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?

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

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.

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).

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.

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.

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:

https://www.investegate.co.uk/nmc-health-plc--nmc-/rns/tr-1-notification-of-major-holdings/201901241344330419O/ 

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

https://investegate.co.uk/nmc-health-plc--nmc-/rns/notification-of-major-holdings/202001101030044297Z/

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.

Workers on boards - sharp edges

Just a quickie on one of my favour topics - worker representation in corporate governance. First up a bit of politics: Once again the main opposition parties (including the SNP) went into the election advocating an extension of worker representation on boards.

There was nothing in the Conservative manifesto, but obviously it was the Conservatives who sought to amend the UK Corporate Governance Code to promote worker directors amongst other options. In addition, there are voices on the Right who want to reinvigorate this objective, something I'll likely to come back to in another post.

Meanwhile polling on the topic shows that the public - regardless of how they vote - support worker representation on boards. My basic point is that this remains a politically attractive policy, even though it is opposed/feared/detested (delete as appropriate) by many corporates and a number of  investors.

It's also starting to creep up the agenda in the US, largely because both Sanders and Warren have made commitments to put workers on boards. Interestingly, there have now also been a handful of shareholder resolutions seeking to appoint worker directors - at Alphabet, Microsoft and Fedex. Needless to say these haven't been successful, but they do start to change the dynamics of the argument.

As I've bored on about plenty of times, I'm not sure it's going to look great having asset managers blocking workers getting a greater voice in corporate governance. To date this has simply been a policy argument and as such has largely been in the shadows, but now we can actually see how Asset Manager X voted on appointing an employee director at ABC Inc the discussion has the potential to get quite a bit sharper.

If you trawl the voting records of asset managers you can already see some voting decisions. I had a look last night at a handful of big managers, all with a decent/good profile in the ESG world, and they all opposed all three resolutions at the US companies named above. Obviously it's a legitimate position to oppose worker representation in corporate governance, but equally it's a legitimate position to support it, and I think the managers of capital are currently way out of step with the views of those that capital belongs to. I doubt that will continue uncontested.

Turnout tales

If recent events tell us anything, it's that voting matters... With that in mind this is a quick post on something that caught my eye this year: sharp changes in voting turnout at a number of companies. Some of the more striking examples have been at companies that have got into financial trouble, like Thomas Cook, Interserve, Kier Group and so on. Here are a few examples (excuse my poor Excel skills). I've included publicly available data on short positions at the same time as the relevant meeting, as I think that the impact of shorting might be part of the story.

For completeness, take a look at Premier Oil, where a huge short position has recently been reported (it seems this one might be hedging).

But it's not just about shorting, there are some interesting results at companies that have been in the middle of other activity. Have a look at Provident Financial, which was facing a bid from Non-Standard Finance earlier this year. I have half an idea here that it could be the result of people taking a punt on the takeover succeeding using equity derivatives, hence banks ended up on the register as counterparties but didn't vote (as I believe there is a tax issue). I'm interested if anyone can tell me if I'm talking gibberish, or not.

And if we look back at Whitbread over the past couple of years, when Elliott had a large derivative position and was pressuring the company to restructure, we also see a drop in turnout. I'm not clear why this sharpened in 2019, though it's worth noting that it bounced back at this month's EGM. Press reports suggest Elliott wound down its position in July.

 

I'd love to see what the turnout at Melrose Industries March 2018 EGM was like, as I suspect we'd see the impact of hedge funds there too. But it's the one set of meeting results not available on its website.

And with that, I'm off... Happy Xmas and see you in 2020!

Workers on boards: high-risk inaction

Over the past few weeks there has been quite a lot of interest in the extent to which UK companies are giving employees a say in corporate governance. As most people will know, the revised UK Corporate Governance Code that came into force this year encourages companies to say/do more in respect of 'workforce engagement'.

Although Theresa May originally said she wanted workers on the boards of all companies, the revised Code actually offers three options - a worker director, a NED nominated to handle workforce engagement, or a workforce advisory panel.... or some other  mechanism chosen by the company, or explaining why you don't comply.

Once this fudge (which was supported/encouraged by some investors) was put into the Code, everyone's expectation was that the large majority of companies would choose the nominated NED option. With a handful of exceptions that is what has happened. Capita, Mears and Sports Direct have all appointed employee directors, but the large majority of PLCs have indeed just tagged a NED. There are some really awful examples out there - like Mediclinic, which appointed its former CEO as the NED responsible for workforce engagement.

Unsurprisingly, this outcome has led to some criticism in the press including both the Mail on Sunday and the Independent. The basic message is that companies have resisted change and have made a mockery of the original idea.

I think this outcome, whilst hardly unexpected, is probably the worst thing that could have happened for all concerned. I actually think that in the medium- to long-term opponents of employees on boards have most to fear, but more of that in a minute. There are (at least) three key reasons why this outcome is bad. First up, employees have denied an historic opportunity to have a voice in the governance of organisations where they spend a large part of their life. Second, boards have made it look like they are resistant to change and/or aren't too fussed about workforce engagement. Third, it makes the UK Corporate Governance Code look ineffective.

On this last point, it's notable that the FRC saw this potential outcome a long way off. Here's Stephen Haddrill in front of the BEIS committee a few years back:

The full-blown worker-elected director model should not be done through the corporate governance code. That is quite a big shift and requires parliamentary weight behind it to get it done. There is a risk if we try to do it through the code that we would have a very high level of non-compliance. That would cause the code to come into some discredit.

Well, that's just happened, hasn't it? I would add to this that we should not expect that monitoring of the Code on this point is likely to lead to any change. Many asset managers are unconvinced about or opposed to employee voice in corporate governance, so they are unlikely to be pulling companies up for nominating a NED instead of appointing employee directors. 

This is part of the reason why I think this outcome is actually *bad* news for people who really want to stop this policy. A bit more willingness to play ball on the part of PLCs might have convinced people that a 'let a thousand flowers bloom' was a reasonable approach to take. But the fact that the overwhelming choice is to stick with the status quo makes things look very different.

I don't think any future government that is supportive of employee voice is going to look at where we are and think PLCs have really picked the best or most appropriate model. I think they are more likely to conclude that a corporate foot-dragging, unchallenged or tacitly encouraged by asset managers, is a block on progress.

They are also likely to think that using the UK Corporate Governance Code to implement employee voice is ineffective. This makes it more likely that employee representation is sought through a change in the law. This would (obviously) be a significant shift away from 'comply or explain' towards a regulatory approach to governance. But current practice seems to point towards this kind of conclusion.    

Changing of the guard in corporate governance

I have been blogging a lot recently about employee representation on boards. This is partly because I'm an advocate of it, partly because no-one else seems to be tracking the issue properly and partly because I think the issue is part of a significant shift that deserves more scrutiny. So I thought I'd write something a bit longer than usual looking at a few interlocking themes.

1. Employee representation at board level, state of play 

Just a quick recap, there are now four UK-listed companies with employees in their board structures:

FirstGroup
Mears Group
Sports Direct
TUI

The last one is unusual as it's incorporated in Germany but listed in the UK (and in the FTSE100). Because of its size it is required to have the co-determination model of governance, so it has a supervisory board with half employee reps, including union officials. None of the TUI employee reps are from the UK as far as I can see.

Of the the other three, two are female and one male. For completeness there is also a female UK employee director on France-listed ATOS. So I think there are (at least) four UK employee directors, three of them female. There will be more. We also know that Capita is recruiting two employee directors (which will make it the first UK PLC to have multiple reps), and there may be others going down this route that we don't know about yet.

As for companies choosing alternative models, here are those that have made public that they are designating an existing NED to represent employees:

Diageo
Hays
Legal and General
McKay Securities
Ted Baker

But there will be plenty more choosing this option. For now...

2. Opposition to and biases about employee representation 

It is worth restating that employee representation at board level has been opposed by a lot of powerful players in mainstream corp gov. This has varied from outright opposition to putting forward much weaker alternatives (like designated NEDs). I think that publicly-articulated views have been toned a bit over the past couple of years, but here's a reminder of some asset managers' positions. I'm also struck by the tone of this comment from the ICGN:

In Provision 3, we believe it does make sense for boards to understand views from the workforce, and it is important that flexibility is granted about which approach would work best for individual companies. The workforce is a critical stakeholder for long-term company success, but companies and workers must remember that the workforce of one of a number of important stakeholders—and the workforce should not become the board’s proxy for all stakeholders. 

And here is another mainstream corp gov view from Eumedion:

Although we understand these proposals [for workforce engagement] in the UK context, we believe that these proposals can have unintended consequences as they can increase tensions between stakeholders themselves and between the board and the various groups of stakeholders. Those tensions will typically appear in stretching situations, such as in the situation of an unsolicited takeover proposal or in the situation of pressure from specific short-term oriented shareholders to change the company’s strategy and policy. 

It is worth anyone interested in corporate governance probing these arguments, as there are some meaty issues (and assumptions) buried within them. I am frequently shocked by the patronising tone that many people adopt when discussing these questions, revealing a low opinion of employees. The implications are often that employees lack the ability to contribute anything constructive, or to think long-term about the company they work for, or to pick representatives who will be effective.

It reminds me of a speech I saw once by a trustee of (I think) WH Smith pension fund. He had previously been an exec at the company (possibly FD?) but had ended up becoming a member trustee for some reason. He said he found it eye-opening because he realised when he was wearing the "company" hat he simply could not see pensions issues independently, even though he thought he could. His views were shot through with the biases that came from his position. He didn't realise this until his position changed.

My point is simply that we are all biased, and we all have views that are shaped by the interests that derive from our current position. I am obviously biased, for example, because of my experience in the labour movement (see note at the end for more info about how this can screw up the way I look at things!). My argument is that in this particular discussion mainstream corp gov organisations often seem to reflect quite deep biases. Perhaps, like the trustee, they can't even see them from their current position.

3. The 'centre' has shifted to the Left, even if corp gov hasn't noticed 

Again, I have blogged about this before, but it is striking that in public policy the idea of employee representation at board level is totally mainstream. All the major political parties have committed to it, and it is the Conservatives who have made the first attempt to introduce it. We can also see from polling - in the UK and US - that the idea is popular with the public, including quite a few Right-leaning voters.

The idea is attracting more attention because of the increasingly widely held view that workers in countries like the UK and US have had a pretty rough time of it in recent history and that capitalism has to change a bit if we're to prevent political problems. We're also starting to see quite frequent pieces questioning whether shareholder primacy is part of the problem. A theme I'm trying to work on is what comes next - I think (at least) it will involve reformed directors' duties, employee representation and greater pre-distribution through ownership, profit-sharing etc. I've also argued that shareholder primacy in utilities is under threat.

I think it's entirely fair to say that these views have come almost exclusively from the Left up until the last five years or so. But now they are pretty much the centre ground in public policy.

Enter Chuka Umunna, of the newly-formed Independent Group (TIG) of MPs, who has published a new pamphlet on what 'progressives' (bleurgh!!! hate that term) believe. I'll just pull out a few relevant bits:

What would this “British model” look like? It could take as its foundation northern European elements: employee ownership trusts; workers on boards and public-spirited non-executive directors, moving towards a form of co-determination as a way of decision-making in the workplace; trade unions; incentives for innovation within firms; long-term financing; and a National Investment Bank with a network of regional banks driving Britain’s public investment rate to the G7 average of 3.5%... The defining characteristics of this hybrid model would be: collaborative workplaces and competitive practices in innovative firms that pay a decent wage, share profits with workers, and give security to those who work within them.

.....

For example, the “British model” could create new tax incentives and legal certainty for mutuals and a vast roll-out of employee ownership because the evidence shows this would encourage long-term ownership and diversify ownership of capital. It would forgo the automatic assumption that nationalisation improves performance in favour of taking a “foundation” share in privatised utilities to force them to serve public good. It would incentivise widespread membership of collaborative unions and employee representatives on remuneration committees.

.....

Too many of the rewards of these new technologies accrue to a relatively small number of individuals, exacerbating inequalities. New ownership structures must be developed to ensure greater distribution of the benefits both to workers and wider society. Employee ownership trusts can be used to spread the rewards in such companies beyond the founders to the workers at large. 

.....

An incoming progressive government could legislate to force companies providing key public services to write the provision of public benefit into their constitution, taking precedence over profit-making. It can then insist on taking a "foundation share" in each company as a condition of its operating licence. This share can be used to install non-executive directors tasked with seeing that the company delivers its newly enshrined public purpose. This would be a smart use of government power for the common good – with shareholders retaining their shares, though now constrained by the primacy of public benefit over shareholder return.

This stuff is well to the Left of New Labour, and even significantly to the Left of Labour's Miliband era shadow business secretary... if anyone remembers him? But TIG is positioning itself as very much in the centre (the pamphlet is published by Progressive Centre). And I think views of this type is pretty much where the centre is going to be in the future.

Mainstream corp gov is simply not here yet, and as such is more likely to be affected by change than to shape it. Look forward another decade and I would not be surprised to see that employee directors are common on UK company boards, that employee ownership and/or profit-sharing has become more widespread. I would like to hope that there is some kind of push to reinvigorate unions too, but I am less confident on that front.

What I don't think will happen is that most UK companies designate an existing NED to engage with their workforce and it will end there. I don't think that a future government will observe companies avoiding having proper representation and think "this is fine, job done".

-----------------------------

Mea Culpa - as an important aside, I have to remember not to blog when I've got strong emotions about a subject! When TIG split off I thought I shouldn't blog about it as I have too much emotionally invested in the state of the Labour Party. I could see a lot of people predicting how TIG would position themselves - partly out of anger, partly trying to bomb their planes before they take off - and could see it was pointless. But because my emotions got the better of me I felt compelled to write something. And because I want to see a certain outcome I projected this. Bad mistake, made worse by the fact that I knew I was making it.

Ted Baker chief exec departure and workers on boards

I'm still tracking company announcements on if/how they are complying with the UK Corp Gov Code in respect of employee voice.

I've found two more choosing to designate an existing NED as employee representative. The first is the recruiter Hays, announcement here.

The second is more interesting - Ted Baker. The news that it has designated a NED to engage with the workforce is actually buried in the announcement that chief exec Ray Kelvin has resigned (having previously been on leave of absence). This follows allegations of inappropriate behaviour stretching back years.

I find this one very interesting as it strikes me that this shows exactly why employees on boards are a good idea. I have no doubt that if there were a couple on the board of Ted Baker then these allegations would have been properly discussed at board level a lot earlier than they eventually were.

Stakeholder governance... in banks

Hat-tip to Responsible Investor for a fascinating news story about Dutch bank De Volksbank considering giving stakeholders such as employees and customers a vote at their AGM alongside shareholders. This is framed in terms of shift away from shareholder value / primacy to a "shared value principle".

The background to this is that De Volksbank is state-owned, having been in public ownership since the forerunner SNS Bank failed a few years back, and is expected to be privatised.

An interesting aspect of the article is the response from Eumedion: “We are sceptical whether an agency model with multiple principals will improve accountability and transparency. It may also increase complexity in decision-making by the so-called stakeholders meeting. Paralysis may be the consequence.” 

I personally think the ESG world needs to encourage more experimentation of the type being considered, but hey. Asserting that a multi-stakeholder approach is cumbersome and complex is an old defence of shareholder primacy, and feels out of step with where the governance debate is currently (see, for example, Keith Skeoch's views in the previous).

It also reminds me of the approach some investors took towards another Dutch company - DSM - back in 2007 when it tried to do something different by trying to introduce loyalty dividends. And in the end they killed it. Let's hope there will be a bit more tolerance this time.

It should also make people in the UK think about RBS. If Theresa May is serious about wanting to see more stakeholder representation in the corporate governance of PLCs, why not start where the state can make it happen? Surely it's time to walk the talk?

Asset managers and worker directors

The more I've been digging around for info on workers on boards, the more interesting things I find. For example, I had heard a rumour a while back that ATOS was thinking about appointing a UK employee director. And it turns out that they did. In fact they have two employee directors, one of whom is from the UK (scroll down here).

This is part of the shift amongst French companies to appoint employee shareholder representatives. When I dug into the ATOS example, I discovered that at the same AGM where the UK director was appointed another employee shareholder rep was rejected.

When I Googled around a bit I found NEST's voting disclosure which showed that UBS had voted against this proposed director.

That, of course, got me thinking about other employee representatives. And in NEST's disclosure you can see that it's not just UBS doing this, and it's not just happening at French companies.

That last example is a Polish company, and looking at its AGM results you can see that there were not insignificant votes against one of the employee reps.

I don't know anything about any of these companies, so there may be important factors behind these votes. But it shows you that these issues can get pretty sharp.

Workers on boards round-up 2

As I've blogged quite a lot recently, I think the ground is shifting with regards to the UK corporate governance model. Specifically, the issue of employee and other stakeholder representation is being debated increasingly frequently.

Although there is still a lot of resistance to worker directors in particular I think it's pretty clear what the direction of travel is. At the start of 2018 there was only one PLC - FirstGroup - with an employee director. By the end of 2019 I reckon there will be at least four. Slow change so far, but I can only see things moving in one direction from here.

Anyway, I thought it would be useful to pull together some bits I've spotted over the past few weeks on this topic.

1. An FT piece looking at employee involvement in governance as part of tackling executive pay.

2. YouGov polling showing workers on boards is supported by about two-thirds of the population in the UK (and by similar margins in other countries, including the US). Other left-wing policies also poll well.

3. A Slate piece on Elizabeth Warren's bill that would introduce worker directors on the boards of US companies.

4. A similar bill from Senator Tammy Baldwin (which also seeks to eliminate stock buybacks). Baldwin's bill calls for a third of the board to be workers, versus 40% in Warren's bill.

5. Google employees seeking a worker director on its board.

6. Polling from the US last April which found workers on boards to be the most popular of 5 progressive policies, supported by more than half of the 3,300 people polled. The detail of the polling shows registered Republicans were the only group where a plurality (not a majority) opposed the idea, and then only just.

7. A piece from Ryan Bourne from before xmas opposing workers on boards.

8. News from December that Capita is recruiting for employee directors (potentially two).

9. A piece from Australia about union attempts to get Labour to commit to workers on boards.

10. Another UK PLC, McKay Securities, nominating an existing NED as a employee representative director.

Previous round-up here.

Capita recruits employee directors

Just a "workers on boards" nugget, but Capita has announced it is seeking to recruit two employee directors. You can read the press blurb here or the story in the Times here.

When I dug around a bit I discovered that this had actually been announced back at the start of August in the H1 results:

So that's three companies so far that I know that will have worker directors next year (First Group, Mears Group and Capita). This will obviously go higher. I reckon in a few years it could be quite commonplace.

What comes next?

I think that the outlines of a future corporate governance model for the UK are increasingly clear. Whilst I'm a long-term, strong proponent of such a change, I think the range of voices in favour is a good indication that it is likely. In very broad terms I see three linked planks:

1. A move away from shareholder primacy. I know that some argue that actually section 172 of the Companies Act a) doesn't really have much practical impact and b) does sort of promote a wider interpretation of shareholder value. But I don't see a really strong argument against a formal shift. It is an increasingly widely made point that workers have long-term firm-specific risk in companies that deserves to be recognised. That needs to be captured in company law.

2. A formal role for employees in corporate governance. As I've blogged before, all the major political parties have made manifesto commitments to workers on boards in different forms. The Tories have actually gone ahead and made the FRC promote this - in a heavily fudged form - in the UK Corporate Governance Code. Although there are to date only a couple of examples of workers on boards (FirstGroup and Mears Group) the door is clearly open now.

3. Ensuring that workers derive a greater share of the wealth that they create at the point of production. This might be worker-ownership funds, or profit-sharing or some other mechanism. Again it is an increasingly widely heard idea (and Ed Miliband deserves a nod, because this is absolutely what he was aiming at with talk of pre-distribution).

This is a mixture of policies which would have been characterised as "far Left" a few years ago, and they are probably still viewed as such by some in the corp gov microcosm. But I could see them commanding a wide range of support across politics (and this is pretty mainstream social democracy in reality).

A couple of things to think about. In the event of a No Deal Brexit it's possible that the radical Right of the Conservatives take control go down a much more Thatcherite route, in which case this stuff will not happen. So nothing is inevitable.

Secondly, alternatively if this mix does look likely to come into force then we have to think about the relative position of shareholders. Strengthening the role of labour means weakening the relative position of capital even if their rights remain the same. This process needs managing. Time to get thinking caps on.

Workers on boards round-up

Just a quick round-up of some news that relates to the issue of worker representation on boards. I think the fact that there is quite a bit is indicative of the shift in thinking that is going on.

1. This is old, but I had totally missed it. Mears Group has appointed an employee director, having been elected at the AGM earlier in June with almost zero opposition. It looks like the director was chosen by management, rather than elected by the workforce. Nonetheless we now have at least two UK  companies with employee directors on the board (FirstGroup being the other).

I'll have a dig into the voting on these directors when I have time. However having a quick look at the AGM results it must be the case that some investors that have been lukewarm at best on the issue of employee representation on board in their public policy positions have voted for the election of employee directors in practice.

I can see some interesting voting issues ahead in the next AGM season, but that's for another day.

2. The ICSA has published a poll showing that the large majority of companies are opposed to the idea of worker directors (though 19% are in favour). I assume, given the ICSA's orientation, that respondents are likely to be company secretaries. There is some useful info on how companies are thinking (or not) about the revised UK Corporate Governance Code:

When questioned as to whether or not they had deliberated the UK Corporate Governance Code’s proposals for getting the workforce voice into the boardroom, 29% of companies have not yet considered them and 15% have, but taken no action. Of those companies that have considered the Codes’ proposals, 25% favour the designated non-executive director option, 14% are inclined to combine one or more of the options, 7% are in favour of a works council or similar, 5% have other ideas, 2% would prefer to have an employee on the board and 1% are unsure.

3.  The ICAEW has published a report encouraging companies to consider the benefits of employee directors on boards. This is very welcome, though it's a shame that unions do not get a mention in there. Still, interesting that one group of professional advisers is taking a more positive line on this.

4. Jim Moore on The Independent has published a comment piece criticising Legal & General for going down the nominated NED route.

5. The Evening Standard has published a letter from Luke Hildyard of the High Pay Centre responding to a previous comment piece (which praised L&G) and arguing that employee directors are indeed a good thing.

6. The Bank of England's Andy Haldane has voiced his support for employee representation on boards.

7. The ETUC held a rally outside the European Parliament calling for greater worker participation within companies, including representation on boards.

Legal & General vs workers on boards

A little bit of news about workers on boards (or the lack of them) in the UK. Legal & General is the first big PLC that I have seen set out how it will address workforce engagement.

Perhaps no big surprise, but they have adopted the nominated NED option:

The Company is also pleased to announce the appointment of Lesley Knox as designated non-executive director for engagement with the Company's workforce, in line with the provisions of the UK Corporate Governance Code (July 2018), with immediate effect. Lesley is currently Chair of the Company's Remuneration Committee and so is well-placed to engage effectively with the Company's workforce.

And it's also worth remembering that is in line with the position adopted by its asset management business LGIM.

The introduction of an employee sitting on a Board or establishing a shareholder committee, in our view, would significantly change the current roles and responsibilities of directors and shareholders. We continue to support the Unitary Board model in the UK and focus our efforts on how Board effectiveness can be improved within the current governance structure. In saying this, we also understand that directors should be accountable to other stakeholders including employees. One way in which there can be better alignment between employees and shareholders is for Boards to better understand the sentiment of employees in the organisation. This can be done by nominating one of the current independent Non-Executive Directors (a “Nominated Employee Non-Executive Director”) to be held accountable for seeking out employees views in the business. This nominated director will have responsibilities to meet with staff at different levels and report back to the Board the findings. Furthermore, in the Annual Report, the Nominated Employee Non-Executive Director should also provide a statement and report back to shareholders at the AGM or Annual Report of what he/she has done to fulfil their remit.

Equally obviously this is going to fall a long way short of the expectations of unions and other advocates of meaningful worker representation. It will be interesting to see if other PLCs follow suit. I can imagine some tension ahead.

Finally, on a related note, there's a piece in the Evening Standard opposing workers on boards and supporting L&G's alternative. There's an interesting bit suggesting that opponents of workers on boards have argued against by reference to directors' duties:

Businesses successfully lobbied that being forced to hire a workers’ rep as a director would make them hostage to unions and get in the way of fleet-footed decision-making.
Besides, they pointed out, the law says directors’ primary duty is to shareholders, not staff. So, under Section 172 of the Companies Act, a director charged with looking out for workers’ interests above all else is breaking the rules.

I think this is a bit off target. For one, as currently formulated the Companies Act does give priority to shareholders but also says they've got to consider impact on workers, environment etc. In addition, if the claim above were true then First Group would have been in breach of the Companies Act for years, since it has a worker on its main board.

Nonetheless, if corporate lobbyists are using this as an argument (and I've also seen section 172 prayed in aid of tax avoidance, large bonuses at banks etc) then it strengthens the case for reform of directors' duties in any case.

PS. Here's what the Companies Act 1985 (section 309) said about directors' duties to employees:

309Directors to have regard to interests of employees

(1)The matters to which the directors of a company are to have regard in the performance of their functions include the interests of the company's employees in general, as well as the interests of its members.

(2)Accordingly, the duty imposed by this section on the directors is owed by them to the company (and the company alone) and is enforceable in the same way as any other fiduciary duty owed to a company by its directors.

(3)This section applies to shadow directors as it does to directors.

Shareholder primacy and utilities

A theme I think anyone with an interest in corporate governance should keep an eye on is the way that the interests of investors in a firm in relation to others are portrayed in financial media and elsewhere.

Under the 1990s model it was common to see the point made that actually we are all shareholders, so we have an interest in the performance and management of companies. In the policy world a lot of emphasis has been put on enhancing the powers of shareholders as a way of balancing managerial power. At its most optimistic this stream of work sees the public as somehow having control over investee companies. These sorts of ideas have been influential for around 20 years in some markets.

However, increasingly we see recognition that life is more complicated than this, that interests within the firm compete, and that it's not necessarily a good thing that investors come first. The latest version of the UK Corporate Governance Code is a mild tilt towards a more "stakeholder" view of the firm. I would envisage a further shift when Labour gets back into power.

This piece in today's Financial Mail is worth a read in this light (the same story is on the front of tomorrow's Mirror). In common with what we saw with Thames Water, the interests of "shareholders" are counterposed with those of customers/consumers.  

Professor David Hall, a water industry expert at the University of Greenwich, said water companies should pay out less in dividends and instead use the money to cut leaks by improving their infrastructure. 'The money is available,' he said. 'But it's not reaching the right places – which are the leaks. It's reaching the wrong places – which are the pockets of shareholders.'

Invest in solving leaks, or distribute cash to investors. In the above quote these options are characterised as pulling in different directions. To prioritise one is to damage the other. This is a million miles away from the Mckinsey hot air about there being "no inherent tension" between different interests. (Interestingly Ofwat has a section on its website specifically about "Profits and dividends"of water companies, and its chief exec has had a pop at recent decisions by some companies.)

As I've said before, I think we are going to start seeing this kind of argument a lot more often than we have in the recent past. Obviously this comes with a backdrop of renewed discussion of public ownership of utilities. I think the increasing prevalence in the media of the idea that there are competing interests is will make more radical policy options more achievable. 

Of course, these are difficult issues. It is definitely the case that taking utilities back into public ownership is going to sting our pension funds. It's not obvious to me that there is a investor-friendly middle route. For example, we could look at the UK "owning" utilities through our pension funds directly, stripping asset managers out of the deal and thus reducing costs. I don't think our funds have the scale to do this, nor are they currently structured in a way that would stop them thinking like asset managers. And at some point the dividends vs investment question will come up.

Nonetheless the ground does seem to be shifting.