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.

Shorting Carillion and funding the Tories at the same time

Nex Group chair costs himself £25,000

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

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

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

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

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

Authority to make political donations (resolution 12)
Resolution 12 is to approve the making of political donations and incurring of political expenditure by the Company and any of its subsidiary companies of up to an aggregate amount of £100,000 in the period up to the Company’s annual general meeting to be held in 2017. The Act contains restrictions on companies making donations to political organisations or incurring political expenditure without prior shareholder approval. The directors have no present intention to make political donations but, because of the broad definitions of political donations and political expenditure contained within the Act, the directors consider it prudent to obtain this shareholder approval. There has been no expenditure under the corresponding authority obtained at the 2015 annual general meeting of the Company. 

This is important. Many companies seek authority to make political donations, but do so to avoid being caught by a wider definition of "political expenditure" (paying for stands at conferences etc). When seeking these authorities companies typically explicitly state that the authority will not be used to make political donations. As you can see, ICAP strongly suggested this would be the case. But donations were made by Nex Group in any case (assuming Nex used the carried over ICAP authority).

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

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

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

Enter, stage right: Workers on boards

“I want to see changes in the way that big business is governed. The people who run big businesses are supposed to be accountable to outsiders, to non-executive directors, who are supposed to ask the difficult questions, think about the long term and defend the interests of shareholders. In practice, they are drawn from the same narrow social and professional circles as the executive team and – as we have seen time and time again – the scrutiny they provide is just not good enough. So if I’m prime minister, we’re going to change that system – and we’re going to have not just consumers represented on company boards, but workers as well.”

So there we go, the incoming Conservative Prime Minister has committed to having workers represented on company boards. As always, these high level statements leave a lot of unanswered questions. By "represented" do we mean the workers themselves are on the board or someone else speaks for them? By "on company boards" do we mean as directors, equivalent to non-executives, or something different? How are these people appointed? Do these policies imply changes in company law?

Nonetheless, this does represent a public commitment to a shift in corporate governance in the UK that it will be hard for the incoming PM to row back from. We need to see the precise details before saying this is unequivocally A Good Thing. But it has certainly set the cat amongst the pigeons, and is definitely a notch to the Left of some of the baby steps Labour "moderates" have advocated. Even the IoD has backed the idea.

May's other proposals are pretty much same old same old - a binding vote for shareholders on exec policy every year rather than every three (which was the original idea before some in the asset management industry lobbied for a triennial vote) and on specific aspects of pay (again part of the last exec pay consultation by BIS undertaken under the Coalition). I also read she proposed pay ratio disclosure - once more an idea consulted on under the Coalition but dropped (and opposed by the asset management lobby if I remember right).

I am going to enjoy the rare privilege of saying I Told You So. I think the direction of policy around corporate governance in general and executive pay in particular has been pretty obvious for the last few years. We had kind of reached the end of the road for the 1990s vintage version of greater disclosure and increased shareholder powers. I mean this in two senses. First, there wasn't a lot more to be done - hence the main thing May has proposed in terms of shareholder powers is increasing the frequency of binding vote, and the disclosure of pay ratios would build on already enhanced disclosure. But second, despite the provision of more powers and more information, and repeated prods from governments and regulators, asset managers have shown themselves to be a pretty weak force for pay restraint.

As I've argued before, giving shareholders prime responsibility for executive pay simply makes it likely that pay will be shaped in a way that asset managers think is reasonable, if they are motivated to engage at all. Asset managers have largely said structure (performance linkage etc) is important, not scale. This may or not be reasonable (I think not, given that the power they have derives from other people's money) but it certainly isn't in line with where the public is at.

This was always going to end badly. Otherwise smart people repeatedly said there's no sense in getting upsetting about the huge and growing rewards for a handful at the top because a) the amounts were small compared to overall company expenditure b) it was performance linked and c) shareholders gained from the "talent". This approach always misunderstood where other people were at, and that they might have different ideas. For a while it looked smart to make shareholders have responsibility for executive pay, and to promote policy to facilitate this, but the danger has always been that if shareholders didn't act this could pull the rug from under shareholder primacy itself. 

I know this is just lefty nonsense coming from me, so it's worth reading someone from the world of finance make a lot of the same points here: 

The UK’s big shareholders and the big boardrooms they are supposed to keep an eye on for us have had endless chances to have a go at fixing the pay problem themselves. They haven’t done it. Now the problem so bad that it looks as if a Tory government is going to have a go at fixing it for them. That’s a political shift that marks a major financial industry failure. And rather a shameful one at that.

Of course, May could still backtrack, maybe by consulting on these ideas and then ditching them when there is pushback. But even a consultation could be politically damaging is it sees some of those with a vested interest arguing against a fairly significant shake-up. I'm not sure the CBI will be putting a joint response in with the Investment Association again saying there isn't really a problem with exec pay, for example. And by opening up this argument, May is only going to take flak for caving into the donors if there is significant backsliding.

I blogged a while back about the need for Labour to set out something thorough in the area of corporate governance and company law reform. It's clear that this now needs to be done rapidly, and radically. The 1990s is over. It's time the Left started setting out a vision of corporate governance in the 21st Century.    

Caledonia update

Just to clear up the mystery of those donations tagged to the Conservative Party that I blogged about last year, I've had the email below from the Electoral Commission. Basically the Tories mucked up their admin -

Dear Mr Powdrill,

 

You contacted me last year about two donations to the Conservative Party that we published on our website PEF Online, which were reported as from Caledonia Investments PLC.

 

Both turned out to have been due to administrative errors, and the Conservative Party has now reported the donations from the correct donors:

 

International Caledonian Assets Ltd

 

The Cayzer Trust Company Ltd

 

Fidelity and the "premier supporter group of the Conservative Party"

Ahh.... Fidelity, the lure of right-wing British politics is just too strong for you isn't it?

I've blogged previously about the latest Fidelity link to the Tories - their involvement with the Leaders Group. According to the Conservative Party's own website this is the "premier supporter group" for the Tories, with an annual membership of £50,000.

As if you were in any doubt about which party Fidelity were rooting for in the General Election, the Q1 2015 disclosure of which "major donors" attended Leaders Group meals in the first quarter shows that both Barry Bateman and Simon Haslam represented Fidelity (FIL Holdings in the list). It isn't clear if the were both at one meeting, or if more than one was attended. As well as being a board member of FIL, Simon Haslam is of course also chair of Colt, where Fidelity is the major investor.

Of course the Conservative Party has embarked on a major assault on trade unions since the election, something that was trailed in their manifesto. If you are a trade unionist who is a pension fund trustee or otherwise has some involvement in this area you might want to choose asset managers who don't fund attacks on you. 

Caledonia Investments update

Just keeping this one warm. As it stands, the Electoral Commission register of donations continues to list two donations from Caledonia Investments PLC worth £4000 in the financial year to 31 March 2015. As previously noted these were not disclosed in the company's annual report and were not covered by previous authority granted by shareholders (Fidelity voted in favour, natch) to make such donations.

As it stands, the FRC has told me that the company has "confirmed" to them that it did not make the donations. The Electoral Commission has told me that it is in discussions with the Conservative Party about the donations. On this basis of the info I currently have, I assume that the donations were wrongly logged by the Party, possibly because they were made by the Cayzer Trust (though I'm just speculating here). Otherwise, if the donations were made by Caledonia, I think company law has been breached.

Behavioural insight as a weapon

I've blogged on an off over the years about behavioural economics and what lefties can usefully learn from it. It seems like the surge of interest on the Left in the UK in this area has subsided a bit compared to a few years back. But I'm sure the same is not true of the Tories. The Behavioural Insights Team (or 'Nudge unit') is now a company arm's length from government, but is still beavering away on all kinds of topics.

They popped into my head today when I was thinking about the Trade Union Bill. From a behavioural perspective a lot of elements of this Bill seem to do the wrong thing in terms of engaged membership. For example, take the remove of Deduction of Contributions at Source (DOCAS). This removes the ability of potential union members to have subs deducted via payroll, and will require unions to sign them up individually by direct debit.

This is the opposite of what the Behavioural Insights Team advises in other areas. For example, in this 2013 paper on increasing charitable giving (which can still be done via payroll deduction!) they say: "One of the most important lessons from the behavioural science literature is that if you want to encourage someone to do something, you should make it as easy as possible for them to do so."

Getting rid of DOCAS makes it more difficult for employees to pay union subs. So we might reverse the message and say: if you want to discourage someone from doing something you should make it as difficult as possible. Seen in this way, the DOCAS proposal makes a lot of sense - if behavioural science is being applied with the objective of discouraging employees from joining unions.

Or look at the proposal on the political levy. Here the shift is from an opt-out to an opt-in model, with the added requirement that members are required to opt in again after five years. In behavioural terms this is changing the 'default'. Again, it's useful to quote the Behavioural Insights Team itself. The text below comes from the doc "Four Simple Ways to Apply Behavioural Insights" (my emphasis added):

1.1 Harnessing the power of defaults
We have a strong tendency to stick with the ‘default’ option, which is the outcome that occurs if we do not choose otherwise. Understanding the default and how it can be changed can significantly improve uptake of a service.
Some of the most famous policy examples from the behavioural economics literature relate to changing the default option. For example, when individuals are automatically enrolled onto pension schemes but can choose to opt out, they are much more likely to end up with a pension plan than if they have to actively opt in (see Box 1.1).
Similarly, organ donation schemes can be set to automatically enrol people. Or tax systems can be put in place that automatically deduct individual’s income tax without an individual having to take any action (as in the UK’s Pay-As-You-Earn system). In these examples the default option can be a very powerful tool for encouraging different outcomes. But because of the power of these particular policy tools, they will also require careful consideration of what might be acceptable politically and to the public at large.

If we look at what is proposed in relation to the political levy we might look at this line in particular:  Understanding the default and how it can be changed can significantly improve uptake of a service.

Currently the political levy default is opt-out, encouraging members to stay in (but having the option to leave). But it is being shifted to opt-in which will encourage members to stay out. What's more the added requirement of a 5 year re-approval of your own decision if you do opt in adds another encouragement for members not to participate.

Once again we see that the policy makes sense - if we reverse the objective. The Tories want less take-up, not more. I think they do indeed understand that the default is a very powerful tool, and they are using this knowledge by changing the default (to opt-in) in order to significantly reduce the take-up of paying the political levy. To use the Behavioural Insights Team example of pensions, if this approach was applied by a pension scheme - you have to actively join, and have to choose again after 5 years - we would assume the sponsor didn't want people in it.

To me it's pretty obvious the Government knows exactly what it is doing with theses interventions - making it harder for employees to join unions, and making it harder for them to pay the political levy. What is significant is that these policies are well-designed from a behavioural perspective if the objective is to reduce union membership and weaken union political activity. What we see here, then, is behavioural science being used as a weapon by the Right against the labour movement. We need to learn a lesson here.

The only question I really have is whether the Behavioural Insights Team was consulted or advised on the Bill, and I can imagine that it wouldn't look good if it emerged that the Government was using psychological tactics to weaken unions. So I was interested to see one stray reference to "behavioural insight theory" in the BIS paper on balloting (para 79 on page 16 here).

Intriguing....

Another Fidelity - Conservative Party link

I've blogged a lot previously about the many links that exist between the asset manager Fidelity and the Conservative Party. I've just discovered a new one that provides a bit more insight into how significant the relationship is.

The Leader's Group is one of the Tories' donor clubs. In fact, according to their own blurb, this is the "premier" supporters group:

Annual membership: £50,000 Chairman: Howard Leigh
The Leader’s Group is the premier supporter Group of the Conservative Party. Members are invited to join David Cameron and other senior figures from the Conservative Party at dinners, post-PMQ lunches, drinks receptions, election result events and important campaign launches.

It's not cheap either, at £50,000 for an annual membership. Helpfully the Tories provide some data on who meets who in this club, and look who turns up in their disclosure for Q4 2013:

FIL Holdings (UK) Ltd (represented by Barry Bateman, Director )

I had vaguely heard of Barry Batemen so I had a google around, and it turns out he's the vice-chairman of the UK business. This is a very senior position in the firm.

So in addition to funding the Conservative Party, employing a Conservative MP, sponsoring meetings of the Conservative Party's business liaison organisation and voting in favour of PLCs making political donations to the Conservative Party, Fidelity had one of its most senior UK people at an event organised by the Conservative Party's "premier supporter group".

Caledonia update

I've had a response from the FRC, which has been in touch with the company. Apparently the company "confirms" that it has not made any donations since 2010. However, as of today the two donations are still on the Electoral Commission website and attributed to Caledonia, so I've been in touch with the Commission, who in turn say they are talking to the Conservative Party.

Curiouser and curiouser...

Why hasn't Caledonia Investments disclosed its Tory donations?

A couple of weeks back I blogged that Caledonia Investments had made two separate donations of £2000 to the Conservative Party - received in December 2014 and mid March 2015.

To be crystal clear, according to the Electoral Commission the first donation was received on 12 December 2014, the second donation was received on 13 March 2015. Both donations fall within Caledonia's financial year which runs to the end of March and the total, obviously, is £4000. And one final detail - both these donations are tagged with are the same company number and name (which are also the same as previous donations made by Caledonia) so I don't think it can be claimed they are separate legal entities (if that matters).

As I blogged previously, it wasn't necessary to seek shareholder approval for this since the aggregate amount is less than the £5000 allowed in any 12 month period. However, I did expect Caledonia to at least make some sort of statement about the donations in its annual report.

Yesterday the company announced publication of the annual report, slightly earlier than its financial calendar had suggested. I spotted this late this afternoon, and I've subsequently had a read through it.

I can't see any mention of the donations at all in the annual report. It's entirely possible I'm being thick here, so please search the annual report for yourself here and let me know if you find something. I am very happy to correct this post as necessary. This apparent lack of disclosure contrasts with previous years when donations were reported, see page 26 of their 2010 annual report for example.

What is more, if my reading of the Large and Medium-sized Company reporting regulations is right - again I welcome any guidance from more knowledgeable people here - donations of more than £2000 in any one financial year have to be disclosed. I've posted the whole of the relevant section of the regs below for info, or you can view them online here.

So my first question is whether Caledonia Investments has met the reporting requirements for disclosing political donations. (To be honest, given the previous pushback they've had from shareholders on political donations I think they should disclose them whether required or not).

Given the possibility of breaching company law in this area I think it is very important that Caledonia Investments makes absolutely clear to shareholders how much of the company's money it has actually donated. If what I say above about non-disclosure is correct then currently Caledonia shareholders may not even know about these donations unless they look at the Electoral Commission register, or stumble on this blog.

Depending on what feedback I get, I will try and raise awareness of this, which leads onto my second question - should shareholders vote for an annual report that they know does not meet reporting requirements? This is resolution 1 on the AGM agenda.

Any feedback on any of the above much appreciated.

Political donations and expenditure

3.—(1) If—

(a)the company (not being the wholly-owned subsidiary of a company incorporated in the United Kingdom) has in the financial year—

(i)made any political donation to any political party or other political organisation,

(ii)made any political donation to any independent election candidate, or

(iii)incurred any political expenditure, and

(b)the amount of the donation or expenditure, or (as the case may be) the aggregate amount of all donations and expenditure falling within paragraph (a), exceeded £2000,

the directors’ report for the year must contain the following particulars.

(2) Those particulars are—

(a)as respects donations falling within sub-paragraph (1)(a)(i) or (ii)—

(i)the name of each political party, other political organisation or independent election candidate to whom any such donation has been made, and

(ii)the total amount given to that party, organisation or candidate by way of such donations in the financial year; and

(b)as respects expenditure falling within sub-paragraph (1)(a)(iii), the total amount incurred by way of such expenditure in the financial year.

(3) If—

(a)at the end of the financial year the company has subsidiaries which have, in that year, made any donations or incurred any such expenditure as is mentioned in sub-paragraph (1)(a), and

(b)it is not itself the wholly-owned subsidiary of a company incorporated in the United Kingdom,

the directors’ report for the year is not, by virtue of sub-paragraph (1), required to contain the particulars specified in sub-paragraph (2).

But, if the total amount of any such donations or expenditure (or both) made or incurred in that year by the company and the subsidiaries between them exceeds £2000, the directors’ report for the year must contain those particulars in relation to each body by whom any such donation or expenditure has been made or incurred.

(4) Any expression used in this paragraph which is also used in Part 14 of the 2006 Act (control of political donations and expenditure) has the same meaning as in that Part.

4.—(1) If the company (not being the wholly-owned subsidiary of a company incorporated in the United Kingdom) has in the financial year made any contribution to a non-EU political party, the directors’ report for the year must contain—

(a)a statement of the amount of the contribution, or

(b)(if it has made two or more such contributions in the year) a statement of the total amount of the contributions.

(2) If—

(a)at the end of the financial year the company has subsidiaries which have, in that year, made any such contributions as are mentioned in sub-paragraph (1), and

(b)it is not itself the wholly-owned subsidiary of a company incorporated in the United Kingdom,

the directors’ report for the year is not, by virtue of sub-paragraph (1), required to contain any such statement as is there mentioned, but it must instead contain a statement of the total amount of the contributions made in the year by the company and the subsidiaries between them.

(3) In this paragraph, “contribution”, in relation to an organisation, means—

(a)any gift of money to the organisation (whether made directly or indirectly);

(b)any subscription or other fee paid for affiliation to, or membership of, the organisation; or

(c)any money spent (otherwise than by the organisation or a person acting on its behalf) in paying any expenses incurred directly or indirectly by the organisation.

(4) In this paragraph, “non-EU political party” means any political party which carries on, or proposes to carry on, its activities wholly outside the member States. 

Caledonia Investments Tory cash drop 2

I've blogged previously about Caledonia Investments continuing to give the company's money to the Conservative Party, this time without shareholder approval. I've just spotted that actually they have done it twice in the past few months, first in Eastleigh, secondly in Finchley and Golders Green.

Together these donations total £4,000, so less than than the threshold set by the Companies Act to require a vote from shareholders to approve them. It probably seems like small beer to people in the City, but I imagine Labour wouldn't have minded an extra £2000 in Finchley and Golders Green.

Caledonia's annual report will be published in just under three weeks according to their financial calendar, so I'll be keeping a look out for how they report these donations. The company's AGM is on 16th July, so it will be interesting to see if shareholders take any action, though as Caledonia presumably won't seek shareholder authority to make donations this time investors may need to use another resolution for any protest vote.

More generally, as I argued previously, these donations are a bit troubling as they are being made by a company which has previously received a strong signal from its independent shareholders not to spend the company's money in this way. Caledonia Investments looks to be taking advantage of a weakness in the Companies Act because it knows it would face resistance if it went over the £5000 threshold and had to seek shareholder approval.  

I'm not sure why that exemption was put in the Act in the first place, but Caledonia seems to be making a pretty good case for its removal.

Caledonia's sneaky Tory cash drop

Well this is interesting. It turns out that Caledonia Investments hasn't quite given up on using company money to fund the Tories after all. I speculated last June that they may have given up. My reasons for thinking this were a) they had made no donations since 2010 and b) they had not sought shareholder approval to do so since 2009.

This remains true, Caledonia has not sought shareholder approval to make political donations since July 2009 when almost 20% of shareholders voted against. As I understood it, because that authority was used (as donations were made during the subsequent 12 months) approval would needed to have been sought again to make further donations. As no authority was sought at the 2014 AGM (the last chance to do so before the election) it looked liked they weren't going to do it.

But then I spotted that Caledonia had indeed made a donation of £2,000 which was received by the Tories in mid December 2014, and looks like it has gone to the local party in Eastleigh, a key target seat to take from the Lib Dems. On the face of it this looks like it isn't permissible, but apparently there is a threshold for donations that require shareholder authority of £5,000 in any 12 months. Only donations over that amount require approval.

It doesn't look great does it? This is a company that knows that a) you are expected to seek shareholder approval for political donations and b) that its own shareholders do not like it making party political donations (as demonstrated by the July 2009 AGM vote). So it appears it has found a way to give the company's money to the Conservative Party without having to consult its shareholders and have a controversial vote. And this enables them to chuck a couple of grand into a key Tory target seat.

If you are a Caledonia shareholder, and/or a Lib Dem leaning corp gov type, you might want to have a look at this one. It looks to me like they are taking the mickey, and they might try and bung a few more quid over before the election.

Fidelity, the Tory-friendly fund manager

As the latest info from the Electoral Commission reveals, Fidelity is still funding the Tories. £25,000 donated in November took their total for 2014 up to £120,000.

They are also still paying Tory MP Sir John Stanley for advice on "business opportunities and risks" at the rate of £1,800 a month (so around £20K a year). As I've noted before his constituency is where Fidelity is based, so will be interesting to see if they continue this relationship with Sir John's  successor as he stands down at this election. It's a very safe seat so will return another Tory.

For those new to this story, it's worth noting that Fidelity have also - 

Voted in favour of political donations to the Tories by PLCs in which they are a shareholder

Sponsored meetings of the Tory business liaison group the Enterprise Forum

Donated £50,000 to the No campaign in the AV referendum

So, if you don't want to fund the Tories by accident you might want to check out if you have any savings managed by them and see if you can switch. I shifted our family savings away from Fidelity several years ago because of this. I continue to try and make non-Tories, including pension fund trustees, aware of this link between Fidelity and the Tories. It's up to individuals to decide if they are happy with it, or if they think it constitutes any kind of conflict, but they should at least be aware of it. 

A few snippets

1. The NAPF put out a survey of pension scheme members' views on issues relating to stewardship last week. There's an interesting finding in there about what they think pension funds ought to be talking to investee companies about. Employee pay and conditions ranks above exec pay, environmental issues and so on. In practice I reckon it's near the bottom of the list of stuff that actually gets talked about. Here's the blurb:

If the primary fund of your pension provider were taking an active role in the companies they invest in, what do you think are the most important issues for them to consider?
Understandably the issue considered most important was the recent financial performance of the company (57%) with pay and conditions of employees (36%) and level executive pay (30%) a distance behind.
Notably despite the significant attention given to issues of executive pay, diversity and environmental impacts – all of which the NAPF agrees are important and material issues for many companies – these do not on the whole feature very highly for respondents.
Recent financial performance of the company57%Pay and conditions of employees36%Level (and structure) of pay for management30%Worth noting are the relative weightings given to the issues by the younger cohort. It is these employees with whom it is most important to engage with pension saving and whom will also be bearing the investment risk for the longest period of time. Given this context, it is worth noting that amongst 18-34 year olds the issue of pay and conditions of employees is considered on a par with the company’s recent financial performance (44%); in addition issues related to human rights and environmental impact are also considered significantly more important than they are amongst the wider population (28%). 

2. There's a been quite a lot about the motivational limits of financial incentives. I've said it before, but I do think there is a shift in opinion underway here, though the corporate governance mainstream seems absolutely determined to keep redesigning performance-related reward.

Anyway, Simon Wong has a good bit in the FT, and he's more optimistic than me that a rounder view of executive motivation is emerging. I completely agree with his ideas too - downplay financial incentives in the CG Code and make companies explain their approach to motivation. I would only add that we should make investors explain their motivational assumptions, especially when proposing another new idea to companies involving financial incentives.

There was also a bit in the NYT last week co-authored by Barry 'Paradox of Choice' Schwartz. And going back a bit, Katherine Birbalsingh gave some good comments on why performance related pay is a bad idea in teaching.

3. There was a bit in the Indy on Caledonia not donating to the Tories.

Caledonia gives up on the Tories?

An interesting little snippet, today the investment trust Caledonia Investments issued its notice for the forthcoming AGM which includes the list of resolutions that will be put to the meeting. The thing I looked for straight away was if they were seeking authority to make political donations, as the company has been a regular Tory donor in the past, and quite noisy about it.

But there's nothing there - no such resolution. And this is, of course, the last AGM before the election where the company could seek such an authority. It looks to me like they may have, finally, backed off. For completeness, I checked whether the Cayzer Trust, the major shareholder in Caledonia, was still making donations, and indeed it is.

But the majority of Caledonia shareholders are not linked to the Cayzer family, and that's why I've always thought it was inappropriate for the company's money to be spent supporting a particular political party (though others - like Fidelity - obviously disagree).

So, hopefully, it looks like common sense has prevailed.

Fidelity's voting conflict

I blogged previously about the the tricky spot that Fidelity Investments puts itself in by making political donations to the Conservative Party. Digging around a bit I've found a second (here's the first) example where it voted in favour of a resolution seeking authority to make political donations put forward by a PLC that made political donations to the Conservative Party.

The 2010 annual report of Enquest is available here. If you turn to page 44 (or just search for 'Conservative Party') you can find the following statement:

Political and charitable donationsThe Company made charitable, social, community-related and political donations totalling US$71,145 during the year, which includes a political donation of US$13,300 to the Conservative Party.

Faced companies that make party political donations, many shareholders will oppose resolutions seeking authority to make them. But I have checked Fidelity's voting disclosure for May 2011 - which was the opportunity to vote against the company - and it voted for the resolution on Enquest's AGM agenda seeking the authority to make donations.

It should be noted that many shareholders did not feel the same way. The AGM results are no longer available on the company's website but I blogged at the time that the vote against was 30%. (For completeness, Enquest now states that it makes no party political donations, see page 17 here.)

So we have two real life examples of an asset manager that makes donations to the Conservative Party voting in favour of political donation authorities put forward by companies that made donations to the Conservative Party.

Doesn't look great does it?

Conflicts of interest of political donor shareholders

The more I think about it, the more troublesome I find it that Fidelity, and other institutional shareholders that make party political donations, have the right to vote on resolutions put forward by companies seeking authority to make political donations.

The important question is, how objective can an organisation that funds the Conservative Party (or any other party) be when voting on resolutions seeking authority to donate to the Conservative Party? In a real-life test case, we can see that Fidelity voted in favour of such a resolution. 

I am sure the intention behind giving shareholders a vote on political donations was not that politically networked asset managers could assist companies in making party political donations. So I think this does need dealing with.

I think there are two simple steps that would address this - 

1. Fidelity should disclose in its Stewardship Code statement that it has a conflict of interest when voting on resolutions relating to political donations. (It currently makes no mention of this conflict as far as I can see)

2. Fidelity should outsource the vote on such resolutions to a third party.  

This model could be applied to other asset managers faced with the same conflict.

More generally, maybe it would be a good idea for Fidelity and others to poll their clients on political donations. I suspect the large majority are unaware that it makes them. Given ongoing reforms to the funding of political parties, such as those relating to the unions' funding of the Labour Party, it seems a little odd that conflicts in financial relationships like those between Fidelity and the Conservatives are not being addressed. 

Fidelity bungs the Tories another £75,000

A quick update on "generally non-partisan" fund manager Fidelity. A quick look on the Electoral Commission register of donations reveals that they gave the Tories £75,000 during 2013, comprising three donations of £25k in April, August and November. This compares to £100,000 donated during the year before.

The drop in donations probably doesn't mean a lot, they seem to be a bit erratic. Also, if previous experience is anything to go by, we might see their donations rise quite a bit this year to help fund the Tories' 2015 campaign. In the year up to the 2010 general election Fidelity gave the Tories £300,000.

Also worth keeping a eye on Caledonia Investments. They have previously sought shareholder approval to make donations to the Tories. But I wonder if the Cayzer family are the sort who might switch to UKIP? Or simply give up of the Tories?

Another Fidelity/Conservative snippet

Doing a bit more digging around on links between the Conservative Party and Fidelity, I came across this piece on Open Democracy (from last March) which lists peers' financial interests related to healthcare reform. It includes a little bit on Lord (Bob) Edmiston -

Lord Edmiston: Shareholdings in Bupa Finance plc where Baroness Bottomley is a director. Bupa provides health insurance, private hospital and care group in direct competition with the NHS. Shares in Fidelity International Ltd, which acquired Telehealth Solutions Ltd in 2011. Telehealth has partners in the NHS and private health-care - and has several contracts with the NHS.  Telehealth is rapidly expanding and works to give people treatment from home, and is seen by Health Secretary Andrew Lansley as a way to save the NHS millions.

A quick look on the Electoral Commission register of donations shows that Lord Edmiston (who became a Lord in 2010) has - like Fidelity - been a big Conservative donor in the past, giving them £250,000 in 2004, though donations have been rather smaller lately (£9,000 in 2011). He also famously lent the Tories money. In 2006 he was also revealed to be one of the members of the Midlands Industrial Council, a business group that funds the Tories. These financial links to the Tories meant that a few eyebrows were raised when he became a peer.

But how did he end up with shares in Fidelity International? I found this profile piece from the Birmingham Post in 2011, which looks like part of a list of top regional business leaders. In it there is reference to a sale of properties to Fidelity:

His business – the IM Group – had a difficult recession in both its car import business and property interests, affecting the value of the business. Net assets of the two sides of the group amount to around £280 million.

The Coleshill-based business sold a portfolio of properties to Fidelity International in August, and that sale realised £22.7 million. The buildings are let to 13 tenants, including Severn Trent, Allied Dunbar and Staffordshire Police as well as a range of industrial clients.

So it's possible - note: possible, I am just guessing here - that shares in Fidelity were part of the deal.

For the sake of completeness, note that Lord Edmiston's parliamentary profile does not list shares in Fidelity in his register of interests. So presumably he sold them.

UPDATE: if you scroll down here, you can see that Lord Edmiston's interest in Fidelity was deleted in 2011.