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 (www.workerscapital.org/proxyreview), 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 (www.workerscapital.org/proxyreview) 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....