Sunday 29 April 2012

James Murdoch snippet

This already came out the second time Murdoch Jnr was in front of the DCMS committee, but page 279 of the rather ace Dial M for Murdoch is worth a read. In it Tom Watson recounts a conversation with Neville Thurlbeck in which NT says that Tom Crone told him he was going to have to show the 'for Neville' email to James Murdoch. NT said he also asked Crone afterwards if he had done so, and Crone said yes but it would be OK because they were going to settle.

It doesn't prove anything, but it is a reminder that one of those right in the centre of those JM/Crone/Myler discussions told a third party at the time that he HAD told James Murdoch about the email.

Friday 27 April 2012

Labour on Barclays

More good stuff from Chuka Umunna

Chuka Umunna MP, Labour’s Shadow Business Secretary, commenting on the Barclays AGM today, said on the need for more shareholder activism:
"We agree with the likes of the Association of British Insurers who have said there must be a change in culture and reform to end excessive pay and rebuild trust. Shareholders must be in the driving seat of reform on executive pay because it is they who own our companies, so it is incredibly encouraging to see Barclays shareholders taking a stand like this and being more activist. 

He added on the Barclays Board’s remuneration report:

"To most outsiders it looks very odd to see Barclays award £2.15bn in bonuses whilst paying out just £730m in dividends to shareholders for 2011, so it is not surprising that there is likely to be a revolt. However, whilst fund managers like CCLA have disclosed that they will vote against the remuneration report today, others are not required to do so under the law as it stands. That is why we have argued - in the face of opposition by George Osborne and Vince Cable - that institutional investors and fund managers should be required to disclose how they exercise voting rights on all issues: this will increase accountability and mean that pensioners and ordinary investors would more easily be able to see how those acting on their behalf vote on the Barclays Board’s remuneration report today.

On the public interest in Barclays’ affairs, Chuka Umunna said:

"We all have an interest in seeing greater responsibility exercised in the City.  It is after all the British people who continue to provide an implicit taxpayer subsidy to the sector from which Barclays benefits.  If banks like Barclays fail to sufficiently justify paying out large bonuses, it will further erode rather than rebuild the trust and confidence in our banking system which we want to see return."

Monday 23 April 2012

Voting disclosure back on the agenda

A nice move from Chuka Umunna, who is putting forward an amendment to the Financial Services Bill seeking the activation of the reserve power in the Companies Act. For those with long memories, this is a bit of a re-run of the battle in the Lords during the passage of the (then) Companies Act when Tory and Lib Dem peers voted to together to strike out the voting disclosure clause. (It was also attacked by Jonathan Djanogly MP, who I see has been in the news for the wrong reasons lately).

Anyhow here's the blurb, fascinating stats in there....!

(Reuters) - The Labour Party called on Sunday for fuller disclosure on how fund managers vote on executive pay, as public anger over directors' high salaries mounts ahead of the annual general meetings of the UK's top companies.

Labour said that it had proposed an amendment to bring into force powers contained in the 2006 Companies Act.

This would enable the government to require institutional investors and fund managers to publish information on how they exercise voting rights attached to shares in publicly listed companies.

Under the current non-legally binding UK Stewardship Code, institutional investors are required to publicly disclose their voting records and, if they do not, to explain why.

However, Labour cited research from corporate governance advisory firm PIRC which showed that only 15 percent of asset management companies produced full disclosure statements on their voting records at company annual shareholder meetings.

"Making fund managers disclose how they vote on issues will mean the pensioner or the ordinary investor will be in a better position to access information on how votes are cast in their name on matters such as executive pay," Labour Business Secretary Chuka Umunna said in a statement.

Both Labour and the ruling coalition government have sought to clamp down on excessively-high corporate salaries, with all three parties targeting the banking sector in particular.

Prime Minister David Cameron in January promised legislation this year to tackle excessive executive pay. Many people in the UK are struggling with wage cuts and unemployment while top company directors still get multi-million pound pay packages.

Barclays holds its annual shareholder meeting on April 27, followed by rivals HSBC, Standard Chartered and part-nationalised lenders Royal Bank of Scotland and Lloyds in May.

Barclays tweaked its bonus scheme last week following resistance from investors to its original proposals, but many investors are still angry that many banks have continued to pay high salaries despite falling share prices and weak results.

Union shareholder activists' letter to Sotheby's investors

excuse the cut & paste!

Dear fellow Sotheby’s shareholder:

At Sotheby’s May 8, 2012 annual meeting, we urge you to VOTE NO on the re-election of Michael I. Sovern, Allen Questrom, and Diana L. Taylor, the incumbent members of the Nominating and Governance Committee up for re-election. The board’s failure to take decisive action and break with James Murdoch in the face of investor demands, a persistent stream of negative news flow from the UK hacking scandal and resulting mounting reputational risk to Sotheby’s are only the symptoms of the underlying problem - a flawed nomination process that fails to identify and recruit credible, outside directors. In fact, little has changed in this regard since the elimination of the dual class voting structure seven years ago, with four of the last six nominees handpicked by the CEO, and the latest appointee, Steven B. Dodge, a former director dating back to the company’s former controlled status. By voting against incumbent members of the Nomination and Governance committee, shareholders can send a strong message: rather than rubber-stamping management’s candidates, the committee needs to perform its responsibilities and obligations and undertake a thorough search for a new crop of independent directors with the assistance of an outside search firm.

The CtW Investment Group works with pension funds sponsored by unions affiliated with Change to Win, which collectively hold $200 billion in assets. Since many of these funds own Sotheby’s through index funds and are unable to sell regardless of board or management concerns, robust governance and director accountability are paramount. Troubled by the concerns being raised over James Murdoch’s judgment, oversight and conduct at News Corp. in the wake of the phone hacking scandal at the News of the World, the CtW Investment Group last fall started calling on the Sotheby’s Nominating and Governance Committee to take decisive action and break with James Murdoch.

The James Murdoch debacle

Despite a clear basis for action in its corporate governance guidelines and the repeated urging from investors, Sotheby’s directors were passive bystanders to a slow motion train wreck, leaving it up to James Murdoch to voluntarily step down on the eve of the proxy statement’s publication. As early as late summer 2011, it should have been obvious that his position on the board was untenable given widespread concern for his ethical conduct, integrity and business judgment – key director attributes outlined in Sotheby’s governance guidelines – in handling the phone hacking scandal at the News of the World. Alleged inconsistencies in his testimony before a British Parliamentary Committee investigating the matter had sent his credibility into free fall. Lord Myners, an authority on UK corporate governance and the former chairman of Marks & Spencer plc, told the British House of Lords in mid-July there were sufficient doubts about his business judgment that he should resign from BSkyB. Sir Christopher Bland, former Chairman of the BBC and BT Group plc, echoed these concerns in The Financial Times, writing that “James Murdoch’s ‘willful blindness’ showed at best a lack of curiosity, and at worst a failure to ask questions, for fear of hearing unacceptable answers.”

Yet the board continued, even after his historic rejection by outside shareholders at News Corp., where 75% of independent shareholders voted against his re-election to the board, to insist on calling James Murdoch a “valued member of the board,” unnecessarily exposing Sotheby’s to months of negative media attention. Despite repeated calls from the CtW Investment Group, widespread media commentary on his increasingly tenuous position at GlaxoSmithKline, Sotheby’s, and his eventual departure from the former and resignation from the latter, our board took no action. It is perhaps instructive to note that James Murdoch was recommended to the board by John Angelo, whose son, Jesse Angelo, is a childhood friend of James Murdoch and editor-in-chief of New Corp.’s “tablet tabloid” The Daily.

There is an unwelcome sense of déjà vu for shareholders in the board’s handling of James Murdoch. Eight years ago, despite the specter of civil fraud charges hanging over him for months, Conrad Black was allowed to step down on his own accord from Sotheby’s board, the last of his outside directorships, at the AGM. In both cases, the board appears to have shown deference and loyalty to these directors, and not to shareholders. Conrad Black later served three years in federal prison for fraud and other charges relating to is media empire, Hollinger International. Unfortunately, this experience highlights that the James Murdoch saga is only a symptom of a broken nominating and evaluation system, rather than an isolated event.

A Broken Nomination System

The quality of independent oversight on a board is, in many respects, only as good as the independence and rigor of the underlying nomination process; this is the Achilles heel of Sotheby’s governance. The identification and recruitment of qualified candidates retains the trappings of the company’s previous controlled status and betrays the influence of insiders in selecting new members. Leaving aside the peculiarities behind James Murdoch’s appointment, the last four new recruits to the board - Daniel Meyer (appointed 2011), Marsha Simms (2011), John Angelo (2007) and Diana Taylor (2007) - were all initially recommended for consideration by the CEO. The result is essentially the same selection process under which longer serving directors were first appointed prior to the elimination of the dual class stock structure and the controlling interest of the Taubman family. Clearly, old habits die hard. The decision to nominate a former director, Steven B. Dodge (2000 – 2007), to fill a current vacancy simply underscores the dysfunction of the current process.

The Risk to Investors

Sotheby’s may occupy a niche of the specialty retail industry, but with close to a billion dollars in revenue and $2.5 billion in market capitalization, just like any other major public company, we believe that it needs to be overseen by critical mass of outside directors recruited in an objective, independent manner. In fact, this is even more critical at Sotheby’s in light of the notorious price fixing scandal a decade ago that resulted in anti-trust convictions for former Chairman Alfred Taubman and former CEO Diana Brooks and hundreds of millions of dollars in fines and settlement costs.

Recommendation: Vote “No” on Directors Michael I. Sovern, Allen Questrom, and Diana L. Taylor

We urge you to join us in opposing the re-election of directors Michael I. Sovern, Allen Questrom, and Diana L. Taylor, the incumbent members of the Nomination and Governance Committee, at Sotheby’s May 8, 2012 annual meeting. In light of the breakdown in the nominating process, we are also asking Sotheby’s to retain the services of a search firm to identify qualified independent candidates to the board.


Richard W. Clayton III
Research Director

Sunday 22 April 2012

Unintended consequences in corporate governance

As I have droned on before, I get a bit sick of hearing about "unintended consequences" when even relatively modest reforms to corporate governance are put forward. This isn't because I don't think policy interventions have unintended consequences, I'm sure most do. But rather because our corner of the world seems only able to consider negative unintended consequences.

As I blogged recently, it's notable that the unintended consequence most governance people think of in relation to a 75% threshold for passing a remuneration vote is a negative one - Stelios dicking around at easyJet. They do not see they equally valid argument that it would empower minority shareholders in companies like BSkyB, Xstrata etc. I think that examples like this suggest a potential positive unintended consequence (unintended because I don't think the policy is designed to address such cases).

More broadly, when you think about it the existence of a corporate governance community (and the employment of people within it) is arguably an unintended consequence. It results from the extension of equity-backed pensions and investment products and the rise of the institutional shareholder as a major player. Before this, certainly in markets like the UK, shareholder engagement of any kind was rare and the idea that shareholders were 'owners' of companies in a meaningful sense was a dormant one.

However with the extension of funded pension schemes (driven in no small part by trade unions negotiating for them) form of investor emerged with potentially significant voting power. The separation of ownership and control which had grown up over many decades before, and was regarded as an inevitable feature of the PLC, could begin to be addressed. Finally there were shareholders with enough clout to make a difference. With the decline in unions the institutional shareholder became the main source countervailing power in the governance of many public companies.

The result is that now many institutional shareholders, mainly but not only asset managers, employ people solely to look at governance issues. It's an unintended consequence, I reckon, of the changing nature of share ownership. So is it a bad thing?

Employee directors and shareholder interests

A quick snippet from the Bullock committee report on industrial democracy.
We do not see why a board comprising employee as well as shareholder representatives should be unable to strike an adequate balance between short and long term interests. A board consisting of shareholder representatives is said to be able to strike the correct balance between the short and the long term interests of equity investors in determining, for example, the size of dividends. If employee directors are unable to strike a similar balance on wage and employment policies, it must be either because they or their constituents are more short-sighted than shareholders and their representatives, or because the the real economic interests of employees lie, relatively speaking, in the short term and those of the shareholders in the long term. Neither proposition is self-evident, let alone proved. To put it no higher, there does not seem any reason to believe that employee representatives will not have as clear a perception of where their constituents' best interests lie, or that the stake held by employees in the long term health of the company is less that that of the shareholders.
Obviously in the UK we haven't really revisited such radical (by UK standards) ideas about corporate governance since the 70s. There is a slight resurgence of interest on the Left now, and we've obviously had the issue of employees on rem comms under discussion. The striking thing is how commonplace employee representation is in other European countries, whereas in the UK it is portrayed as almost communist (seriously, one rem consultant compared employees on rem comms to Cuba).

Thursday 19 April 2012

Adventures in voting data - notice for meetings news

Governance geeks out there may have noticed my mini obsession with the rising average vote against resolutions seeking authority to hold meetings on short notice. The average vote against is higher than that on director elections or auditor appointments which I think is, frankly, barking.

It is also obviously being driven by overseas investors, as my own trawling of asset manager websites suggests that UK institutions vote for this type of resolution. However, I have (finally) been able to find an institution that does vote against them - Morgan Stanley.

More tedious voting data related titbits to come....!

Tuesday 17 April 2012

It's not all about the money

Someone else in the corporate governance world arguing that over-reliance on financial incentives for directors is a problem.

Sunday 15 April 2012

Change to Win still targeting Sotheby's


Nominating Committee’s Repeated Failure to Recruit Independent Directors & Mismanagement of Murdoch Scandal Taint Credibility

WASHINGTON, D.C. - In a letter to Sotheby’s (NYSE:BID) shareholders, the CtW Investment Group called on them to oppose the re-election of the incumbent members of the Nominating and Governance Committee. Chairman Michael I. Sovern, Allen Questrom, and Diana L. Taylor, should be opposed for their failure to recruit independent, credible directors and for the mismanagement of the James Murdoch scandal.

The Group’s letter points out that four of the last six director nominees have been handpicked by the CEO, including Diana Taylor who currently sits on the nominating committee, while the latest appointee, Steven B. Dodge, is a former director dating back to the firm’s days as a controlled company.

“The Sotheby’s board’s failure to take decisive action shows how little has changed since the elimination of the dual class voting structure and controlling insider interest seven years ago,” stated Richard Clayton, CtW Research Director. “This is particularly alarming given Sotheby’s track record with previously sullied board members.”

Additionally, the Group called on shareholders to take action against the directors for their gross mismanagement of the James Murdoch scandal.

“Sotheby’s directors were passive bystanders to a slow motion train wreck,” continued Clayton. “They sat by and let former director James Murdoch voluntarily step down on the eve of the proxy statement’s publication despite a mass outcry for his removal from investors and widespread media commentary on his increasingly tenuous position. Shareholders are tired of seeing the company’s name in the press for the wrong reasons.”

To see the full letter to Sotheby’s shareholders click on: s_Vote_No_Letter_April_12_FINAL.pdf

Recently, James Murdoch stepped down from the boards of GlaxoSmithKlein plc (LON: GSK) and Sotheby’s and resigned as Executive Chairman of News International and as Chairman of BSkyB (PINK: BSYBY), where more than 40 percent of the company’s independent shareholders failed to back his re-election. In the fallout from the hacking scandal at the News of the World, Murdoch also received a resounding vote of no confidence from shareholders at News Corporation (NASDAQ: NWSA) last October, with over 70 percent of independent shareholders voting against his re-election to the board.

The CtW Investment Group works with pension funds sponsored by unions affiliated with Change to Win, which collectively hold over $200 billion in assets. The Group first raised concerns with Sotheby’s nominating process last fall with calls on the Nominating and Governance Committee to take decisive action regarding James Murdoch.

Why we have a problem

Read this statement, from one of the NEDs at Barclays:

“Many, many people were at fault in terms of what caused this crisis – partly politicians, partly regulators who loosened capital requirements – and there are many reforms still to be done,” he said. “But it is time to stop talking about revenge and to reflect calmly on how to move ahead.”

I wouldn't disagree that politicians were partly to blame, or regulators. But what about, you know, the banks? Do not under-estimate how prevalent this idea is - that if it wasn't for those meddling politicians and bureaucrats none of this would have happened. It's a way of maintaining the belief that markets will inevitably right themselves, and it's only the actions of meddlers that pushed them so far from equilibrium. (Read Hyman Minsky for some solid thinking about why the financial sector inevitably tends to instability, regardless of the actions of politicians, regulators etc).

Unfortunately this idea infects thinking about the crisis. It's a version of the law of unintended consequences that is never knowingly undersold in the policy bit of the investment world. Whilst people continue to use this sort of cop out to avoid facing up to the fact that banks are quite able to get themselves in serious trouble we will continue to make little progress.

Monday 9 April 2012

Challenging incumbent directors

A pessimistic view on this:
"[Shareholders], instead of constantly exercising their franchise, all it to become on all ordinary occasions a dead letter; retiring directors are so habitually re-elected without opposition, and have so great a power of insuring their own re-election without opposition, and have so great a power of insuring their own re-election when opposed, that the board becomes practically a close body; and it is only when the misgovernment grows extreme enough to produce revolutionary agitation among the shareholders that any change can be effected.
As the language may suggest, that's quite an old quote - from an article on the mid-19th century railways, published in 1854. (from this, which looks marvelous). Out of date now, of course, given the huge strides forward in governance, as evidenced by the regular removal of board directors by shareholders...

Saturday 7 April 2012

A bad argument against a 75% threshold

One of the elements proposed in the BIS package of reforms relating to shareholder powers over executive pay is raising the threshold needed to pass a pay vote. Though (if I remember right) the consultation does not actually specify what it ought to be, 75% has been knocked about.

One argument that has been put forward against this proposal is that it would effectively allow controlling shareholders to hold companies to ransom, and the example of Stelios at easyJet has been used as an illustration. It does sound convincing, and certainly Stelios has been a pain for the easyJet board. But....

If you think about it, a 75% (0r whatever higher threshold) actually empowers minority shareholders in their ability to reject inappropriate pay policies where there is a controlling shareholder. After all, isn't it more likely (knowing what we do about the typical relationships in place) that a controlling shareholder would be in favour of whatever pay policy was proposed? Think of companies like Xstrata or BSkyB where minority shareholders have had concerns about the pay policy but, because the company only needs 50% to get it through, they can effectively assume they will never get defeated.

In the case of Xstrata I think that for at least the last couple of years a majority on minority shareholders have opposed the remuneration report, but have been unable to defeat it. With a 75% threshold in place they would have been able to do so.

In practical terms a 75% threshold for the backward-looking advisory vote might not matter - the company might be able to ignore a defeat if it could demonstrate to independent shareholders that it was the controlling shareholder messing about. (Essentially easyJet did ignore its defeat in 2011 I think?) A defeat of the forward-looking binding vote would prevent the company from making changes, but in that case existing arrangements would be kept in place (I admit this might be difficult in some cases).

But it is striking, when you think about it, that some folks immediately cotton on to one example that demonstrates a potential problem with a 75% threshold, rather than equally valid cases where it would be empowering. Almost like there was some kind of inability in my corner of the world to see anything other than (negative) unintended consequences from any reform.

PS - if this controlling shareholder misusing a 75% threshold is a real problem, there must be numerous cases of authorities relating to share structure getting blocked, right? That's a much more fundamental way to frustrate a company, and plenty of special resolutions to get stuck into.

Thursday 5 April 2012

A few more behavioural snippets

I'm going to delve a bit more deeply into the theory of performance-related pay in my reading over the next couple of months, in order to a) be able present a fair description of what proponents believe (and what most corporate governance folks also implicitly accept) and b) develop a theoretically stronger critique of it. (If anyone is interested, two books I just managed to get cheap second-hand are this and this).

As such I'll be posting up chunks of text as and when I find useful nuggets. I'm still plugging away with Aubrey Daniels' Performance Management, which is all about using positive reinforcement in the workplace. So below are a few interesting (to me) fragments. Bear in mind this is coming from a behaviourist perspective.
If their wage (or salary) is the only incentive, then we should expect the very minimum level of performance, just high enough to avoid being fired. Performing below that level has a very clear consequence: they get fired. Performing above that level has no consequence at all, so there's no incentive for increased effort.
Remember that things that were reinforcing at one time or place may not be reinforcing at another time or place. This means that managers must constantly monitor performance to ensure consequences are still effective. [Does any rem comm do anything like this? As in test the behavioural effects of incentive pay?]
And pointing to other reinforcers -
Money is necessary, but not sufficient, to produce outstanding performance, especially over a long period of time. The best job you will ever have is one that you leave every day, feeling that you made not only a financial profit but a psychological one as well.
Finally, it's worth noting that there are warnings about using positive reinforcement in a manipulative or controlling way, and the negative feelings that may arise as a result. But, as I've argued before, the way agency theory theorises pay is explicitly about controlling directors - aligning their interests with those of shareholders, or 'bonding' them.

Wednesday 4 April 2012

Gotcha! Our lads sink flagship chairmanship

Well, it took the best part of nine months, but finally James Murdoch as relinquished the chairmanship of BSkyB. This is, needless to say, welcome but now probably not enough. There is little sense in him remaining as a non-executive of BSkyB where he will continue to be a reminder of all things hacking-related.

The speculation is that that, by dropping the chairmanship, Ofcom might not be as interested in his role. But why stay on the board at all if the News Corp/News Intl influence is seen as problematic? Critics (ahem) may argue that he and other News Corp reps will continue to act as backseat drivers. This is especially the case when you consider that Nick Ferguson has been resolute in his defence of James Murdoch. (In fact, I can't believe Ferguson is a long-term option as chair. He has a generally good reputation, but this debacle hasn't done him any favours. So start thinking about the next chair.)

Staying on as a NED also means a few more hurdles to clear. First up, the DCMS committee's report into phone-hacking. There is a political fight going on here, with the Tories wanting to keep the language about Murdoch less critical. But if, as seems likely, it concludes he didn't lie to parliament it will no doubt censure him for failing to spot the problem (or read the email). Could a non-Murdoch NED survive criticism by parliament? Why should shareholders tolerate a renewed round ogf negative headlines? And there's Leveson of course.

Also bear in mind that it isn't just the evidence of phone-hacking that he failed to spot. He also missed the cover-up, where the criminal charges are potentially pretty serious. Given that he was in the habit of barging into the offices of other papers with a certain flame-haired NI executive, he can hardly say he wasn't close to the action.

So, all in all, a big step forward but not enough. If he tries to make it through another AGM he deserves to get a major vote against his re-election. More broadly investors ought to be thinking about a wider board shake-up, with more distance from News Corp.

Monday 2 April 2012

Two bits worth reading, and a nice quote

1. An ace-a-tronic article by ex-Observer man Simon Caulkin on executive pay. This is great, as it delves a bit into the theory behind pay as currently structured, including the motivational aspects of it. A nice chunk towards the end:
"If after 30 years of tinkering the system still can't be made to work, there's something wrong with the initial premise. It's time to accept that both its central elements are fundamentally flawed. Researchers have been saying for years that pay for performance is a snare and a delusion, because the reasons for high performance can neither be isolated nor realistically linked to actions the CEO should be taking. In the FT, Lambert argued forcefully that the whole project is counterproductive, distorting executive behaviour, undermining intrinsic motivation and inciting risk. 'Is it right to think that senior managers are only driven by money and if they don't get what they want they'll go somewhere else?' he queries. 'I don't think so. And if they are, is that who boards really want to run the company?"Link
2. Some nice research (PDF) by the High Pay Centre on the make-up of rem comms. We're getting into really interesting territory now with folks like the HPC starting to look in detail at exactly who sits on rem comms. The next obvious step is to consider how this might affect their decision-making, which the HPC flags up:
when the majority of individuals on remuneration committees come from similar backgrounds it is not surprising that critics of remuneration committees have suggested that they fall victim to “groupthink” where individuals are reluctant to challenge the consensus view. It has been demonstrated by Cass Sunstein that group polarisation can occur, and more extreme decisions are reached, when groups are made up of like minded individuals. This may in part explain why we have seen such a gap between public perception of what is an acceptable level of pay and the current norm in executive pay awards.
Great stuff.

3. I like this quote (from here) from a guy at Cavendish Asset Management which illustrates the value of investors going public in their disagreements with companies (a subject which is close to my heart currently):

"The media was key. We didn't have a big enough stake in the company to vote down the move, but the deal looked so poor we had exert a much bigger influence by talking to the press. That influenced other shareholders and meant the deal didn't go ahead."