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.