Corporate charges for phone hacking?

An interesting piece appeared on The Guardian website tonight about possible charges against former News International directors under the Regulation of Investigatory Powers Act (RIPA). Section 79 of RIPA (below) specifically refers to the criminal liability of directors relating to crimes committed by the "body corporate". Section 79 got mentioned in a few news stories when the hacking scandal exploded last July, but there hasn't been a lot of focus on it since. Then the culpability of News International directors did briefly get an oblique reference in Sue Akers evidence right at the end of the Leveson Inquiry hearings.

I suppose the three people you might think most at risk, in descending order are Rebekah Brooks, Les Hinton and James Murdoch. Brooks is suspected of knowing about hacking, but I suppose there's a question as to whether it's worth hitting her with a corporate as well as individual charges. Les Hinton was CCed on the Goodman letter where he sprayed about the allegations about others' involvement in hacking (others who are now, it ought to be noted, being charged under RIPA). And Murdoch obviously signed off the Taylor settlement and then failed to notice any wrong when the Guardian splashed on it in 2009.

There's enough there to worry a few people. More generally, I suspect that a corporate conviction under RIPA might go down quite well with News International hacks who feel they have been thrown to the wolves to save the management (and one director in particular). It would also demonstrate that we are serious about corporate culpability. Worth keeping an eye on.

79 Criminal liability of directors etc.(1)Where an offence under any provision of this Act other than a provision of Part III is committed by a body corporate and is proved to have been committed with the consent or connivance of, or to be attributable to any neglect on the part of—
(a)a director, manager, secretary or other similar officer of the body corporate, or
(b)any person who was purporting to act in any such capacity,
he (as well as the body corporate) shall be guilty of that offence and liable to be proceeded against and punished accordingly.
(2)Where an offence under any provision of this Act other than a provision of Part III—
(a)is committed by a Scottish firm, and
(b)is proved to have been committed with the consent or connivance of, or to be attributable to any neglect on the part of, a partner of the firm,
he (as well as the firm) shall be guilty of that offence and liable to be proceeded against and punished accordingly.
(3)In this section “director”, in relation to a body corporate whose affairs are managed by its members, means a member of the body corporate.

Undead performance-related pay

The more I think about it, the more I think that a couple of recent developments in respect of performance-related reward for executives indicate a significant shift in opinion about motivational assumptions.

First up, if you read the Kay Review section dealing with pay it's pretty obvious that John Kay is a skeptic. He openly questions the value of paying bonuses, and draws attention to the way that performance-related reward might crowd out professional standards and/or attract the wrong kind of people. He seems to share the view that beyond a certain point, it really isn't about the money for many people. I don't mean that he thinks they don't care how much they are paid, but rather that tweaking reward systems isn't going to achieve a lot.

The Review's proposals - only pay extra reward in shares, and make executives hold them for a very long time - seem to me almost intended to do the opposite of the formal role of reward schemes. Kay is concerned about the potentially negative behavioural effects of short-term rewards, so he suggests we push the performance period right out. In other words, let's amend performance-related reward so that it has no immediate  effect.

You might think I'm overselling this, but at the Review launch last week, Kay was pretty strong on the way that we discount for the future. It really isn't much of a leap from this to the pay proposals.  If we defer the reward for 'performance' way into the future, it is unlikely to be valued much by the recipient and therefore won't exert much pull on executive behaviour.

In fact, if you accept my broader argument that performance-related pay is underpinned by a behaviourist psychological perspective then you ought to think that - from that viewpoint - pushing the reward way into the future is the wrong thing to do. Behaviourists argue that the reinforcer needs to be applied soon after the behaviour it is intended to reinforce. To state the obvious, if you only get your shares after you've left the company that isn't going to reinforce an action that you might have taken years earlier.

That's why I think that Kay's proposals may actually be a compromise designed to defuse the behavioural effects of performance-related reward within the existing system. I wonder whether Kay thinks such schemes are largely a waste of time, motivationally speaking, but has got the clear impression that there's not much appetite for scrapping existing practice. I have no direct evidence for this view, but otherwise the combination of the narrative about bonuses and the actual proposals on pay don't quite add up for me. And by the by, there's a great quote in Obliquity where he says carrots and sticks only work where you're employing donkeys and know exactly what you want your donkeys to do. I personally do not think that shareholder-focused remuneration systems can ever meet those requirements. I don't think John Kay does either.

In the same vein as Kay, Fidelity have come out with a proposal for "career shares" whereby directors would be required to hold at least some of their share-based rewards they receive until retirement.  Again, this must surely deaden any motivational effect of the awards. How can rewards of this nature have any greater motivational effect than providing a pension?

If, and it's still and if, we see executive reward develop in the way envisaged by Kay and others we will end up in a really odd place. We will continue to be providing performance-based pay, which has developed with the explicit aim of controlling/directing director behaviour, but it will be designed in a way that seeks to avoid any immediate behavioural effects. Performance-related reward will be in large part hollowed out - the schemes will still exist but without actually performing their supposed function.

In such an environment I think that "fairness" will start to become a bigger argument for performance-related reward (I've touched on this before). In fact Alfie Kohn made the point throughout Punished By Rewards that there is a moral argument buried in performance-based reward - if you do something well then you should get a reward, regardless of whether it motivates or reinforces. I suspect we're going to start seeing that line of argument supplant claims about motivation and/or alignment. But whilst companies and rec comms might use it as a way to defend performance-related incentives, arguing that executives deserve rewards might be quite a tough sell in an economy flat on its back with high unemployment.

Of course, all of this would be much easier to see, and easier to challenge if you disagree with it, if the motivational assumptions that sit behind various pay reform ideas were spelled out. But they very, very rarely are. As a result performance-related pay will likely continue to be widespread - and unthinkingly advocated - despite the fact that schemes aren't doing anything, in a motivational sense.

PS. Obviously I'm aware that some people attach an amazing "aligning" quality to the value of shares but it's not obvious to me why motivational effects should be any different to cash-based rewards.

TPA spin on unions

You may have noticed that the Taxpayers Alliance recently published its "name and shame" report on the pay of trade union general secretaries. What caught my eye was a piece in the Telegraph by the TPA's now chief executive Matthew Sinclair. It's a useful demonstration of their approach. For example:

In their latest returns to the Certification Officer, 36 trade unions have reported that they gave their general secretaries or chief executives pay and benefits of more than £100,000. That compares pretty well with the private sector. According to the Institute of Directors, the average basic pay of a managing director in a small company (turnover up to £5 million a year) was £70,000. At a medium-sized company (turnover up to £50 million a year) it was £100,000. And even in a large company (with a turnover up to £500 million a year) it was £128,000.

Let's initially just focus on the stats he quotes. There's a nice piece of sleight of hand in there. Many union leaders have "pay and benefits of more than £100,000" and this compares well to the private sector. Ok, so in order to compare presumably we'll look at pay and benefits in the private sector? Er... no. The comparison is actually with average basic pay. Guess what, if you and I are paid the same, and you compare my pay and benefits with your pay I will have a bigger figure. Matthew does compare one union leader's salary with the IoD figure, but further down in the article he only gives the total figures for three other union leaders. They clearly aren't the same type of figure as the IoD one. I suspect most readers won't notice the changes in figure used in the article, and will simply compare the two.

You might also question how valid the comparison is in any case. The TPA have looked at 36 union leaders, but there are more than 36 TUs. I assume all they have done is pull out the examples of those whose pay+benefits are over £100k - ie they've left out union leaders who don't fit the picture. They then compare those cases they seem to have selected on size with the IoD average figures. Comparing selected specific cases with averages, what could go wrong? Guess what - I could pick out some highly-paid IoD members who earn more than the average IoD member.


Finally, is the TPA even comparing like with like in terms of roles? The GS of a trade union is surely the equivalent of a chief executive or managing director of a business. If you're looking at an average of all directors, surely you need to compare with a comparable figure for unions - ie include at the least all DGS and AGS positions. If you can't do that then surely the TPA should compare union GS salaries with MD/chief executive salaries, not the stat for all directors.  


UPDATE: Matthew replies on Twitter that he is using average fig for managing director, so I was wrong about the last point. Not going to delete it as a) I should have spotted it (it's in the text) and b) I put up the incorrect claim so I should be accountable for it.

The Kay Review

It's got some great stuff in there. You can download the final report here.

Being a saddo, I find the most intersting stuff is about the nature of ideas that underpin existing market practice. I don't have time to do a proper overview so thought I'd bung up a few snippets I like.

Like this:

Regulatory philosophy influenced by the efficient market hypothesis has placed undue reliance on information disclosure as a response to divergences in knowledge and incentives across the equity investment chain.

 And this:

Anthropomorphisation of ‘the market’ in phrases such as ‘markets think’, or ‘the view of the market’ is common usage. It should hardly need saying that the market does not think, and that what is described as the view of ‘the market’ is simply some average of the views of market participants. ‘The market’ knows nothing except what market participants know

 And this:

measures to make the market more ‘efficient’, in the technical sense implied by the efficient market hypothesis, may have the effect of making the market less efficient in the broader and more important sense of achieving better resource allocation through better corporate decisions.

And the best line in the Review:

we see the sell-side analyst as a dispensable link in the chain of intermediation

A blast from the past

Paul Myners, October 2009:

I question the absence of an organisation in the UK that speaks solely on behalf of institutional investors without a commercial interest, as opposed to a tangential activity of trade associations.
The most appropriate arena for this to take place would surely be an industry-wide institute operating with close ties to the academic institutions also engaging in the debate. I have in mind something similar to the Council of Institutional Investors. But no such organisation exists in the UK.
Such a body would focus exclusively on promoting understanding and best practices in stewardship and good governance, unfettered by any other loyalties or priorities.
To date the only significant effort to address this challenge was the creation of the Institutional Shareholders Committee Forum.
This is composed of various constituent member bodies including the ABI, AIC, IMA and NAPF.
The terms of reference for the ISC are to provide a conduit through which members can share views and, where appropriate, co-ordinate activities on any matter likely to affect the interests of investing institutions in their role as investors.
However, in practical terms the ISC has struggled to deliver tangible results.
This should not come as a surprise.
The forum is a coordinating mechanism for trade bodies who themselves operate primarily to promote the interests of their own industries – there is no one organisation in the UK that speaks solely and exclusively on behalf of institutional investors without commercial benefit as an overriding goal. This, in my view, is a deficiency.
To compound this disconnect, the ISC is a loose collection of trade associations rather than member firms, and as such is two degrees removed from the operational nexus of the industry.
The committee has rarely met and has not evolved. It is controlled by industry trade bodies; it has no budget or permanent secretariat.
Trade bodies clearly and correctly operate primarily in the interests of their own fee-paying members. This may or may not accord with the interests of end investors but it is a fact of life that parties selling services to others for gain are not necessarily always going to have entirely shared interests with their clients.

Fidelity update

It's been a while since I've blogged about the Fidelity-Tories interface, so here's a quick round-up of cash donations etc since May 2010.

Direct cash donations from Fidelity to the Tories (you need to search for 'FIL' as the donor name on the Electotal Commission register) declared since the election stand at £150k. This compares with £300k donated in the year up to the election. Fidelity also donated £50k to the No campaign in the AV referendum last year, though obviously that was not a Tory-only campaign.

Fidelity also continues to employ Sir John Stanley as a consultant at £1,800 a pop. He's declared 23 days consulting with them since the election, totalling £41,400. In comparison, median annual full-time earnings are now abour £26k. According to the register of members' interests, the payments are for "attending meetings as necessary and advising on business opportunities and risks". To put in context, Sir John is MP for Tonbridge and Malling, and Fidelity's HQ is (still, I think) Tonbridge. So you may not think it's unreasonable that he works with a large local employer.

Finally, Fidelity has also sponsored a meeting of the Conservative business liaison group the Enterprise Forum:

Thursday 12 May 2011
Pension Reform
Breakfast Briefing
Steve Webb MP - Minister of State for Pensions
Kindly sponsored by Fidelity International

Again, to be fair all kinds of organisations get involved in this kind of activity, though I wonder if Fidelity also supports similar Labour events? 

Voting disclosure bits and bobs

I've had a bit of interest in my recent blog on voting disclosure stats, so thought I'd follow up with a bit more detail.

We looked at all the asset manager signatories of the Stewardship Code, which was 175 at the time. On the best reading at that point, we classed 50 (29%) as disclosing. However of that 50 only 27 (15% of all Code signatories) disclosed a full record, ther rest either report only oppose votes and abstentions or just stats. I could run through the argument why disclosing only votes against or abstentions isn't good enough, but it's easier to just point to an example of an output under such as system. 

Also under the voluntary regime you get a major timelag in disclosures. Two of the biggest asset managers don't have any voting data on their websites later than Q2 2011, a third is at Q3 2011. This means that right now can only do a partial analysis of of voting in 2011 even based only on the minority that do disclose.

There are errors a plenty in disclosures too. One very large asset manager's disclosure for Q1 2012 only has the first page up (of 150+ that were supposed to be uploaded). Another manager reports that it voted both for and against the G4S attempted acquisition of ISS. Another manager has its voting decision on one key AGM missing. I've also seen a manager post up the same quarter's data twice  (ie its Q2 disclosure was actually its Q1 disclosure repeated) and it was for Q2 in the UK which is the most important bit!

It's fair to say that the industry has been fairly resistant to the idea of mandatory disclosure, and has put quite a bit of lobbying effort in the past to frustrating it. Some people may remember that when the Companies Bill was debated in the Lords the Tories and the Lib Dems combined to vote out the clause relating to the reserve power. I vaguely recall an IMA lobbying brief being read out pretty much verbatim by one Tory (can't remember if it was in the Lords or Commons). I suspect the politics of this issue have shifted somewhat now though.

Meanwhile the band of proponents of reform has gradually grown, and the principle of public disclosure (if not the need for mandatory disclosure) has basically been won. I think to be historically accurate The Co-op Asset Management set the ball rolling by starting to disclose in 2002. We started campaigning on it as an issue at the TUC around the same time. (Interestingly, the main reason we got stuck in at the TUC was because the industry was very unco-operative in response to the first fund manager voting survey. If they had played ball it might not have become a campaign.) More recently Fair Pensions has pushed the disclosure issue hard.

So, after ten years, we've got patchy voluntary disclosure. I hope we don't have to wait another ten years to finish the job properly.