Monday, 17 August 2020

Working from home, working in fear

[There is a] religious element [in attitudes toward work]: the idea that dutiful submission even to meaningless work under another's authority is a form of moral self-discipline that makes you a better person.

...

[T]he morality of "you're on my time" has become so naturalised that most of us have learned to see the world from the point of view of the [employer] - to the extent than even members of the public are encouraged to see themselves as bosses and feel indignant if  public servants (say, transit workers) seem to be working in a casual or dilatory fashion, let alone just lounging around.

... 

There seems a broad consensus not so much even that work is good but that not working is very bad; that anyone who is not slaving away harder than he'd like at something he doesn't especially enjoy is a a bad person, a scrounger, a skiver, a contemptible parasite unworthy of sympathy or public relief.  

David Graeber, Bullshit Jobs


As we all struggle to come to terms with changed working practices in response to the Covid-19 outbreak, there's a rather unpleasant point I see being made about working from home with increasingly regularity. 

I should probably set out my own view from the outset. I've been working remotely, barring a handful of office days, for five months. I personally prefer it, as I find it enables me to get on with the 'thinky' aspect of my job more easily. However I do feel the need for face to face meetings too, so anticipate a mix of home and office working in future. One thing I *hate* is commuting. Aside from the fact that it's a pain, I feel it's time wasted. If I do the school run in the morning if I work from home I can start work properly by about 9.10 whereas it's nearer 10 if I go to the office, and I find eating into my working day that way stressful.  

I also recognise I'm in a privileged position in that I can work from home easily. This is not the case for many working people either because of their occupation, their living arrangements or other factors. And I take the point that a lot of people find the social aspect of office working important. Working from home should, of course, be a choice offered to people. 

Or should it? Because what I see argued with increasing regularity is that employees need to stop working from home and get back in the office, for their own sake. The argument is that while those working from home might be enjoying it for now, they should be careful what they wish for. If their job can be performed from home, it can be performed from anywhere. Companies might see the benefit of reduced office costs from remote working, but might also see that this could be taken even further, with jobs performed remotely from other countries with (obviously) lower labour costs.

This point has been made by a variety of people including Helena Morrissey, Kirsty Allsop, Allister Heath and, most notably Luke Johnson. In the last case, there's a really (presumably deliberately) unpleasant edge to his comments. Those working from home are 'slackers', will miss out on promotion opportunities, and so on. The message is clear: working from home is risky, you're better off getting back in the office. 

As far as I am aware none of these people have a direct financial interest in office working. If they were the owners of Pret it might be a different story. In addition, the risk they are highlighting is, in essence, not a new one. If many jobs can be fulfilled remotely, and remote working can be done pretty much from anywhere these days, then the risk of your job being off-shored is already there. Perhaps you working from home now has increased the visibility (to employers) of the viability of remote working, but it did not create the risk (if it is a risk). The technology that enables remote working did that.

So if the risk of off-shoring is there in any case, then what message are those working from home being given? It seems like they are being encouraged to work from the office because this will make them visible so their employer does not think about off-shoring their role. That boils down to encouraging presentee-ism as an employment protection tactic for workers. Not exactly what you would expect from exponents of the efficiency of the private sector, but it does chime with David Graeber's view that a lot of private sector white collar work is... errr... bullshit. 

Just for the sake of working these points through I'll assume that someone like Luke Johnson is not primarily motivated by a desire to protect the job prospects of workers who are not in his direct employment. So what else might be going on in seeking to frighten employees back into the office? 

Part of it is undoubtedly a desire to monitor. If people become 'slackers' working from home then get them back where you can keep an eye on them. (Incidentally, this doesn't seem to offer much support to off-shoring as a response. If I can't trust someone located in the same country as me to be sufficiently incentivised to do their job remotely, does paying someone less money to do the job even further away seem likely to solve the problem?) 

There is a strong moralising element in all this too. Part of the criticism of people working from home is that they 'enjoy' it too much. The implication being that a less hateful working experience is somehow too 'easy' and work should be 'hard' (which we see played out in politics through the valorisation of 'hard-working' families). 

I think this gets to the nub of it really. As Graeber suggests in Bullshit Jobs, behind a lot of the bizarre employment practice in the private sector sits a (usually) implicit theory of motivation. This is that people will shirk unless monitored, prodded and so on. A shift to more working from home entails a degree of trust on both sides. Do we allow employees self-determination, or do we insist that they must be in a certain location where their performance can be monitored? (leaving aside the obvious point that technology enables monitoring of remote working too.)

Some of the comments in relation to working from home suggest a lack of trust in people to be self-motivated, and are certainly perceived that way by employees. My own view is that lack of trust in turn creates its own problems. If people feel they are not trusted to get on with their work they will tend to await clear instructions so they don't get it 'wrong'. A hierarchical, monitoring approach to work seems to be unlikely to breed innovation and creativity.

To threaten employees with the risk of losing their job if they seek to work from home is especially unpleasant, and more of a cattle prod than a prod. Job security is important to the large majority of people at work, yet is also perceived to be moving in the wrong direction (according to polling in this). Playing on the fear of unemployment to achieve monitoring and control does not feel like 'stakeholder capitalism', especially given that the current shift to working from home is being driven by a public health risk.

To build on this last point, I wonder how a company going down the route of off-shoring jobs in the current environment would be perceived. Recent polling shows that a very large majority of the public think that while there is no vaccine available workers should be able to decide whether or not to return to the office. If a company laid off UK-based workers working from home because of Covid and replaced them with overseas ones I'm not sure the most common response would be "well, they had it coming".

Finally, we should acknowledge the fact that if this argument is being made means that the question is being asked in some companies. That alone should be a reminder, if you need it, that there are conflicting interests within the firm that can never be wished away, despite the 'win-win' boosterism that is prevalent in ESG-land.

PS. A couple more bits from David Graeber. Experience during the pandemic has only reinforced some of his points.

Shit jobs tend to be be blue collar and pay by the hour, whereas bullshit jobs tend to be white collar and salaried. Those who work in shit jobs tend to be the object of indignities; they not only work hard but are also held in low esteem for that very reason. But at least they know they're doing something useful. Those who work in bullshit jobs are often surrounded by honor and prestige; they are respected as professionals, well paid, and treated as high achievers - as the sort of people who can be justly proud of what they do. Yet secretly they are aware that they have achieved nothing; they feel they have done nothing to earn the consumer toys with which they fill their lives; they feel it's all based on a lie - as, indeed, it is.

...    

[I]magine if a certain class of people were to simply vanish... If we all woke up one morning and discovered that not only nurses, garbage collectors, and mechanics, but for that matter, bus drivers, grocery store workers, firefighters, or short-order chefs had been whisked away into another dimension, the results would be equally catastrophic. If elementary school teachers were to vanish, most schoolchildren would likely celebrate for a day or two, but the long-term effects would be if anything even more devastating... The same cannot be said of hedge fund managers, political consultants, marketing gurus, lobbyists, corporate lawyers...

Saturday, 11 July 2020

Post-democratic ESG

A theme I keep returning to is the lack or decline of democracy in the small corner of world I inhabit. A long time ago, unions in the UK ran an initiative called the Campaign for Pension Fund Democracy which sought to give pension scheme members greater control over their pensions. When I first got interested in what we now call Responsible Investment in the late 90s it was because of similar thought that this would be a route to democratising capital.

Yet if anything democracy has declined. The shift from DB to DC, and towards professional trustees, has reduced direct member involvement in the governance of pension funds considerably. The shift in local government pensions towards pools has likewise in most cases reduced the control that elected politicians have over assets. Many would argue that these changes are a good thing for investment decision-making, but I personally feel we have lost something important along the way.

Meanwhile ESG has exploded in the investment world. Much of it is gimmicky, and the issues I personally care about the most seem to be those that investors spend least time on, and do badly. However the sheer amount of research and numbers of people involved have both grown enormously. 10-15 years ago I could probably name everyone in London in an investment institution (i.e. a pension fund or asset manager) that had a specific ESG job. Now there are loads of them!  

The problem is that, depsite all this, the power isn't largely shifting in the direction of beneficiaries. Instead the process is actually making asset managers more significant political players. As I've said before, this was always the danger with the focus on 'mainstreaming' ESG. Whilst it's obviously preferable that Blackrock supports shareholder proposals on climate than not, I don't think a lot of people have thought through what it means to make Blackrock (which is itself a public company with shareholders) a powerful arbiter of companies social and environmental standards.

Funnily enough I find myself agreeing with something Hayek wrote about the purpose of corporations (even if I don't agree with his conclusion that companies should focus on profit):
"To allow management to be guided in the use of funds... by what they regard as their social responsibility, would create centres of uncontrollable power never intended by those who provided the capital. It seems to me therefore clearly not desirable that generally higher education or research should be regarded as legitimate purposes of corporation expenditure, because this would not only vest powers over cultural decisions in men selected for capacities in an entirely different field, but would also establish a principle which, if generally applied, would enormously enhance the actual powers of corporations."
This really resonates with me today. Again, it's obviously better that corporations (including financial services corporations) seek to adhere to and promote higher standards of social responsibility. But it comes with dangers too, and I think the lack of democracy is a big issue that goes unremarked. It reinforces the very unhealthy tendency for CEO hero worship (*cough* Tesla *cough*). Here's a bit from the ace-a-tronic Winners Take All that nails this point:
All around us, the winners in our highly inequitable status quo declare themselves partisans of change. They know the problem, and they want to be part of the solution. Actually, they want to lead the search for solutions. They believe that their solutions deserve to be at the forefront of social change. They may join or support movements initiated by ordinary people looking to fix aspects of their society. More often, though, these elites start initiatives of their own, taking on social change as though it were just another stock in their portfolio or corporation to restructure. Because they are in charge of these attempts at social change, the attempts naturally reflect their biases. 
The initiatives mostly aren't democratic, nor do they reflect collective problem-solving or universal solutions. Rather, they favour the use of the private sector and its charitable spoils, the market way of looking at things, and the bypassing of government. They reflect a highly influential view that the winners of an unjust status quo - and the tools and mentalities and values that helped them win - are the secret to addressing the injustices. Those at greatest risk of being resented in an age of inequality are thereby recast as our saviours from an age of inequality.  
The second para above is the bit that really bothers me. Corporate-led initiatives are inevitably top-down and shot through with class bias. If you've never had a bad manager, or had to worry about your safety at work, or how much you get paid, or felt unable to speak out about something, you're not going to think these are the sorts of issues that matter.

And corporate preferences crowd out alternatives. For example, it is still under appreciated what a disastrous effect asset manager opposition to employee representation in corporate governance has had in the UK. I am still hopeful that this one will be won in the long term, but there is no doubt that by first opposing workers on boards and then by accepting/promoting the 'designated NED' fudge they have actively blocked the democratisation of companies.

By promoting non-democratic investment institutions as arbiters of social and environmental institutions, we are inevitably going to end up with companies that adhere to ESG standards that are acceptable to financial services companies.

Monday, 6 July 2020

Boohoo in doo-doo

Online retailer Boohoo is in the news for a lot of bad reasons. Allegations of poor working practices in supplier factories, which in turn are linked to a Covid outbreak in Leicester, come after news its had created a new incentive scheme for directors, which it did not put to a shareholder vote.

Much of the recent scrutiny of the company stems from a report issued by the campaign group Labour Behind The Label, which you can find here. Questions about poor working practices in Leicester, including illegal underpayment of the minimum wage, have been raised for years.

What I find interesting about the story is that the risk to the company and its investors from poor labour conditions was obvious. This is a sector where there have been numerous scandals and, as the FT article from 2018 shows, specific allegations of illegal practices in Leicester were not hard to find.

Boohoo even lists labour abuses as both operational and reputational risks in its annual report.



Well it was certainly right about the reputational risk... but if you read the list of mitigating actions / policies the company lists, you might well be reassured.

And it also says it applies "strict labour standards throughout our supply chain" in the blurb about its support for the SDGs.


The lesson here is pretty obvious - you cannot just go by what a company says about labour issues in its annual report. I don't think it's any great revelation that if you only listen to what companies say about themselves you get a very partial picture. Some companies do flat out lie, but more often it's simply the very human inability to be able to see their own flaws, or why others might have a different view. It's why I cannot buy into a model of employee engagement that doesn't involve real employee voice (which to me means unions, board representation etc) and think a model of shareholder engagement on labour issues that is restricted to investors talking to senior management is fundamentally ineffective.

Either some investors don't get this, or they don't care. Having done this kind of work for a long time, I'm afraid there are some investors out there who basically think labour is a cost and unions, labour law etc are barriers that they'd rather companies could avoid. They take a punt on companies with labour practices that they know to be poor because they can make money, and they are willing to look the other way.

(Coincidentally I have a small personal link to this as my dad's side of the family are from Leicester and his mum and dad used to work in a shoe factory there.)

Saturday, 20 June 2020

Politics isn't static

Just a quick post in response to some claims I've seen re-emerge about the wisdom of pitching to the centre in politics. Warning: I'm obviously on the Left, so have strong priors. But I do find the way this is usually put across a bit unthinking.

To repeat the obvious, the 'centre' shifts over time. For example, much as I disagree, currently I would say the 'centre' is still pro-Brexit ('Get Brexit Done' was very appealing, even to some Remainers). But it was mildly pro-EU before and may shift again. 

Similarly I think a lot of 'sensible' opinion is now that austerity was taken too far, even if at the time the 'centre' view was that it was sensible. You don't hear Rishi Sunak arguing that that 'There's No Magic Money Tree'. And further in the past the centre would have also been fairly openly racist, sexist and homophobic. It took people willing to go beyond the existing consensus to shift. 

This is simple stuff and it is not intended as a justification of my own politics. It is evident that someone like Nigel Farage did not think the way to achieve his political objectives was to tailor them to where public opinion already was.

A year or two back I found a good take on the process of political change, or the lack of it, in this book. Yudkowsksy is not a leftie, I think he'd be a pretty moderate US liberal. But the explanation is a good one.

"The... force locking bad political systems into place is an equilibrium of silence about policies that aren't 'serious'.

"[I]f an existing politician talks about a policy outside what journalists think is appealing to voters, the journalists think the politician has committed a gaffe, and they write about this sports blunder by the politician, and the actual voters take their cues from that. So no politician talks about things that a journalist thinks that a journalist believes it would be a blunder to talk about. The space of what it isn't a 'blunder' for a politician to talk about is conventionally termed the 'Overton Window'...

"To name a recent example from the United States, it explains how, one year, gay marriage is a taboo topic, and then all of a sudden there's a huge upswing in everyone being allowed to talk about it for the first time and shortly afterwards it's a done deal. If you suppose that a huge number of people really did hate gay marriage deep down, or that all the politicians mouthing off about the sanctity of marriage were engaged in a dark conspiracy, then why the sudden change?

"With my more complicated model, we can say, 'An increasing number of people over time thought that gay marriage was pretty much okay. But while that group didn't have a majority, journalists modelled a gay marriage endorsement as a 'gaffe' or 'unelectable', something they'd write about in the sports-coverage overtone as a blunder by the other team.

"...Those journalists weren't consciously deciding the equilibrium. The journalists were writing 'serious' articles, i.e., articles abut Alice and Bob rather than Carol. The equilibrium consisted of the journalists writing sports coverage of elections, where everything is viewed through the lens of a zero-sum competition for votes between Alice's team and Bob's team. Viewed through that lens, the journalists thought a gay marriage endorsement would be a blunder. And if you do something that enough journalists think is a political blunder, it is a political blunder. The journalists' sports coverage will describe you as an incompetent politician, and primates instinctively want to ally with likely winners. Which meant the equilibrium could have a sharp tip over point, without most of the actual population changing their minds sharply about gay marriage in that particular year. The support level went over a threshold where somebody tested the waters and got away with it, and journalists began to suspect it wasn't a political blunder to support gay marriage, which let more politicians speak and get away with it, and then the change in belief about what was inside the Overton window snowballed."

I think this is pretty much spot on. (It also sorta mirrors the Keynes line about stock-picking becoming about second-guessing other people's second guesses about other people's second guesses). 

We see the process happening all the time. Anti-EU feeling was on the fringe for a long time, but obviously ticked up significantly. Yet even when (in retrospect) it was tipping over into a majority position it was treated as 'loony', even by many Conservatives. And it is still treated that way by many. Similarly, you can see that the media-political class isn't completely sure about where to position itself in relation to Black Lives Matter, or at least the more radical end of its activity like toppling statues. 

As an aside, I think a defensive political lesson to take from this is to listen to the 'cranks' both on your own side and the other's, and to listen to the best versions of the arguments they are making, not focus on the obviously idiotic ones. Today's 'crank' could be shaping tomorrow's centre, but today's centre will dismiss her as a 'loony', 'Trot' etc.           

To go back to the beginning, what I think I find frustrating about 'you can only win from the centre' is that it is takes the equilibrium for granted. It's playing the same kind of role of as the journalist in Yudkowsky's scenario - policing the boundaries as they are currently understood. And essentially it betrays a conservative approach (I genuinely don't mean 'conservative' in a pejorative sense, it's an entirely legitimate way to view the world, I just don't share it). I genuinely believe there is more freedom of manoeuvre than it allows. Certainly I think there is scope for economic radicalism that is denied by 'win from the centre' advocates. 

I'll finish up with a quote I heard from a union mate that apparently comes from the well-known US union organiser Tom Woodruff: "A rolling programme builds its own consensus. Consensus by itself never built anything but worthless shit."      

Monday, 11 May 2020

Stakeholder capitalism, not missionary capitalism

This is an unusual book. I struggle to place it politically, since it both strongly advocates both reasserting the voice of the working class in politics and society, alongside quite conservative positions on issues like immigration. According to Wikipedia Michael Lind is a former neoconservative and an advocate of 'democratic nationalism', which doesn't immediately appeal to me.

It's more of a polemic than an analysis. But there are bits of it that I feel hit the target, even if that might just be because the caricatures are resonant more than anything else. For example:
Many of today's so-called community organisations are not so much grass roots as AstroTurf (an artificial grass. A contemporary "community activist" is likely to be a university graduate and likely as well to be rich or supported by affluent overclass parents, because of the reliance of non-profits on unpaid interns and staffers with low salaries. Success in the non-profit sector frequently depends not on mobilising ordinary citizens but on getting grants from the program officers of a small number of billionaire-endowed foundations in a few big cities, many of them named for old or new business tycoons, like Ford, Rockefeller, Gates, and Bloomberg. Such "community activists" have more in common with nineteenth-century missionaries sent out to save the "natives" from themselves than with the members of local communities who headed local chapters of national volunteer federations of the past.
I think there is a lot of truth in this, and the point applies more widely (Angus Deaton made a similar point).

This reminds me of things I see in my corner of the world in relation to the way employment issues are dealt with by investors. This is still very much approached in a 'top-down' and instrumental way. Employee engagement is now seen as A Good Thing, but because it can be instrumental to creating value for investors. Further, employee engagement is something done *to* workers *by* managers. And, therefore, engagement over employment issues is something that 'responsible' investors do with senior executives that may, or may not, benefit workers.

I think this is in part why many investors struggle with unions, and have seen labour issues as more 'political' than others (there are other reasons too - some investors literally just hate unions and are explicit that they want to keep labour costs down). Effective unions are about the empowerment of workers through self-organisation, not getting someone else to act on workers' behalf. A category error a lot of people in my field make is to understand the 'union' as the full-time officers rather than the actual union of workers. Unions are not NGOs working on behalf of workers, they are they workers themselves.

Where investors often get twitchy is when workers start making demands, because this is seen as a challenge to management. It gets particularly sharp in the corporate governance discussion where it's pretty obvious most investors don't want employee representation on boards (though they've got a bit more subtle about how they position themselves on this issue).

It's ultimately a question about power. Do we want workers to exercise it themselves, and therefore think about ways to accommodate this within the firm/corporate governance/engagement etc, or are we content with corporate and investors having it, with the hope that some missionaries amongst them will intervene on behalf of the workforce?

Sunday, 10 May 2020

Concentration, alignment and pre-distribution

Like most people, I'm not really clear at what stage we are in the Covid-19 outbreak. Confused briefing to the papers (and a new strap line that doesn't include "Stay Home") suggests to me that in general the government *is* easing the lockdown de facto, even if it isn't saying much publicly. But conversely almost everything I hear through work points to continued disruption for months or years ahead.

With that in mind, it's worth thinking about some of the things from this highly unusual period that might endure. Waking up to the absence of noise, and walking around seeing very little traffic, has been a revelation in London. But I suspect that travel levels will creep back up, which is rather sad. And in any case, I'm going to stick to my knitting and cover a few things I know a little about.

Concentration

Concentration - both in ownership and within sectors - is something I think could be a lasting effect of the crisis. On ownership first, I think the big asset managers, and particularly the passive managers, will emerge stronger from this crisis.

I've been following asset management for over 20 years, and throughout that time I've heard the argument made that it's during a downturn that you really want active management, rather than just tracking the index down. It's never been borne out by events, and throughout the past couple of decades all that is happened is that assets have shifted from active to passive. I think this crisis will only add to that trend.

There's an interesting piece in the FT on this topic here which points out that the concentration of assets with a handful of investment groups had surged since the start of 2020. The largest 1% of investors now account for 63% of total industry assets.

There are couple of noteworthy comments in the article below:
Mr Miller said that concentration was also accelerating at fund level, with investors channelling more money into large, low-cost, predominantly passive funds. “We’ve seen investors buck the idea that active managers can outperform in a downturn,” he said.  
and
Mr Miller warned that the concentration of assets in the hands of fewer decision makers could increase baseline market volatility in future. He added: “It could also make the heads of the largest asset managers incredibly powerful influencers of the global economy as they can exert serious pressure on their portfolio companies.”
I don't currently see anything that is likely to change this. We can see ongoing consolidation within the industry and the continuing active to passive shift. On one level this is fine. I don't have much faith in active management, and the sheer number of active funds on sale seems ridiculous.

However, the concentration of power in the hands of a small number of players is significant. Some people in my world must think this is a good thing, since the separation of ownership (let's leave this aside for now!) and control is supposed to be the flaw in the public company that corporate governance and stewardship seeks to mitigate. But it doesn't feel like a victory does it?

The fact that this concentration is being driven in large part by investors going passive raises other questions. For example, at what point does that fact that much of the money invested in the market is not making active buy/sell decisions start to distort it? I remember first hearing this argument in the late 1990s when the point seemed fanciful, but we are now at the point where more money is being managed passively than actively.

Also, if asset managers have a position in a company simply because it is in a given index why should their views on ESG issues be more desirable than those of the underlying beneficiaries? Part of the story of responsible investment in the early years was that it was going to democratise the finance sector, and let those whose money was fuelling it have a greater say. But in practice what is happening is that large passive managers are agglomerating that power for themselves. My personal view is that the fact that it's investment professionals who call the shots in part explains why RI has such a wealthy liberal feel to it. But that's for another day...

Industry concentration

The other side of the concentration question relates to market structure. There are a number of elements to this. First, it's inevitable that this crisis will kill businesses that were already weak, in turn they might be picked over by other firms which survive and might be able to pick up bargains in the current climate.

Second, there are certain sectors that seem likely to be particularly affected. I read a piece on The Nation (which I can't find now!) looking at the impact on shopping streets in the US. The argument was that smaller independents would lose out to larger chains. Certainly it seems a safe bet that Amazon emerges stronger at the end of this. But it will surely go beyond this. Airlines looked ripe for more consolidation in any case as a number had failed or looked like they were going to.

Third, competition policy seems likely to be relaxed, even if not explicitly. For example, the CMA in the UK recently issued guidance on its stance in response to Covid-19. It essentially said that its position was unchanged. However the CMA's existing position was that it would take into account the financial viability of the company potentially being acquired. If there was a risk of business failure it might allow a takeover. Well, in the current environment there must be more cases where businesses are at risk of collapse, ergo it seems likely that more acquisitions that might otherwise have failed to gain clearance are approved. I don't want to oversell this point, but it's worth bearing in mind.

Incidentally, while I was looking for a separate article I found this piece from Aviva Investors which covers a number of the points I make above in more detail, and adds a few more.

Ownership + industry concentration to stay?

The combination of ownership and industry concentration was already attracting attention in public policy land. If the present crisis does reinforce both trends the issues that this raises become sharper. But I'm not sure that governments are going to want to unpick any of this or feel compelled to do so.

I've always felt that making anti-trust / pro-competition policy a centrepiece of a political programme feels a bit too abstract, despite the legitimacy of the points this would be intended to address. How many people get out of bed to campaign for 'challenger banks' for example? And who are the allies that they can count on. Arguably a capitalism dominated by a handful of big firms in each sector is better for reinvigorated bargaining by labour if that were ever to occur.

So on balance I think we are shifting to greater concentration and I don't think too many people will be motivated to do much about it.

Executive pay: aligned with who? 

Onto more pure governance turf, I think changes to executive pay so far in the crisis deserve a look. As many people will be aware, the most common response from companies has been to cut base salaries for directors, with cuts around 20% of salary typical. The symbolism is pretty clear - many workers are furloughed on 80% of their normal salary, so the execs get paid 80% of their normal salary, or something similar. In some cases directors are also giving up or deferring bonuses, and in a smaller number of cases LTIP awards. Overall these types of changes have been generally seen as a good thing.

A question to consider here is how easy it will be to return to normal. For example, if an executive has taken a 20% pay cut during the furlough, is it ok to put the salary back to 'normal' once furloughing is over? What if the company has reduced its headcount? What happens when a bunch of companies push executive salaries back up? I can imagine some resistance to putting pay back to 'normal' levels.

Also, imagine in contrast if a company emphasised that it felt it was important for executives to continue to have considerable variable pay with a substantial equity component in order to ensure that their interests were aligned with those of shareholders. Even if they went to say that aligning directors' interests with shareholders would deliver value for all stakeholders (blah blah blah) it wouldn't feel right in the current environment.

But why not? If public companies are supposed to be run in the interests of shareholders, and this is justified on the basis that there is no conflict between different stakeholder interests and therefore those other stakeholders benefit from such a focus, why shouldn't directors continue to prioritise shareholders? Why are they aligning their pay with their employees rather than their investors?

The common sense answer is that companies understand that this is a moment at which it is important to prioritise employee safety. You could manufacture an argument that not doing this would be damaging to brands, and thus to profitability, and thus it's actually in the interests of shareholders to put employees first, for now. However I don't think anyone really believes that. But it does again raise the question of whether different interests are in conflict and, if they are, whose should come first.

Shareholder primacy paused

I've written elsewhere that I think shareholder primacy has been paused for the time being. For certain companies this is more obvious than others. For example, in a number of markets banks and insurers have been told to stop dividends, buybacks and payment of bonuses. Similarly in some countries those companies that are receiving state support are barred from such activity. In the first case, regulators seem to have adopted this stance to ensure that financial institutions are well capitalised, in the second it's more a question of ensuring that taxpayers are not subsidising investors.

Again, if there were no conflicts of interests this doesn't seem like it should be necessary. For example, banks would cancel dividends and buybacks because they knew they needed to do so to preserve capital and in doing so ensure they were delivering long-term value to shareholders.  Actually, it seems that the UK's banks were not planning to scrap dividends before they were told to, and Standard Chartered was carrying on with its buyback right up the last moment. Does this mean that the PRA was wrong to tell them to stop?

An obvious retort is that this in an extraordinary situation and such moves might be politically necessary if not necessarily economically efficient. By which I mean simply that banks paying huge dividends and bonuses during a time of high unemployment might cause other, bigger problems. But is this only the case during a crisis, or is this just the moment at which we can see more clearly where the tensions are?

There was already increasing discussion of the merits of shareholder primacy before the pandemic hit. I think a shift back to arguing - explicitly - in favour of the model looks unlikely, though we might see lots of tortured arguments along the lines that actually lower dividends and no buybacks are good for shareholders. Therefore this might be another aspect of changed governance that endures.

Stakeholder alignment and pre-distribution 

Finally, here's something I'm hoping for. I am glad to see Ed Miliband back in a frontline role, and shadow business feels like the ideal place. When we was Labour leader he toyed with the idea of pre-distribution even if there wasn't much flesh on the bones. Maybe now is the time to revisit it. Thinking again about changes to executive pay, a model of stakeholder alignment would surely put a much greater emphasis on profit-sharing and similar models whereby the entire workforce gains when the business succeeds.

It's always struck me as bizarre that there is more interest in putting 'employee engagement' targets into incentive schemes for executives than ensuring employees are engaged. Rather than paying A in a way that might incentivise them to ensure that B is engaged, why not just focus on how B is paid?

Once more, things were already moving in this kind of direction. For example, disclosure of pay ratios really wasn't driven by investor interests, and the data that is being disclosed is going to be used by a much wider set of stakeholders. So this does feel like an area where more is likely to happen. I know some people are already thinking about these kinds of issues, so let's encourage it. Let's make stakeholder alignment an objective in pay discussions from here on.

Finally, this in turn points to a different way of thinking about engagement. As I've written before I think a model which focuses on interactions between senior corporate staff and senior investment staff is flawed. This is the approach which spits out ideas like putting employee engagement KPIs in LTIPs because the conception is that is the strata that matters, and that is where the action happens, even if the bulk of the company is not involved. But again more later...

Sunday, 5 April 2020

Crisis pressure points

Clearly there are areas where the Covid-19 shutdown is going to have a bigger impact than others.

I won't bother rehashing stories about what's happening to retailers etc. but there are a few things that I think are worth clocking from the past week. The PRA letter to UK banks may actually have been a bigger deal than first thought. The FT reports that the banks were set to ignore its requests to exercise restraint on dividends and buybacks (on the latter Standard Chartered was still going right up till the end of March). I found this the most interesting bit:
Mr Woods’ intention was for the banks to make the announcement without public direction from the BoE, but leaders at four of the five lenders balked at the plan, the people said. RBS, which is majority owned by the taxpayer, was the only one willing to comply. “We all had exactly the same view,” said an executive at one of the four refusenik banks. “Just being asked to do it was not enough. We would have chosen to go ahead in paying the dividend and told the [BoE], ‘thanks very much for your input but we disagree’.” Another person briefed on the talks said: “Making the BoE force our hands was the only way of protecting ourselves from a shareholder revolt. If we had done it of our own volition then we would have faced legal challenges.”
Follow the direction of travel, and the PRA has also written out to insurers asking them to think of doing likewise:
When UK insurers’ boards are considering any distributions to shareholders or making decisions on variable remuneration, we expect them to pay close attention to the need to protect policyholders and maintain safety and soundness, and in so doing to ensure that their firm can play its full part in supporting the real economy throughout the economic disruption arising from Covid-19.
Meanwhile the European body EIOPA has gone much further and told insurers to stop making distributions to shareholders and consider variable pay

EIOPA urges that at the current juncture (re)insurers temporarily suspend all discretionary dividend distributions and share buy backs aimed at remunerating shareholders. This suspension should be reviewed as the financial and economic impact of the COVID-19 starts to become clearer.Taking into account the need to preserve an efficient and prudent allocation of capital within insurance groups and the proper functioning of the Single Market, EIOPA urges that this prudent approach is applied by all (re)insurance groups at the consolidated level and also regarding significant intra-group dividend distributions or similar transactions, whenever these may materially influence the solvency or liquidity position of the group or of one of the undertakings involved. The materiality of this impact should be monitored jointly by the group and solo supervisors.This prudent approach should also be applicable to the variable remuneration policies. It is expected that (re)insurers review their current remuneration policies, practices and rewards and ensure that they reflect prudent capital planning and are consistent with, and reflective of, the current economic situation. In such context, the variable part of remuneration policies should be set at a conservative level and should be considered for postponement.(Re)insurers that consider themselves legally required to pay-out dividends or large amounts of variable remuneration should explain the underlying reasons to their National Competent Authority.
From initial signals it looks like UK insurers may conclude that they do not need to change their approach. Legal & General issued an RNS statement on Friday afternoon confirming its intention to pay a dividend:
The Board of Legal & General plc has given careful consideration to the PRA's letter of 31 March.
The Board continues to pay close attention to the need to protect its customers and employees at this difficult time. The Board has carefully considered the need to act prudently in maintaining safety and soundness, and in so doing ensure that Legal & General plays its full part in supporting the real economy. It also recognises the importance of dividend income to many institutional and retail shareholders, particularly in the current environment.
As things stand this is fair enough, the PRA has asked insurers to consider their approach, L&G says it has and intends to go ahead with dividends. It will inevitably, however, carry another message given that the company's asset management arm is one of the biggest investors in UK companies.

What's interesting is that both banks and insurers have nodded to the interests of shareholders as a reason to carry on despite regulatory flags. In the case of the banks this has resulted in them being overruled by regulators, essentially cancelling shareholder primacy for the time being. What happens next with the insurers is unclear, especially give EIOPA's intervention.

This issue might even spread to asset managers. Amundi has already proposed suspending its 2019 dividend with DWS apparently likely to follow suit. Both are owned by European banks, which might explain it. But then a number of asset managers are owned by insurance companies too. There may be a bit of a domino effect here. And if investors start pulling their own dividends and buybacks, the pressure for investee companies to do likewise increases. Equity income funds beware!

Finally, worth also watching what is going on with utilities. Here's an interesting bit from the Sunday Times:


A second story in the paper looks at similar requests for leniency from energy companies, with one saying that: "Underlying it is a fact of the modern energy market: margins are wafer-thin."

This talk of wafer-thin margins reminds me of train operating companies. I remember the CEO of National Express explaining this is why they pulled out of UK rail - they just couldn't compete with state-owned (or partially owned) operators.

There's obviously a very delicate balance between trying to avoid monopoly rents and having private operators involved. It feels like an especially tough sell that this is a good model if it needs bailing out by the state when there is trouble ('trouble' a bit of an understatement here in current circumstances...) There is potential for there to be some big shifts in policy here.

(PS. To make a brief political point, there has been a lot of discussion of the merits of Labour being committed to public ownership of utilities. There is a small (basically Blairite) bit of the party that seems to dislike public ownership per se, but a more common tactical argument is that it might be poor prioritisation a) it's a lot of money b) is that really where you want to spend it and c) will the voters think you for it. But *if* utilities need bailing out during this crisis, it might be the Conservatives who end up paying the price (both financial and political) for any extension of public ownership. In this instance tactical arguments against melt away, and I can't imagine anyone Left of the Conservatives arguing for rapid re-privatisation. These are just a few sketchy thoughts that I'll try and develop a bit.)

Saturday, 21 March 2020

Capitalism: down with the sickness

I'm just a humble labour & corpgov wonk, so most of the time the kinds of things that interest me are buried in the business pages. But it feels like, as with the financial crisis, questions about who controls businesses and how, and in whose interests, they should be run are going to become big political issues once more.

As I've made clear previously I have *zero* knowledge of Covid-19 beyond what anyone else can read. All I can speak with any sense about is how I see it impacting the areas that I do know about. So here are a few quick thoughts about the direction of travel.

First up, we should expect a very sharp turn away from normal expectations across the market. Dividends are already being suspended by many companies as they admit they can't accurately forecast what will happen in the months ahead. Buybacks are not going to have a good crisis, and many are being suspended. Some boards have already announced that directors are cutting their own pay, more will surely follow. At work we've been trying to get companies to embrace common sense on this.

Second, some companies will get it badly wrong, and this may do them serious damage. EasyJet is taking a lot of flak for proceeding with a £174m dividend payment even as it seeks state support (it claims it is compelled to make the payment, which is something I need to check out). Ryanair spent millions on a share buyback during March even as it cancelled hundreds of flights. One report I read yesterday said it is cutting staff pay by 50% (O'Leary is taking the same pay cut, but he doesn't really need the money does he?). Getting this stuff wrong in an environment where 'license to operate' is very much in the state's hands may have long-term implications. Directors will get booted out, companies' reputations will be in tatters. It could be terminal in some cases.

Third, there will be even more pressure for a shift to a more stakeholder-oriented governance model. This argument has gained a lot of ground over the past few years, so as the Covid-19 crisis hits it's one of the ideas that are "lying around", as Milton Friedman put it. You can see already in proposals from people in both the UK and the US that a change in the nature of businesses most directly affected is already being put forward. I can imagine a consensus forming very quickly that bailed-out companies must protect employment, cut executive pay (and no bonuses, LTIPs etc, obvs), stop dividends and buybacks and (maybe?) bring employee representatives into the boardroom. This would be a very clear shift away from operating in the interests of shareholders, even 'enlightened' shareholder value. And it would be very hard to unpick afterwards. What happens to bailed out companies may well start to affect those further away from the epicentre.

Fourth, I think (and hope) the crisis will lead to demands to change our employment model. All the 'flexibility' in zero hours contracts and gig work has been exposed as coming with huge downside risk for employees. But it also makes capitalism vulnerable. Workers without sick pay aren't going to self isolate. It's a lot of lower paid workers whose jobs can't be done from a laptop at home who going to keep things moving. In contrast many of us will reflect that we have bullshit jobs. Nothing is inevitable about a change, but I hope that, once we come out of the other side, unions build on some of the excellent work they have done so far and push for a new employment settlement.

Fifth, surely we're going to change our views on which organisations should and should not be privately owned. I have no idea where the line will end up being drawn but it won't be in the same place it is now.

Finally, the experience of a prolonged health crisis might serve to reset the discussion about pay. We're already seeing medical staff risking, and in some cases losing, their lives to protect us all. They, like most of us, do their job without any expectation of getting any bonus for it. So what makes executive directors so special? If the complex pay model we have for public companies - with all its targets, vesting dates, endless pages of reporting, and wasted investor research and engagement time - is part of a governance model that itself is out of date, let's junk it for good.

PS - https://www.youtube.com/watch?v=09LTT0xwdfw

Saturday, 14 March 2020

In defence of the Behavioural Insights Team

I've seen something a bit odd on twitter over the past few days - people from various bits of the Left having a dig at the involvement of the Behavioural Insights Team (BIT) in the government's response to the Coronavirus outbreak. I've no dog in this fight, but what I've found particularly odd is the way this criticism has bled into a general attack on using 'behavioural science' to inform policy.

I know zero about epidemiology, so have nothing of value to say whatsoever about whether the BIT should be involved or not (that doesn't seem to stop a lot of people having an opinion though...). But I do bristle a bit when I see people on the Left attack the idea of looking at things like social psychology and behavioural economics when formulating policy. I also find it jarring when people who apparently have no science background describe this as 'pseudoscience'.

To be clear, there are important critiques of a lot of this kind of stuff. There is a big question mark over the replicability of some 'findings'. Stuart Ritchie has a decent thread on this topic here. And I'm happy to defer to people who have the expertise to say that there is no meaningful role for the BIT. But it's a big jump from this to the 'pseudoscience' sort of attack I see on Twitter, and apparent distaste for the BIT on the part of some people on the Left. I think this is a bit mistaken, so I thought I'd set out a few points in defence of this kind of work.

First, one line of attack is that the BIT is a gimmicky outfit that should have died with David Cameron's gimmicky government. But actually behavioural economics had an impact on policy even under Tony Blair. If you go back to the Pensions Commission's first report there's a section on what behavioural economics says that could inform savings design. This had a direct influence on decisions like auto-enrolment.



It also had an impact on the design of NEST. For example, one of the papers on Personal Accounts (what the NEST scheme was called initially) cited various bits of behavioural economics research in the discussion about default design and number of fund choices.




Now some people on the Left don't like auto-enrolment or NEST, so for such people this is irrelevant. But if you think it's a good policy (and one developed and initiated by a Labour government) then you should at least be aware of the role that behavioural economics played in framing it. This stuff is not 'Tory' or 'Cameroon'.

Secondly, on a related point, there seems to be a bit of confusion about what the big idea is. I think that's because there isn't one. FWIW from what I've seen/read I don't really think there is a 'theory' that sits behind the work of the BIT. If you read David Halpern's book on the work of the BIT it boils down to some pretty basic principles, rather than some overarching theory. This is a page from it where he summarises the key ones:



A lot of the work of the BIT seems to be applying these kinds of principles combined with randomised testing. Big wows, as I think the young people say. "Make it easy for people to do things you want them to do" doesn't strike me as a particularly ideological position. If there's a decent attack to be made on this, surely it's more that this is 'common sense' and actually probably just good sales and marketing tricks. I think I'd still take issue with that, but at least I'd feel it at least comes somewhere near the target, as opposed to suggestions that there is some malevolent right-wing anti-regulation agenda at play.

Another reasonable attack on this kind of work is perhaps that it seems to promise technocratic 'solutions' to political problems. I can remember someone making the point when Nudge came out that it was trying to take the politics out of politics, which does feel sorta kinda fair.

But I wonder if that's mixing up policy design/implementation with policy objectives a bit. Take that 'make things easy' point, it could be used to design policy interventions with wildly different political objectives. In terms of savings design it has influenced the decision to change the default from opt in to out out. But you can reverse the point - make things harder if you don't want people to do them. Which is what I thought the Conservatives might have been doing by removing payroll deduction of union subs. (I was wrong, or, at least, my FOI did not return anything!)

Which leads onto my third and main point - I don't really get why the Left would want to attack this kind of stuff anyway? It can be used for purposes we like or don't like, but we could say that about comms, or other elements of policy delivery. But some of it surely reinforces Left positions. I first came across behavioural finance when I started reading more about financial markets (Robert Shiller etc). And it was obvious to me then that this literature was problematic to those who argue that markets are efficient. Similarly behavioural economics suggests lots of ways in which markets do not operate in the way that stylised accounts of them suggest. Going further, it was reading around this kind of stuff that lead me to critiques of performance-related pay - something a lot of people on the Left are uncomfortable with.

This is not to say that behavioural finance / economics is 'left wing'. Richard Thaler and Cass Sunstein used the godawful term 'libertarian paternalism' to describe their approach (though again that tells us something, as they were attacked for using evidence of market inefficiencies as a way to propose paternalistic policies). But I don't see the value in not looking at what we can learn from this stuff.

To establish that when X happens people do Y, and not Z, does not mean you must adopt a certain policy, or that you should rely on non-regulatory interventions. All that it means is that if you have a certain policy objective it's useful to take account of this stuff to design your interventions. I find that basically uncontroversial. It doesn't mean don't look at other information to form decisions, or that you must reject certain types of intervention.

I am sure that some of the interventions that are 'behaviourally informed' will fail, and that some of the 'findings' that underpin them will be disproved. That's all fine. When the facts change and all that. Equally some of it will prove to be robust and simply become 'economics', or whatever else. Some people seem to have forgotten how much has already entered the mainstream. (Let she who is without a copy of Thinking Fast And Slow cast the first diss). I am also sure that people will be able to find things that David Halpern and/or the BIT have said/done that people on the Left (including me) would find objectionable.

I'd just urge some caution. What are we really arguing with? If it's actually the policy objective I think we're missing the point. If it's the science I'm happy to let the academics fight it out and tell me what I should think once they are done. I just fear a baby/bathwater outcome.

Sunday, 8 March 2020

Fluttery votes

Here's the list of Paddy Power Betfair (now Flutter) major shareholders disclosed in last year's annual report. Capital Group is reported as having 5.9%, or 4.6m shares at 5 March 2019. Of these almost 3.9% are accounted for by the EuroPacific fund.


Here's an excerpt from the EuroPacific fund's NPX form that covered the 2019 AGM. The only resolution it said it voted against was resolution 2, to approve the dividend.


And here's an excerpt from Paddy Power Betfair's AGM voting results for the May 2019 meeting showing the vote against the resolution to approve the dividend.


The small print in the annual report says that the EuroPacific Fund delegates voting rights to Capital Research and Management. Does that mean that it voted For the dividend resolution, or didn't vote? Either way surely the NPX disclosure is pretty meaningless.

Against transparency!

The more time I spend looking at disclosures from investors, the less sense a lot of it makes to me. I've blogged quite a bit about meaningless Stewardship Code reporting, with dozens of hedge / boutique funds using exactly the same blurb. We are about to be hit by a wave of SRDII reporting that I think will repeat the same pattern.
I really question whether there is any point to all this reporting. I doubt most of these funds will ever aspire to be active 'stewards' of companies, and that's fine, most people that invest with them understand that. I am also sceptical that anyone reads the stewardship blurbs produced by managers or uses them to base asset allocation decisions on.
There's obviously a mini industry in producing compliance statements, which is probably going to matched over time by people within consulting or auditing firms who will assess them. So to the extent that there is interaction between people over the content of these disclosures it will be between people who write blurb and people who read blurb. It will not be between people who have capital to invest and people who are paid to invest capital, which would seem to be what we were all aiming at when the Stewardship Code came in ten years ago.
So if a lot of disclosure is meaningless, it goes largely unread, the only people who pay attention to it are compliance people (and compliance service providers) and consultants, and the firms who are making the disclosures are unlikely to change anyway, what's the point? It just seems to be imposing a cost.

Saturday, 7 March 2020

NMC voting turnout

Right... here's what we can see in the NMC meeting results. The first graph just sets out what NMC reports. So there is a headline total voting turnout for all meeting and at AGMs from 2015 I can also split out the insider and minority shareholder turnout figures because of the requirement to report the votes on independent NEDs twice.
In the second graph I've put in an assumed minority shareholder turnout of around 81% as this was the level it was at later on. This applies at three meetings - 2013 and 2014 AGMs, and the 2016 EGM. If I don't assume roughly the same turnout and instead assume 100% turnout of the insider bloc, then the minority shareholder turnout at the 2014 AGM would be 65%., which just didn't feel right.
UPDATE: I've added a third graph which is raw votes (rather than %) just in the years where insider votes are identifiable.







There are a few notable points. The 2016 AGM result look a bit odd. The big drop in overall turnout and insider turnout is largely Shetty not voting his shares, and this is explained in the AGM results notice. (Shetty held 47.7m at this point according to the annual report)

The very high, and unrepeated, level of minority shareholder voting is surprising. If my numbers are right it's 58.9m out 61.4m shares being voted, so only 2.5m(ish) not voted. By comparison at the previous AGM it looks 11m shares from the same free float were not voted.

Secondly, investors really don't like this company's approach remuneration. At that 2016 AGM 41.4m votes were cast against the remuneration report, so 70% of the minority shareholder vote. If we go to the 2016 EGM, 56m votes were cast against the rem policy. If we assume an 81% turnout (with more shares in issue) I reckon the vote against was around 85% of the free float. And it was over 80% against the remuneration report at the 2017 AGM too.

Thirdly, the 2013 AGM is quite interesting as it is obviously the controlling shareholders who voted the SID off the board (the vote against him 128m, shares held by controlling party disclosed in the annual report 124m) and on the same day it appointed the former EY person who became the SID.

Finally, it's terminal turnout time again. Voting levels drop as the shorting builds up.

How seriously do hedge funds voting disclosure?

Not seriously, I would argue. The principle that investors should disclose their voting records is pretty well established now, but we still get this cut & paste stuff justify not doing so.













Wednesday, 4 March 2020

More NMC stuff

A quick look at disclosures for one of NMC's largest shareholders, Wellington. Last Friday there was an RNS that announced that it held a bit over 10m shares, but in a note said it didn't have voting discretion for 1.35m of them (13.5%).


Then on Monday there was an RNS that replaced the one issued on Friday that announced that Wellington held 10m shares but the not now says it didn't have voting discretion for 8.7m of them (86.5%).


What happened there then? Who voted the other 8.7m shares (over 4% of those outstanding), or did no-one? Did they only find out on Monday? Not insignificant given that Wellington looks to have been the third largest external shareholder after Capital and Hermes (though part of its holding relates to a Vanguard fund it manages).

Monday, 2 March 2020

NMC Health voting rights

I spent a bit of Sunday trawling through NMC annual reports and RNS announcements. If you look at the disclosed shareholders in the annual reports you can figure out the holdings of the controlling shareholders. If you then look at the AGM results you can see both the total ISC and how much was voted. And because of the requirement to report the votes on independent NEDs both with and without controlling shareholder votes you can figure out what number the company put on controlled votes at the time of the AGM.

Looking at the 2015 AGM the numbers are exactly the same - combined voting rights disclosed in the annual report matched all votes cast minus minority shareholder votes cast. Looking at the 2017 AGM it's basically the same too. At the 2016 AGM it looks like 47.5m insider shares weren't voted, which is roughly B R Shetty's disclosed shareholding in the annual report for that year. Not sure why that might have happened. (Incidentally my initial calculation, which I'll look at again, suggests the reported turnout from the free float at the 2016 AGM was 96%, which seems high).

At the 2018 and 2019 AGM results it looks like 6.7m and 6.8m insider shares weren't voted at the respective meetings. This may be related to the fact that Shetty pledged 7m shares (but not 6.7m or 6.8m) to Goldman Sachs as part of a financing deal, about which NMC has provided more information today.


Sunday, 1 March 2020

Star Trek: The Paper Clip Maximiser

One of the books I really enjoyed recently was The AI Does Not Hate You by Tom Chivers. It's sorta more about the people who think about AI, and how they think about it, and it was basically right up my street.

There's a bit early on where he describes of the early thought experiments relating to AI risks, which is known as the paperclip maximiser. Here's the explanation in the book:

"Imagine a human-level AI has been given an apparently harmless instruction: to make paperclips. What might it do? Well, it might start out by dimly making paperclips. It could build a small pressing machine and churn out a few dozen paperclips a minute. But it's bright enough to know that it could be more efficient than that, and if it wants to maximise the number of paperclips it can make, it's probably better not to go straight for a small press. It could instead use its materials to make a larger factory, so that it's making thousands of paperclips a minute. Still, though, if really wants to make as many paperclips as possible, it might want to improve its ability to think about how to do so, so it might want to spend some of its resources building new processors, upgrading its RAM and so on.

"You can see where this is going, presumably. The end point of the paperclip maximiser is a solar system in which every single atom has been turned into either paperclips, paperclip-manufactoring machines, computers that think about how best to manufacture paperclips. or self-replicating space probes that are hurtling out towards Proxima Centauri at a respectable fraction of the speed of light with instructions to set up a franchise there."

This is a great little explainer, which apparently originates with Eliezer Yudkowsky (by the way whose book Inadequate Equilibria is also worth a read and I may blog about later). But it also reminded me of Star Trek The Motion Picture (the first Star Trek movie).

In that film there is a giant entity, which we later find out is called V'Ger, spreading through the universe, destroying a lot of stuff in its path, including Federation spaceships! Here's how Wikipedia describes the way the film ends:

"At the center of the massive ship, V'Ger is revealed to be Voyager 6, a 20th-century Earth space probe believed lost in a black hole. The damaged probe was found by an alien race of living machines that interpreted its programming as instructions to learn all that can be learned and return that information to its creator. The machines upgraded the probe to fulfill its mission, and on its journey, the probe gathered so much knowledge that it achieved sentience. Spock realizes that V'Ger lacks the ability to give itself a purpose other than its original mission; having learned what it could on its journey home, it finds its existence meaningless."

OK, so it's not quite the same thing. An important point in Tom Chivers' book is that AI risk really isn't about machines achieving sentience. However there's a big similarity, the goal - go and find out all that you can and transmit it back - gets interpreted in a very broad way, the machine is unable to go beyond the goal, and the goal ends up being achieved in a way that leads to humans getting killed.

TR1 tales at NMC

A few more funky bits and pieces in the entrails of NMC Health's filings...

A couple of banks facilitating stuff for clients presumably. In the Morgan Stanley case it's an equity swap. Quite interested in who would want an NMC equity swap at this point, but again it's possible that the disclosures have lagged. The TR1 showing Morgan Stanley linked positions going below the disclosure threshold was issued to the market on 27 Feb, whereas the TR1 disclosing the previous notifiable holding was issued the day after.

24 Feb (but issued on 28 Feb)
Morgan Stanley - under 5% to 5.12% (3.94% not shares)
https://www.investegate.co.uk/nmc-health-plc--nmc-/rns/holdings-in-company/202002281540585546E/

25 Feb (issued on 27 Feb)
Morgan Stanley - 5.12% (3.94% of which not shares) to under 3%
https://www.investegate.co.uk/nmc-health-plc--nmc-/rns/holding-s--in-company/202002271636474038E/


Here's another bank in the mix: Goldman Sachs, and it's a mixture of put and call options, swaps and CFDs. At one point in early January the total interest in NMC shares goes from below 1% to almost 13%, of which less than 2% represented actual shares themselves, but that represents over a quarter of the free float. There are a bunch more Goldman TR1s that I'll look at later.

8 Jan
Goldman Sachs - 12.94% (11.17% not shares)
https://www.investegate.co.uk/nmc-health-plc--nmc-/rns/holdings-in-company/202001151000018746Z/

That stuff drifts down again to just under 9% before disappearing under 1% again on 17 January. So this all happened within 10 days.
https://www.investegate.co.uk/nmc-health-plc--nmc-/rns/holdings-in-company/202001211716315043A/


Finally, you can see a bit of stock lending activity out there too. For example, TR1s issued by Norges Bank show it winding down the amount of stock on loan (plus a jump in overall holding) from the back end of 2019. I've stuck a few of these into a chart.


Blackrock also issued a bunch of TR1s as its position went up and down, and there is a bit of disclosed stock lending in there. Here's a disclosure showing 1.6% lending near end November 2019.
https://www.investegate.co.uk/nmc-health-plc--nmc-/rns/holding-s--in-company/201911281100020114V/  

According to ShortTracker, the total public short in NMC hit about 6% at max, and was at 5% at the time of the meeting in December that approved the company's buyback and its remuneration policy. Just the Norges and Blackrock disclosures show 3.75% between them out on loan around that time.

Incidentally, the voting turnout for that meeting was reported as 85% - with almost 178m out of 208m shares voted. Turnout at the AGM last June was actually a touch higher - 87% and 182m shares - that strikes me as pretty good in general and therefore not one of the cases I've found previously of shorted stocks seeing falling turnout.

Saturday, 29 February 2020

FTSE100 corporate governance failure

UPDATED: Very useful info from Chris Hodge added - the ownership disclosure requirements are weaker for non-UK issuers. 

It's not surprising, given the market turmoil, that the crisis at NMC Health has attracted less attention than it would normally get, but it's shaping up to look pretty nasty. At the time of writing, the shares are suspended, the FCA has launched a formal enforcement investigation, the chief executive has gone (following several other directors) and the FD is on sick leave, the company has revealed off balance sheet financing running into hundreds of millions, the company is reported to have pledged future credit card payments from customers to obtain financing, there are reports of staff going unpaid and one analyst has warned that NMC shareholders might at the extreme be left with nothing.

It's pretty amazing that this has happened at a FTSE100, and this is something to bear in mind next time the claims is made that the UK's governance regime is the envy of the world. All this must surely require a thorough review.

First up, let's be clear this is not a UK company in a meaningful sense. Its shares trade here but the bulk of the business is elsewhere. Why are companies like this listed, and allowed to be listed, in the UK in the first place? Surely this example should lead us to look again at the listing rules?

Secondly, it's another controlled company, with a free float of only about 45% (though exactly who had the beneficial ownership the 55%+ is still a little unclear). [actually it looks to me like the free float was closer to 42%] Once again - why do we allow this, and if we are going to continue to do so why are shareholder protections so weak? 

The NMC case really brings this home. The 'protection' is that votes on 'independent' non-executives have to be shown twice, once including the controlling shareholder votes, and once without. And in the latter case if the director gets less than 50% the election has to be re-run. OK, great, but key players at NMC were not caught by this. B R Shetty, the founder and vice-chair who is right in the middle of it all was (rightly, obviously) not designated independent. So the governance regime by design excludes him from accountability. Nor is this glaring flaw in the regime a new thing - think James Murdoch at Sky.

Thirdly, even if all that doesn't bother you, its board clearly had independence issues. Surely in the case of a controlled company like this you have to be extra vigilant, and you should use what limited power you have to push for a board that has strong independent representation. So why so little challenge from shareholders? Looking back at its last AGM the directors barely got a tickle, let alone a slapped wrist. If I was invested with an asset manager that had a big position in NMC and voted for everything at that AGM I'd give them a serious grilling. 

We may need to need to look at reporting too. If NMC was unclear about who owned what it's possible that some of its RNS announcements are wonky. Having had a read through some of them I already have some questions. 

UPDATE: Actually the point in italics below is easily explained. The disclosure requirements for a 'non-UK issuer' are actually less than for UK issuer. Excerpt from the FCA below.




It's not obvious to me why there should be less transparency regarding the ownership of a non-UK issuer. It feels particularly odd in this case given that uncertainty regarding ownership of shares is right in the middle of the story. 

Also I realise that NMC did not tick the box (literally) on the TR1 forms to identify it as a non-UK issuer. Maybe an oversight though.

For example, this TR1 issued in January 2019 shows Capital's holding in NMC going over 5% on 22 January:

Then there's nothing until January 2020, when this TR1 says that on 8 January Capital's position went to 11.5%:

It seems very unlikely to me that Capital held the same position for almost a whole year and then went from 5% to 11.5% in one day, given the size of the move, the limited free float etc. So what's going on there? And when I looked at a share register showing historical holdings in the company, it looks like they went over 5% earlier. I thought TR1s had to be issued each time a shareholder goes over a 1% threshold - am I missing something? 

I appreciate that most market participants aren't going to rely on TR1s for holdings info, but these are regulatory announcements. Perhaps there is a reason why it didn't report ownership going over 6%, 7%, 8% etc, but if so the reporting regime seems a bit pointless. And it may not just be Capital, are there other TR1s that should have been issued? 

This in turn makes me wonder about the disclosures in the annual report. Here is the list of major shareholders in the most recent annual report.


I thought that requirement to disclose major shareholders kicks in at ownership of 3%. If the company issued a TR1 in January 2019 saying that Capital went over 5%, and the statement of major shareholders in the annual report is as at 6 March 2019, why is Capital not in the list?

I'm going to keep digging away at this one, and will blog again as I find more out. At the moment I'm just shocked that this had happened.