Sunday, 19 January 2020

Rump placings

A very quick one. I've updated the graph a did a year or so back on the amount of stock shifted via rump placings (essentially the leftovers that aren't taken up in a rights issue). I got into this one because of Kier Group, which had a rights issue to forget. The biggish (just under 15%) new one to look at is M&S - it's the fourth highest rump placing % I could find. Though bear in mind this is from last June.


Thursday, 16 January 2020

Post-democratic pensions

"[T]raditional politics in seen less and less as something that belongs to the citizens or to the society, and more and more as something done by politicians. There is a world of citizens - or a host of particular worlds of them - and a world of politicians and parties, and the interaction between them steadily decreases. Citizens change from participants into spectators, while the elites win more and more space in which to pursue their own particular interests."  
Peter Mair, Ruling The Void 
Stylizing owners and managers of capital as trustees of society has lost any remaining credibility, their much-publicised exercises in philanthropy notwithstanding. A pervasive cynicism has become deeply engrained in the collective common sense, which has come as a matter of course to regard capitalism as nothing but an institutionalised opportunity for the well-connected super-rich to become even richer.
Wolfgang Streeck, How Will Capitalism End? 
Among all [those] who have a say in the running of the company, only 'people who invest' - the shareholders - are in no way space-tied; they can buy any share at any stock exchange and through any broker, and the geographical nearness or distance of the company will be in all probability the least important consideration in their decision to buy or sell.In principle there is nothing space-determined in the dispersion of the shareholders. They are the sole factor genuinely free from spatial determination. And it is to them and them only, that the company 'belongs'. It is up to them therefore to move the company wherever they spy out or anticipate a chance of higher dividends, leaving to all others - locally bound as they are - the task of wound-licking, damage-repair and waste-disposal. Whoever is free to run away from locality, is free to run away from the consequences. These are the most important spoils of victorious space war.
Zygmunt Bauman, Globalisation: The Human Consequences 

So again I find myself drifting back to these questions that gnaw away at me, about the nature and the legitimacy of much of the activity that is undertaken in the world of Responsible Investment.

There was an interesting piece in the Sunday Times before the election about the decision of utility companies to restructure in a way that provides more protection for shareholders against a potential shift to public ownership:
National Grid and SSE, which together own Britain’s entire gas and electricity transmission spine, this weekend confirmed they had created overseas holding companies in recent months to seek shelter from Labour’s renationalisation agenda. SSE has put its UK business into a new Swiss holding company; National Grid has shifted its gas and electricity businesses into new subsidiaries in Luxembourg and Hong Kong. The moves are designed to build defences against Labour’s sweeping renationalisation plans. Switzerland, Luxembourg and Hong Kong have “bilateral investment treaties” with the UK that ensure investors are paid properly in the event of any state asset grab.
National Grid's statement was particularly interesting:
“Labour’s proposals for state ownership of National Grid would be highly detrimental to millions of ordinary people who either hold shares in the company or through their pension funds — which include several local authority pension funds,” it said. “To protect their holdings, and in line with our legal fiduciary duty to our shareholders, we have established holding companies in Luxembourg and Hong Kong. This has no financial benefit to the company and does not affect its day-to-day operations. It is solely to protect our shareholders’ interests.”
There are three things I would emphasise here. First, the interests of 'millions of ordinary people' are here identified as being as indirect investors in the company. Clearly in the case of electricity generation and supply obviously they also have an interest as customers and a small minority also have an interest as employees. 

Second the use of fiduciary duty to justify this restructuring shows just what a double-edged concept this can be when let loose in a public policy setting. Law can be used to delegitimise or disable entirely reasonable political objectives.

Finally, what about the statement that there is no impact on day to day operations? Doesn't this say it all, and hammer home the point Bauman makes? The physical infrastructure, the public (customers), the employees and the delivery of the service all remain absolutely rooted in the UK. But through some piece of legal magic 'the business' (apparently something other than these things) can slip across the border to Luxembourg, or Switzerland or Hong Kong, and thus out of the grasp of politicians. 

Taken together all these things point towards taking important questions out of the realm of politics. My own different interests might be in conflict. I might have more to gain through public ownership as a customer than I lose through nationalisation as an indirect investor. Yet while in the former field of politics I have a vote, and thus have some power, in the latter (the field in which I am encouraged to see myself) I have little or none. The interests of 'millions of ordinary people' as investors have very little expression. It is typically intermediated by financial services giants. Even the remaining limited pockets of quasi-democratic control (member trustees and equivalents) are being squeezed in all markets in favour of professionals. Meanwhile innovative use of the law, and legal concepts, serves to put undesirable policy proposals out of reach.

This reminds me of another couple of bits from Streeck, this:
Standard economic theory treats social structure and distribution of interests and power vested in it as exogenous, holding them constant and thereby making them both invisible and, for the purposes of economic 'science', naturally given. The only politics such a theory can envisage involves opportunistic or, at best, incompetent attempts to bend economic laws. Good economic policy is non-political by definition... The implication is that while an economy, if sufficiently conceptually disembedded, may be modelled as tending towards equilibrium, a political economy may not, unless it is devoid of democracy and run by a Platonic dictatorship of economist-kings. Capitalist politics... has done its best to lead us out of the desert of corrupt democratic opportunism into the promised land self-regulating markets.
And this:
[T]he battlefields on which the contradictions of democratic capitalism are fought out have become ever more complex, making it exceedingly difficult for anyone outside the political and financial elites to recognize the underlying interests and identify their own.
This latter point particularly resonates when I look at asset managers. A decade ago most of the asset management industry was deeply resistant to the idea that it shouldered any responsibility towards the companies and assets in which it invests. These days it is a disadvantage for an asset manager to not have a convincing ESG story. The move to "mainstream" responsible investment has resulted in it looking much like all the rest of the financial services industry. Besuited salespeople who a decade and a half ago had zero interest in RI now actively promote ESG products. The industry still makes a lot of money, but now some of the branding features pictures of smokestacks and colourful frogs.

To be fair, this has gone beyond adopting a policy, putting out a report or two. Increasingly asset managers seek to demonstrate that they are having an 'impact', as measured through positive changes to investee companies and assets. That said, the issues that led me into this world - the treatment and employment conditions of the millions of working people who built the pension funds that enable ESG activity to exist - continue to feature infrequently. ESG events rarely touch on workplace issues, and even when they do speakers representing workers or even workers themselves are usually not on the panel. This is even the case when investors and corporates hold events to talk about the importance of engaging with stakeholders.

Within the RI industry there is a professional sense of who the 'good guys' are - the firms more committed to ESG issues in a real way. If you are an ordinary punter, even a trustee, all the firms must sound the same these days. They can all wheel out an ESG analyst, or offer a case study on a climate-related engagement. To go back to Streeck, it's really feckin difficult to see who is actually on your side. (and to reiterate, if you're a worker who's expecting investors to back you up it's a pretty small group) 

Mainstreaming has also fed the idea that ESG issues are things that can be measured, assessed in data points, and risk managed. The idea that any of this is in any way "political" is discouraged, and activity that looks like advocacy is characterised as unsophisticated or lacking in maturity. Highly-paid specialist staff can handle all that for you with a quiet word in the right ear.

This overlaps with the shift away from any notion of democratic oversight or accountability in much of the pensions industry. What really bothers me is the idea of a sophisticated, well-remunerated, globally mobile ESG elite spends its time negotiating over social and environmental issues with little reference to underlying beneficiaries. I think we are approaching this already.

Ultimately this comes down to the question of what we want to happen to the giant firms like Blackrock and Vanguard. They are repeatedly, and rightly in my opinion, exposed for failing to back resolutions on climate change. Few people bother to look at their voting record on social issues, but its basically the same. So the question is: do we just want a better Blackrock, or do we want something different? 

The reaction to Blackrock's recent conversion to a tougher position really teases these issues out. If you think that mainstreaming is the biggest goal, it is an unquestionably good thing. And obviously it IS better that Blackrock is more engaged than not. But if your conception of RI has any notion of democratisation in it then we need to tread carefully.  

PS. This is a theme I keep being drawn back to, but am finding hard to write about without sounding like I'm just moaning, so I'm going to try to flesh it out a bit more. Hopefully this will make it a bit sharper, but also show up which bits are just moans.

Wednesday, 8 January 2020

Red Tories

One of the most interesting things I read over the holidays was Little Platoons by David Skelton. If you don't know him, he's a Conservative policy wonk who has spent several years looking at ways to broaden his party's appeal beyond its traditional electorate.

The book advocates a return to a One Nation style of Conservatism, and has a strong focus on what has happened to the North. Although he is understandably defensive of previous Conservative governments he acknowledges that deindustrialisation was devastating to working class communities.      He's also quite perceptive about the relationship between Labour and the North, and sees the decline in the relationship as an historic opportunity for the Right.

Another interesting aspect of the book is the way he triangulates his position. He repeatedly positions One Nation Conservatism in opposition to both state-oriented, 'old style' socialism and economic liberalism. I think this is one of the fault lines that we'll see under Boris Johnson - those who think they've won and so they can govern in the free market liberal mode, and those who want to cement the gains in traditionally Labour area and therefore tilt towards economic intervention. 'conserving' therefore might trump markets where there is a forced choice.

In policy terms it's notable that Skelton proposes things on my turf that some on the Right of Labour are sniffy about. It's not often you read a Conservative thinker criticising unions for not taking the opportunity offered by the Bullock Commission. He advocates worker representation throughout business, including on boards, and is (briefly and mildly) critical of Theresa May for losing her nerve on this point. He also advocates greater employee ownership and encouraging other forms of ownership (mutuals etc). And he advocates a public interest test for takeovers. Although it's framed in national terms, it doesn't across as at all UKIP-y. (more generally on employment issues he proposes a Workers' Charter to enshrine rights up to and beyond the Social Chapter.)

I've argued before that you could see this being quite fertile ground for Conservatives, if they want to occupy it. You could even imagine them, for example, wanting to take Northern rail back into public ownership, or at least something different to the current model. Just think what kind of message that would send. Taking back control of monopolies could be similarly defined in terms of reinvigorating national, or regional, power.

This is not entirely new. I have a smidgen of sympathy for Nick Timothy (remember him?) who was advocating a lot of similar ideas under Theresa May. The 2019 campaign was very different in lots of ways to 2017, but it achieved the sort of outcome he was aiming at. I thought Mansfield turning blue in 2017 was an important development (no doubt there were other earlier signs), now it looks like a safer Conservative seat. Skelton's book reads to me like a more fleshed out version of what Timothy was aiming at.

Obviously there's much in it I disagree with too. I can't be enthusiastic about Brexit in any way. And I think he struggles with unions (though he's supportive). In my opinion life's much more complicated than "left-controlled unions bad, moderate unions good" and "unions were too powerful in the past". And today if you think unions are a good thing you should be advocating ways to make it easier for people to form and join them. Recent Conservative policy points in the opposite direction.

However, that said, much of it I agreed with. If the Conservatives adopted much of what he advocates this could be quite a big deal.

A few snippets:

"The fall in share and home ownership means that the rhetoric of popular capitalism hasn't come close to being matched by reality, contributing to a sense that rising prosperity was something that was happening to other people. At the same time... wages have hit a prolonged period of stagnation, meaning that capital has been far out performing wages. This was notably the case in those organisations that saw executive pay grow in a way that had little relevance to performance... Changing the nature of the British firm would make our economy more productive, and our employees more engaged. As well as reforming the nature of the firm in a way that engages and capitalises workers, it's also crucial to consider how all can work with dignity and security."

"Employee engagement within the firm should be the norm, rather than the exception. [S]uccessful economies... who place a premium on skills, also tend to place a premium on proper management-worker cooperation within the firm. To achieve this, having worker representation at every level, including on the board and remuneration committee is important. What is more important, however, is entrenching a culture of engagement and cooperation throughout the firm."

"The [Workers] Charter would also encourage firms to offer an ownership structure that goes beyond the proposals [note: I assume this is a reference to Inclusive Ownership Funds] unveiled by John McDonnell, which acknowledges the problem, but amount to double taxing and severely limit the number of shares that firms can prove to workers. Instead, firms would be expected to report annually on the proportion of their workforce empowered with share ownership. They would also be expected to explain why this didn't apply to all levels within the firm. Companies with fewer than 10,000 employees should also be incentivised through the tax system to provide share ownership to workers."

Friday, 3 January 2020

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.

Thursday, 26 December 2019

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.
No alt text provided for this image
No alt text provided for this image
No alt text provided for this image
For completeness, take a look at Premier Oil, where a huge short position has recently been reported (it seems this one might be hedging).

No alt text provided for this image

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.

No alt text provided for this image
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.

No alt text provided for this image 

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!

Wednesday, 11 December 2019

The dog that didn't bark

To be honest, I'm not looking forward to election day tomorrow. If the polling is right we can expect a Conservative majority and Brexit to go ahead, neither of which are my favoured outcomes! I thought the same would happen in 2017 and it didn't, so who knows.
Also in 2017 I blogged about how in my corner of the world a broadly 'Left' take on corporate governance was winning, even as it looked life the Left was losing in the Big P political field. This trend has only continued in the following 2 years. Positions that were once only advocated by the likes of the TUC, High Pay Centre etc have become fairly standard.
Another thing I've blogged before is that the political value of business endorsements in election campaigns has declined significantly. It might even be a net negative now. And this is a point on which Boris Johnson, a politician who seems to have no guiding purpose except getting into power, is obviously alert to.
In this respect it's interesting to note that in this election one of the previous staples of Conservative campaigns is missing (no, not Jacob Rees Mogg...): the collective statement from business leaders warning against a Labour government. This was literally a front page attack in the 2015 campaign. So where is it this time? I can't believe that the Conservatives couldn't organise a similar joint letter now, when Labour is positioned further to the Left and advocating taking some businesses into public ownership. Perhaps some feel it is too dangerous to speak out, but there must be a reliable core of party funders and friends that could be put together.
So my gut feeling is that the Conservative campaign team may think that such an endorsement (or, seen the other way, corporate attack on a particular outcome) would be a net negative. Certainly you can imagine Labour immediately trying to flip it into evidence that corporate interests dominate Right politics. If my hunch is right, then it's just a bit more of an indication of how politics has changed from the 1990s, and from the crash in particular. It has some interesting implications for those of us in ESG land, which I'll return to at some point.

PS - VOTE LABOUR.

Sunday, 8 December 2019

Shorting and voting

As some people will be aware, I've been looking into changes in voting turnout at companies in trouble. Short version: turnout has fallen at several such companies, in some cases significantly. Why this might be is another question. Since several of these companies were also been heavily shorted there's a potential explanation. Perhaps investors lending shares to those shorting were not recalling them in order to vote.

So I've had a look at public shorting data (which I know is limited) and plotted this against turnout. The charts below are v basic. I've just looked at the short position on (or shortly prior to) the date of the relevant meeting. Really I ought to put more shorting data in, as obvs the shares don't get lent out and shorted immediately before meetings.

Anyway, it looks like there is a bit of a correlation, although the Debenhams example does not show that at all. So it's possible that something else is going. Perhaps changes in the register explain it - as companies get into trouble big institutions who are more likely to vote are no longer there in numbers. Or perhaps some investors just give up - if you're an indexer who has to hold the shares, but know the company is doomed why vote? Why not at least get a bit of lending income? So not a straightforward story.

PS - Premier Oil obvs not in the same category as the others. I included it as the story about the massive short in the company is in the press today.