Wednesday 29 June 2011

Bullocks (snippets of Bullock)

Following a bit of a Twittersphere exchange over Labour policy on corp gov, I thought I'd get hold of a copy of the Bullock report on industrial democracy (got it for 1p!). Here are a few bits on the role of shareholders containing arguments that are rather familiar. Like:
[T]he effect of the 'managerial revolution' in large companies has been to concentrate power in the hands of boards of directors. Although in theory, and in law, directors are appointed by shareholders, the shareholders are too numerous to act effectively as a body, and have largely acquiesced in effective control by the board of directors. It is only when there is a financial crisis or dissension within the board that shareholders are called upon to exercise power and take decisions. Except in such circumstances the members of the board are free to run the company as they wish.
Company law is largely based on the concept of ownership. The ultimate control is seen as residing with it's owners or shareholders... They may, and almost invariably do, delegate management of the company to appointed officers. They may revoke the delegation at any time by changing the articles of association or dismissing those they have appointed. In addition the shareholders' ultimate authority cannot be delegated or overridden in a number of specified areas. These include: appointing the auditors [note this is the first power listed!]... ratifying acts carried out by directors who exceeded their delegated authority... Approving certain payments to directors for compensation for loss of office; agreeing to changes in the capital structure; and putting the company into voluntary liquidation.

In practice of course, particularly in large public companies, the share looses are often a passive force, exercising their powers on the advice and initiative of the board of directors and rarely initiating action themselves. This is not to say that the shareholders' powers are not important in a few unusual cases, nor to imply that the shareholders are in some way manipulated or bypassed by their directors. It is inevotable that where the shareholders are numerous and diverse, they will in many cases be insufficiently organised and interested to do more than leave thecdetailed business of the company to a board of directors and to professional managers.
The report also quotes this excerpt from a 1973 CBI report:
The responsibilities of the board to it's employees are today different from but no less important than those which it must accept to it's shareholders. It might be said that they are even more important, at least in the short term, as failure to achieve satisfactory working relationships with employees can put a board in a position where it will have great difficulty in meeting its obligations to it's shareholders.

Monday 27 June 2011

Narrow remuneration report defeat. Not.

OK, it's only a fledgling, but look at this. On a simple for/against split the vote in favour is just under 10%. Include abstentions and the vote in favour falls to just over 5%. Plus they failed to pass to share issue authority resolution, plus they received a 20% against the report & accounts. Given that they only had five resolutions on the agenda that's not a great AGM.

Saturday 25 June 2011

Blue Labour, governance and nostalgia

I was at the Compass conference today. I spoke in one session, on pay inequality, but I also managed to catch the session on Blue Labour's economy. The fact that there was a slot on this subject shows that a) people want to get into a bit more of the detail of this strand of thinking and b) that there is more to the Glasman tendency than just 'faith, flag and family'.

I am one of those who thinks that BL has something in it and I've always thought characterising it as 'right wing' fundamentally misses the point. Even before I read more about Glasman I thought the language being used was influenced by Polayni, and I think that influence demonstrates that this isn't just about cultural conservativism and nostalgia (although....).

What was interesting to me today was that the speakers, including Glasman, started talking about... err... corporate governance without any prompting from the audience (even before the questions started). Picking up on the idea that work, and workers, should be valued the idea of governance reform was tied to the need to make the UK's conception of business less about flexible labour markets, speculation and - implied - a liberal Market for corporate control.

Instead Glasman in particular advocated a much bigger emphasis on vocational training and acknowledgement within governance of the contribution from labour. This, he suggested, would be a shift away from recent history when the workforce in companies has been badly treated and excluded as party within governance. Essentially he seemed to be suggesting that by properly valuing workers, and giving them a real voice, a sense of common endeavour within companies could be established to replace the current deference to finance capital.

All quite interesting, and the concrete proposal stemming from it was workers should be represented on boards in UK companies, so co-determination, or something like it.

Workers on the board though? As is obvious, despite spending my working life trying to make it work I am not wedded to the UK's current approach to governance, and would be open to arguments for a tilt away from shareholder primacy, like employee representation of rem comms. But co-determination would be a major shift.

And this is an area where maybe nostalgia does show through. Because this sort of reform, a shift to a more Rhineland capitalism, was of course The Next Big Thing in the mid 90s. Labour had the opportunity in 1997 for this kind of turn, and did not take it. It would have been difficult then, I think it would be equally if not more so now. Because whilst I personally agree with the need to recognise the contribution of the workforce, and to enshrine their right to participate, can we marshall enough evidence of the business benefits to build support for such a radical change?

Labour could of course just make the case in political terms, but that would be a big, big statement, and are we sure that the public would respond positively to it. Certainly some business people believe that the market for corporate control is too liberal, and that they face too much short-term pressure from investors who don't really care about the long-term success of the company. But would they think a strategic alliance with labour would be a good way out of it?

So some big obvious challenges to implementing such a major reform. At least you can't accuse BL of not being ambitious.

Thursday 23 June 2011

Vince Cable speech, a few thoughts

First, a bit like his Lib Dem conference speech, when you get into the detail there isn't much new. Essentially the short-termism stuff is booted into next year, whereas whatever action there will be on executive pay - probably tweaking the directors rem reporting regs - comes under the narrative reporting strand of work. That indicates that structural reform, like reconfiguring rem comms or strengthening shareholder rights, may be off the table.

Given that the narrative reporting consultation already asked questions about the DRRR it's not a big shift from what I can see. But it does mean that Vince is going to have to do something pretty special on disclosure to make all the rhetoric look justified. Pay ratio disclosure, plus maybe something on performance, must surely be the minimum now that Ed has advocated the former (which is already in place in the US anyway!).

In terms of appointing John Kay to look at the Market short-termism stuff, if definitely a good appointment, and it gives the initiative a bit of independence. But given that it won't report until 2012, presumably after which the govt will respond before deciding how to move forward, more time will be lost. Why didn't they put the whole review under an independent expert in the first place, a point I think Paul Myners made early on. Will there be enough time to do something?

Finally the section on board diversity looks like just a restatement of policy - we'll keep an eye on progress on Davies.

I think Labour can, and should, push these issues. Primarily because I think this s important territory where we have a good story to tell and where we should continue to pushbthe agenda. But also so that Vince has a reason to not just accept minor tweaks like further disclosure.

Long-termism review recommendations

In light of Vince Cable's announcement yesterday, here's what the TUC said five years ago...
We do not propose to make finely detailed policy recommendations. We believe that it is more important to identify those areas where change should be sought and make broad suggestions for change that can be explored with other interested parties. The investor-company relationship contains too many elements to address only one area, or to only involve one of the relevant participants.

We do not believe that a voluntarist approach to these issues will be sufficient, therefore a number of our recommendations relate to activity we believe the Government could consider.

• The Government should initiate an inquiry into short-termism, to include representatives of employees, employers, the pensions and investment industry and other interested parties.
• Trade unions should identify and network their trustees on pension funds and begin a programme of education on developing long-term investment strategies. The largest funds should be a priority.
• Trustees should consider the implementation of long-term mandates. The Government should encourage the development of such mandates in the Local Government Pension Scheme.
• Trustees should encourage the incentivisation of long-term investment analysis by supporting the Enhanced Analytics Initiative.
• The section of the Combined Code dealing with executive remuneration should be revised to make an explicit link to long-term shareholder value and the importance of extra-financial issues. Companies’ remuneration policies should be reformed accordingly, including a move away from options-based rewards.
• The Government should review the potential to introduce incentives to encourage investors to hold shares for the long term.
• The Government should consider the creation of a British equivalent of the Council of Institutional Investors. Alternatively existing organisations such as the Financial Reporting Council and Institutional Shareholders Committee should be reformed in order to ensure the interests of working people as investors are properly represented.
• Given the poor success record (both financial and organisational) of deals, companies and their investors should operate the ‘precautionary principle’ in relation to merger and acquisition activity. Bidding companies should be able to demonstrate that a proposed deal would operate in the public interest. The impact on impact on employment and industrial competitiveness should be put to shareholders when bid is being decided upon.

Wednesday 22 June 2011

Blair's journeys

Took a punt on this recently, as I'm quite interested in metaphor analysis. This book looks at lots of key speeches by various leaders - Churchill, MLK, Thatcher, Clinton etc - to see what types of metaphor turn up most often and how they are used. Notably 'journeys' account for 25% of all the metaphors employed by Tony Blair in the speeches analysed...

Shareholders and nominations committees

Here is the key proposal Lord Myners floated in his speech at the ABI today. Interested to hear from investor types if they think this is desirable and/or workable. Nils Pratley likes the idea.
We simply need to recognise that the principal failure [in relation to executive pay], if there has been failure, is one of agents and to rectify this by putting responsibility back into the hands of or closer to principals or owners. This could be simply achieved by shareholders becoming members of the board Nomination Committee. This should not strike us as odd. After all company law makes it very clear that shareholders have ultimate responsibility for board membership. And yet most boards are significantly self-perpetuating with the chairman playing a very significant role. I doubt that it comes as a surprise to many in this room if I suggest, from my experience, that many chairmen seek out candidates who will “fit in well” rather than candidates who will be powerful advocates of shareholder value or willing to “take a stand” on executive remuneration. There is a natural bias in the appointment process towards conformity.

I am not suggesting that the chairman be taken out of the process of board appointment but I am proposing that we give serious consideration to adding to the Nominations Committee three or four owner representatives. The Nominations Committee would take primary responsibility for selecting non-executive candidates to be placed before shareholders for vote and would also oversee the review of board and committee effectiveness – including the effectiveness of the Remuneration Committee.

This would seem to me to address one of the key anxieties in this space – can investors trust boards and committees to make wise and sensible decisions as agents and to put the interest of the company and its owners before all others?

Shareholder representatives on the Committee would be named and would expected to sit on the Committee for a number of years provided the firm they represented remained a significant shareholder. I have no hard and fast views on how these people should be chosen although there may be a role here for the Institutional Investor Council, with the Financial Reporting Council acting as a standard setter, reviewer and back stop on corralling participants. Such a move is entirely consistent with the underlying ethos of the Stewardship Code – I am simply taking it further. I would start with FTSE100 companies and all significant banks and financial firms. I would review progress after five years to establish whether a case existed for wider application.

Shareholder representatives would be paid for their work on the Nominations Committee, just as the chairman and other members of the current committee are currently paid. Appropriate “Chinese Walls” would need to be set in place to ensure that price sensitive information would not be used inappropriately. Fund managers may need to re-skill their organisation to ensure that they employ or have access to the right people for this task.
He was also lukewarm on Ed Miliband's ideas on exec pay (pay ratio disclosure, employees on rem comms), though this section of the speech caught my eye...
Employees may have more “skin in the game” in respect of their dependence on the with employer than many shareholders have as an owner of the company but there seems to me to be little constitutional case for employee membership of the Remuneration Committee (although I think it would make good sense in many cases for the Committee to seek workforce input as one of the multiple sources used to inform the thinking of the Committee and dilute the influence of the benefit consultant).
Personally I'm in favour of employee involvement in remuneration policy, for various reasons. I think initially it will be a challenge (are there enough people willing/able to do the job well?) but I think that over time a network could develop, a bit like the the trustees network run by the TUC. Would be interesting to see how unions with co-determination network their people.

Vince Cable ABI speech

Here. Some interesting bits in it.

Paul Myners also gave an interesting speech, in which he put forward the idea of shareholder involvement in nominations. Will post up some excerpts, once I figure out how to access my emails via my iPad (did I mention I now have an IPad?).

Institutional Investor Committee update

The Institutional Investor Committee has announced its advisory council, see below. Initial thoughts - high level people, asset manager heavy (but arguably that reflects the IIC members' members & where the real power is) and no LGPS representation (though local govt funds mus represent the bulk of open funded DB schemes?).
IIC announces Advisory Panel members

The Institutional Investor Committee has confirmed the membership of its newly-formed Advisory Council.

The council is made up of market practitioners from the institutional investment industry, each of whom who have been appointed for an initial term of two years.

The IIC, which was set up by the Association of British Insurers, the Investment Management Association and the National Association of Pension Funds, said the purpose of the new body was to provide a channel for the institutional investment community to be consulted on particular issues which affect its roles and responsibilities. It also aims to provide a mechanism for collective engagement with companies.

The council will be led by Institutional Investor Committee chairman Douglas Ferrans and will meet on an ad hoc basis to discuss issues affecting the institutional investment community.

Members include: Alan Brown, chief investment officer, Schroders; James Charrington, chairman of BlackRock EMEA; Alain Dromer, chief executive, Aviva Investors; Stuart Fowler, investment director - equities, Aerion; Roger Gray, chief investment officer, Universities Superannuation Scheme; Richard Lacaille, global chief investment officer, State Street Global Advisors; Ray Martin, chairman of the NAPF Investment Council and vice president - pensions at DeutschePost DHL; Michael McLintock, chief executive, M&G; and Keith Skeoch, chief executive officer, Standard Life Investments

Ferrans said: "We are thrilled that leading representatives from the institutional investment industry have agreed to serve on the Advisory Council.
"The council will ensure that the stewardship and corporate governance agenda is investor-led and will drive collective action on shareholder engagement."

Tuesday 21 June 2011

Paying trustees

When I was working with pension fund trustees at the TUC I was always a bit nervous about the idea of paying them. This was long before I got interested in the area of motivation theory, and was instead I think mainly a concern that payment might lead the "wrong" type of trustees to come forward and/or change the approach of those already elected.

As I've read more about motivation research, I would have thought that I would become more hardened in my opposition to paying trustees, but actually I find myself more open to the idea. I'm currently reading Motivation, Agency and Public Policy and it makes the case very well that financial rewards can work to 'crowd in' motivation when we're expecting people to act altruistically. This maybe because they are seen as a symbol of appreciation, rather than an incentive to increase supply...!

I think this may apply with respect to trustees, at least of big schemes. The job they have to do has become much more demanding both in terms of time involved and the intellectual effort required. If you accept Le Grand's argument, there's a threshold that volunteers or public servants need to cross in terms of self-sacrifice in order for it to feel worthwhile (counterintuitively too little sacrifice makes it seem less appealing). But there's also a threshold at which the sacrifice becomes too much. Perhaps the increased workload has pushed many trustees to the edge of the latter threshold, and some form of payment would at least be a recognition that their contribution is valued, and may make them stick at it.

When I think back to times I heard member trustees (who were TU members) arguing that they should be paid, it was generally argued in terms of the amount of work they had to put in. It felt like a request for recognition, rather than a demand for compensation.

Thursday 16 June 2011

Fund managers & stewardship

Just a snippet, but in a recent conversation with a mainstream fund manager they questioned why a lot more weight was being put onto the role of shareholders. Why, they asked, don't we just legislate if we think companies should adhere to certain standards?

I'm not saying this view is typical of all fund managers - it isn't - but I suspect it might be more widespread than is generally assumed. As I have argued before, I think some managers really wouldn't have a problem with a more regulatory approach to corporate governance, if it means that they don't have to peform a role they are not sure adds value.

Wednesday 15 June 2011

Voting disclosure - good enough for India

It's been a (short) while since I moaned about the lack of mandatory public disclosure of shareholder voting records in the UK. You will recall that the fund management industry (principally) has managed to convince people that this is an admin nightmare/waste of money/bad idea generally.

Well, today I learned that last year India made it mandatory for mutual funds to publish not only their voting policies, but also how votes have been exercised. It looks like this is closely modeled on the US approach. The relevant circular is here. I know about this because a journo has just been in touch to ask for some comment on the voting patterns emerging. So the data is starting to generate media interest.

The UK - which has a voluntary regime under which the majority disclose little or no useful data - now has less transparency than India when it comes to the exercise of ownership. The asset manager lobby in the UK has done a brilliant job of frustrating reform in this area so far, surely now it's time to exercise that reserve power in the Companies Act?

Monday 13 June 2011

Ed's speech and corporate governance

You may have noticed that Ed Miliband gave a speech today. Part of the speech was about the need for responsibility on the part of high earners, specifically in the business world, and there were two ideas floated about how Labour might potentially address this issue when next in power - disclosure of internal pay ratios and employee representation on remuneration committees.

So first up, pay disclosure: "companies should publish the ratio of the pay of its top earner compared to its average employee."

Note the 'should' (my emphasis) - there's no debate about this proposal. The interesting question about this idea is who is it aimed at? What I mean by that is that in my experience most shareholders, the big ones anyway, are even less interested in the 'pay gap' than they are in the scale of executive rewards. I think it's unlikely, therefore, that such information would be used by investors if disclosed. Beyond a handful of faith-based investor groups shareholders aren't, at present anyway, going to be voting against remuneration reports if the ratio is "too high".

But I think the data would get used by other groups - like Living Wage campaigners, NGOS, maybe union organisers, etc. I still don't think it will make that much of a difference, companies are often willing to tough out a bit of bad publicity, but arguably the importance of the proposal is that it's a reform related to executive pay that apparently doesn't assume shareholders and management are the only interested parties.

This view is reinforced by the second proposal of employee representation on rem comms. Immediately before floating this Ed said "we also need to recognise – as many great companies do - that firms are accountable to their workers as well as their shareholders". This will be uncontroversial to many Labour supporters, and it may well just be a throwaway line, but it's the sort of thing you wouldn't really have read in a speech on governance by a Labour minister (except Paul Myners) in the last five years. In corporate law and governance policy we somehow got wedded to an almost mythical view of shareholder capitalism, whereby only shareholders and companies had any role in boardroom pay, and we actively resisted pursuing any other course.

To suggest that we might actually put employees on rem comms makes an important shift away from recent Labour corporate governance policy, whether intended or not. I am sure many shareholders would be hostile to this, it's interesting to question whether they would regard employee representatives as independent, but that again arguably demonstrates why Ed may have something to gain by pursuing it. If you think executive pay is a problem, don't assume that a market solution to it. And, as I have said before, I personally believe there is a case for employee representation on its own terms, not just because it would be instrumental to tackling executive pay.

So taken together you could see these two proposals as marking a re-calibration of Labour's approach to these issues. But...

1. The language on employee representation - we should debate the idea - is notably weaker than that on pay ratios. Why not just say we will do it, especially when...

2. ...both ideas are already under active consideration by Vince Cable in the short-termism review. Personally I would not be at all surprised to see the Coalition move on pay ratio disclosure. I very much doubt they will go for employees on rem comms, but they have consulted on the idea (so you could argue that they've 'debated' the idea). As such as policy proposals these could be overtaken by events very soon, leaving us with nothing much to say again.

3. I'm still not sure we really know what we think about executive pay. There is a lingering impression that actually Labour still is "intensely relaxed" about rewards at the top - provided there is justifiable performance. This seems to be rooted in the (IMO) false belief that the executive pay problem, such as it is, consists primarily of rewards for failure. Personally I think it's more a question of scale of rewards allied to an "everyone must have prizes" mentality. That's a much tougher nut to crack than the rare, obvious cases of people cashing in when doing a bad job (and which everyone agrees are wrong).

In light of all this, my view is that we would be better off making both proposals firm commitments, and quickly, and use them as 'tests' for how serious the Coalition is about governance reform (because I think they will duck the employee representation one). I also think we must be willing to say that sometimes performance linkage isn't the only question to be dealt with in executive pay - sometimes we also have to question the amounts involved. Otherwise, as Ed says elsewhere, we can find ourselves outflanked by some very establishment groups (CBI etc).

Sunday 12 June 2011

Blairite guru vs shareholder-focused governance

OK, slightly cheeky way to label him, but...:
In principle I can see little to be said for the present law. It gives to shareholders, and to shareholders alone, the right to appoint directors, and to receive and approve the company's accounts. This right they possess because they, and they alone, are legally 'members' of the company by virtue of owning shares. No legal responsibility exists towards the workers, the consumer or the state; and none of these has any legal rights.

This seems a somewhat unreal position. It can hardly be denied that industry is in practice a joint enterprise in which management and workers participate as well as shareholders, and indeed participate rather more actively; and the law, by investing shareholders alone with legal rights, does not merely fail to reflect the reality - it turns it upside down.
This is from the chapter on the structure of private industry in The Future of Socialism. Notably he goes on to argue that worker-focused governance reform through amending company law - for example to enshrine employee directors - probably isn't worth the effort because the gains might be limited and, in any case, the unions already have power within companies. Given that the latter isn't really true any more, what would Crosland say in 2011?

Wednesday 8 June 2011

Parish news

1. Today I turned 40. How did that happen.

2. Powdrill 3.0 has been successfully commissioned. The project manager is confident of a mid-November delivery.

Tuesday 7 June 2011

Another remuneration report defeat

At Afren, yesterday. The interesting thing to note about it is that in a way it's a rerun of last year's result (when it narrowly won) - if you include abstentions the vote in favour was just over 40%, the same as last year. Afren only narrowly lost yesterday, so on the face of it all that happened was a slight shift from abstention to opposition. (I say on the face of it as it clearly possible that different concerns drove the oppose vote in each year).

In a way it's a useful result as it may encourage other companies to try and address shareholder concerns whether they receive a high oppose vote but scrape through, rather than take the view that "a win is a win". Just surprised that Afren, having only got the active support of 2/5ths of its shareholders last year didn't make a serious effort to avoid defeat this time around.

Sunday 5 June 2011

The psychology of incentives

There's an interesting little paper out from PwC's remuneration consulting arm with this title here which came out earlier this year. Basically they got the LSE to run some of the famous decision-making experiments (ultimatum game etc) on executives. And unsurprisingly, to me at least, execs aren't hugely different to the rest of us. This is even to the extent that many execs say that they would take a substantial pay cut to do something more interesting:
on average executives would be prepared to accept a pay cut of 50% for their dream job, perhaps doing something completely different. A quarter of respondents prepared to take a 70% cut.
It's definitely interesting stuff, as it's useful to have a bit of research on pay and motivation as applied to execs, because I've found that a common response when trying to raise these points in the 'real world' is the claim that the experimental evidence wouldn't apply to people at the top. Obviously research like this still isn't 'real world' but at least the subjects are the ones we are actually interested in.

The spin PwC put on it is also interesting. In fact I think they are probably right to argue that bonus deferral probably reduces the attractiveness of the incentive. As a remuneration 'reform' for me it only really has value in preventing people for getting paid for illusory performance, and I'm unconvinced that it will really change attitudes to risk-taking (because of my general scepticism about the motivational effects of financial incentives at this level). But even in these limited terms it may not work very well (we'll have to see what happens in practice).

Similarly the 'fairness' point that PwC make is pretty solid, as it seems that (above a certain basic level) many people are more concerned with relative rather than absolute level of reward. But for a pay consultant to make this point is surprising, since it also opens up the question of fairness from the point of view of other employees. More disclosure - particularly if BIS grasp the nettle in respect of internal pay ratios - will surely add fuel to the fire.

Finally, I have to say I'm pleased that the motivational aspects of pay at the top are being subject to a bit more of a psychological approach. I've felt like I've ben ploughing a bit of a lone furrow on this sometimes, given that 'common sense' views about incentive schemes dominate most pay discussions (even those about reform). So I wonder whether PwC have done this because they have picked up some scepticism in the market (perhaps from companies) about the motivational value of incentive schemes. What they have produced is interesting, but there is a stack more that could be said. It would be useful if investors were more vocal here.

Friday 3 June 2011

WPP vote and reaction

Figures from yesterday's AGM are here. Almost 42% against the remuneration report and looking at the turnout on other resolutions probably about 2% in abstentions. It will, to state the obvious, be one of the worst results (from a company perspective) this season.

Martin Sorrell's reaction is worth a look, see WSJ blog piece here. Once again, following the likes of Aberdeeen Asset Management and Ladbrokes, the language does not suggest any sense of compromise with shareholders. Could be the first signs of a scrap ahead.

Wednesday 1 June 2011

Political donations & shareholders

1. Big vote last week against EnQuest on the resolution seeking authority to make political donations. It was 30% against, which is waaaay above average. But in this case there was a reason, as the company gave the Tories £8,500.

2. Latest Electoral Commission disclosures reveal that Fidelity is still funding the Tories, with another £25,000 handed over in Feb. Search for "FIL Investment" here.