"either an idiot... or possessed of a dangerous agenda and very cunning"
Saturday, 7 October 2017
The emerging new politics of corporate governance and ownership
I wrote a piece a few months ago (prior to the election) saying that I thought that while the Left were unlikely to win the election, we were winning the battle of ideas. I don't actually think this was a particularly insightful or original take, but it does seem that this the way that things are panning out (though Labour did much better than I dared to hope). So I'm interested in where it looks we are headed, why this is, and what it means for corporate governance in the UK.
First, a few indications of the direction of travel. The government's recent corporate governance reforms tell their own story. Although defanged, they have still broken new ground, and tackled existing issues in new ways. For example, the disclosure of pay ratios is entirely aimed at addressing concerns about relative reward. It demonstrates that even within the micro politics of the executive pay debate the argument has decisively shifted away from the idea that linking pay to performance is where the action is. In addition, a Conservative government has backed the idea that workers should have some form of representation in the governance of businesses in which they work. Finally, perhaps as significant is how little emphasis was placed on the role of shareholders (this is a good indication of where some thoughtful Conservatives are at - workers should have the same rights over exec pay as shareholders!). This is in marked contrast to pretty much every major public policy intervention on corporate governance since the early 90s at best.
Zoom out from corporate governance and we can also see that there is a battle underway regarding what form of regulation and/or ownership should be in place for utilities. Once again it is a Conservative government that will be seeking to more actively control prices (through an energy price cap). This is a policy that was literally described as "Marxist" by the same party when it was advocated by Labour two years ago. For its part, Labour is now advocating returning utilities to public ownership (personally I hope "public ownership" in the 21st century is an open question rather than a direct lift from the past).
It is also worth looking at some of the rhetoric around Labour's policy in this area. This is from Jeremy Corbyn's speech to the Labour Party conference last month: "Take the water industry. Of the nine water companies in England six are now owned by private equity or foreign sovereign wealth funds. Their profits are handed out in dividends to shareholders while the infrastructure crumbles the companies pay little or nothing in tax and executive pay has soared as the service deteriorates."
A liberal and global market for corporate control has resulted in this picture (which applies much more widely than utilities obviously). It's much easier to build a populist argument for taking public control of infrastructure when it isn't even owned by our own pension funds. I can imagine some Conservatives riffing on this point in the future,
Why is all this happening though, and what does it mean for UK corporate governance? There may be some answers in some polling carried out for the right-of-centre Legatum Institute. This polling was carried out by people who are advocates for free market capitalism, but are concerned by the direction of travel in UK politics and want to understand what is driving it. Though, to state the obvious, I disagree with them politically, they seem to be asking the right questions. The full report is here.
There is too much to summarise so I'm just cherry-picking items that I think are relevant for people (regardless of political inclination) interested in corporate governance, ownership and related issues. First look at the polling on utilities. 83% of those polled think water should be in public ownership, whereas 77% think the same for electricity and gas and 76% for rail. Digging into those numbers a bit deeper, 76% of Conservative voters support nationalising water (68% for electricity, 69% for gas). And those figures are consistent across age groups too, in fact the youngest voters are slightly less keen on nationalisation than older ones.
Most adults experience utility providers on a regular basis, and most people intuitively get the idea of/problems with monopoly provision without ever picking up an economics text book. In addition, a large chunk of older voters will have experienced both public and private provision. In a nutshell, with their consumer hats on, the public do not like what they get. With this background, the polling results demonstrate why the politics around rehabilitating public ownership work. No-one loves utility companies, no-one thinks that changing provider changes the product/service, those that experienced both public and private ownership are as convinced of the desirability of change as those with no experience. How a government might approach public ownership / control is the difficult bit, but there's little doubt they would have public backing to try it.
Now look at the polling on issues relating to business in general. There is strong support for capping executive pay, for requiring businesses to consider factors other than profit, to regulate more and so on (and milder, but still majority support for workers on boards). On most of these issues there is a gap between Labour and Conservative voters, with the latter less enthusiastic for more interventionist policies. Nonetheless on the question of whether there should be a cap on executive pay versus letting companies pay executives what they want a large majority of Conservative voters favour a cap. A majority also favour businesses not being solely focused on profit. They are evenly split on workers on boards, but looks like a very slim majority say it doesn't matter.
I would say these polling results present challenges for the UK corporate governance status quo. Executive pay is the most obvious area. It's a safe bet that the vast majority of people whose employment is in some way related to corporate governance would oppose a cap on pay (in my experience many are even sceptical about pay ratio disclosure). I expect that many of those who have a formal role in setting or affirming executive pay (rem comm members, asset managers) will be amongst the most opposed to the idea. This is of course their right, and again we need to properly chew over what we mean by "capping" executive pay, what the effects might be and so on.
But the key thing is that much of the corporate governance establishment, for want of a better term, is in a very different place to the large majority of the public, and even a large majority of right-wing voters. Put simply: the people who have most influence on executive pay tend to hold the most right-wing views on the topic. Their views are further to the Right than the public in general or right-wing voters specifically. I suspect that gap in views is going to matter a lot more in future. I simply cannot imagine a future Labour government considering that if a lot of rem comm members and asset managers think executive pay is basically OK then they should leave it alone.
On similar ground, the strong support for wider business objectives rather than just profit maximisation may help explain why shareholder primacy is increasingly questioned, and not just on the Left.
I imagine that some of those who work in corporate governance who read this will be thinking that the kind of ideas that are being put talked about - public ownership, pay caps, workers on boards - are ill-informed, counter-productive, economically damaging etc so they are right to not take them seriously. I think this is wrong in two senses. First, it is important to grasp is that these issues are contestable in politics once more and therefore need to be argued over. It will be no good to simply assert that the door must remain closed. Second, it is a mistake to assume (as some appear to) that those who think differently are simply misinformed or ignorant. I think most of us (regardless of our politics) would agree that no single party or group has a monopoly on wisdom. This should apply in our corporate governance microcosm too.
If the last few years have taught us anything it is, as Yogi Berra is supposed to have said, that it's tough to make predictions, especially about the future.... Nonetheless at the moment it does look as if it is the Left that will set the terms of the debate in the UK with regards to corporate governance and related issues, and that policy interventions are likely to follow this trajectory. I am genuinely interested to hear if people agree with this, or, more importantly, disagree.