More cut & paste lobbying

I've been digging around in consultation responses again at work and, unsurprisingly, have found yet more examples of PLCs putting very similar answers in. More worryingly, I can see what looks like an example of a corporate governance body doing a bit of cut & pasting too.

First the corporates. Here's a bit of the GC100 response to last year's FRC consultation on the Stewardship Code covering shareholders' use of proxy advisers - 

we believe that material institutional investors (holding above 1%) who have signed-up to the Stewardship Code should disclose the extent to which they rely on the services provided by proxy advisors. Furthermore, material institutional investors should be required to engage directly with issuers prior to lodging their votes in the event that they intend not to support the company’s resolutions.

Here's BT on the same point -

we believe that  institutional investors who have signed-up to the Stewardship Code should disclose the extent to which they rely on the services provided by proxy advisors. In addition, institutional investors with a material holding (i.e. a voting interest of 1% or above in a company) who have signed up to the Stewardship Code, should be required to engage directly with issuers prior to lodging their votes, to the extent that they intend not to support the company resolutions

And this is from Smith & Nephew -

a requirement for shareholders holding in excess of 1% to engage directly with the issuer if they intend to vote against or withhold their vote.

This is just one example from an initial skim. I have found that there are usually more bits of identical text, I just haven't had time (yet) to do a proper comparison.

Also, here's a bit from the Hundred Group's response (representing FTSE100 FDs).

A requirement that investors should not rely on the services of proxies where they own a significant holding in a company – we suggest a threshold of 1% of the voting capital

Not the same text, obviously, but the policy idea (1% threshold for being active engaged) is the same which may, or may not, be significant. 

The FRC also consulted at the same time on audit committee guidance. Here the similarities in the text are a lot clearer. Again these are just snippets from an initial search

GC100

In reality, a “fair, balanced and understandable” approach is already the default position for companies when publishing their annual reports. The rationale for this proposal still does not appear to be clear

BT

...in our view, a “fair and balanced” approach is already the position companies take in preparing their annual reports. The rationale for this proposal still does not appear to be clear.”

Hundred Group

[This] may lead to the unintended consequence of creating an implied reliance by other Board members on the Audit Committee’s review and hence reduce the scrutiny of the Annual Report by other Board members with relevant knowledge and expertise.”

Rolls Royce

We consider that it may have the unintended consequence of creating an implied reliance by other board members on the audit committee’s review and hence reduce the scrutiny of the annual report by other board members with relevant knowledge and expertise.

As an aside, it's sort of interesting, isn't it, that different PLCs choose different representative groups' text? (I am assuming that the GC100/Hundred Group responses come first, not the PLC ones).

When I get a bit of time, I'll go into more depth on all these. To be honest, I'm getting a bit enured to this now. From what I have seen this is happening across the board, to consultations on governance issues ranging from the FRC, to BIS, to the Competition Commission and who knows where else. I think we have to work on the assumption that PLCs are happy to adopt a party line, and throw their individual weight behind it rather than just relying on their representative groups. This bothers me, as we all know how twitchy politicians get about annoying PLCs.

Finally, there are couple of investor groups at it too. Here's what the International Corporate Governance Network had to say about "fair, balanced and understandable" reports -

ICGN members agree with the Code’s main principle that the board should present an annual report that is a fair, balanced and understandable assessment of the company’s position and prospects. As mentioned under Code provision C.1.3, the directors should also consider the basis on which they consider that the annual report provides the information necessary for users to assess the company’s performance, business model and strategy. Requiring boards to state these points in the annual report also reinforces these responsibilities. However, some of our members are concerned that these points could add to clutter without necessarily adding any meaningful disclosure. It could also result in standardised reporting on the process followed as opposed to more informed disclosures on how reliable the information is. There are also many types of user. The primary audience of accounts should be the holders of ordinary shares, as the providers of the risk capital and bearers of the residual risk.

And here's what the IMA said on the same point -

It is important that an annual report is fair, balanced and reasonable. However, for boards to be required to state “the basis on which” they believe the annual report is so and provides users with information to assess the company’s performance, business model and strategy is likely to add clutter without necessarily enhancing transparency. Such disclosures could also become standardised on the process followed, as opposed to being informed disclosures on how reliable the information is, and certain of our members consider they would blur accountabilities and responsilbities between directors and auditors. There are also many types of user. We maintain that the primary audience should be the holders of ordinary shares, as the providers of the risk capital and bearers of the residual risk. Whilst reporting is expected to meet a growing set of needs and some consider it should also be aimed at other stakeholders, such as creditors, employees, bankers, customers and suppliers, these other stakeholders are protected by contractual and other rights that are not shared by shareholders.

Got to say the fact that the concern expressed about "standardised reporting" is almost identically worded did make me chuckle.

And a bit more. ICGN -

The company’s interaction with the external auditor should be overseen by the audit committee of the board on behalf of the shareholders. The audit committee seeks to assure itself and shareholders of the quality of the audit carried out by the auditors as well as overseeing their independence. Whilst audit committees may have a responsibility to advise the board on the financial reporting framework and controls adn assurance over that framework, it remains the board’s responsibility to whether the annual report is fair, balanced and understandable. The annual report should also provide the information necessary for users to assess the company’s performance, business model, strategy and business risks. Though we stress, it is the full board that maintains the liability and accountability for ensure the integrity of financial reporting and for the annual report overall. Proposals for the committee to advise the board on the entire annual report could be seen as a delegation of power. It also places a further burden on the audit committee and does not take into account that some companies have committees that deal with particular aspects of the annual report such as risk committees

IMA -

IMA considers it important that the audit committee does not undermine the role of the unitary board and its responsibility for the annual report overall. This proposal could be seen as a delegation of power. It also places a further burden on the audit committee and does not take account of the fact that some companies have committees that deal with particular aspects of the annual report such as risk committees. The audit committee should remain within its remit and focus on financial reporting, controls around that reporting, and the role and work of the internal and external auditors. It should report to the board to enable the board to exercise its responsilbities but only on these matters. Similar concerns apply to the related proposals in the Guidance to Audit Committee.

Bundled choices, exit, voice etc

When an investor buys and holds a share they are making a kind of bundled choice - all things considered, this company's shares are worth owning. This decision may encompass a whole range of factors - expectations of future performance, views on quality of management, concerns about governance, social and environmental management, even psychological biases! But it is, in essence, a kind of bundled choice. On the face of it buying or holding the shares represents 'support' for the company, but this position is an aggregate one.

Historically asset managers have used the bundled choice nature of holding a company's shares as a reason for not challenging investee companies. This can take two forms. One the one hand asset managers have sometimes sought to downplay the significance of issues beyond financial returns - if we really didn't like the company's management, or they were that bad, we wouldn't hold the shares etc. Ergo our decision to hold shares means that we have decided other issues are relegated. On the other hand they have sometimes used the argument that you can't really unbundle the choice, much as you might like to - eg. we agree that the company's governance is  poor, but if we challenge them this could make the situation worse (see, for example, reluctance to challenge James Murdoch's continued presence on the BSkyB board).

Companies have exploited this too, for example seeking to portray challenges to board structure as a referendum on the leadership of the company (see JP Morgan recently), and making the point that if you don't like how they generate their returns then alternatives are available (see Rupert Murdoch ahead of last year's News Corp AGM).

And one might also make the case that calls by campaign groups for disinvestment from certain stocks are built on the idea of a bundled choice - if you don't like what the company is doing, you shouldn't be holding its shares. (I have some sympathy with this view in a limited number of cases.)  

If the last 20 odd years of corporate governance activism by shareholders have been about anything, it is legitimizing 'voice' as an alternative to 'exit'. With such a mindset we can take the approach that we might like the company in general, and rate its prospects, but we think that it could still, say, improve its governance. So we'll continue to hold your shares, but seek to encourage you to make changes too. This represents, in my opinion, an attempt to unbundle some of the decisions that are made in relation to equity investing. Trying to remove a poor director, or opposing a pay proposal, can be combined with continuing to rate the company, and a wish to remain invested.

Even taking an optimistic view of things, I can only describe this as having been marginally successful so far. In fact, if anything, I see signs of a counter-revolution. For example, 'integration' in the responsible investment community is, it seems to me, something of a sacred cow. This perspective argues that any concerns about "ESG" issues should be tied into the investment process as much as possible and, ultimately, inform investment decisions. The logic of this is that market signals (ie buy/sell decisions) are event more powerful than the exercise of ownership rights.

But, if you follow this through, this could take us back to the situation we were in about 20 years ago. Imagine you really can quantify the financial materiality of, say, respect for freedom of association and it isn't really material. Presumably then no investment decision would be affected by it as an issue, and no market signal would be sent. Essentially the message to companies would be: freedom of association will never be important enough an issue for us to sell your stock. Alternatively, you might discover that something more mainstream, like board independence in small caps, is very material. But then if this is integrated into your investment decision this points to selling out (or never buying in). I know in reality those who advocate integration would now doubt try to exercise voice as well, but I think the fact that integration could emphasize "exit" over "voice" goes curiously unremarked.

In the same territory, the argument that asset owners should leave 'ownership' issues up to asset managers seems to be resurgent. In a sense this, too, is a logical follow on from the perspective adopted by advocates of 'integration' . If you pick an asset manager to select stocks for you, why would you take responsibility for voting and engagement away from them? These should be tied up with the investment decision, if we really believe in integration, so leave responsibility with those picking the stocks. It is again in essence an argument for bundled choices, after a long period in which the emphasis has been on trying to allow asset owners to have both access to the financial returns from a given investee company and be able to influence it over ESG issues, even if the intermediary didn't agree.  

Put these things together and you can see a scenario in which responsibility for oversight of ESG issues at PLCs falls largely to specialist staff within asset managers. These are organisations that live or die by their ability to marginally outperform each other over relatively short periods of time. So it's quite possible that issues which we might consider important, but which are not financially material, end up rarely, if ever, getting raised in the company-shareholder dialogue, certainly at a senior level. You can hear in the discussions around the Stewardship Code, for example, the intention to emphasize that this is not about responsible investment. Once the CIO level people are involved this is too "soft", and instead the focus is solidly on financial returns (linked, of course, to issues like strategy etc).

Needless to say, there are big issue at stake here. In the UK economy PLCs are a very important element. Publicly-traded companies dominate fields like transport, finance and so on. Under our corporate governance model, formal accountability is to shareholders and no-one else. In practice clearly relationships with the state, regulators, customers, suppliers etc are also very important, but only shareholders are afforded control rights. Yet the ideas that are articulated in this area continue to emphasize the right, even desirability, of 'owners' backing out when they see things they really don't like, or choosing to overlook things that they might think are wrong but don't hurt returns.

Expressed in those terms it doesn't look like a great model, does it? And this might explain the desire of some to explicitly move away from it.

Abso-bloody-actly

Very interesting farewell piece from David Miliband in the New Statesman, that's available free online here. The whole thing is worth a read, but what he says about empowerment and the workplace, and the (misplaced?) belief in win-win outcomes is on the money.

The sense of disempowerment can be economic, in workplaces that lack the collective power of trade unions and where employee satisfaction and opportunity are limited...

In truth, the “Third Way” discussions of the 1990s were too weak in addressing issues of economic power, in the workplace and elsewhere. There seemed to be sufficient common ground to facilitate win-win solutions. But the stagnation of wages, among other matters, has shown that this perception was optimistic at best. Economic empowerment needs a harder edge.

He also backs 'pre-distribution':

[T]he tendency of markets towards inequality and instability needs to be countered by action upstream in order to curb abuse of power, and to empower citizens and employees with rights, information and control. “Predistribution” does not fit on an electoral pledge card, but the idea is right and so is the challenge of developing new ways, either through individual rights or collective organisation, to tilt the balance of power towards ordinary people.

This is punchier than you'd get from some of Blairite supporters.

Audit fees get controversial

A little snippet, last Thursday Pennon Group had its AGM. It stuck out an RNS statement on the results at lunchtime on the Friday. Check out the votes on resolution 12, there was a vote against the resolution on auditor's fees of about 44%. Including abstentions the vote in favour was just under 51%. Don't think I've seen a vote that big on one of those resolutions before & not entirely sure what happens if a company loses the vote - maybe convene another meeting to seek authority again?  

PLC lobbying - seeing double

Back at the end of 2009 the FRC consulted on a revised version of the UK Corporate Governance Code (or Combined Code as it was then). As corp gov people will remember, the big change proposed was annual election of directors. This was somewhat controversial at the time, with most companies strongly opposed. As a result there were a lot of PLC responses to the consultation.

Looking back through the submissions, I noticed that those put in by Sainsbury's (chair: David Tyler) and Logica (chair: David Tyler) were rather similar. Actually, they are virtually identical. The only difference I can see is in the first para where the timing of the most recent board is mentioned. The text looks to be otherwise the same, only the letterheads are different.

If you read the letter (singular!) you can see that it has a very personal style to it, see the little para on "fashionable views", for example, or the comments on the press. It does not read like a letter prepared by a policy/public affairs person, or a company secretary (or even like a slightly tweaked cut and paste of a generic submission...) So it looks a lot to me like we are reading The Thoughts of Chairman Tyler, even though both letters are sent "on behalf of the board" of the respective companies.

If I'm right, it's a bit of a reminder, I guess, that for all the advances we think we've made in terms of process and principles around governance, if a senior business bloke (and it is usually a bloke) wants to send a "green ink" letter on his company's letterhead it will often happen. In this case it looks like he got to do it twice.

For all that, annual elections happened anyway.

Another soldier in the army of labour...

Parish news announcement. Powdrill 3.0 due in one month.

Headline is a reference to this.

I like this line...

The art of politics lies in making particular demands which, while thoroughly realistic, strike at the core of hegemonic ideology and imply much more radical change. 

From a lefty bloke with a beard.