Friday 25 May 2012

Labour and corporate governance

As I've discussed with many people out there in the Real World, there seems to be a resurgence of interest within the UK labour movement in issues relating to the goverance and ownership of companies. In a sense this shouldn't be a surprise, given the events of the past few years. But what is interesting, and makes me hopeful, is that Labour is starting to talk about these issues.

Ed's piece on responsible capitalism here is still short on details. In addition whilst it's nice that there is section on equity markets, it really doesn't say anything that Vince Cable hasn't already (and much of what Cable has said has been good). But I put this down to the need to plant your flag on territory, but leaving the policy ideas to others (especially given that they might blowup). The bigger deal, in my opinion, is that corporate governance reform is back on Labour's agenda as a policy area. 

This is important. Much of the world that the UK governace community works in results from a big push in the 1990s. It's (almost) 20 years since the Cadbury committee, and in that period a fairly consistent framework has been applied. Despite Labour's brief flirtation with a 'stakeholder' model, essentially we settled on 'enlightened shareholder value'. When we were in power we improved company disclosure, gave shareholders more powers, pushed for more independent boards etc. This essentially reinforced a model of governance, and of the company, that drew a lot from economic theory and business text books, and turned away from Labour's historic position.

One of the reasons I enjoy going back and reading old books and reports is that they remind you how radically differentviews about corporate governance were. As I've blogged previously, Tony Crosland didn't think it was worth bothering with workers on the board, with the resulting diminution of the role of shareholders, because a) the unions were strong enough to have a say within companies and b) because shareholders didn't really play the role theory expected/desired of them. That was were moderate Labour thinking was on corporate governance back then.

In contrast, in power from 1997 we assumed that shareholders would indeed play the role of owners, because it was in their financial self-interest (enlightened or otherwise) to do so. Often the old argument was invoked that actually the "long term" interests of shareholders were not so very different to those of employees and other stakeholders. As such, the focus on disclosure and shareholder empowerment could actually further progressive causes. (I advocated this myself, though I now consider it pretty inaccurate.)

Post-crisis we can see that the prescriptions of 1990s vintage corporate governance didn't help a whole lot. Disclosure, more independent boards, greater shareholder powers etc didn't stop the banks from destroying themselves, no did it stop the upwards march of executive pay. Indeed, I obviously argue that the enormous emphasis on peformance-related pay has at best been counter-productive.

Since losing power in 2010, Labour has avoided saying much on corporate governance, so essentially one might conclude that our policy positions are where they were pre-election. In fact on issues like executive pay this would have seemed to be a fair conclusion, until recently. In supporting calls for more or better disclosure and greater shareholder powers we are again reinforcing the 1990s model. But... the decision to come out in favour of employees on remuneration committees opened the door a little. I suspect a number of people support this policy not because they expect that it will make a big difference in executive pay (though it might help) but because it legitimises the role of employees in corporate governance.

It's a shame that the Blue Labour debate got hung up on issues like immigration, because there is a lot of interesting stuff in it about business, and corporate governance. Essentially there's strong support for co-determination and approaches like it. This appears (to me) tied to the idea of re-establishing the value of labour. Why should an engineering business have to pay more attention to its shareholders than to skilled, long-standing staff that it employs? Why shouldn't labour and capital (!) both be represented in governance? This type of thinking seems to be starting to re-emerge within Labour.

There are risks here. We could look like we're going back to a different 1990s model - Rhineland capitalism. In just the time I've been interested in governance I've seen Germany be praised for its partnership approach, then be criticised for being insufficiently 'flexible' ('sclerotic' being the decriptor of choice for thumbnail sketches of Germany's approach to employment issues in the mid 2000s), and now undergoe a reappraisal. And no doubt some nutters on the Right will characterise any idea of employee represention in governance as "Soviet" or suchlike. But it would be a real shame if Labour doesn't at least explore governance issues more deeply, and instead restrict itself to small specific policies like remuneration committee reform.

And one thing I definitely think we should is start talking about reform of performance pay as a governance issue. The PwC report I blogged about recently is evidence of a shift in opinion. This has been bubbling away for two or three years now but I think could boil over. Reform of executive pay can be used to tackle the scale of reward and its relation to that for other employees, and it can be carried out under the banner of simplification. Given the PwC paper, I do wonder who would actually have a problem with Labour pushing for a scaling back of performance pay in the name of simplification. Finally, this could also be described in a sympathetic way, by acknowledging that business leaders don't only do it for the money, and are more trustworthy than the implication that they need carrots dangled in front of them to do their jobs well. I reckon we should just go for it.

Monday 21 May 2012

PwC challenges performance-related pay

Last year PwC put out a report raising some questions about the motivational aspects of executive pay. Today they have published a bigger, global survey of executive views, preview commentary here. Although it doesn't delve into motivational theory, it clearly continues an apparent turn away from reliance on performance-related pay.

Get a load of this:
Reward design tends to assume that people make rational decisions, but is that really the case? The issue of performance pay has polarised academics for some time, but questions are increasingly being asked about its effectiveness. In those markets that have used them longest it’s also becoming increasingly clear that there is something seriously wrong with LTIs. Companies invest an enormous amount into these plans, but the response from executives can rarely be said to justify the cost.

The recent financial crisis and the perception that bonuses played a role in causing it has led to a renewed focus on performance pay. But even now, the ‘solutions’ put forward are still based on the assumption that performance-related pay works, and that the answer is to structure it differently, to have more sophisticated payout formulae and to defer pay over longer periods.
And this:
[P]aying in incentives rather than salary is an investment. And like any investment companies need to be clear about the payback. Is the payback better performance? If so, what’s the evidence you’re getting it? Is it about cost flexibility? If so, how much do you need? Is it just that you’ve got to offer it because everyone else does? If so, have you tested that assumption?

In too many cases performance pay is deployed with blind faith rather than cold analysis. 
And this:
We need to consign to the scrap heap the agency model approach to executive pay, based on ‘rational economic man’, which has been so unhelpfully influential in current Western pay systems.
I could have written some of this myself!  

Friday 18 May 2012

WSJ vs union shareholder activists, round 2

Odd, the WSJ has run another piece attacking union shareholder activists.
Politicized shareholder resolutions are the must-have tactic this year in the union campaign to scare businesses out of exercising their free speech rights. So far, they're a bellyflop.

Unions and campaign-finance scolds threw everything they had at WellPoint in recent weeks in retribution for the health insurer's political donations, but at the company's annual meeting Wednesday shareholders easily rejected two proposals intended to shut the company up.

The first, brought by union front Change to Win, asked shareholders to vote against board members Julie Hill and Susan Bayh (wife of former Indiana Senator Evan Bayh) because of the board's refusal to disclose political spending. 


The disclosure gambit is key to the left's strategy of intimidating businesses from spending on politics to compete with unions and liberal billionaires like Peter Lewis of Progressive insurance. The political bludgeoning will continue, but at least this year the effort to vilify corporations that have exercised their First Amendment rights isn't getting the kind of traction the activists had in mind.

In other, completely unrelated, news
Some shareholders are intensifying their calls for a shake-up at the top of News Corp on the back of the British parliamentary report. Change to Win, an advisory group that works with pension funds with over $200bn in assets, called for Murdoch to resign. Senior policy analyst Michael Pryce-Jones said News Corp's board should meet to form a succession plan immediately. "This is a company in crisis," he said.

Wednesday 16 May 2012

Corporate lobbying

Not many people this side of the Atlantic seem to have picked up on a rather interesting little spat over corporate funding of lobby groups. At US health insurer WellPoint there's a shareholder resolution which calls on the board to

report, updated semi-annually, on all company political donations, including a) An accounting through an itemized report that includes the identity of the recipient as well as the amount paid to each recipient of the Company’s funds that are used for political contributions or expenditures; and b) the title of the person or persons in the Company who participated in making the decisions to make the political contribution or expenditure.

So far, so uncontroversial. There's been a big push lately in the US by some shareholders for greater disclosure of corporate funding for lobby groups. There was even a push at News Corp. Interesting stuff that many in corporate governance would regard as relatively uncontroversial, if somewhat new territory.

So what's with the Wall Street Journal's extremely aggressive editorial on the subject (here) which broadens out into a full-on attack on unions and others from seeking disclosure of what companies doing? The language is pretty full-on, accusing "the left, unions and activists" of seeking to "intimidate companies from exercising their free-speech rights". It claims this is of a camapaign to demonise the multi-billion corporate lobbying industy. Why all the fuss over this? Why now? It's baffling.

In other, entirely unrelated news, Change to Win Investment Group - which is attacked in the WSJ editorial - continues to be one of the most vocal shareholder critics of the governance of News Corp, and has raised public concerns about the impact of the hacking scandal.

Tuesday 15 May 2012

Director motivation

A quick snippet from R.A. Gordon's Business Leadership in the Large Corporation (1945!) as quoted in The Economic Theory of Managerial Capitalism by Robin Marris.
The most important spurs to action by the businessman, other than the desire for goods for direct want-satisfaction, are probably the following: the urge for power, the desire for prestige and the related impulse of emulation, the creative urge, the propensity to identify oneself with a group and the related feeling of group loyalty, the desire for security, the urge for adventure and for "playing the game" for its own sake, and the desire to serve others... These motives can satisfied more or less through monetary rewards. They can also be satisfied in good part by other attractions which the large corporation offers its business leaders. 
Interesting that back then it was taken for granted that businessmen had a range of motivations (doesn't make them good, obviously) and that money was only a proxy for many of them. Now corporate governance has an excessive emphasis on the structure of pay, built on the assumption this is what directors really want. to the exclusion of other forms of motivation. Have we lost something?

Bias and arrogance in the hacking scandal

One of the most interesting things, to me anyway, about the hacking scandal is the way that various players seek to impose a certain understanding upon events, and the way that this affects commentary on the subject. At various points in this scandal key events or issues have  been cast in a certain light, and the interpretation of them has shifted.

First, let's think about the way the big allegations first surfaced, and the reaction of various parties to them.  When The Guardian went big on the Gordon Taylor case in July 2009, News  International gave them both barrels, accusing them of misleading the British public no less, and claimed all the substantive allegations were  wrong. Many people took this at face value and thought The Guardian was  attacking commercial/political rivals. Similarly when the select committee produced its first report News International accused it of bias, partisan politics etc and this was backed by at least one of the DCMS committee members. Again, some were happy to accept this.   

By  and large I think political affiliation could determine the view of many people at this stage, with notable exceptions on the more Murdoch-friendly Left. When there were renewed allegations, for example in the New York Times, lefties tended to view them as significant, righties as "old news" recycled by those desperate to attack Murdoch and/or the Tories (via the PM's director of comms). 

When  the hacking scandal blew open properly last summer there was a brief moment when it wasn't clear just how bad the scandal would get and how far up it would reach. The news of the hacking of Milly Dowler's phone briefly united all parties/viewpoints in condemnation. Everyone agreed the BSkyB deal should be scrapped, and that Rebekah Brooks should get the boot. A consensus at last.  

But since then, once again views have tended to diverge. For example, on the key question of what actually happened to Milly Dowler's phone it is clear that defenders of The Guardian believe that Nick Davies' error - claiming that voicemail messages were deleted, rather than stating that this is what was believed - was trivial. For those (mainly) in the News International camp or on the Right politically it was very significant, and arguably the main reason the News of the World closed. Notably recent testimony to the Leveson Inquiry effectively leaves the facts of this issue for ever open to question.  

There was also the difficult question of whether only News International was at it. Most people think not, though evidence of a  similar scale of hacking by other papers has not, and may never, appear  (perhaps because it has been destroyed). For those concentrating on News International this was justified because employees and executive there were clearly guilty, and had already patently lied about their involvement. For opponents this was evidence of political bias against Tory-supporting newspapers. This even spilled into the select committee when one member sought to draw attention to allegations about the former  editor of The Mirror.  

At each of these points you could sense that various interpretations were being put onto events and issues to cast them in a certain light. One of the best examples is the role of James Murdoch, where there remain conflicting versions of events. Murdoch himself wrote a lengthy letter to the select committee to assist its members in joining the dots in a way that was least damaging to him. The committee split on this issue as you might expect it to.

 It happened again when arrests started happening as part of Operation Elveden concerning payments to public officials. From certain parties a couple of important arguments were put forward. First,  this was stamping out the ability of journalists to get whistleblowers to talk. Second, it was a waste of police resources, given there were more serious crimes that warranted more attention. Critics, and the police, hit back arguing that the info being sought was largely gossip, and that this it had the effect of corrupting police officers and others. And we've seen these arguments recycled today as Rebekah Brooks has sought both to cast doubt on the use of police resources to charge her and others with conspiracy to pervert the course of justice, and to suggest that the issues at stake were relatively trivial.   

Clearly much of the corporate PR effort has been deployed to encourage a certain view of events to hold, and therefore to leave News Corp in a less bad light.  Equally on the other side, people like Tom Watson have sought to keep the criminality, and the extent of it, at the forefront of people's minds. Even at this relatively late stage there is still a tussle over the overall narrative of this scandal. Some people clearly don't want to believe it's really that bad. (I'm biased too, but in t'other direction  - I think this will rank as a major corporate scandal when we look back  on it and I view most of the facts through that prism).

The one thing that we've seen very little of, however, is contrition on the part of those at the centre of events. Look at the stance take in the past few days by Les Hinton and Rebekah Brooks. Quite  a few people at the centre of this scandal have expressed regret about what happened (and that knowledge couldn't have been gotten to their understanding more quickly...), but not really about their own role. Mistakes were made... but not by me. Perhaps I'm wrong, but I don't recall any of the key players saying anything like "I fell down badly on  the job, I bear responsibility, I apologies for my own failings and those of my subordinates". Instead, lots of people can't remember what they knew, but certainly weren't told what they should have been. Even now I find that quite shocking.

This is not just about News Corp, it's a general problem at a senior level in business these days. Public/customer/stakeholder/shareholder anger is typically characterised as arising from a breakdown in communication - we should have explained ourselves better - rather than a  failure of policy or decision-making. Companies, directors and their lobbyists would rather argue back, tough it out, than acknowledge mistakes. The statements made by Rebekah and Charlie Brooks today will amaze some people, but they are symptomatic of a wider problem. I can't help but think that this type of attitude, not at all uncommon at the top of the private sector, is going to cause problems in the future.

Sunday 13 May 2012

The language of shareholder rebellions

One thing I think we can probably all agree on is that "the shareholder spring" is a rather inappropriate label for the events of the last few weeks. Whilst many people are pleased that institutional shareholders seem finally to have decided to exert some pressure on investee companies, it's not really comparable with events in Egypt, Libya, Syria etc. In fact, even the basics aren't the same - investors are exerting rights they have long had, rather than risking anything to obtain new ones. (Indeed some shareholders are resisting govt plans to give them more rights!)

It's also interesting to note the way that reports in the media (and in the industry, I'm as guilty as the next person) struggle to describe the events themselves, which is understandable. First, are these really "revolts" or "rebellions"? Think about it - a vote on a remuneration report, for example, is really a mini referendum. If it is voted down surely that's just a "defeat" rather than a rebellion? We don't talk about an anti-AV rebellion last year do we?

Similarly it's interesting that media coverage isn't settled on whether rebellions are 'suffered' or 'inflicted'. This matters because the choice of language determines who is at the centre of the action - the company or the shareholders. More generally, I think the language of rebellions is used because the business pages are not generally used to institutional shareholders challenging management (by voting against) or talking about it. So although the actions concerned are limited and isolated, they do represent a challenge to the executives running our PLCs. So in a broader sense maybe the language is not as inappropriate as might first appear.

Personally I think it would be better if we could shift the language employed in this debate so that votes against management and public comment were seen as healthy dissent rather than insurgency. After all, the private sector is only likely to play a bigger role in our society in future. PLCs will become even more economically and politically important. I think that in turn means that they should expect to be required to exhibit more accountability. Therefore we shouldn't portray those seeking to hold them accountable as rebels, they are just exerting their rights.

Again, it comes down to the fact that different conceptions of what the shareholder-company relationship is about. To some it's largely transactional, to others it's political (and therefore power matters). Confusingly the different parties use similar language to mean different things. But if we think there is any value in the idea of shareholders acting as a countervailing power within companies it doesn't help if trying to push back is characterised as an extreme outcome.

Saturday 5 May 2012

An executive legitimacy crisis

"Legitimacy or illegitimacy characterise the relationship of government to the governed - or, more broadly, the nature of authority. The relationship is legitimate when people in general accept the institutions and procedures of authority and the decisions which emerge, even when they don't like them. When that general acceptance becomes eroded, when there is no general acceptance that decisions have been properly arrived at, the relationship becomes illegitimate."
Robert Cox, as quoted in Understanding Newspapers (a book I happen to be reading currently) 
I thought I'd try and write something about what seems to be going on this AGM season. First there is pay - defeat at Aviva, along with big votes against at companies like Inmarsat and Barclays, and plenty so far clocking up 20% plus against (plus also Cairn Energy pulling a share award earlier). There are also what look to be shareholder-pressured board changes at Astrazeneca, Trinity Mirror and BSkyB. And we may yet see more.

It's early days, and I'm wary of falling into the trap of taking a handful of cases as representative. It will be useful to see some actual data on, say, average votes against resolutions at AGMs for the 6 months to the end of Q2. But it does seem like something has shifted, and it could be quite significant. Shareholders, which in practice means asset managers, seem more willing to push companies hard where they disagree than they have been before. (As an aside I think I can spot a couple of asset managers whose voting stance has shifted, but will have to wait until we have some more data on that one.)

A few things are driving this. In part a pushback on pay in particular has been in the post since the crisis hit. One thing even mainstream portfolio managers hate is paying out when the performance isn't there. This is not what people usually mean by 'rewards for failure', which is typically applied to cases of directors being paid off to leave when they've messed up. But, not unhelpfully, paying out bonuses when the performance has been poor is now starting to attract the same label, which must irritate the business lobby no end given the way they have tried to frame the exec pay issue.

Secondly, institutional shareholders are, of course, under a lot of pressure to improve their own performance. They have been accused of acting like absentee landlords and initiatives like the Stewardship Code are an attempt to encourage a more active approach. Despite the change in Government, the public policy background is the same - hence Vince Cable's support for the wave of sparky AGMs, and his attempt to give shareholders more powers. More broadly there is a sense that the public aren't too happy about people like Bob Diamond continuing to trouser a lot of money even when they say their company hasn't done well.

As a result, the background to the current season has never been more supportive for a more combative approach from institutional shareholders. When both the editor of City AM and people on the Left are welcoming what is going on something is happening. From the Left perspective it obvious these corporate fat cats are getting paid too much money and it's good that anyone is trying to do something to tackle it. From the Right the argument is somewhat different,  basically since they believe that shareholders are the only legitimate voice in executive pay apart from management, if shareholders are kicking off than that must mean something is wrong. I don't think, so far, I have seen any business comment pieces say anything other than this wave of protests is A Good Thing.

The knock-on effects could be interesting. First, to go back to the quote at the start, this is eroding the legitimacy of board authority in some cases. If you are telling shareholders that really you have no option but to pay bonuses despite poor performance (the Marcus Agius line) and they are still voting against you in large numbers then you are losing your authority. Shareholders have given companies the benefit of the doubt when it comes to executive pay for a very long time. The pendulum appears to now be swinging sharply in the other direction. In addition, to return to the City AM type perspective, if you've been arguing for years that exec pay is a matter for boards and shareholders only, once shareholders start opposing that legitimises others' complaints about top pay.

Secondly, I think having crossed a certain point this will make it easier for shareholders to go further. As I've argued repeatedly over the years, too many asset managers undervalue the votes that they have, and rarely use them to challenge boards even when they have concerns. This year's AGM season is different because, finally, some asset managers seem more willing to use the power they have always had and vote against. Look what an impact it seems to be having (we've already seen companies worried because of the Aviva vote). And once you've voted down one company, it becomes that much easier to do it again. Perhaps herd instinct can work in our favour on this one.

Thirdly, this will probably also lead to more scrutiny of shareholders. I have lost count of the number of media calls recently asking me what's driving the apparent spike in opposition. I think we're going to see much more interest in how shareholders approach these issues and who actually walks the talk. With big well-known companies like Aviva and Barclays in the firing line I think there's a public interest in how 'ownership' is exercised. More generally, the irresistible trend towards transparency as an aid to accountability will come into play. I don't think the stock line that "we achieve more behind closed doors" is going to be good enough in future. There will be more of an expectation that investors should speak out publicly. Again this is not before time.

But my overall impression is that the biggest effect is the erosion of the authority of the boards of those companies affected, and of the business lobby as it continues to seek to hold back the tide. I have no doubt that this may be limited in impact and duration, but it's worth keeping an eye on.

Tuesday 1 May 2012

A few thoughts on the hacking report

So, it's finally out, and pretty bad for News Corp all things considered. As expected, Crone and Myler take a lot of the flak but, aside from the headline stuff about Murdoch Senior, the accusation that Les Hinton misled Parliament is significant. Hinton was one of Rupert's key men, and a friend of decades. If the committee - the whole committee - believes that Hinton knew, this surely raises the probability that Rupert knew too.

The report talks tough on a lot of issues, portraying some of the pay-offs to key people as attempts to buy silence, and the language of a "cover-up" is sprinkled throughout. This is important. Because whilst there is a minor row about political divisions (more below) the large body of the analysis is shared by all parties - there was a cover-up, Parliament was misled by senior News International staff, James Murdoch's innocence is unproven, News International and News Corp governance was "not effective" (understatement!). These things matter because as we know from experience News Corp will seek to magnify any shred of doubt to obscure the much bigger story - a large-scale corporate scandal and cover-up staged over many years.

On the politics of the report I clearly am likely to be biased, but I do think the report as published is right. Two of three parties represented on the committee, and two thirds of its members agreed with the line about Rupert Murdoch not being fit to run a major international company. And the partisan charge can equally be directed at the Tories who decided not to endorse the tough language on Murdoch. There is a valid claim that the committee's remit was not to look at 'fit and proper' type issues. But there was also the danger that this was an important opportunity to hold to account the senior executives of a company that lost its way.

Bear in mind that News Corp got very, very close to taking control of BSkyB (perhaps with the connivance of the culture secretary). Remember that the company put its political enemies under surveillance, and used its public platform to attack them ruthlessly (go back and read that News of the Screws editorial on the first hacking report - blatant lies). Despite widespread illegal activity, lying to Parliament, tailing 'problem' MPs and lawyers, they very nearly got away with it. If the committee had not sought to tie all this to the senior execs at the company the likelihood they would have escaped. Now there is at least a chance they will face further action. That is surely only right given what has happened. 

Shareholders now have reason to go back to both News Corp and BSkyB and seek further reform. I do not underestimate the likelihood that some asset managers will claim the report is 'partisan' or 'political' because they are uncomfortable making value judgments about directors. But seriously, if you don't think that this report should make you question the suitability of Rupert and James Murdoch as directors, who do you think isn't suitable?