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."

And...

"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.

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.

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.

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.