Wednesday, 20 June 2018

Votes on Persimmon remuneration report

I'm not sure anyone has looked at individual investor voting decisions on the remuneration report at Persimmon's AGM back in April, so I thought I'd take a look. As people may remember, there was a large vote against the rem report, and abstentions and oppose votes were far greater than those for. But on a straight for/oppose split the company "won" roughly 52% to 48% (full results here).

I actually can't find that many disclosed voted as a number of managers disclose by quarter, and we're still in Q2. But of the ones I can find there are some interesting ones.

In the US CalPERS and CalSTRS both opposed.



As did NBIM, the investment arm of the Norwegian sovereign wealth fund



But in the Netherlands ABP/APG and PGGM both abstained



Amongst asset managers I can see that BMO, LGIM and Janus Henderson vote for




Whereas Schroders opposed


I'll post up more as I find them.

Wednesday, 13 June 2018

Chantal Mouffe on centrism and right-wing populism

This is from On The Political, published in 2005:
In a context where the dominant discourse proclaims there is no alternative to the current neo-liberal form of globalisation and that we should accept its dictats, it is not surprising that a growing number of people are listening to those who proclaim that alternatives do exist and that they will give back to the people the power to decide. When democratic politics has lost its capacity to mobilize people around distinct political projects and when it limits itself to securing the necessary conditions for the smooth working of the market, the conditions are ripe for political demagogues to articulate popular frustration.
For some time the case of Britain seemed to provide a counter-example to such an evolution; however the recent success of the [UK] Independence Party in the 2004 European elections suggests that things may be changing. It is of course too early to predict the fate of such a party, and the British electoral system certainly does [not] facilitate the rise third parties. But the dramatic surge in the share of votes needs to be taken seriously. It is undeniable that all the conditions nowadays exist in Britain for a right-wing populist party to exploit the popular frustration.

Unions and public policy

Just a few links to some recent bits and pieces related to rebuilding unions. I am hopeful that the public policy discussion is moving on from simply observing that the decline in union density is correlated with rising inequality (and related issues), to thinking about what we might do to reverse it.

1. Most significant is this IPPR report which has all kinds of ideas about how we can help unions to be a significant force at work again.

2. An interesting economics blog again concluding that stronger unions would be good thing.

3. Stick with me... a piece by Nick Denys from Tory Workers on a Modern Employment Act in this CPS (!) pamphlet. I flag this up to show that there are thinking Tories who do think unions are a good thing (though they obviously don't like the Labour link). There's not a load on offer here, but I think it's interesting that something like this has made it into print.

Another snippet on Inmarsat takeover and hedge funds

Just to keep this updated, there are a lot of regulatory disclosures being fired out by Inmarsat now. So I'm just keeping track of the hedge fund related ones.

Marshall Wace, which is very active on the short side in the UK, now has a 2.38% long position using derivatives.



Melqart Asset Management, one of the firms that was active around GKN/Melrose, has a 1.17% long position, again using derivatives.



UPDATE: Citadel now has a 1.95% long position, again using derivatives, plus 0.16% short.



Plus Pelham has 1.82% long derivative position I blogged on Monday. So around 7% in long derivative positions held by hedge funds in total so far, just in terms of what we can see (I'm not sure what the disclosure threshold is). I expect this will rise. Presumably these positions are offset by a counter party bank holding actual Inmarsat shares, so we might see them start cropping up on the register as major shareholders as was the case with GKN.

Also worth clocking that some more funds have outstanding short positions in Inmarsat. In addition to the names on the FCA list, regulatory disclosures show that Renaissance Technologies and Millennium Investment Management both have short positions of just under 0.5%.

Monday, 11 June 2018

Inmarsat: in come the hedge funds

At the back end of last week the UK-listed telecoms business Inmarsat revealed that it has been approached by US-listed Echostar Corporation about a potential takeover, which it knocked back.

As a result of the offer, a different regulatory disclosure regime kicks in, which means that we can see all sorts of detail on which investors are doing what. And, as you might expect, we can already see some hedge funds piling in with fairly sizeable positions.

For example, Marshall Wace:


And Pelham:


As you can see from the disclosures, the long positions these funds have taken have been built up using derivatives rather than by buying shares. This shouldn't be any surprise to anyone who followed the detail of the GKN/Melrose bid. And obviously this will be a bloc of investors that will want Inmarsat to be taken over.

It also means that we should expect to see banks emerge as major shareholders on the Inmarsat shareholder register as they build up holdings as counterparts to these derivative positions. Plus we will probably see a notable short position in Echostar emerge.

Finally, here is a quick look at who the major shareholders (1%+) at the moment, data from Capital IQ.



UPDATE: for completeness it's worth noting that a few investors are actually short Inmarsat. So worth keeping an eye on this too. Latest from FCA disclosure below.


Sunday, 10 June 2018

Pay ratios - an important step forward

Tomorrow will see the introduction of regulations that will make it mandatory for larger listed companied to disclose the ratio between chief executive salaries and the average pay for employees of the same firm. Although the UK has actually been beaten to this reform by the US of all places, this represents an important development for a number of reasons.

First, it is a shift away from the centrality of shareholder interests. I am unclear about the extent to which Conservative policy wonks are aware of this (or care either way) but if you've followed this debate you should know what I mean.

I don't think many people seriously believe that the disclosure of ratios will lead to the creation of greater returns for shareholders. Nor is the policy aimed at the issue which most shareholders have focused on - tying executive reward to shareholder returns. Rather this policy is all about intra-firm inequality and relative reward. Some shareholders (asset managers) care about these things, many do not. But essentially their support or opposition to the policy is taken to be far less important than would have been the case 5 years ago.

We can see the shift in focus too in the expected revised requirement for demonstrating how the range of stakeholder interests are taken into account by directors. Employees are once again highlighted as an important group. I know for many people on the Left these will seem like very minor tweaks but they do matter.

And that's partly because, secondly, these reforms represent a defeat for the corporate governance mainstream. Most people in the microcosm I inhabit still adhere to the 1990s vintage view of the world, and the policies that flow from it. This is built around disclosure and shareholder empowerment. In that cluster of policies pay ratios make no sense. And it was only a few years ago that major shareholders and their representatives were publicly opposed to pay ratio disclosure. Many still believe the whole exercise is pointless and/or an illegitimate intervention in the shareholder-company relationship. However, some have swung to support ratio disclosure, probably in part because they don't want to be too far out of line with the government, and this isn't a hill worth dying on. Nonetheless it is a defeat for the mainstream and a policy that comes very clearly from the Left is being put in practice by a Conservative government.

Which leads me on to the third reason why this policy is important - it has shifted the centre of gravity in terms of what is "reasonable" to ask for in this area. Again, it wasn't that long ago that arguing for disclosure of pay ratios was very much a left-wing position - and an aspirational one at that. Now that it is being put into practice pay ratios will shortly become the status quo. That means that on the Left we can now use this as a jumping off point for more radical policies. In my opinion we should not underestimate how important and influential having a measure of intra-firm inequality embedded into corporate disclosure will be in terms of shaping people's thinking about a) what matters in this field and b) what might be politically achievable.

It's taken a long time to get here, and there is a lot more to do. For instance we have to push on worker representation in corp gov too - the government lost its nerve, but the door has been left ajar. But the introduction of pay ratios is a win, end of. And it's the start of something.

Sunday, 3 June 2018

Keep your nose out of executive pay!

This is from the concluding paragraph of a recent academic paper on executive pay:
While the pay controversies fueling calls for regulation have touched on legitimate issues concerning executive compensation, the most vocal critics of CEO pay (such as members of labor unions, disgruntled workers and politicians) have been uninvited guests to the table who have had no real stake in the companies being managed and no real interest in creating wealth for company shareholders. Indeed, a substantial force motivating such uninvited critics is one of the least attractive aspects of human beings: jealousy and envy. 
I would recommend giving the paper a read as it has some interesting things to say about various attempts at executive pay reform. Two things in particular I did appreciate are the acknowledgement of the potential for *positive* unintended consequences from policy interventions, and of the fact that companies do try and find gaps in / ways around regulation.

But the above paragraph is indicative of why I have a lot of problems with some of the dominant ideas in corporate governance, and in the sub sector of executive pay.

Given that we know that in Actually Existing Capitalism when we say "shareholders" we really mean asset managers. (As a side note in this paper it is notable that union pension funds are highlighted as a group of activists, with the implication (as I read it) that they aren't really the right kind of shareholders.) As such I really struggle with the suggestion that union members and workers (they have to be prefaced with the pejorative 'disgruntled', obviously) are "uninvited guests" in discussions about the distribution of rewards within companies. And I think upside-down to suggest that the workers in a company have no real stake in the business compared to shareholders.

This conclusion also takes as read that creating wealth for shareholders is the function of business (rather than, say, one of its outcomes) which is highly contestable. More interestingly, again we see a mainstream corporate governance paper suggesting that different stakeholder interests - those of union members and other workers, and those of shareholders - are potentially in conflict. The implication in this paper is that in such a scenario the interests of shareholders are justified and therefore should win out. I would say these are far from settled issues now.

What about the claim that critics are substantially driven by "jealousy and envy"? I would suggest that it's more about conceptions of fairness, which seems to be form of judgement that humans have evolved. I think that people are more concerned that rewards are determined fairly, than that they necessarily benefit personally. The sense you get from ordinary punters is less "I want some of that" than "how the hell do they get away with this?". But if jealousy/envy is apparently so important, shouldn't we expect to see this in the demands made by executives in respect of their remuneration, and perhaps we should start there?

Finally, in my opinion the tone of the paper, exemplified by the conclusion, is part of the problem that the 1990s corporate governance model has. In this world, executive pay is not a political issue, it is a technocratic one that, if it cannot be 'solved', can at least be defused. There is an array of views that are packaged into this perspective, such as that pay is a private matter between companies and shareholders; the public is misinformed/misled; politicians are meddlers who usually make mistakes; and concern about pay levels (rather than structure) is misplaced. As such it is quite a natural for people who hold these views to suggest that only a select group of people are legitimately allowed to comment about executive pay. Personally I am surprised otherwise smart people cannot grasp how utterly elitist all this sounds.

Monday, 21 May 2018

Ryanair: ownership and control

Ryanair's latest results are out today. Aside from the update on negotiations on unions, which I won't comment on..., the bit that caught my eye is the commentary on Brexit and the potential knock-on impact on Ryanair's shareholders:
We remain concerned at the likely impact of a hard Brexit. While there is a general belief that an 18 month transition agreement from March 2019 to December 2020 will be implemented and further extended, it is in the best interest of our shareholders that we continue to plan for a hard Brexit in March 2019. In these circumstances, it is likely that our UK shareholders will be treated as non-EU and this could potentially affect Ryanair's licencing and flight rights. Accordingly, in line with our Articles, we intend to restrict the voting rights of all non-EU shareholders in the event of a hard Brexit, so that we can ensure that Ryanair is majority owned and controlled by EU shareholders at all times to comply with our licences. This would result in non-EU shareholders not being able to vote on shareholder resolutions. In the meantime, we have applied for a UK AOC which we hope to receive before the end of 2018.
Just as a remainder, Ryanair has to be majority EU-owned and controlled to qualify as a European carrier. Currently something like 45% of its shares are accounted for by ADRs held by primarily US investors, so it is close to the limit. The problem is that once the UK leaves the EU whatever shares are held by UK investors will likely count against it. The rough estimate is that UK investors account for about 20% of shares held, so you see the problem.

Ryanair's route to get around this is quite interesting for a number of reasons. First up, what is proposed here - taking away voting rights - is a new twist. Ryanair had previously talked about forced sales of shares, or the creation of new European vehicles to hold shares for UK investors. Now they are talking about taking away voting rights from shareholders. [As an aside I note that the language talks about not voting on 'shareholder resolutions'. Surely this must apply to management-proposed resolutions as well or not much changes!]

The company states that it already has the power to do this in its articles, and I dimly remember some commentary related to the ability to disenfranchise shareholders when it was introduced years back. I'll have to go back and read to see how it works. Notably Ryanair would rather have non-voting shareholders than leaving voting rights alone and enforcing share sales. In a Bloomberg interview, O'Leary said that he felt that different shareholders would have different views on this, but if they didn't like it they could sell.

I assume that Ryanair will only do this in the event of a hard Brexit, but I'm not clear if it needs to do anything to put this into action (i.e. seek approval), so that deserves a look too.

It's also worth considering who would get hit. If we take the statement at face value it is ALL non-EU shareholders, and in the Bloomberg interview O'Leary talks about both the UK and US (and the language was the same on the earnings call). So that suggests that shareholders representing, say, 65% of Ryanair's shares lose their votes.

And which investors specifically would lose out? I reckon most of the big ones (data from Capital IQ): -


Here's my rough take on the largest holders: Capital's holdings are through ADRs, FMR is a mixture of US and UK, HSBC, Baillie Gifford and Jupiter are UK, Janus Henderson is a mixture of ADRs and UK.

If that group of investors loses its votes, then the largest voting shareholder would be Michael O'Leary, in a voting float of say 35% (though of course this might change in practice as some UK and US investors decide they don't want non-voting shares). That's interesting for Ryanair's corporate governance, especially given that its board is not overburdened with independent representation.

Wednesday, 16 May 2018

Carillion: shareholder primacy plus shareholder inaction

As most people will be aware, the Work and Pensions and BEIS committee have published their joint report on the Carillion collapse today. I won't bother rehashing much better summaries of what it says that you can read elsewhere, rather I want to focus in on a couple of things I found particularly interesting.

First, whilst clearly the Carillion collapse in first and foremost the responsibility of the directors of the company, I think there is an accomplice in the room that is not identified: shareholder primacy, or at least the Actually Existing version of it.

One of the quotes I found most interesting in the report is below:
Mr Murchison said that, while dividends should be “a residual”, payable once liabilities had been met, there was a problem with “corporate cultures where a lot of management teams believe dividends are their priority”. Carillion’s board was a classic such case, showing:
desire to present to investors a company that was very cash generative and capable of paying out high sustainable dividends. They took a lot of pride in their dividend paying track record. Such an approach was inconsistent with the long-term sustainability of the company. (page 19)
This comes from the head of Kiltearn Partners which was one of Carillion's largest shareholders. I think it is spot on, and is exactly the point that Colin Crouch made a few years back (longer blog on these sorts of issues here):
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.
I think this pretty much how many public companies are run. Although the theory is that shareholders are a residual claimant, in practice directors put them much higher up the pecking order. Of course, it doesn't always end up like Carillion, but we should be worried that even asset managers acknowledge that there is a problem with directors prioritising dividends. 

The other interesting thing that Carillion shows us is that shareholders (really asset managers) don't necessarily pressure management, at least not all the time, but they don't need to. Directors would rather keep one step ahead of the pack, so I think they've internalised shareholder demands to the extent they don't often have to be explicitly made. 

When you look at the engagement that took place with Carillion it's surprising to me how limited it seems to have been in some cases. Some investors don't really seem to have done a lot, even as the warning lights were flashing. What's more it's difficult to see any real change in behaviour compared to how shareholders engaged with banks in the run up to their collapse. 

It's good that this report refers to the Stewardship Code, but I think they let the shareholders off the hook. Is there much evidence of any process to stewardship activity? I can't see any indication of escalation for example, despite a) the seriousness of the situation and b) this being part of the Stewardship Code. The report says that shareholders were "rational" to sell their shares. Fair enough, but that option is there in every case and was the pre Stewardship Code era defence asset managers used to deploy. So why even pretend that stewardship is a meaningful activity in a situation like this? 

Remember, this was a company in serious trouble, and there were plenty of signs that financial market participants thought so. In that case, shouldn't we have seen a great deal of 'stewardship'? Wasn't the whole point of the Code to try and get investors to engage effectively rather than be hands-off and/or just flog their shares if things were going wrong. And remembers to that this was a case of business performance, not some abstract governance issue, so shouldn't the Investor Forum have been in there? There are a lot of threads still hanging in my opinion.

Finally, there are a few minor points about other market activity I would make. First, there was a major shareholder sitting on the register that did nothing - Deutsche Bank. According to the report it held 5.8% of Carillion in March 2017, and here's the reason why:
Not proprietary investments. Shares held on behalf of clients and for hedging purposes. No engagement with Carillion management.
I'm not clear exactly what this means. Is it this institutional asset management clients sitting behind a nominee account, shares held to hedge derivatives exposure, a mixture of both, or what? Large positions held by banks - rather than asset managers - often have an interesting story behind them. I think the report should have dug into this a bit, especially given the size of holding. 

Secondly, the issue of shorting is hardly touched on. The question I still grapple with is if you are short on the active side but long on the passive side, does this create a conflict in how you approach stewardship? More precisely, are your active team going to want you to engage with the company to address any cause of underpreformance?

Thirdly, who was lending all the stock? According to reports, the total short position in Carillion at its peak was about 25%. That is a lot of shares. So where did they come from? I know that data on stock lending is made available to market participants (and regulators?) but it's not public. But I would put money on it, given the scale of shorting, that some of our pension funds let stock that was used to short. Maybe that's fair enough (a question for another day), but maybe it also ought to be disclosed somewhere that us ordinary mortals can see it?

Sunday, 13 May 2018

Lynn Stout and shareholder capitalism

Lynn Stout, one of the most interesting thinkers/writers on corporate governance, sadly died recently at the ridiculously early age of 60. She was definitely someone who has had an influence on my thinking, and I strongly recommend her books (which are very readable) to anyone who shares my interest in corporate governance and related topics.

What is particularly striking is how her perspective has gradually come into vogue. When I first got seriously interested in the various schools of thought around governance about 15 years ago I remember some people suggesting she was a fringe thinker and/or not helpful in terms of practical advances in governance reform.

The reason for this is pretty clear: she was a strong opponent of shareholder-focused governance. More recently she did some terrific work showing that some of our assumptions about this model - like that directors have legal duties to act in the interests of shareholders - are very wonky. The longer I have looked at these issues, the clearer it has become that foundational beliefs in 1990s corporate governance model (like that shareholders 'own' companies) are highly contentious, if not flat out wrong. Yet they are treated by far too many people as Gospel truths.

Well, Lynn Stout was one of the heretics, and it's a shame she died too young to see the governance debate reorient towards her views.

Here are a few excerpts from The Shareholder Value Myth that give you an insight into her perspective:


“The standard shareholder-oriented model of the corporation teaches that it is not only acceptable but morally correct for shareholders to pressure managers to raise share price in any way possible, without regard for how the corporation’s actions impact stakeholders, society, or the environment. Shareholder value rhetoric also inevitably signals that most other investors are behaving selfishly. Finally, the standard model teaches that selfish investing, far from harming others, actually benefits them by promoting better corporate performance and economic efficiency.”

“[D]iversified shareholders who are uninvolved in and ignorant of a company’s day-to-day business decisions are in no position to police against, or even know about, antisocial corporate behaviour. To the contrary, because the only thing most investors see i stock price, they are likely to pressure corporate directors and executives to adopt strategies that… make corporate harms to third parties more likely. And when disaster strikes, uninvolved shareholders are unlikely to feel personally responsible. How many BP shareholders felt responsible for the Deepwater Horizon disaster.”

“[T]he lack of information and rational apathy that makes individual investors poor guardians of their universal portfolios also makes beneficiaries of pension and mutual funds poor judges of whether their portfolio managers are doing a good job of stewarding their universal interests. Just as retail investors default to the cheap, easy strategy of judging corporate performance by whether the share price went up or down yesterday, pension and mutual fund beneficiaries judge the performance of fund managers according to whether the value of the fund went up or down yesterday.”

“[E]ven when directors have perfectly well-tuned moral compasses, shareholder value thinking subjects them to relentless shareholder pressure from investors who may act as if they have no moral compass at all.”

And a bit from Cultivating Conscience:

"Corporations are legal fictions, but they are also very real social institutions. More specifically, they are very real social contexts. The employee who walks through the front door of the corporate headquarters and takes the elevator upstairs to his office enters a world that provides a powerful mix of social signals about what is expected, what others are doing, and how his actions affect others. If he does not become as purely self-interested as Economic Man, he may at least behave like his second cousin, Corporation Man. In other words, it is true that corporations act only through 'their ' people. But corporations also influence how 'their' people act.

"Sometimes the corporate context pushes human behaviour in a conscientious direction. Inside the firm, corporations often try to encourage trust, co-operation and dedication to team goals through inspirational posters, motivational team meetings, and team-building in its most obvious and hilarious form, the corporate retreat... When it comes to dealing with those outside the firm, however, the story may be quite different. Especially in large public companies, the corporate environment often channels human behaviour in a direction that moves it closer to the psychopathic ideal of the homo economics model. This is because business typically employ the familiar social levers of obedience, imitation and empathy to encourage employees think primarily about the welfare of those 'inside' the corporation (executives, employees), not those 'outside' it (customers, the community, outside investors)."