Saturday 29 December 2012

Employees on rem comms - a few thoughts

I'm strongly in favour of the idea of employee representation on remuneration committees, so very pleased that it's a Labour policy these days. But if we are going to get it to work, in the hope that Labour gets back in 2015, we need to deal with a few practical issues. These are the sorts of questions I flagged up in my previous post.

There is an excellent TUC briefing on this subject which I won't seek to re-invent, especially as I agree with the positions set out in it, so I thought I'd set out how I think we could make this work.

Firstly, are we talking about employee reps on rem comms, or employee directors who sit on rem comms? The real question here is if we are going to establish the principle of employee involvement in UK corporate governance is a limited role in remuneration all that we should aim for? If we created employee directors who sit on rem comms then we're still meeting the policy commitment but as part of a much bigger shift in governance.

At present I personally think trying to establish employee directors across UK companies would be a real stretch. There simply isn't much support for the idea & as such it would also been seen as politically risky (although easy to counter with real-life examples like Germany). In contrast employee reps on rem comms alone could be achieved pretty easily (despite most mainstream corp gov people not being supportive) and shouldn't be a serious fight over it.

However I also think that if we are going to open this issue up it's a wasted opportunity if Labour doesn't look at the wider question of employee representation. So, some sort of review looking at the issue, as a way of fulfilling the commitment to employees on rem comms (which is the absolute minimum that should come out of the review!). If you think about it, this isn't too different to the Coalition consultation on executive pay - we knew a binding shareholder vote would be one result (because of the PM's public commitment to the policy) but there was an opportunity to look at other issues in the same territory.

Assuming we do end up with the reps rather than directors model, how do we achieve it? In common with the TUC I think any easy way in is to simply tweak the Corporate Governance Code to say rem comms should have employee representatives.* I would also definitely make it representativeS for the simple reason that one rep on their own may find it hard to speak out, so two at least.

In terms of appointment, I think where a union is recognised they ought to nominate the employee reps, as they are likely to be able to provide support (dealt with more below). Where there isn't a union, employees could put themselves forward with an election taking place if there more than the required number of candidates.

In addition, given the limited role envisaged for employee reps I again share the TUC's view that it's not obvious why they should face a shareholder vote, especially as below-board employees sometimes already participate in CSR committees.

Finally, who trains them? I think the unions would probably provide support to members on rem comms in any case, but it makes sense for there to be some arms-length bodies offering training too. It is obviously very important that this is a separate provider to any rem consultant employed by the company. In fact in general, I think rem consultants ought to be kept out of it.

I think the training itself should involve at least three elements. First, the ideas behind pay policies - in particular the theory behind the use of incentives schemes (obviously I would prefer this leans heavily towards scepticism about performance pay). Second, industry data and trends (in order to provide background info) and guidance on how to interpret the data. Thirdly, behavioural training - understanding the dynamics in the committee, what arguments to look out for, how to be avoid being hoodwinked etc.

I think some of the could be set up now and, if we want to make sure that this is a policy that is ready to be rolled out quickly, it might not be a bad idea to get some basic plans in place.

* This could set up an interesting situation. Assuming we did go down the 'tweak to the Code' route then companies could, of course, 'explain' any non-compliance. That in turn leads to the question of whether shareholders would challenge them if they did not comply with this provision - could vote against on the rem policy vote, for example. If shareholders in turn did not challenge non-compliance (because, perhaps, they don't accept an employee role in rem discussions) it would create an interesting problem. Shareholders (asset managers) might argue that they have no obligation to enforce a policy they don't agree with. But in turn if I was a trustee on, say, a TU pension fund or a Labour-controlled LGPS fund I might not be very impressed with my asset managers.   

Thursday 27 December 2012

A mini corp gov policy for Labour

I've been blogging a bit lately about the direction in which Labour thinking on corporate governance seems to be moving. Maurice Glasman seems to push the argument the furthest and explicitly advocates a co-determination model in the UK. I'm not sure how much support that has and it's worth noting that in the past the UK labour movement has been ambivalent about the idea of employee involvement in company governance.

Nonetheless there is a bit of a sense amongst people on the Left who think about such things that the 1990s vintage of corporate governance - which Labour did much to bring to life - has not delivered what was expected. In a sense the whole 'stewardship' debate in the UK comes from the realisation that even the biggest institutional shareholders did not exercise the kind of oversight that much theorising about corporate governance expects.

The response of the mainstream corporate governance community has been to push the existing model further - hence we now have a Code for the interaction between shareholders and companies. But some people on the Left are starting to look at other models, particularly with a greater role for employees.

In this context the existing Labour policy commitment - employee representation on rem comms - makes a bit of sense. It's a nod to the idea that other stakeholders should have a say in governance, but can (just about) be made to fit within the existing system too. There are some important issues that would still need to be dealt with - who appoints employee reps, should they face a shareholder vote too, do they count in an 'independence' assessment of rem comms, who trains them etc etc. This is an issue I'll come back to in a future post.

However, if the we're still basically straddling the two camps here's a micro policy idea - a future Labour govt make it easier for shareholders to file non-binding resolutions. Currently if you want to file you need to have either 5% or have 100 shareholders supporting the resolution with an average holding of £100. Given the supposedly* more fragmented nature of the share-ownership of UK PLCs these days, 5% looks like an awfully high bar to set. To put it in context, Legal & General, which manages billions on an index-tracking basis, usually holds about 4.5%. Only BlackRock could be confident of being able to file on its own (if it ever wanted to) in most companies. And what about companies with controlling shareholders? No single investor except News Corp held over 5% of BSkyB in the run up to last year's AGM.  

So why not drop the threshold to, say, 1% and allow investors to meet this threshold by co-filing (ie two investors with 0.5%, three with 0.35% etc)? Realistically, this would still mean that only institutional investors could file on their own, it would at least widen the pool of those who could file relatively easily. Bear in mind, too, that this would mean the process is considerably tougher than the US. But it would at least provide a new option to shareholder who wish to be proactive.

Of course some of the big investors - and representative bodies - won't like the idea. But then most of them didn't support the idea of a binding vote on remuneration policy (if you go back even further, some of them even didn't support the introduction of the advisory vote!) so opposition of that type shouldn't be seen as particularly important. In addition I know there was some discussion of an idea like this in corp gov policy land in 2009, but it was squashed, so it wouldn't be completely out of the blue.

It's a minor tweak within the existing system but, if we look at the US as an example, it could enable a wider group of investors to be proactive in putting items on the agenda of AGMs.

* I'm not sure this is actually true. I think the ownership base has changed, so we see more overseas names on the share register, and there's a different mix at each company. But if you look in the FTSE 100 at the average holding of the largest investor, or the number of notifiable holders, you can make a case that fragmentation is a bit of a myth.

Sunday 16 December 2012

A few links

1. This article dealing with Labour policy on corporate governance from (!) 1996 shows that actually there was some quite radical thinking going on immediately prior to Government. No reason why we shouldn't be as ambitious now, especially given a) the experience of the financial crisis and b) having had a seriosu crack at pretty manistream governance reform when in power.

2. This paper is worth a look. Not the first one I've seen that seeks to query the motives of union shareholder activism. Don't think these would appear if it was ineffective.

3. The Fair Pensions report on ethical funds is worth a read, low priority given to labour issues is notable.

The banks

A few weeks back I blogged about how the labour movement ought to position itself if the UK's banks need recapitalising. Since then we've obviously had the Bank of England saying the banks may indeed more capital and also making the point that they went into the crisis with too little (potentially £50bn too little), something which I'll come back to.

As I said before, if the banks need recapitalising then the UK public will likely be on the hook one way or another. The state may directly assist in the recapitalisation as it did before, or UK institutional investors, managing the nation's savings, could be tapped up via rights issues. It's the latter possibility that particularly interests me as this will be a key point at which the need for accountability within the financial system could be asserted.

It's notable that the ABI has already put out a document about the banking sector and what investor expectations of it will be. Already some have commented that they seem to have 'pre-crisis' ideas of what kind of return they can expect from organisations which many hope will operate more like utilities in the future. That aside, it is important that ABI has to some extent set its stall out.

Asset managers are only ever the intermediaries. As I never tire of boring on , they have views about, for example, what's reasonable in terms of executive pay that are completely out of touch with those of the people whose capital they invest. But whilst the responsibility for the assessment of such issues is delegated along with the managment of capital their views will dominate the investor side of corporate governance discussions.

And so it will be with the banks. I suspect a lot of ordinary punters think bankers could be paid a lot less and that banks should be cut down to size. But unless someone tries to get those views into the corporate governance microcosm pretty quickly we could see the banks recapitalised with our money without any reform demanded in return. If you think I'm overdoing this, consider how weak investor ideas about 'reform' of bankers' pay are. It's all about structure, not scale. When Paul Myners was City minister and wrote to the heads of the big asset management firms to ask them what they were doing about pay at the banks several of them wrote back saying they didn't want to put too much pressure on.

So what could we do instead? Why shouldn't we draw up a set of reforms that we wish to see enacted in return for supporting any rights issues. Retail and investment banking split? Pay freeze and no performance related awards for directors of any bank that requires extra capital (after all, management of capital is the core business of banks, so if they need a lot more of it they aren't doing the job very well)? I would actually make the list pretty extensive on the understanding that there will be pushback from vested interests. Therefore the the real point of the exercise would be to make the point that the asset managers are just the middle men and that their views are not the only ones that are legitimate.

The obvious groups who could do something like this are the TUs, in particular through member nominated trustees who are TU members, and Labour-controlled local authority funds. I recognise that it sounds a bit of an unusual idea, but then think, in contrast, how odd it would be if we don't do something. The banks may well be recapitalised with our money (again) without us getting any meaningful reform in return. This after a year when the UK's banks have been tied up in Libor manipulation, money launderings and sanctions busting.

A final related issue - let's consider the Bank of England's point that the banks went into the crisis with too little capital. One of the arguments for why this happened is because of the way IFRS distorts banks' profits (as I understand it this is principally through the way provisioning for bad loans now works). If that's the case, and the banks really weren't profitable in the late 2000s, that raises some serious questions - why were the directors paid any performance related rewards, why were dividends paid out (and were they legal), and why did auditors sign off the accounts?

There are some very big issues here that haven't yet been properly dealt with. Another reason, I would argue, why those on the Left should be on the front foot if we're expected to pump more money into the banks.

Monday 3 December 2012

The psychology of incentives

There are a couple of encouraging signs that investors are starting to query the idea that redesigning incentive schemes yet again is likely to deliver any real benefits. Regular readers (yes, both of you) will know that this is an issue that I've been banging on about for a few years now, so I'm pleased that the argument does, finally, seem to be shifting.

First up, LAPFF has published a paper on employee engagement which basically argues that investors spend too much time focusing on a) board directors and b) financial incentives. It says that instead investors should be looking at how companies engage their employees, and that when this issue is looked at in depth it's pretty clear that monetary rewards are a small part of the story. If you've read any of the behavioural stuff in this area some of it will be familiar to you, but I think it's the first paper by an investor group that really pushes these ideas.

Separately, I just came across this paper by the Aus arm of BlackRock. What's interesting about this one is that it includes a big section on what motivates executives. This draws significantly on the recent PwC work on the psychology of incentives. I personally don't think the paper actually moves that far (and it may surprise some that it emphasises the role of short-term incentives, though this is where hyperbolic discounting points you!) but it's surely significant that a publication by the world's biggest asset manager even covers this territory.

A final thought - it's interesting how influential that PwC paper is turning out to be. No doubt it's in part because it draws on the views of executives themselves, but I can't help thinking it's also because of who is saying it. A remuneration consultant criticising incentive schemes is more powerful. It's same effect that we see when Sir Michael Darrington criticises the scale of executive reward. Sometimes, it's who delivers the message that matters. Lately the right people have been doing it.     

Tuesday 27 November 2012

TUC Fund Manager Voting Survey 2012

I can't believe this thing is 10 years old, but today saw the launch of the TUC's annual survey of shareholder voting. As usual it was launched to coincide with the annual conference of the TUC's trustee network. Llots of interesting stuff to look at in there. For example, there are a couple of asset managers who voted for James Murdoch to be re-elected as chair of BSkyB last year (one of which is a significant - Premier League if you like - donor to the Tories). Also interesting to see who supported Barclays last year.

Anyhow, here's the official blurb:

Big divide in fund manager positions on company reports

There was a sharp divide in the positions taken by fund managers last year, with a small number backing 85 per cent of company resolutions and a small minority supporting 25 per cent or less, according to the latest TUC Fund Manager Voting survey published today (Tuesday).
The tenth annual Fund Manager Voting Survey, published to coincide with the TUC Pension Trustee Conference taking place in central London today, analyses the voting records of 26 fund managers, pension funds and voting agencies across 76 company resolutions between January and December 2011.
The survey found a sharp divide in investors' voting stances. Three survey respondents supported over 85 per cent of management proposals on which votes were sought, while three respondents supported less than 25 per cent of proposals.
Remuneration remains the issue most likely to be opposed by investors, though bank remuneration reports actually received strong support.
The RBS remuneration report received the highest level of support of any in the survey, though this is probably because its Chief Executive Stephen Hester handed back his bonus in the face of shareholder pressure before the report was voted on, says the TUC. The survey shows that a number of respondents undertook considerable engagement with RBS.
The survey shows encouraging progress in the public disclosure of fund managers' voting records, with 26 of the 28 survey respondents now making at least some voting data publicly available.
The fact that when the first TUC Voting Survey was published in 2003, just one institutional investor - the Co-operative Insurance Society - made its voting record public, shows just how much progress has been made, says the TUC.
However, the TUC still has concerns over the quality of data being made available by fund managers, with some only disclosing votes against and abstentions, and others only providing headline statistics.
And while many investors cited the Stewardship Code as a reason for making their voting more public, it has had little effect on their voting stances, says the TUC.
The TUC would like the Code toughened up so that fund managers are required to consult their clients over their approach to voting and engagement.
TUC General Secretary Brendan Barber said: 'Fund managers have considerable power over the behaviour of corporate Britain but they wield influence in very different ways.
'It's encouraging to see more fund managers publicly disclosing their voting records, even if the quality of reporting is a little patchy.
'However the sharp divide in voting positions sends an important message to pension funds and other fund manager clients - when it comes to voting and engagement, it makes a huge different who you invest with. Clients should engage with their fund managers to ensure they are happy with the approaches being taken.
'The fact that the two remuneration reports captured in our survey that drew the most support were those of banks, shows that concern about bonuses and company performance do not necessarily translate into action.
'Getting people more actively engaged in where their money is being invested should ultimately improve corporate behaviour. It is encouraging that fund managers have reported an increased level of interest in voting and engagement from their clients compared to previous years. The challenge now is to ensure that fund managers take client views into account in their approach to voting and engagement.'

Sunday 25 November 2012

Asset managers, expertise and pay

A long time ago, when I first got into the world of shareholder activism I was struck by the straightforward point that people within asset management businesses were unlikely to have expertise in labour and employment issues. Despite the growth of responsible investment, I think most people still go into the industry because they think investment management is interesting - financially and/or intellectually. They don't go into it because they want to explore the relationship between employment issues and firm performance and, therefore, what view shareholders should take of them.

Back then I thought that there was an opportunity for the labour movement to provide more information to investors to help them understand these links better, and as such devote greater attention to employment issues. The point being that if asset managers didn't have the expertise internally, we could at least help get them up to speed. 10 plus years on I'm less optimistic, primarily because of the instrumental way that most asset managers continue to look at the world, and ultimately labour is a big cost in their minds. It is striking, to me anyway, how little 'responsible investment' engages with employment issues compared to its embrace of environmental ones.

But all that aside, I think the point about expertise still stands. To push it on a bit, imagine if an asset manager, or group of asset managers, developed their own policy on how companies should interact with their staff. I don't mean fund an acadenic study looking and these issues and then develop recommendations. I mean imagine if they just had a bit of a think about what they believed was best, came up with a headline idea or two, with no real evidence to back them up, and then said to companies 'you should do this'. It would be ridiculous, wouldn't it?

Why, then, do we allow asset managers to play such an important role in executive pay reform? This is an area where there is actually a lot of both academic and real world evidence about what does and does not work in terms of reward and motivation. Yet this is also a field in which asset managers still get away with saying 'you should do this', in terms of changes in remuneration policy design, with typically no evidence provided in support. 

Let's look at a particularly prominent example of the guff in this area - 'alignment'. This is a term that is widely used in shareholder discussions about executive pay. Yet, having read a lot of stuff about reward and motivation over the past three or four years, I don't think I've seen it used in any of the psychological literature in this area. I think the idea that sits behind it - that you come to share the interests of the shareholder simply through the nature of your reward - is even more challengeable. Rewards work well on simple, routine, measurable tasks but when they do work well arguably it's because the recipient is focused on the reward not the task, not because they have come to share the interests of the production line manager, or whoever. Indeed the whole problem of people gaming reward programmmes is surely evidence that recipients don't come to share their interests. In terms of behavioural theories of motivation, I'm not actually sure that 'alignment' even exists.

But in the investor corner of corporate governance land the existence of 'alignment' is taken as a given and its achievememt greatly sought after. What's more we already 'know' how to achieve it in principle, we're just nailing down the details of doing it in practice. It is taken as self-evident that paying in shares achieves alignment. This idea is so well embedded (despite the lack of evidence for it) that you only need to genuflect towards the concept of alignment in your executive pay reform proposal to enable to skip over any questions about motivation. Paying in share simply switches most people's minds off in these discussions, it is, apparently, so obviously A Good Thing. If we're worried that paying in shares based on short-term measures is bad, just push the measurement or holding periods out. Done. Simple.

Yet when we see how executives themselves talk about share awards it isn't obvious their interests have been aligned with those of shareholders simply because they have been paid in magic beans... sorry... shares. So one executive quoted in the PwC research on the psychology of incentives describes share schemes as a 'lottery ticket'. Lots of executives in the research don't like being paid the way asset managers say they should be paid, and significantly discount the rewards that are supposed to get them thinking like shareholders. And what's more, none of this info is hard to find. Criticism of performance-related pay has not been as visible as it is now for a long time.

Why then, in an area as politically charged as executive pay, are asset managers allowed to put forward proposals (ie career shares) that have no evidence provided in support of them, and rely on a core assumption that is challengeable? Why do we take it for granted that, despite the existence of much research about what works and what doesn't when it comes to motivation, asset managers without any expertise in this field can put foward their own ideas, and that they will be taken seriously?

The more I think about it the more I think it is no surprise that executive pay has got out of control since we've relied on shareholder oversight alone to act as a restraining force.

Wednesday 14 November 2012

Banks, corp gov, stakeholders etc

Apologies for just posting a splurge of text, but this section of Andy Haldane's evidence to the Tyrie commission caught my eye. John Thurso's question is good, and he gets extra points for a great mixed metaphor (barking up a blind alley indeed!):

Q620 John Thurso: You make exactly that point—I found it a fascinating lecture to read. I will move on to shareholders, if I may. If you look at both Walker and Kay, they saythat what we really need to do is get shareholders more engaged. You are making the point that they are actually a fraction of the stakeholder community. Are we actually barking up a bit of blind alley if we look to enfranchise shareholders and bring them into this, in that, first, banks stocks are now a commodity that is traded on a very short term; secondly, as you point out, they are a very small part of the overall picture; and thirdly, they do not have any real control? The more we look to shareholders, the less we are keeping our eye on the ball of what we really ought to be doing.

Andy Haldane: I think that the conclusions of John Kay’s review of short-termism, broadly defined, were well targeted in empowering the asset managers, who these days hold the power when it comes to managing shares in many companies, not just banking companies. I though that the John Kay proposals, having shareholders sit up and pay somewhat greater attention than they have hitherto, were very sensible to lean against the endless corporation problem. However, I think the point you raise is right: there are stakeholders beyond shareholders about whom we might think more imaginatively. Other company law and rules in other countries do take them seriously. Existing company law in the UK does have these “have regards”—this broader set of stakeholders—but it is not clear to me how much regard is paid to that broader set of stakeholders in the actual running of firms, not just banks.

Sunday 11 November 2012

The labour movement and the banks

Given the scale of financial and political support the banking sector has received in the past few years, it's surprising just how little change the labour movement (both Labour and the TUs) has managed to demand of it. I am sure that this is at least in part because when the crisis first hit the principal concern was simply to keep the system working. We had a Labour government in power and - rightly - the biggest issue was keeping the financial system on its feet.

Following the recapitalisation of the UK's banks, we did embark on a reform effort but, in retrospect, it looks like we missed the opportunity to push further. There were big changes in the governance of individual banks (ie board members forced out & replaced), but the reforms of corporate governance in the banks as a whole were limited, and very much cut with the grain of existing practice.* It was a largely technocratic exercise. Given what Bob Diamond was paid prior to getting the boot, I think we can safely say that pay 'reform' is largely cosmetic, for example (make it more long term, pay is shares, yawn).

Similarly, there was no serious challenge to the structure of the UK's banks - either the number of banks, or whether universal banks are an acceptable model (these are both things I haven't taken a view on because I know far too little to say anything sensible). Labour has subsequently in opposition toughened up its position significantly but the parliamentary wing of the movement is, currently, unable to do much with this.

But what if we get another opportunity? Suppose that the banks again face the need to raise capital quickly. They could turn to taxpayers (ie further Government bailout) and/or shareholders (right issues). If it is the former then I would hope that the parliamentary party makes the argument that there must be a quid pro quo - if the taxpayer is funding the bill then there must be a pay freeze, and those banks requiring support should commit to split retail and investment arms completely.

But the same holds if the banks had to turn to shareholders. The asset managers, remember, are just the middle men. Effectively they will be tapping up our pension funds. In such a scenario I think the TUs ought to make the point very loudly (and quickly!) that working people's retirement savings would be providing support for the banks and that, again, something would be required in return. Unions could get into the trustee-asset manager link and make the case that this is not a decision the asset management industry could make alone. If you want our money you need to commit to reforms.

Who knows what will happen with the banks. At the moment things look stable, though the sector has been hit be scandals like Libor, PPI and money laundering. But if things got tight again in terms of capital there would be a window in which the movement could influence the structure of the industry. Just a thought.

*As I've written previously, arguably the more interesting overhaul has occured within financial regulation. A much more open-minded discussion (eg Turner Review) has taken place there than within the corporate governance microcosm, which never misses the opportunitry to pat itself on the back about how great 'comply or explain' is. The regulators are now more proactive, and looking at different issues. The result, I believe, is that in the UK-listed banks shareholders will basically get to approve things that regulators have already decided are OK. Shareholder primacy on paper only.   

Beeb vs News Corp

As far as I am aware, no-one sent the former BBC director general an email suggesting (before broadcast) that the Newsnight report on sexual abuse might be fundamentally flawed. Yet, despite this, he has taken personal responsibility for a failing within the organisation he was in charge of.

I said this reccently about James Murdoch ahead of BSkyB's AGM -
In other fields individuals in leadership positions subject to this level of criticism would be forced out, even if there was no 'smoking gun'. 
I didn't realise it would be proven true - in a directly comparable organisation - so quickly. Perhaps Entwhistle would have been better off if someone had emailed him - he could just claim he hadn't read it properly. That defence works in public companies, apparently.

Saturday 3 November 2012

The Shareholder Value Myth

A few quick observations about Lynn Stout's recent short book (or long essay) The Shareholder Value Myth. First, one of the points she makes early is on is that it is a misconception that there is any kind of duty for companies or directors to maximise shareholder value to the exclusion of other concerns. This, according to Stout, is based on a misunderstanding of very limited case law. It also overlooks that fact that, even that though they could, most corporations do not adopt byelaws that could make the single-minded pursuit of shareholder value their mission.

What I find interesting about this is that it sounds very similar to the situation in the UK regarding the fiduciary duty of trustees. Once again very limited case law, which doesn't say what many people assume it says, has been misread as saying that trustees have a duty to focus on maximising returns to their pension funds to the exclusion of other considerations. Fair Pensions have done a great job of demolishing this one, and I highly recommend their report on fiduciary duty (though the idea that there is such a duty on trustees continues to lumber on as a zombie idea).

Secondly, Stout also makes the point that investors in the US don't seem that bothered about having ownership rights, as evidenced by the fact that they continue to support IPOs where the company adopts a dual class share structure etc. Once again the parallels with the UK are interesting. Two recent significant reforms that give shareholders more power - a binding vote on remuneration and annual election of directors - were opposed by many investors (the large majority in the case of the binding vote, including the investor trade bodies).

So given that the law doesn't compel companies to focus on shareholder value, and shareholders don't seem that bothered about acting like owners, why do these ideas dominate. Part of the answer is ideological - the success of agency theory as a way of looking at public companies means that empowering shareholders and making companies accountable has become 'common sense'. There may also be some politics here, some people would rather prioritise capital over labour (or at least undermine the legitimacy of the role of labour) and agency theory can assist that. More generally, Stout argues, a fixation on shareholder value is a simplifying way of making sense of corporate mission. It's easily grasped, to say the least, even if it does mean that other concerns/interests are overlooked.

The problem, Stout says, is that a focus on shareholder value can mean that corporations (and the directors that manage them) to behave more like the model than they would otherwise. Most of us (directors, shareholders etc) balance self-interest with a pro-social nature - we care what people think, and frequently behave in a way that is not purely self-interested. However, the simple shareholder value conception of corporate purpose does not allow for this. In passing this looks to me like another version of the 'self-interest as a norm' idea that I've written about previously.

One final tiny point - as is probably obvious, Stout is coming at these questions from a left-of-centre perspective. It's also notable that she has collaborated with Margaret Blair, who is someone any Labour/TU types interested in corp gov & related questions should have a read of. There are some interesting ideas here, and we could do with making them more visible.

Friday 2 November 2012

Global union shareholder voting review...

I love this initiative - a global TU-driven look at shareholder voting. More details here, blurb below

The Global Unions Committee on Workers’ Capital (CWC) announces the launch of Global Proxy Review 2012, a report and new interactive website that encourages investors to take an active role in proxy voting oversight for global equity portfolios.
What do Citigroup and Pacific Brands have in common? Both faced significant ‘say-on-pay’ shareholder votes against executive compensation in 2011-2012, and are widely held in global pension funds.
With a comprehensive report and a new interactive website (, Global Proxy Review gives pension fund trustees and other responsible investors an overview of these and other key shareholder votes at companies likely to be held in global equity portfolios. This information can be used to hold fund managers and proxy voting services accountable for the votes cast on behalf of pensioners and investors.
The 2012 report includes 38 votes from eight different countries on environmental, social and governance (ESG) issues of particular importance to the labour movement. This year’s votes are from Australia, Canada, the Netherlands, South Africa, Spain, Switzerland, the United Kingdom and the United States of America. They include votes at significant companies in over 20 sectors including: NewsCorporation, Enbridge, TNT Express, AngloAmerican, Banco Santander, Transocean, Barclay’s and JP Morgan Chase.
More than a third of the votes selected for Global Proxy Review 2012 were ‘say-on-pay’ votes, reflecting a general trend in shareholder voting to address the issue of excessive executive pay. The votes also include significant social issues, such as risks associated with aboriginal opposition to a major oil pipeline, and governance issues such as board governance and shareholder rights.
Shareholder voting is one of the primary means by which investors can influence a company’s operations. It is therefore important for shareholders to participate in the voting process. However, pension equity investments can span hundreds of companies and numerous countries. Add to this complexity, regulatory differences, conflict of interest problems, agency dilemmas and narrow interpretations of fiduciary duty, which all contribute to accountability gaps along the investment chains of pension funds.
Recognizing these gaps, Proxy Review was created to serve as an accessible resource for pension trustees who would like to evaluate how key proxy votes in international portfolios were cast on their behalf.
Launched last year with a pilot report, Global Proxy Review has expanded this year to include two new countries and an interactive website ( where users can search key votes compiled since 2011. The project is a collaboration between the CWC and labour and responsible investment advocates from across the globe. Partners include: Australian Council of Super Investors; Shareholder Association for Research and Education (Canada); Eumedion (Netherlands); Community Growth Fund and Labour Research  Service (South Africa); the ConfederaciĆ³n Sindical de Comisiones Obreras (Spain); ETHOS Foundation (Switzerland); Trades Union Congress and Pensions Investment Research  Consultants Ltd (UK); and the American Federation of Labour and Congress of Industrial Organizations (US).

Thursday 1 November 2012

BSkyB AGM - as expected

So, James Murdoch has been re-elected with an approx 5% vote against, according to reports (no RNS yet). As expected, institutional shareholders backed off once again, despite the Ofcom report, DCMS committee report etc.

A small factoid to consider - if the reported level of opposition is right (with minimal abstentions, apparently), this means that he had a much tougher ride in 2008 (6% oppose, approx 13% in total not in favour) than today. That was because he moved from chief executive to chair in breach of the Corp Gov Code. (Oddly opposition to his re-election as chair fell right back by 2010 to less than 2% when a News Corp bid for BskyB was looming).

So not being an independent chair was more important on appointment than when a bid was in the offing, and being re-elected was easier after being critcised by both Parliament and your industry's regulatory body.

Pick the bones out of that one, as they say.

UPDATE - AGM results here. Two other directors - DeVoe & Siskind - got higher votes against than James Murdoch. Neither criticised by Parliament and Ofcom as far as I am aware....

Tuesday 30 October 2012

Barclays pay vote updated, again

OK, have found a few more

FOR - BlackRock, Goldman Sachs, Martin Currie, Standard Life
OPPOSE - Aberdeen, AXA, F&C, Fidelity, Henderson, Hermes (as disclosed via BTPS), Investec, JP Morgan, Jupiter, Kames, Legal & General, M&G, Royal London, Scottish Widows, State Street

Still looking like a big NO from big institutions.

Monday 29 October 2012

BSkyB - don't expect an upset

BSkyB's AGM takes place this Thursday and, inevitably, James Murdoch's re-election has become the focus of attention once more. At last year's AGM he was re-elected with a vote of almost 19% against. That would register as a big protest in any company as votes against directors are very low typically. But of course BSkyB isn't an ordinary company, as it has News Corp as a controlling shareholder. Once you take account of its 39% stake, the vote from other shareholders in favour of James Murdoch (ie excluding votes against and abstentions) was about 55%.

Since last year's AGM three things have happened. James Murdoch has stood down as chair, though he remains as a non-executive. He has been criticised by the DCMS select committee, which found his role in the hacking scandal unimpressive, and was unable to decide how reliable his evidence was. (It's worth noting, by the way, that his loudest defender on the committee is now a columnist for The Sun). Thirdly he has been criticised by the broadcasting regulator Ofcom, I think in stronger terms than the DCMS committee did. Ofcom ruled in BSkyB's favour, as expected, on the 'fit and proper' test, but there is an implication in its report that had James remained as chair then its thinking might have been different (though its decision might still have been the same, obviously).

Already there is a bit of noise around the AGM thanks to Fair Pensions' valiant efforts to keep this issue alive. But I would be surprised if the result of Thursday's meeting is anything other than an easy win for James. For some investors, giving up the chairmanship was enough. Others won't take a view on the hacking scandal, and essentially give James the benefit of the doubt. In addition, the fact that BSkyB cleared the 'fit and proper' test means that a big threat to the company has passed. Add all that together and you can see that there's enough wriggle room for mainstream investors to back off. (And bear in mind that some big players backed him last year anyway).

For what it's worth (and everybody look what's going down...)   I think this is problematic. It demonstrates, to me, the enormous gap between the idea that shareholders can/should play a quasi public interest role in companies and the reality on the ground. In other fields individuals in leadership positions subject to this level of criticism would be forced out, even if there was no 'smoking gun'. In a PLC, especially one with a powerful controlling shareholder, things are different. These kinds of judgments are easily ducked if you can construct a case why the individual remaining in post is good for the business, and thus shareholders. And when you consider that this will be the third time that James Murdoch has been awarded such latitude (appointment as CEO and appointment as chair previously) you realise how familiar the arguments for letting it happen are.

Sunday 21 October 2012

News Corp: inside the kessel

Last week I attended the News Corp annual meeting for the second time, so thought it would be worth reflecting on what happened.

First the background. A lot of shareholders have had problems with News Corp, for a number of reasons, for a long time. There's the dual class share structure which gives the Murdoch family effective control despite holding only a small minority of the issued shares (as they hold a lot of the Class B voting shares). This has inevitably led to the family's interests distorting some decision-making, especially with Rupert Murdoch as combined chair and chief executive. Many would argue that the board lacks independent voices, and there are too many personal connections.

So News Corp has long been considered by some investors as a problematic company because of governance concerns. In fact that undersells it significantly. Various analyses put News Corp near the bottom of the scale in terms of governance. And it's not as simple as saying 'if you don't like it don't buy it' because of the growth of index tracking.

Last year's AGM took place a few months after the hacking scandal blew up, leading to the closure of the News of the World, the dropping of the BSkyB, departure of Rebekah Brooks, Murdoch Snr and Jnr being called before the DCMS delect committee etc. As a result it was a very bad-tempered meeting. Shareholders asked a lot of critical questions, and Rupert Murdoch was quite combative in responding to them. Among the attendees was Tom Watson MP who warned the board that computer hacking could be the next leg of the scandal. (For info, Operation Tuleta is now up to 17 arrests, the most recent one taking place last week.)

A year and a bit on from the hacking scandal the feel of the 2012 AGM was very different and the number of investors attending was noticeably down. The Q&A was much more respectful, on both sides, and Rupert Murdoch was much more polite. Either the company has decided to change its approach, it's a bit of a PR/IR makeover, or a bit of both. But the overall effect was to make it feel like an environment in which aggressive questioning by investors was a bit out of order. Quite an effective pacification strategy if it was intended.

The reason I was there was because the Local Authority Pennsion Fund Forum had co-filed a resolution with Christian Brothers Investment Services seeking the appointment of an independent chair. A second resolution, filed by the Nathan Cummings Foundation, sought the elemination of the company's dual class share structure. In a sense, this represented a more focused approach from shareholders seeking reform than last year, when a lot of them opposed individual board members (with James Murdoch receiving a massive vote against).

On both resolutions Viet Dinh handled the company's response, and essentially defended the company's existing practices, though I personally felt there was a chink of light on the issue of an independent chair. I also think that when the company splits in two there might be movement, but we'll have to wait and see.

Last year the company delayed publishing the results of the meeting until the Monday following the Friday AGM. This time they managed to get the results out within hours of the meeting. Both resolutions received a clear majority of independent shareholder support (about 2:1). This is quite a big deal, as the votes of the likes of CalPERS, Hermes etc don't actually get you very far on their own. To get a vote of 30% plus of all Class B holders means that some big mainstream assset managers were onside. This is important because they could have simply concluded that there isn't much point challenging Murdoch at his own company. Instead they chose to support the introduction of an independent chair.  

I suppose that's the best point to conclude on. Given the structure and history of News Corp there is an understandable tendency to be pessimistic about the prospects for change. I personally think, given recent events, that we have to give it a try. Phone hacking (and computer hacking, payments to police etc) only got the exposure it derserves because some people decided that they had to keep pushing, even though the odds were stacked against them. The least that long-term shareholders can do is exert some effort, especially as the issues that are being fought over are mainstream governance concerns - splitting roles and equal treatment of shareholders. And if in general we only pick the easy targets we aren't going to achieve a lot.

Friday 19 October 2012

More Q3 voting data

Legal & General also have a new quarter's worth of voting data up. Unlike M&G, they opposed the Darty remuneration report that got voted down, and voted against the new incentive scheme for Mike Ashley at Sports Direct, which also bit the dust.

They don't seem to have held AEA Technology, which also lost the vote on its rem report in September, which I find odd given that they're an index-tracker. Any ideas, fellow governance geeks?

Meanwhile I can still spot a few big asset managers who have no 2012 voting data available at all. I don't mean the usual non-disclosing ones, I mean managers who haven't updated. 

Thursday 11 October 2012

Institutional Investor Committee update

There isn't one. It doesn't seem to have said anything publicly for more than 6 months.

However I think I'm right in saying that no significant issues relating to UK institutional shareholders have emerged during the period...

Wednesday 10 October 2012

Q3 voting data

M&G are the first asset manager I've seen who have put up voting data for the third quarter of 2012. A couple of interesting (ok, interesting to me) points stick out -

They voted for Darty's remuneration report. This being the company that had to issue an RNS because their previous reporting was deficient. The remuneration report was voted down at the company's AGM in September.

They didn't vote (or at least their reporting says 'no action') at the Sports Direct AGM where the proposed incentive scheme for Mike Ashley was defeated. There's a similar 'no action' report in their Q2 disclosure in respect of Capital Shopping Centres (which saw a pretty big vote against its rem report). I know some managers don't bother to vote where they have piddly holdings, maybe that's it?   

Actually I've spotted a few 'don't vote' disclosures in another manager's reporting, which I may explore further in another post.

Tuesday 9 October 2012

News Corp news

News Corp's AGM is approaching rapidly - it takes places this time next week - but what can we expect this year? Last year there were very large votes against a number of directors, with James Murdoch topping the unpopularity poll with a large majority of non-Murdoch shareholders voting against him. This year will inevitably be different as ISS, inexplicably, has recommended supporting the re-election of ALL board members. This comes after the DCMS committee report, Ofcom 'fit and proper' decision etc. I'm a bit gobsmacked that ISS doesn't think that this might raise questions about Murdoch Junior's suitability for the board.

Therefore perhaps this time around we ought to focus attention on the shareholder resolutions filed at the meeting - one seeking an independent chair (and thus also a split in Murdoch Senior's roles) and one seeking to abolish the dual class share structure which currently shields the company from minority shareholder accountability. We already know that both ISS and Glass Lewis, the two big advisers, have backed the resolutions, which suggests that they will get significant votes in favour. I reckon anything over 20% will be fairly good going given the way the deck is stacked.

There are also some rumblings about the FCPA, which is a potential threat to the company that hasn't yet been realised. This is all tied up with the payments made by News International journos to cops and others for info.On the face of it these payments were made to commercially benefit the company (since they elicited info which sold newspapers), so it does look like News Corp could indeed be on the hook. But the other question that has surfaced is whether the auditors (Ernst & Young) should shoulder any blame. (There's more going on here which I will blog about at a later date).

And fairly soon after News Corp we have the BSkyB AGM (1st Nov I think), where James Murdoch faces re-election as a NED (though no longer a chair, of course). He has been severely criticised by the broadcasting regulator, with a veiled suggestion that a decision might have been different on 'fit and proper' had he remained as chair. No surprise, but I think he should have left the board entirely, and I hope shareholders vote against his re-election, but, knowing the timidity of the asset management industry, I expect he'll get through fairly easily this year.

I'll post up more info on both AGMs as I get it. 

Monday 8 October 2012

Shares for rights

The latest announcement from the Chancellor of 'shares for rights' swap for employees is an interesting, and worrying, one. Here is the Treasury statement on the idea -
Companies of any size will be able to use this new kind of contract, but it is principally intended for fast growing small and medium sized companies that want to create a flexible workforce.
Under the new type of contract, employees will be given between £2,000 and £50,000 of shares that are exempt from capital gains tax.  In exchange, they will give up their UK rights on unfair dismissal, redundancy, and the right to request flexible working and time off for training, and will be required provide 16 weeks’ notice of a firm date of return from maternity leave, instead of the usual 8.
Owner-employee status will be optional for existing employees, but both established companies and new start-ups can choose to offer only this new type of contract for new hires. Companies recruiting owner-employees will continue to have the option of inserting more generous employment conditions into the employment contract if they want to. 
Now I assume from the above that HMT's part of the deal is tax relief, as I don't see how they could underwrite the share awards themselves (or why) without making a very large and and open-ended commitment, unless we see some qualifications later.

If we take this initiative at face value, perhaps it is aimed at mainly start-ups etc. But if so a) it could simply end up giving more tax relief to people who don't need it (what if the start up is a hedge fund set up by portfolio managers leaving a big asset manager who are on a serious wedge) and b) it will lock in poor employment rights at firms that become big employers (note it doesn't need to be optional for new hires). 

But what if this is intended to be bigger than start-up type situations? In simple terms this is a bribe to give up employment rights. There is no reason why a company can't have employee share ownership and decent employment rights after all. You can see various problems ahead. Presumably not all existing employees will take up the offer, so companies will likely end up with a two-tier workforce. If that were not divisive enough, it raises the question of how the employer (which must want to cut rights back to use this option) will look on employees who don't participate. But in the longer term if all new hires go onto these contracts this could have a major impact.

You get the impression that this is a way for the Tories to start chipping away at employment rights. Encourage employers to take them away voluntarily at first, with a token pay-off to employees in return. If it works and you reach a critical mass (perhaps just in a particular sector) you could formalise through some other strategy.

There's also the question of risk. As I've blogged previously, Margaret Blair has done a great job of clarifying that employees already shoulder a great deal of risk relative to shareholders, as they make firm-specific investments in training etc. This initiative means that they lose employment protection in return for a greater firm-specific investment, this time a financial one.

I don't like this at all.

Wednesday 3 October 2012

Labour and corp gov

There were only a couple of passing mentions in Ed's speech to corp gov type issues - including committing to the scrapping of quarterly earnings. However according to The Grauniad a briefing doc was issued alongside which had makes the following suggestions:
• Giving long-term shareholders a greater say in the direction of a firm by restricting votes on a takeover to those already holding shares when a bid is made. That would lock out hedge funds, which snap up shares in the hope of profiting from a takeover. Labour claims the takeover of Cadbury by Kraft was driven by such speculators.
• Abolishing rules requiring companies to produce quarterly company reports, since they force managers into short-term profit-making.
• Placing a duty on investors to act in the best interests of ordinary savers and to prioritise long-term growth of companies.
• Introducing a code forcing companies to publish their pay ratios, and placing a duty on directors to justify publicly why their ratio is 40:1 or more.
Points 2 and 3 are obviously already in the Kay Review - though, importantly, we still don't know if the Coalition intends to implement all of it. Points 1 and 4 have, essentially, already been considered and rejected since the Coalition took power. Takeover Panel was allowed to kill the first one off (well, govt chose not to challenge it's decision which said it's a company law issue & may not be a good idea). The Coalition itself chose not to pursue pay ratios.

As such Labour positioning on these issues is part occupying territory we know the Coalition now won't touch, and partly (it looks to me) goading it to enact key bits of Kay.

What we didn't hear (unless I missed it) was anything about other governance reform. I did see a couple of comments that suggested that Labour policy is for there to be an employee on every public company board (ie not just a rem comm member). If true, it's a further shift in thinking. Again, this is turf that the Coalition won't touch.

The Left and performance-related pay

The latest issue of Renewal has some pieces in it covering problems with relying on financial incentives for motivation. One is by Bruno Frey, who I've blogged  about before, another is by... err... me!

Sunder Katwala's piece on Jon Cruddas, which is free on the site, is also well worth a read.

Thursday 27 September 2012

Labour and rem comms

Interestingly, a lot of stuff I read coming from Labour MPs, commentators etc these days seems to take for granted that corporate governance reform is going to part of our programme when back in power. The extent of such change I'll come onto, but it is striking that the idea of having employee representation on remuneration committees is basically uncontested now within Labour. It is now apparently so uncontroversial that I've seen people further Right than me in the Party suggest it's pretty meaningless (or at least ineffectual, which might not come from the same perspective).

I apologise for obsessing about this one idea, but in the little corner of the world I inhabit the idea of employee involvement on rem comms is Very Radical Indeed. People in the mainstream corp gov world believe it would fundamentally challenge our model of corporate governance and/or that it will simply never happen. This is understandable on one level. After all, until recently this idea really was on the fringes of the debate about executive pay. Until the last few years pretty much the only strong public voice in favour came from the TUC. I know from my own time there that it was common to be the only person in a meeting advocating the position, and that hadn't changed much until the last year or two. If you only followed the corp gov community's opinion you could easily form the view that this still is on the edge of the debate.

Now, however, it's a firm policy position of a political party that could well be in power in a couple of years. I suspect that partly it's the work of the High Pay Centre, which managed to straddle both the mainstream of corp gov opinion on pay and some more radical terrain. This is no doubt in no small part because it did not just rely on the opinions of investors and instead included other voices. In any case the effect has been to destigmatise what was once a radical idea, at least in the policy world (as I say, I don't think the traditional corp gov community has accepted the idea and, as such, neither has it recognised that this reform really could happen).

There are a few reasons why this reform sits well with other influences on Labour thinking. The Blue Labour perspective has been associated with a push for something along the lines of co-determination (obviously a much more radical overhaul than just putting people on rem comms), in part, I think, as part of its emphasis on rebuilding the status of labour. Meanwhile, if you accept, as I do, that a focus on predistribution is a decent guiding principle when there isn't much money around to redistribute then trying to influence inequitable pay outcomes at source makes sense.

The thing is, as I've argued before, putting employees on rem comms opens up other issues. If employee involvement is good enough for remuneration issues, why not push their role wider, and look at employee representation in general? If rem comms are going to take account of employee pay, and employee views, should their scope widen beyond executive pay, and cover remuneration policy across the business?

This also opens up the discussion around executive pay. Currently the approach in corporate governance is essentially instrumental - is pay set and structured in a way that furthers shareholder interests? This can lead to the circular argument that if shareholders do not challenge executive pay, then it must be in shareholders' interests (otherwise they would challenge it) and therefore - from this perspective - it is OK. But involving employees in decisions about executive pay challenges the notion that this is just a matter for boards and shareholders (and therefore just because shareholders approve a given policy that doesn't mean it's OK). It suggests there are other questions that are valid to ask about executive pay other than whether it does a job for shareholders.

And if all this happens, presumably we will need to look again at the Corporate Governance Code (and maybe company law) which is currently built around the board-shareholder relationship.

Hopefully this shows that rem comm reform is not the small issue it may appear to be. If you pull at some of these threads other things unravel. But does that matter? One of the criticisms of Labour's rhetoric around responsible capitalism is that there isn't much behind it. Perhaps Labour ought to be really bold and push for wider governance reform that recognises the role of employees rather than just aiming at rem comms. When people like Jon Cruddas are saying we should at least be thinking of a 1979-style rupture I do wonder whether we ought to push further. I'll try and sketch out a few ideas in another post.

Tuesday 25 September 2012

Corporate governance whodunnits

Anthony Bolton at Fidelity was occasionally called the silent assassin for his role in taking out leaders of underperforming companies. Events of this season, and in particular the emerging picture of asset manager voting behaviour, have reminded me of this label.

Whilst most of the attention focused on the 'shareholder spring ' (bleurgh!) has concerned remuneration issues, we've also seen a number of chief execs forced out - at Aviva, Astrazeneca and Trinity Mirror, for example.In all the three cases I mentioned, the departure of the chief executives was announced around the time of the respective company's AGM. In other words, there was an opportunity to use a formal right - the vote - both functionally (adding to a collective majority vote against the director) and as a signal (even if a majority wasn't achieved a high vote could make the director's position very difficult).

It didn't happen. Only in the case of Sly Bailey at Trinity Mirror was there a significant vote against the chief executive, and it was still well short of a majority. At Aviva and Astrazeneca the votes against were tiny. At both Trinity Mirror and Aviva there were big votes against the remuneration report. Aviva was, of course, defeated and I think I'm right in saying at Trinity Mirror the oppose votes and abstentions were greater than the votes for, but on a straight for/against split it squeaked through. The argument for this focus is that concerns about the chief exec were combined with those about rewards despite poor performance. Hence some shareholders used the rem report vote to take out their frustrations, and the chief execs went anyway. Job done. Right?

But a couple of things about this leave me uncomfortable about this, and I'm interested in whether other people are bothered too. First, what is the point of having votes on director appointments if they aren't going to be used? I accept the point that much engagement around board issues takes place well away from the AGM. But in these three examples, based on the timing of departures, it is clear this wasn't the case. Although concerns dated back further, the pressure came at the time of the AGM. The right to vote could have been used, but wasn't.

What troubles me is that the formal signal that large shareholders - stewards if you want - sent via their vote was that they supported the chief executive. Just to be clear - large majorities voted FOR these directors. Investors didn't actively abstain, or just not vote, they voted in favour. If these shareholders did not wish to see the directors concerned continue on the board then, in my opinion, their actions subverted the signalling function of voting. Other market participants will have got the impression that the directors enjoyed overwhelming support, when actually they were being knifed. This, surely, totally hollows out voting? Why have it if it gets used in a way that sends the opposite signal of the shareholders' actual views?

In addition, this means that the 'assassins' hands are clean. I, and I am sure many others, know who some of asset managers were who pushed the directors out, but do their clients? If all they get is a quarterly report with voting decisions and a bit of narrative I suspect they might not do. The client will see the vote FOR recommendation on the relevant resolution. Unless the manager also reports that they met with the board and told them the chief executive had to go their fingerprints won't be on the knife. There will be no formal trace of the intervention (to remove a couple of FTSE100 chief execs), rather the formal record will suggest the opposite.

What also bothers me about this is that 'stewardship' is being presented as both a public policy solution to some issues, and being sort of undertaken in the public interest. It's a bit convoluted but the argument runs that savers are, broadly, the public and stewardship by asset managers helps fund their pensions by improving company performance. But if this quasi public interest role is being attributed to asset managers, shouldn't the public be able to know more about how it is being carried out?

If no-one is comfortable disclosing the fact that they pushed out a CEO (though I am in two minds about whether this is necessarily an inherently bad idea), shouldn't the punters at least be able to expect that the votes asset managers cast on their behalf reflect their actual views? After all we are talking about the removal of the heads of our largest public companies by organisations who only have the power to achieve this because they have control of other people's money.

It somehow feels fundamentally wrong that only those that work in the City know whodunnit.

Thursday 20 September 2012

BSkyB passes 'fit and proper' but...

The language used about James Murdoch is pretty damning:

a company director is required to exercise reasonable care, skill and diligence in the exercise of his functions47. He may delegate, but has a duty to supervise appropriately. We consider James Murdoch’s conduct, including his failure to initiate action on his own account on a number of occasions, to be both difficult to comprehend and ill-judged. In respect of the matters set out above, in our view, James Murdoch’s conduct in relation to events at NGN repeatedly fell short of the exercise of responsibility to be expected of him as CEO and chairman.
Ofcom makes the same point several times in the report, highlighting the fact that James Murdoch had several opportunities to investigate further and/or clear the mess up - the Taylor settlement, the first Guardian story, the first DCMS committee report.

He got a $5m bonus from News Corp this year.

Wednesday 19 September 2012

ACTU report on high frequency trading

This is the first trade union report I'm aware of on the HFT issue... good job by the ACTU. PDF here.

High-Frequency Trading - A Workers’ Capital Briefing

14 September, 2012 | Submission In August 2012 The Australian Securities & Investments Commission (ASIC) issued a consultation paper seeking views on its draft market integrity rules and guidance on automated trading.

A high profile and increasingly important form of automated trading is ‘high-frequency trading’ (HFT): a set of practices that utilises speed to generate additional returns to HFT firms and their clients.

In recent years there has been growing concern that HFT is serving to exacerbate the speculative, short-term and volatile nature of financial markets.

ASIC’s consultation is, in part, a response to such concerns.

Australian industry and not-for-profit funds are major participants in global capital markets. Via the world’s
major trading exchanges they invest billions in equities, bonds, derivatives and foreign exchange.

But unlike some other participants, super funds have little or no choice but to remain in these markets for the long-term.

Our super funds therefore have a strong interest in financial markets that are regulated to be transparent,
secure and fair. Such markets are more likely to deliver stable and reliable returns over many years – rather
than short-term speculative gains in the space of a few days, hours or seconds.

The purpose of this ACTU paper is to highlight some of the risks that HFT may present to super funds as long-term investors in global financial markets. Those who specialise in HFT earn billions in profit every year, not from long-term productive investment in jobs and communities, but from being able to trade faster than their competitors. For this ‘skill’ they are paid large fees and commissions.

In the context of the global pensions industry, payments for such short-term unproductive trading represent a growing leakage from the investment chain that connects workers’ contributions to the sources of long-term return that will ultimately help to fund their retirement.

The issues raised by HFT therefore deserve close attention by unions and super funds.

This paper is intended to serve as a brief introduction to HFT and why regulatory reform is necessary. After a brief explanation of what HFT is and how it can generate profits, the paper critically discusses the arguments commonly made in support of such trading. These arguments are found to be flawed.

The paper therefore ends by outlining some reforms that would help to counter the risks HFT now presents to financial markets and those long-term investors who have come to rely on them, and proposes some immediate steps that super funds in Australia should take.

Monday 17 September 2012

Another big vote against a rem report

This time 33% against and its Imagination Technologies. Also some big votes against directors.

Thursday 13 September 2012

Another remuneration report defeat

No surprise really, but Darty got spanked on the vote on its remuneration yesterday, as well as losing its chief executive. It's a record year - woohoo - for remuneration report defeats however you cut it.

The ones I know of - Aviva, Cairn Energy, Centamin, Central Rand Gold, Darty, Pendragon, Plus Markets and WPP.

Also we know the average vote against is up a fair bit on last year, and some big votes are still coming through.

Clearly some shareholders have toughened up this year, though if you look into the data in detail a few of the big houses still only oppose a fraction of companies.

Anchoring and pay

I am very pleased. I've just managed to demonstrate the well-established cognitive bias known as 'anchoring' using a sample of well-educated people who work in corporate governance in one way or another (policy, asset management etc).

We gave all audience members a set of questions, one of which was to estimate the average fees paid to a supervisory board member in Germany. Before asking them for their estimate we exposed them to a figure which we explicitly told them was false. One group got a very high figure, the other got a low figure.

The result, as you might expect, was that those exposed to the very high (but irrelevant) figure gave higher estimates than those exposed to the low figure. The size of difference was dramatic - the average estimate with the high prompt was more than six times larger than the estimate with the low prompt.

I'm going to run this on a bigger sample next time. Would be good to use a sample of corp gov people who regularly analyse and/or engage on pay.

Tuesday 11 September 2012

Betfair & political donations

Interesting one this. Party political donations are very rare by UK PLCs these days (except Caledonia...) and are usually opposed by institutions (unless they donate too....). As a result most of the time when companies seek authorities wit a political donations resolution a) they are seeking authority to incur expenditure rather than make donations and b) the resolutions pass very, very easily.

Betfair just got a 29.5% vote against its resolution seeking authority to make political donations. This is almost certainly because it did make party political donations. Actually these were in Germany - to the CDU and FDP. Considering that a fair chunk of Betfair's shares are held by directors this looks to have been a very large revolt by independent shareholders.

Thursday 6 September 2012

Company loses binding pay vote, world does not end

Sports Direct was blocked in its attempt to set up a new bonus plan for Mike Ashley (no laughing). The other interesting point about this one is that the plan was proposed with a special resolution, so needed 75% to get through.

As we know from the debate about exec pay reform earlier this year, a combination of a binding vote and a higher threshold to pass is bordering on a Khmer Rouge approach. As such there can be no doubt that a) Sports Direct will be plunged into an existential crisis as a result of this vote and b) shareholders will be hugely disappointed with this outcome. 

Institutional Investor Committee

It's been a while since I blogged about the IIC (version two), mainly because it doesn't seem to have done anything.

The last public statements I can see are from March, on audit (EU proposals) and executive pay (UK Govt proposals). On the former I would say that the IIC position is a lowest common denominator one, as I know there are institutional investors who take a different view. The content also looks very similar to that used in one of the IIC member's own presentations, which makes me think that this could mean it's just one body's position slightly rehashed.

The statement on the BIS consultation on executive says nothing specific on the actual proposals, probably because the key measure - a binding shareholder vote - was (I think) not supported by any of the IIC members. There is, however, some accompanying commentary which is worth a read.

There's nothing since March though. Nothing on the 'shareholder spring' (barf), or on the Kay Review. The latter surely is worthy of comment given that he proposes a new 'investor forum', which would presumably cut across the IIC's role?

Ho hum.

Against incentive pay schemes

A new report out from the FSA does a rather good job in showing what the problems are. From the blurb -

  • Most incentive schemes were likely to drive people to mis-sell and these risks were not being properly managed;
  • firms failing to identify how incentive schemes might encourage staff to mis-sell, suggesting they had not properly thought about the risks or simply turned a blind eye to them;
  • firms failing to understand their own incentive schemes because they were so complex, therefore making it harder to control them;
  • firms relying too much on routine monitoring of staff rather than taking account of the specific features of their incentive schemes;
  • sales managers with clear conflicts of interests, such as a responsibility to manage the conduct of sales staff whilst themselves able to earn a bonus if their team made more sales; and
  • firms not doing enough to control the risk of mis-selling in face to face situations.

Wednesday 5 September 2012

News Corp news

Their proxy materials are out, with the AGM taking place on October 16th.

A few interesting nuggets. The company is facing three shareholder resolutions - to appoint an independent chair, to eliminate dual class share structure, and to introduce majority voting.

Both James and Rupert Murdoch pick up big bonuses - reduced in light of 'events' but still big.

Andrew Knight is coming off the board.

Monday 3 September 2012

Olson, Hirschman and shareholder activism

Something that can seem quite odd on first glance is why shareholders expend any effort on issues like executive pay. After all, as I bore on quite frequently, there are a variety of reasons why we might expect them either to not bother, or to be ineffective if they do try. One argument I realise that I personally rarely invoke for shareholder reluctance to get stuck in is the classic collective action problem.

In fact Mancur Olson directly referred to this in relation to shareholders:
Why, then, do not the stockholders exercise their power? They do not because, in a large corporation, with thousands of stockholders, any effort the typical stockholder makes to oust the management will probably be unsuccessful; and even if the stockholder should be successful, most of the returns in the form of higher dividends and stock prices will got to the rest of the stockholders, since the typical stockholder owns only a trifling percentage of the outstanding stock. The income of the corporation is a collective good to the stockholders, and the stockholder who holds only a minute percentage of the total stock, like any member of a latent group, has no incentive to work in the group interest. Specifically, he has no incentive to challenge the management of the company, however corrupt or inept it might be.
To be fair, Olson was referring to individual shareholders, rather than institutional investors. However, given that even large institutions rarely hold more than a few percent the point still holds. In straightforward cost/benefit terms shareholder activism doesn't seem to make any sense, or rather it doesn't seem to make sense to lead it, you should free ride. 

The reason I don't use this argument is because I rarely run up against it when dealing with people in the the corporate governance microcosm. The nearest you get is that some people will sometimes tell you that they don't want to take the lead in engaging with a particular company because they have a very small holding - meaning a fraction of a percentage. But even then they are typically still voting. In practice, then, quite a lot of the time asset managers with relatively small holdings (certainly small enough that they would derive a very marginal gain from any uplift in value) do bother to engage. But why?

Of course some people will suggest we can discern some other interest. Certainly in a few cases assets managers and other providers offer shareholder engagement as a service, so you could argue that they simply do it because they are paid to. But, again, I don't think that captures it. Why the upsurge (as limited as it might be) in shareholder opposition this season? It is clearly not the result solely of the activism of those paid to be activist - they don't have enough power to do it alone (and were presumably doing it already anyway) and in any case we know that some mainstream investors are involved.

One of the best responses to Mancur Olson came from my old fave Albert Hirschman in the book Shifting Involvements. Again focusing on individual motivation, Hirschman says that at certain times the model of cost/benefit analysis changes:
[A]t some stage in our cycle, the benefit of collective action for an individual is not the difference between the hoped-for result and the effort furnished by him and her, but the sum of these two magnitudes! And a further surprising consequence follows immediately: since the output and objective of collective are ordinarily a public good available to all, the only way in which an individual can raise the benefit accruing to him from the collective action is by stepping up his own input, his effort on behalf of the public policy he espouses. Far from shirking and attempting to free ride, a truly maximising individual will attempt to be as activist as he can manage, within the limits set by his other essential activities and objectives.
It's important to be clear that Hirschman's book is about how commitment to public versus private activities goes through waves as punters become disappointed with one, then turn to the other, then back again. Therefore, according to Hirschman's theory, it's only at a given point in the cycle when activism might be its own reward. Nonetheless it does put a rather different spin on how shareholders, and specifically those individuals undertaking engagement activity, might approach it. I don't think this by any means captures the range of motivations, but it does at least point us away from the assumption of a bottom line cost/benefit approach (where activism is a cost) which does not reflect what we see in practice.  

For what it's worth I think the current round of activism is taking place in no small part because some investors at least believe that it is a good thing that it does so, regardless of whether they can show a real financial benefit. Their views about the merits of shareholder engagement are more important than any notional financial returns. One of the things I like about Hirschman is that he looked at how ideas develop over time (The Passions and the Interests being the stand-out example) and the impact they had in practice.  I think that at least currently he can offer us some better insights into what shareholders are up to than Olson.

Wednesday 29 August 2012

Barclays pay vote updated

Fidelity and Henderson opposed too.

FOR - Goldman Sachs, Standard Life
OPPOSE - Aberdeen, AXA, F&C, Fidelity, Henderson, Investec, JP Morgan, Jupiter, Kames, Legal & General, M&G, Royal London, Scottish Widows

I think that's about all the voting data there is out there for now. Obvious big one missing is BlackRock, which has no 2012 data available yet. But if you look at the list above it's pretty clear that mainstream UK institutions largely voted against. So maybe US & other overseas investors swung this. Given that ISS recommended in favour it seems likely that there were quite a few US votes in favour.

Monday 27 August 2012

Decline of the ownertariat

The whole time I've been interested in share-ownership there have been competing views about what we are actually faced with and what can be achieved. Depending on how seriously you take the word 'ownership' in respect of shares, or rather depending on what you think you own, your view can be quite different. Obviously I'm most interested in how the Left, and the labour movement, can respond and even within that subset of the responsible investment world there seem to be two different conceptions. These are greatly simplified below -  

A more defensive/tactical approach - there is influence in the shareholder-company relationship that can affect working people one way or another. If we get organised we can counter some of the negatives, and even utilise that power in support of other objectives.

A more optimistic/strategic approach - ownership of companies via shareholdings is important and can be democratised. Through systemic change we can reconfigure financial markets to take account of ESG issues in a socially and financially beneficial way.

I suspect that many people shift from what I've called a tactical approach to a strategic one over time. For example, you might start off thinking about some specific employers, and how you can work on the company-shareholder relationship to influence them. From there you start thinking about whether we can broaden out the way that 'ownership' works, and how to ensure that all such relationships take account of employment issues.

Personally, though, I've gone in the other direction. I have shifted from quite an expansive view to a more limited one, and this tends to inform how I see ideas and activity within this field. I find it difficult to see much share-ownership as being ownership in a real sense, and I struggle to see how this will change in a way that can be channeled in a progressive (barf) direction.

For example, it's notable that one idea currently doing the rounds is that of more concentrated portfolios with bigger stakes. The arguments for this seem to be a) that diversification only reduces risk up to a point (a few dozen stocks I think?), after which it tails off b) oversight declines with larger portfolios (obviously) and c) a smaller number of larger stakes increases the financial self-interest in picking the right companies and ensuring they do well.

This is all sounds alright doesn't it? It does, of course, rather undercut the Universal Owner theory that has been very influential over recent years. This claims that since really big investors own everything they can't escape externalities, so they need to be concerned about all companies. But if we going down the route of concentrated 'ownership' portfolios this is no longer the case, right?  

It also looks like a case of Back to the Future. When I first got into this stuff (as a journo, a million years ago) taking large active positions was the reason that bog-standard (ie non activist) asset managers would give for not focusing on corp gov. We know the company really well, if we had concerns about the board we wouldn't invest etc etc etc.

And, more generally, doesn't this model also look a lot like mainstream activist funds? Particularly if part of your big strategic aim is to argue all this stuff from a business case perspective, I don't see what is new? From a strategic perspective of trying to get the market to work better this might make sense, but it might make the life of those taking a tactical approach more difficult. Odey Asset Management has a big, long-term slug in BSkyB - how useful were they in trying to get the board to take the hacking stuff seriously?

Finally, these days I am also less comfortable with suggesting that pension funds and other savings represent a way for the public to 'own' companies. Leaving aside the point about whether shareholding = ownership, it's important to recognise that a) many working people have never been in pension schemes and b) of those that are many are in unfunded ones - NHS, Teachers, Army etc. In the private sector DB schemes with trustees (many of them union members) are in long-term decline. The DC schemes that are replacing them have the opposite effect to that of DB ones on shareholding - atomising rather than aggregating it. In addition most are contract-based rather than trust-based, so member oversight, weak as it often is in DB schemes, is non-existent in DC schemes.

In light of all that, I think that - at least for the time being - Lefties who are interested in this stuff are better advised to focus on the tactical rather than the strategic. When all the stars are in alignment, shareholder-focused activity can be very effective, however equally there are times when you can achieve little. It's not obvious to me that redesigning the pension system, corporate governance, company reporting etc to make shareholder challenge more effective is a good use of limited resources. This is particularly the case if a) 'shareholders' are NOT analogous with working people as a whole and b) as a result we can't rely on shareholders to do the right thing.  

Tuesday 21 August 2012

Votes on remuneration reports this year

Some very quick observations, based on having compared changes in voting results at specific companies.

Average oppose vote is definitely up by a fair bit, but the average abstention % is slightly down. It's a small shift but may confirm a) what I've heard from people that some managers have reduced/stopped abstaining and b) what I've seen when looking at voting records of UK institutions comparing 2010 and 2011.

Most of the big defeats do not seem to reflect long running concerns, in the sense that in the previous year the level of opposition was low. The exception is WPP, where there was a big vote against last year. Still the increase in opposition to tip it to a defeat this year was pretty big, but not in the same league as the others.

Flipping it around, two of the defeated companies last year saw big drops in opposition this year. One of last year's losers saw the biggest drop in opposition in the group of cos I looked at.

More performance pay/motivation stuff

Hat-tip to Ciaran for this one, right up my street
Modern remuneration systems for executive directors include substantial elements of performance based pay. The idea behind this is that by rewarding executives for performance their interests become aligned with those of the company’s shareholders, thus bridging the principal-agent gap. Executive remuneration through performance based pay has become an explicit corporate governance tool that is supposed to improve the governance of companies. Others have argued that the governance and design of performance based pay system is often poor, as result of which the principal-agent problem actually increases. This paper argues that even if we can improve the governance and design of executive performance based pay, it cannot be made to work because people behave differently than performance based pay assumes. Research revealing our bounded rationality, bounded awareness and bounded ethicality shows that we simply cannot handle executive performance based pay. Regulation will not solve the problem, what is needed is a paradigm change, a refocusing of attention by shareholders, non-executive and executive directors. Such a paradigm change requires a deconstruction of the current myths surrounding performance based pay and the creation of new remuneration narratives. 

And another interesting paper from John Hendry (who has done some great stuff previously on investor and executive conceptions of shareholders as 'owners')
Informed by agency theory, the dominant theory and practice of CEO pay both exclude non-monetary incentives and treat money itself as pure exchange value. Drawing on the economics of non-monetary incentives and the sociology of money, we use qualitative evidence from UK FTSE100 CEOs, to challenge and supplement this perspective. We conclude that for these CEOs even incentive pay acts more as security than as incentive and that the monetary (exchange) value of pay matter less than its symbolic values and significantly less than peer group recognition and respect, personal achievement, job satisfaction, and the challenge of beating corporate competitors.

Wednesday 15 August 2012

Barclays pay vote round-up

Being the sad man that I am, I've been collecting asset manager voting decisions on Barclays' remuneration report at this year's AGM.

Here are the scores on the doors so far -

FOR - Goldman Sachs, Standard Life
OPPOSE - Aberdeen, AXA, F&C, Investec, JP Morgan, Jupiter, Kames, Legal & General, M&G, Royal London, Scottish Widows

Will update when I get more data. Interesting thing to note is that some hefty UK institutions voted against. So where did all those votes in favour come from?