to approve the making of political donations and incurring of political expenditure by the Company and any of its subsidiary companies of up to an aggregate amount of £100,000 in the period up to the Company’s annual general meeting to be held in 2017. The Act contains restrictions on companies making donations to political organisations or incurring political expenditure without prior shareholder approval. The directors have no present intention to make political donations but, because of the broad definitions of political donations and political expenditure contained within the Act, the directors consider it prudent to obtain this shareholder approval. There has been no expenditure under the corresponding authority obtained at the 2015 annual general meeting of the Company. 
This is important. Many companies seek authority to make political donations, but do so to avoid being caught by a wider definition of "political expenditure" (paying for stands at conferences etc). When seeking these authorities companies typically explicitly state that the authority will not be used to make political donations. As you can see, ICAP strongly suggested this would be the case. But donations were made by Nex Group in any case (assuming Nex used the carried over ICAP authority).

At the least this is a breach of investor trust, and I seriously question why any shareholder would vote for the resolution next week after this has happened. But I wonder whether a shareholder could argue that this is actively misleading - I've seen cases taken over misleading IPO docs for example. Companies rarely completely fold to campaigners' demands immediately, but the fact that the chair immediately agreed to pay the money back out of his own pocket makes me wonder if the board thinks they crossed a line.

More generally, perhaps it is time that shareholders toughened up on the issue of political spending overall. Why not ask for disclosure of any spending that the company thinks falls within the wider definition of political expenditure? It might shake some interesting data out, and reveal things shareholders may be uncomfortable with.

Finally, I can't help but notice that the chair of Nex Group is also a non-executive director of Caledonia Investments, which people may remember had a bit of history of this kind of thing which also ended badly.

Friday, 2 June 2017

Chantal Mouffe interviewed in 2007

“The consequence of the disappearance of a fundamental difference between the democratic parties of centre-left and centre-right is that people are losing interest in politics. Witness the worrying decline in voting. The reason is that most social democratic parties have moved so far towards the centre that they are unable to offer alternatives to the existing hegemonic order. No wonder people are losing interest in politics. A vibrant democratic politics needs to offer people the possibility of making genuine choices. Democratic politics must be partisan. In order to get involved in politics, citizens have to feel that real alternatives are at stake. The current disaffection with democratic parties is very bad for democratic politics… I am really worried by the celebration of the politics of “consensus at the centre” that exists today. I feel very strongly that such a post-political zeitgeist is creating favourable terrain for the rise of right-wing populism.” 

Thursday, 18 May 2017

In praise of conflict (not just the band)

I don't read much political theory, but am very interested in Chantal Mouffe so recently bought this. Just started reading it last night and great to find that someone has properly theorised some issues where I've had my own half-baked thoughts. This stuff should be compulsory reading for those anaesthetised by the "we're all on the same side, all interests align" guff that is everywhere in ESG land.

"[P]olitical questions are not mere technical issues to be solved by experts. Proper political questions always involve decisions that require making choices between conflicting alternatives. This is something that cannot be grasped by the dominant tendency in liberal thought, which is characterised by a rationalist and individualist approach. This is why liberalism is unable to adequately envisage the pluralistic nature of the social world, with the conflicts that pluralism entails. These are conflicts for which no rational solution could ever exist, hence the dimension of antagonism that characterises human societies."


"A well-functioning democracy calls for a confrontation of democratic political positions. If this is missing, there is always the danger that this democratic confrontation will be replaced by a confrontation between non-negotiable moral values or essentialist forms of identifications. Too much emphasis on consensus, together with an aversion towards confrontations, leads to apathy and to a disaffection with political participation. This is why a liberal democracy requires a debate about possible alternatives. It must provide forms of identifications around clearly differentiated political positions."

PS The band.

Sunday, 14 May 2017

Shareholders go quiet on executive pay

Once again, ahead of the UK AGM season we had the now traditional "boards braced for stormy AGM season" story. Anyone who follows this debate will know what I mean. We've all seen several times the claim that a second "shareholder spring" is coming as investors "get tough" and "crack down". This season the reheated story was spiced up with the extra line that the government is considering giving them even more powers.

Of course, the proportion of companies that lose a vote in any season is tiny (very rough guess: less than 2% of the All Share) and the "shareholder spring" itself had only a handful of defeats. So really investors only needed to turn the dial by one notch to deliver a record season. I suggested that getting defeats into double figures, while still meaning 95% of companies get shareholder approval, would send a pretty important signal.

It's pretty clear now that is unlikely to happen. So far there have only been two pay defeats - Pearson and Crest Nicholson - and both were on the advisory remuneration report vote, not the binding remuneration policy vote. This means that, for all the pre-season puffery, no companies have been given a binding direction by their shareholders because of their approach to executive pay. However you cut it, this year's AGM "fireworks" have been duds. 

However, the other thing that is being put about in the business pages is that while, yes, there haven't been the number of defeats people were expecting this is because of successful shareholder engagement behind the scenes. There are couple of examples being briefed of companies pulling resolutions before the vote to avoid defeat, or making big concessions during engagement with shareholders. 

I'm a bit sceptical for a couple of reasons. First, this is a line I have heard quite a lot over the years, primarily from asset managers that tend to vote with management most of the time. So it's not clear to what extent the engagement that has taken place this year differs from other seasons. Second, companies are not stupid. Like any good negotiators, in a tricky situation they are going to go into an engagement with a headline ask, and an acceptable fallback position. We don't know to what extent the agreements that are being agreed between companies and asset managers represent where the former party wanted to be in the first place.

Which leads onto the key point in all this. No-one outside the closed circle of corporate executives, asset managers and remuneration consultants really knows what is going on. Because asset managers prioritise confidentiality in engagement, exactly what deals are thrashed out - and who amongst them is doing the most thrashing! - is not information that is available to the public. I know there are some good people out there who do feel a responsibility to try and bring some of the public concern about executive pay into their discussions with companies. But I know there is a lot of bullshit out there too. I have been hearing the "we are engaging behind the scenes" line from asset managers that I know put little pressure on for about 15 years. 

Many of the people who exercised the votes that approved the executive pay arrangements that are apparently now egregious are still pushing the same (Vote For...) buttons. Are we sure that they have changed? In my experience, many people within asset management continue to hold views on executive pay that are well to the Right of the public (who are often considered to hold very ill-informed views about the value of executive talent). It's not obvious that we should conclude that there has been a real change unless we get some real evidence. 

So I would not advise people (including business journos) to accept the "it's all getting sorted out in private" line uncritically. More generally, I don't think the current position is going to hold for the asset management industry. Executive pay continues to be a subject of public debate, and anger. This season the headline output of what shareholders do - votes - may fall rather short of the pre-match build-up. In fact, it could be interpreted as evidence that shareholder oversight is far too weak a tool. But I don't think arguing that "we're sorting it out in private but can't tell you about it" is going to convince many waverers that actually yet another season where the vast majority of companies got approval is actually OK.

In the current environment does making private deals between corporate executives and major financial institutions, and telling the public they can't be allowed in, over an issue as politically charged as executive pay look like a great outcome? I think shareholders are going to have to become much more open about their engagement and its results, and they really need to think about the public output that voting in favour but engaging privately creates. Even so, I am not sure another season where even people who follow executive pay will have seen very little happen is going to do much to stop the the drift away from shareholder oversight as a public policy tool.

Monday, 8 May 2017

Internal logic versus external stupidity

I've blogged about National Express a few times over the years, mainly in relation to its anti-union activity. But today a story in the FT about its executive pay arrangements caught my eye. I think it's a great example of why performance-related pay is a colossal waste of time, including trying to tie pay to ESG targets.

As many people may know, there was a tragic accident in the company's US school bus business last year in which six young children died. This is clearly pretty much the worst safety outcome a company that transports children can have.

Understandably, therefore, the company has reduced to zero the amount of the chief executive's bonus that is tied to safety. But, he's still going to get the rest of the bonus, which equates to over 150% of salary. Some shareholders are ticked off, and think that the company should not have paid any bonus at all, sensing that a chief executive getting a seven figure bonus in the year when the company suffered multiple child fatalities is not a good look.

To me, this sort of outcome is the inevitable outcome of the performance-related pay delusion. If you set multiple targets for variable pay you are always going to get these kinds of perverse outcomes. If you've hit your financial targets but there have been fatalities then simply not awarding the bits of pay tied to ESG criteria is logically what you should do. But it looks appalling. Applying some common sense has its own problems - for people within business/finance at least. If you scrap the bonus entirely (which is what I think they should have done) then it makes plain what a joke the system is - it is incapable of delivering sensible outcomes.

This isn't the first time this has happened in relation to fatalities involving a PLC. The CEO of Thomas Cook got in a similar mess by giving up some, but not all of her share award. To try and stick to a logical/statistical approach merely invites the question "so how many people would have to die before you didn't take any bonus/share award?". Companies - or investors - that simply hide behind the incentive design look inhumane.

There was a similar example with News Corp when the hacking scandal blew up - with James and (I think) Rupert Murdoch agreeing to give up some, but not all, of their bonuses. And, more generally, when there is a lag between performance and reward (because shareholders have asked that reward be tied to slightly more long-term performance) you get examples when exec awards vest despite performance having subsequently turned bad again.

I know I am well out of step with many ESG people here, but to me the fundamental problem is the insistence on performance-related pay. Quite aside from motivational issues, perverse incentives and the whole question of why the most highly paid need or deserve further incentives to get them to do their job, performance pay generates these ridiculous outcomes. They make sense according to the text book internal logic of incentive schemes but they look terrible to any half conscious actual human being. Instead of wasting even more time trying to tie ESG criteria to pay we should be scaling back variable reward if not scrapping it altogether.

Wednesday, 3 May 2017

New guidelines for assessing company behaviour on labour issues

The Committee on Workers' Capital (CWC) has just published an important new document - the CWC Guidelines for the Evaluation of Workers' Human Rights and Labour Standards.

Its the product of a couple of years' work by a global group of trade union experts from countries including Australia, the US, Spain, Canada, the Netherlands and the UK. It also has the imprint of the ITUC, the peak body in the global labour movement. So if you're an investor or an ESG researcher looking at a company wanting to get a handle on how well it handles labour issues, these are the indicators that you should be looking at.

Press blurb below, the guidelines themselves are here.

Global Trade Unions Release Guidelines For The Evaluation of  Workers’ Human Rights and Labour Standards

Global union initiative will elevate the profile of social issues in the investment chain

VANCOUVER, CANADA, 1 MAY 2017 - Investors will be able to properly evaluate company adherence to robust labour standards and responsible employer relations as a result of a new global trade union initiative.

The Committee on Workers’ Capital (CWC) Guidelines for the Evaluation of Workers’ Human Rights and Labour Standards are a comprehensive set of key performance indicators (KPIs) for investors to evaluate companies’ social performance. The guidelines were produced by trade unions from around the globe in response to concerns that asset owners and other investment chain actors are not equipped with tools to adequately scrutinize social issues such as labour relations in their environmental, social and governance (ESG) analysis.  

The CWC Guidelines were endorsed at a meeting of the Council of Global Unions in February 2017, giving them unique status amongst ESG KPIs as an official document of the global labour movement.

“When companies like XPO Logistics or Sports Direct mistreat their workforce, they create risks for investors,” says Sharan Burrow, General Secretary of the International Trade Union Confederation. “Yet to date the ‘S’ in ESG has been the weak link in investment analysis, and investors have lacked a shared framework to assess companies’ approaches.”

The Guidelines are inspired by key international norms, standards and frameworks including the UN Guiding Principles for Business and Human Rights, the OECD Guidelines for Multinational Enterprises and the ILO Fundamental Conventions. The indicators are grouped in ten themes, which include workforce composition, social dialogue, supply chain, grievance mechanisms, workplace diversity, and pension fund contributions for employees.

 “The CWC Guidelines will help pension trustees, asset managers and rating agencies properly evaluate the social performance of investee companies,” says Burrow. “In addition to improving investors’ ESG analysis, use of the Guidelines will send positive market signals for companies that respect fundamental labour rights. Ultimately, the capital of working people in their pension funds should support the fundamental labour rights that were necessary to create pension funds in the first place.”

The CWC Guidelines were developed over the past 16 months by a multinational working group of trade union specialists from countries including the US, Australia, Spain, Canada and the UK.  The CWC will use the Guidelines to elevate the profile of decent work practices in its work with pension fund trustees and other investment chain actors such as sustainability rating agencies.

For a one page briefing on the CWC Guidelines, please click here.

Sunday, 30 April 2017

Non-alignment of interests

I've recently found something that captures important points relating to competing interests within the firm: this news story about American Airlines. More specifically, the quote from the analyst is almost perfect:
“This is frustrating. Labor is being paid first again. Shareholders get leftovers,” Citi analyst Kevin Crissey wrote in a note to clients. Investors showed their displeasure by sending American Airlines Group Inc.’s stock down 5.2% to $43.98 on Thursday. 
Why do I like it so much? First, as I've bored on about at length, there's a strain of corporate governance boosterism that seeks to deny that there is really any tussle between competing interests at all. The best/worst example I have seen, in a piece about long-termism, is this godawful claim from McKinsey:
in truth there was never any inherent tension between creating value and serving the interests of employees, suppliers, customers, creditors, and communities, and proponents of value maximization have always insisted that it is long-term value that has to be maximized.
"never any tension" FFS!

Yet in this news story we see an obvious tension between the interests of labour and the interests of investors (or those speaking on their behalf). I know some may retort that these aren't the real investors and/or if they were taking a long-term perspective then maybe they would support higher wages. But in Actually Existing Capitalism, public companies consider that asset managers are the "investors"/"shareholders" (as asset managers generally do themselves), and analysts are seen as providing insight to assist investors. What's more the tension is made absolutely explicit by the analyst: if labour gets more investors get less.

Secondly, the analyst also provides a very good expression of shareholder value mission creep. The complaint is that labour is getting paid first and shareholders are getting 'leftovers'. But this is how the model is supposed to work. The company pays all necessary costs and then distributes what is left to shareholders. Yet the analysts seems to think that this is somehow out of order. This is exactly the point Colin Crouch made a few years ago:
In theory, shareholders’ earnings, their dividends, based on profits, are the residuum in a firm’s trading activities, the last claim that is made on a firm after all claims from bond-holders, employees, creditors, investment needs and other requirements have been met. This is the risk-bearing activity at the heart of capitalism that enables firms to be innovative and that justifies shareholder maximisation: if the shareholders must wait until all other contractual claims on a firm have been met then they need to be able to have the final say over how the firm is managed. Also, their rewards from successful transactions must be high, as these must compensate them for the losses that will come from risks that go wrong. 
This principle remains valid if a firm goes bankrupt; shareholders have the last claims on any assets. But during routine operations of a viable company it has been heavily compromised by the emergence of profit expectations within today’s highly volatile stock markets. Ideas spread as to what short-term return on profits ought to be available in the market; remember shares are being bought and sold with an eye primarily on the secondary markets. There will therefore be a flight from shares of firms not meeting the prevailing idea of a good return. Such firms become vulnerable to hostile takeover, something which senior managers are keen to avoid, as it often leads to them losing their jobs. Managers are therefore under strong pressure to meet or exceed a target level of return to shareholders. If necessary, investment plans, customer service and employee compensation will have to be held back to meet this target. Once this occurs, distributed profits are no longer a residuum but are an early call on a firm’s earnings.
It's obvious that the directors should not pay employees less than they think is necessary to recruit, retain and motivate them. If the board prioritised paying investors over paying staff what they think is necessary to meet the needs of the business I think that would be a breach of directors' duties. So, in technical terms, employees should get paid first and shareholders should get "leftovers" - that's the model.

Assuming the analyst knows the basics of corporate law and does not mean this literally, I guess the point is really that the board should have thought more about shareholder interests when making pay awards, with the implication that employees should have got less. Which again suggests that there are indeed conflicting interests (and note that the stock did take a hit).

So, in today's capitalism, it is clear that employees' and investors' interests can indeed be in conflict. It may not always be the case, and I do think investors often would benefit directly from employees having better terms and conditions. But there is conflict there.

In light of this, the recent discussion about worker representation in corporate governance looks even more pointed. If asset managers are responding to a consultation arguing that workers should not get any formal role they are, essentially, simply asserting that their interests should (continue to) come first in that arena. I'm not sure, to put it mildly, that those of us who want to rebuild labour's share of the wealth created within the firm have much to gain by strengthening shareholder rights further in the UK. And we should be arguing relentlessly for employees to gain more power and resources within the firm directly, because experience shows that investors (as they are currently constituted) in the main aren't reliable supporters. Or at least not yet.

In my opinion, it would much better if we were open in our discussion of corporate governance and related issues that not all interests pull in the same direction all of the time. Then at least we could make more honest decisions about who gets what, rather than pretending we can all win and, in doing so, obscuring who actually does (clue: for the last 30 years or so it hasn't been labour).

As the late Tony Judt put it:

“Societies are complex and contain conflicting interests. To assert otherwise – to deny distinctions of class or wealth or influence – is just a way to promote one set of interests over another. This proposition used to be self-evident; today we are encouraged to dismiss it as an incendiary encouragement to class hatred.”

PS. There is nothing new under the sun, the idea of praying "long-term interests" in aid of better corporate behaviour is an old one, not some startlingly fresh insight from McKinsey.

Wednesday, 26 April 2017

A decade of blogging

I realised recently that I've just completed a decade of blogging. Although the arrival of two kids means I blog a lot less often than I used to, and read a lot less to blog about, I still feel the urge to communicate. Partly I just enjoy writing, but I also feel/hope that it is worth putting an unequivocally pro-labour and pro-Left voice into the blogosphere on issues like corporate governance, ownership etc.

The benefit of blogging for this long is that I can see some of the trends that have come and go over the period and - I think - see the broad outlines of change. So here are a few general observations after ten years of doing this stuff. NB - I am speaking about the UK here primarily.

1. Obvious really, but the financial crisis had a much deeper and lasting impact than many people on the centre Left initially realised. I think people did initially expect a big shift, but because there wasn't an immediate swing to the Left in policy or in political support many concluded that this wasn't going to happen at all, and that things would carry on much as before, albeit with much constrained public spending. I think we can now see that this conclusion was wrong, but perhaps until Corbyn, Brexit and Trump quite a lot of people still thought not much would change from the 1990s.

What is particularly striking is the disconnect that has developed between technocratic policy wonk opinion and public opinion, and a seeming unwillingness on either side to meet in the middle. I think a lot of mainstream policy people still think that they got nothing much wrong over the past couple of decades, and the public are just too dense to know what's good for them. These people also have considerable influence over our politicians. Hence the tortured political positions we see post-crisis where politicians play to the public with their rhetoric and policymakers with the detail and neither group feels entirely satisfied. Perhaps it was ever thus, but the gaps between policy people and the public and between rhetoric and reality feel very large now.

2. Corporate governance reform involving shareholder empowerment no longer looks like progressive policy. From the 1990s onwards a number of influential people on the Left enthusiastically embraced the ideas that shareholders = the public, that shareholder engagement was a new/exciting way to restrain poor corporate behaviour, and that tooling up shareholders could tackle tricky issues like executive pay. I'm not sure quite when this hit the wall, but I think you would struggle to get many people on the Left to get out of bed for this agenda now.

In large part this is due to practical experience. Shareholders, which mainly means asset managers, have been overwhelming uninterested in tackling the scale of executive pay, and unwilling to engage over labour issues. I think we lost a decade - and corporates gained the same - in fiddling about trying to find ways to make asset managers do things they don't want to, and trying to redesign executive pay rather than just constrain and/or it.

During the same period the nature of the shareholders of UK business changed, so there is now much more foreign ownership. This makes it significantly harder to argue that giving shareholders more power is a good thing for people in the UK. If dividends and voting rights are going to American asset managers (who care even less about executive pay than their UK counterparts) what progressive agenda is being served by giving them a greater say?

For me personally, the way that asset managers and some of the business/finance lobby groups have responded to the question of worker representation on boards is the final straw. It wasn't a surprise, but I have still found it absolutely sickening. There is no way I would personally support any further extension of shareholder rights since many of those shareholders lobby against my interests. And in my opinion the fact that these organisations are increasingly active in public policy is net negative for the Left.

3. ESG progress, from a labour/Left perspective, has been disappointing. To many of us it looks like "responsible investment" is largely about executive pay plus climate change. Labour issues, despite labour rights being central to all the key human rights standards, are still seen as "political" and few investors (with honourable exceptions) seem willing to hold companies to account to anything like the same extent they would do over environmental issues.

I think there are several issues at play here. One is that there is a tussle over resources within the firm (forget the Mckinsey bollox that all interest align over the long term) and some investors don't want to give any ground. Undoubtedly there is a cultural element too - many people in the City hold views on various issues that are further Right than the public, even if they don't realise it. There are few union fans. There is a generational aspect - many younger ESG people have little knowledge/experience of the labour movement and are more drawn to environmental issues. And there is a class aspect to it too.

The net result, as I've said before, is that responsible investment in general gives off the vibe of being about wealthy, globally mobile liberalism. The worst sins in this world view are market imperfections and a lack of meritocracy. But this world view is given airtime through the management of the savings of millions of people who will never get into the top tax bracket or be headhunted for non-executive roles. Again as I have said before I do not think the disconnect between the views articulated by most ESG people and those of the people whose money gives them a job is sustainable.

4. Unions have remained largely focused on pensions as benefits rather than pools of capital, and potential leverage. This has started to change in the past few years but we didn't catch the capital strategies bug initially. I personally think this has been a missed opportunity, though I would prefer to see unions engage tactically with capital where they have specific, achievable objectives rather than waste time and resources trying to rebuild "the system". I've become more convinced of this over the past few years, and I say this as someone who is interested in policy and has enjoyed doing policy work. In my opinion it just doesn't deliver enough to make it worthwhile.

5. There is nothing inherently democratising about markets, widening share ownership, greater participation in the finance system etc, if anything the reverse has been true. The idea of self-determination ends at the office/factory/depot door for the large majority of people I deal with professionally. Hence the hostility towards worker representation in corporate governance. Most people in this world do not believe that business needs to be democratised, but they do believe that more functions in society should be run by the private sector. This can only lead in one direction.

And the same applies to pension funds. Whatever the theoretical merits of the "professionalisation" of trusteeship, in practice it has led to de-democratisation. Across several key markets member trustees have been denigrated and moves have been made to remove them from decision-making. As such the control of capital that belongs to the public has increasingly slipped from their grasp.

Along this path the real threats to the subversion of fiduciary duty have become clear. If you are union person with any experience in pension fund investment issues you will have had lectures about Scargill, and the need not to put political objectives ahead of the interests of beneficiaries. Imagine how terrible that would be.

But it is OK for policymakers and politicians to try and determine the asset allocation that pension funds adopt (ahem... infrastructure) through rewriting investment regulations and altering the structure of pension funds. We now have a situation where policymakers are making all kinds of regulatory tweaks in order to help funnel capital that is supposed to fund our retirements into projects that they won't raise taxes to pay for (even if this might be a cheaper option). I don't remember ever being asked to vote on this one.

Monday, 24 April 2017

Pension funds and labour standards

I recently spent quite a bit of time trawling pension fund's responsible investment policies to see what, if anything, they say about labour issues. The background to this is the long-expressed gripe that investors seem to spend less time looking at the S in ESG than the E and G, and, as a result, it can be hard to get them focused on labour issues.

What I found was that, actually, a lot of big pension funds and providers in Europe do have policy around labour issues, with many referring to the UN Global Compact, OECD MNE guidelines and ILO conventions. But there is a big geographical bias. Most funds in countries like the Netherlands, Sweden and Denmark (which all have some big funds) refer to labour standards in one way or another. But most funds in the UK do not.

This is, to put it mildly, a bit of a problem since the UK is also a country where workers have no formalised role in corporate governance. So we don't get board representation, but nor do our pension funds promote labour rights in their ESG policies.

One of the things that surprised me while doing the research was how may ex-UK pension funds still apply screens and/or divestment policies. In the UK we are a bit sniffy about this approach and personally I still think engagement is what we want at most companies for most of the time. But doing the research has firmed up my belief that the UK really has no place to tell other jurisdictions how to do RI - our funds are laggards in my opinion when it comes to international standards (for example, little discussion here about application of the OECD guidelines).

In terms of which companies are excluded because of labour issues, I specifically looked at Walmart (because I was aware it was on some funds' exclusions lists) and Ryanair (because.... well... because it's Ryanair innit?). Here's what I found

And finally there are some good examples of strong policies on labour issues out there, probably my favourite is ERAFP, below:

The full report is available on the ITF website here: http://www.itfglobal.org/en/resources/reports-publications/pension-funds-and-respect-for-workers-rights/ 

Thursday, 9 March 2017

Prosegur IPO - potential investors should take note of labour risks

Just a quick plus for UNI and their excellent work exposing poor labour practices at Spanish-listed security firm Prosegur. The company is about to carry out a partial float of its cash-in-transit business, which makes this a very timely issue for investors thinking about buying stock (I guess passive managers tracking European indices will have to).

Anyhow, significantly the prospectus for the IPO makes reference to the potential reputational risk arising from allegations of poor labour practices. In addition, investors should be aware that UNI has submitted an OECD complaint. Therefore this one requires some proper due dilligence.

UNI's release on this below

Prosegur’s IPO prospectus recognizes that UNI’s charges could present a risk for investors

Prosegur, the Spanish  private security giant, is preparing to raise capital for its Cash in Transit division through an IPO in March. 
In communications with potential investors, the IPO’s  prospectus recently  recognized that UNI’s allegations “of unfair labour practices … specifically… in Latin America and India”  could damage the company’s reputation.    
For several years, UNI has complained that Prosegur has violated the rights of its employees to form and join unions, and that its actions violate internationally recognized human rights standards.
In January, 2017, UNI filed a case against Prosegur with the government of  Spain which alleges that the company continues to violate the rights of employees in Latin America and India and does not have a due diligence process in place to identify and avoid the risks of human rights violations. Such a due diligence process is a requirement of the OECD Guidelines and the UN Guiding Principles for Business and Human Rights.
UNI’s submission provides examples of union activists employed by Prosegur in Latin America who have been threatened, harassed and attacked. It also cites a report from a renowned Indian labour attorney which found that Prosegur had committed systematic breaches of minimum legal obligations under Indian law.   
UNI Global Union Deputy General Secretary, Christy Hoffman said, “Why should any  investor accept the risk that Prosegur’s faulty management systems will continue to be the subject of global criticism? There is no excuse for Prosegur’s refusal to enter into a mediated solution to address the glaring deficiencies in its so-called “flexible” and “decentralized”  management practices.  These leave the door open for an “anything goes” approach, something which is not condoned by any standard of human rights due diligence.  Its time for Prosegur to put its house in order if it plans to continue to expand into high risk areas across the world. ”  

Friday, 17 February 2017

Where are the workers?

The LSE has produced guidance on company reporting on environmental, social and governance (ESG) issues. So I searched it for references to various issues. Guess what? Like most RI/ESG initiatives, labour issues get very little attention.

Shifts in the UK corporate governance model

I've blogged a bit recently about what appears to be a significant shift in thinking about corporate governance. There are signs all over the place that faith in shareholder primacy is faltering. There have been plenty of think pieces on this subject over the past few years, so I just want to highlight two recent voices from within the system. The first is Guy Jubb, who used to be the corp gov head honcho at Standard Life. His written submission to the BEIS committee inquiry makes a number of interesting points. On Section 172 of the Companies Act he says:

This duty, which is derived from the nebulous concept of enlightened shareholder value, lacks grit, is unduly focussed on shareholders and fails to provide an effective basis for legal accountability.

And on shareholder engagement he says:

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. They should harness its potential in order to develop a new and realistic framework of corporate accountability and shareholder engagement. The interests of the public and of the shareholders are not being served effectively by the status quo.

The whole thing is worth a read, but the thing to bear in mind is that these views come from someone who has a lot of experience engaging with companies as part of a major institutional investor.

The second person worth listening to is Chris Hodge, who was the person in charge of the UK Corporate Governance Code at the FRC for many years. His recent essay has a lot of interesting things to say about what we can, and cannot expect, from corporate governance. He is sceptical that corporate governance can bear the weight of growing public policy expectations. He makes the point (which I bang on about regularly!) that policymakers - and, I would add, those seeking to influence public policy - are too quick to reach for greater reporting/disclosure as a solution to a given problem. 

There are a couple of particularly good points that I strongly agree with. The first is about conflating shareholder interests with those of the public:

It may be tempting to believe that shareholder interest can be a proxy for public interest.
In 1992 – when 70% of shares were owned by UK pension funds, insurance companies and individuals – that might even have seemed plausible. Yet looking at the ownership base today, with over 50% of shares owned by overseas investors, it would be illogical to do so. Why should we expect the citizens of Norway or the retired teachers of California, for example, to feel they have a responsibility to look after the best interests of UK society?

While shareholder interest and public interest – or the interest of one or another group of stakeholders – may often coincide, that will not always be the case. Indeed, one of the charges laid in the current debate about directors’ duties under Section 172 of the Companies Act 2006 is that some boards have given too much weight to the interests of their shareholders at the expense of the interests of other stakeholders. If those stakeholders do not have the ability to represent meaningfully their own interests, the answer is not to ask shareholders to do so on their behalf. 

The second is about that old chestnut executive pay:

It is over 20 years since the Greenbury report first recommended that companies report to their shareholders on this issue, and since that time the reporting and voting regimes have been regularly strengthened and, it seems, may be about to be strengthened further.
This regulatory approach has arguably benefitted shareholders by enabling them to put pressure on companies to align pay with performance, and may therefore be worth preserving for those reasons.
But in over twenty years it has done nothing to slow the increase of executive pay – some would argue it has contributed to it – or to reduce income inequality. There is no evidence to support the view that those objectives can now be achieved by adding more reporting requirements and voting rights.

Again the whole thing is worth a read, and again his views are worth taking seriously given where he has seen the world from.

There are two key points I would draw from all this for people on the Left. First, recognise that the fundamentals of corporate governance are highly contestable, especially at the moment, and don't simply play within the existent system. It certainly isn't as simple as empowering shareholders being inherently good. As we've seen in the debate about worker representation on boards, big shareholders will do us over on public policy when they think our interests and theirs do not align. On exec pay, we should be clear-eyed that focusing on shareholders simply isn't going to tackle the pay gap, as Chris Hodge says. We will need different tools. 

Second, we need to shape the model that comes next. The corp gov establishment moved very quickly to try and squash the idea of workers on boards. However that is far from a lost cause, it's really just the first skirmish, and there is also a recognition that things need to change. My gut feeling is that "common sense" in mainstream corp gov will settle around ideas like reformulating directors' duties and creating new regulatory powers to tackle companies. It looks like the FRC already sees the way the wind in blowing, and is seeking to position itself as a more interventionist body. These aren't inherently bad ideas but regulatory oversight might not be massively more beneficial to workers than the current model if there isn't an effort to shape it. The Left should be ambitious and get in early so that the voice of the people that work in companies doesn't get excluded from the new model too. 

Tuesday, 7 February 2017

Is this what asset managers really think about executive pay?

There was a fascinating piece in The Times a couple of days ago about asset managers threatening to get tough on executive pay. You know, the news story that now appears before every AGM season, quite often accompanied by claims this could be the "stormiest" AGM season yet.

Sorry if I sound jaded, but I have heard "crackdowns" on executive pay by shareholders being threatened pretty regularly since about 2002 and the results have been pretty unimpressive. I don't think there has been a single year when less than 98% of All-Share companies have had remuneration arrangements approved.

What struck me about the piece in The Times is that attitudes may not even have changed that much. The whole thrust of the article is that asset managers need to be seen to act because if they don't government will do.

It's a "pre-emptive strike" by asset managers who are "Fearful of a tide of new corporate governance regulation". The asset managers agreed (without consulting any of us) that Government intervention *would* (not could) destroy shareholder value. And one manager states: “The last thing we want is government intervention as it could prevent British companies from attracting global talent.” 

What I don't see anywhere in the piece is the sense that high pay for executives is a problem. Rather, government sticking its nose in is the problem, and therefore asset managers need to work together to create the impression of action in order to forestall any government intervention. 

The cynicism and other worldliness on display here is pretty staggering. These people really don't seem to think there is a problem, and will use the power they derive from our savings to avoid public policy interventions.

I've said it before, but giving the people who are least concerned about the scale of executive pay the primary role in overseeing it is a questionable strategy, to put it mildly. The attitude on display in this article makes this argument far more effectively than I could. And we should say thank you to whoever briefed this line to The Times. I think they are idiotic for saying these things in public, but they have provided us with invaluable insight into how asset managers may really view the issue of executive pay.