Wednesday 27 February 2013

Bankers & the top rate tax cut

George Osborne's decision to cut the top rate of tax is the gift that keeps on giving - to Labour, in political terms, and to the very, very rich, in financial terms. Understandably then Labour is ramping up its campaigning around the cut ahead of its implementation in a month.

But there is scope to focus in on one particular group of £1m+ a year earners that will benefit - bankers. Because there is also that slow-burn policy issue of disclosure of below-board pay for top-end earners within banks. Sir David Walker - who has changed his mind on what extent of disclosure is sensible at least three times - has just announced that he wants Barclays (which he now chairs, of course) to disclose details of pay across the bank.

Be very wary of expectations management, but the Grauniad piece on this initiative speculates that this could see Barclays reveal that as many as 600 staff earn £1m+. Also in that article it is revealed that in 2011 HSBC had almost 200 staff on £1m+, whilst RBS had over 100. So we could be looking at around 1,000 people working for banks earning over a million a year. Labour estimates that there are 13,000 in total earning that much, so at a push we could be looking at 1 in 10 of them being bankers.

Obviously this needs to be treated with caution (some of those bank staff may not be paying tax in the UK?) but I reckon it is at least worthy of exploration. We could be looking at a secondary story of "Osborne gives £100m back to bankers" (£100K tax cut X 1,000 recipients).

Final thought - going back to Walker's twisting position on bank pay disclosure, he famously penned an article giving the Govt cover to back away from extensive disclosure (and just disclose the earnings of a handful of below-board high earners). If banks stuck to that it would, of course, be difficult to assess the number of bankers on £1m+. Is it too cynical to think that Osborne (who must have been planning the tax cut some way out) and his minions were aware of this, and thus this was part of the calculation in not wanting more extensive disclosure?

Kay, Myners & Standard Life

From Lord Myners' evidence to the BIS committee on the Kay Review (and specifically the investor forum idea): 
Lord Myners: I will be very interested, Chair, to read the transcript from when you interview people who are supposedly establishing this investor forum, and to see how successful they are in convincing you that they are going to set up something that is really meaningful. My suspicion is that you will have significant doubt. I would then suggest to you that, if they cannot do it alone in this country, it is going to be almost impossible to do it globally. 

From Responsible Investor today:   
Standard Life Investments has said it is “debatable” whether the proposed investor forum – one of the key ideas of the recent UK government-backed Kay Review – will achieve results.
Now Standard Life, one of the leading fund managers in the UK with £163.4bn (euro) under management, has poured further cold water on Kay’s idea, saying: “While there will always be room for improvement, it is debatable whether this particular proposal will achieve the desired results.”
And they are far from the only asset manager saying this

Tuesday 26 February 2013

First they came for the bankers' bonuses...

As I've blogged before, there's something interesting going on around the UK's fight against a max 1:1 ratio for fixed to variable pay for bankers. Norman Lamont's staggeringly bad piece in the Telegraph today reaffirms my belief that something reasonably significant in this argument.

The interesting thing about most of the UK commentary on this topic is how bellicose it is. Lamont's piece has a few touches of this in it - the proposal is "lunacy" for example. Certainly the general tone of the arguments that UK lobbyists make is stupid European politicians don't know what they are doing, and whilst the punters might like this kind of 'populist' attack on the bankers they don't realise that it's against their own interests. In other words "Leave it, thickos!"

I have no doubt that, as Lamont argues, there is an element of European-level politicking going in here. No doubt some French and German politicos would like to get one over on the City, and thus hobble the UK a bit. But equally I think it is more than likely that something else is going on with the UK's lobbying. The limited ambition of the bonus cap proposal doesn't seem to deserve the enormous amount of crap that is being thrown at it. So why is the CBI willing to shred its own reputation defending bankers' bonuses over 100% of salary? (I don't buy that anyone really believes this level of detail of bankers pay can affect the economy).

Certainly the formal arguments don't really add up. Even under a 1:1 ratio bankers can expect far more variable pay than almost anyone else. That means that banks still have some flexibility to manage their costs through remuneration policy alone. If that isn't enough they could enact a pay freeze, or pay cut. And if they get really desperate they can always cut the (highly-paid) headcount. This is after all the kind of tough decision that lots of businesses are having to make. It's not clear to me why, uniquely, banks need to pay their staff an enormous amount of variable pay just to enable them to get through a tough period.

Obviously, banks will claim in response that more variability = more flexibility. But then that doesn't seem to square with the argument that any downwards pressure (or pressure at all, really) on bankers' pay will see them all leave the country. Presumably it's at least relatively easier for a banker to change firm, rather than country. If a bank massively cuts variable pay in a bad year won't their 'talent' leave for another firm?

In addition, as we know well from PLC experience, variable pay isn't actually that variable, most incentive schemes pay put something most of time. I am sure bankers come to expect their bonuses and as such big cuts will indeed be seen quite negatively. They don't really want 'flexibility' in remuneration policy, they want as much of that 100% (or 200% or 300%) in their pocket as possible, and the must banks know this too. (It's striking too that the PwC research on the psychology of incentives found that most execs don't really like variable pay that much.)

So what is going on? I think in part it is about the politics of the UK in Europe. We don't want to get beaten on a issue that affects an area of competitive advantage. Hence this is, in part, a proxy for a wider pushback against European 'meddling'.

But I am a bit more convinced that there maybe some concern about the direction of travel on remuneration policy in general. If 1:1 is enough for bankers, why do we need a higher ratio for company directors. Maybe the CBI have been reading their Pastor Niemoller:

First they came for the bankers' variable pay, and I did not speak out because I was not a banker.... 

SHARE Key Proxy Votes Survey

Canadian labour-friendly shareholder activist group SHARE has gone live with its latest annual voting survey. What's more they have made it a rather wonderful online resource, which you can play about with here.

It's really rather good!

Here's the press note on it.
Most shareholders continue voting with management on key issues including the Northern Gateway Project and SNC-Lavalin CEO’s generous severance package
VANCOUVER, BC – While the majority of shareholders continue to vote with management, a growing number of shareholders are giving more care and attention to how they vote, with several key votes in 2012 registering 20% or more of shareholders voting against management recommendations.
One highlighted issue is a shareholder proposal at Enbridge Inc. asking the company to report on the risks associated with First Nations’ opposition to the Northern Gateway pipeline. Nearly 30% of shareholders voted for the proposal, noting that First Nations’ consent plays a pivotal role in the future of the Enbridge proposal.
“The response on the Enbridge shareholder proposal illustrates that shareholders increasingly recognize the investment risks associated with social and environmental issues when they vote,” said Peter Chapman, Executive Director of the Shareholder Association for Research and Education (SHARE). “However many institutional investors, including charitable foundations and trusts, are not yet providing guidance to managers and proxy voting service firms to ensure that voting is aligned with their interests.”
The 2012 annual Key Proxy Vote Survey analyzed the voting records of 32 firms with combined Canadian equity holdings in excess of $58 billion in 2012. SHARE has been producing the survey since 2001 with the goal of making proxy voting more accessible and encouraging fiduciaries to more rigorously review the work of those that vote proxies on their behalf.
The vote result at SNC-Lavalin also illustrates the increasing willingness of shareholders to vote against management. At SNC-Lavalin’s shareholder meeting in May 2012, nearly one-quarter of votes were lodged against the executive compensation package offered to former CEO Pierre Duhaime, which included $1.9 million in salary continuance plus other benefits. This generous severance package was offered despite the on-going criminal investigation into corruption and bribery charges both in Canada and Libya during Mr. Duhaime’s tenure.
“In the realm of proxy voting, a vote of 25% against a severance package is a strong show of shareholder opposition” notes Laura O’Neill, SHARE’s Director of Law and Policy, “But one still wonders how more than 75% of shareholders voted in favour of the former CEO being rewarded so generously despite the significant loss in shareholder value on his watch.”
New this year, individuals and institutions can review select proxy voting decisions of participating fund managers and proxy service firms online and find out exactly how they voted on key issues. “It is important to have a resource that makes proxy voting practises easily accessible to pension fund trustees and other fiduciaries,” said Charley Beresford, Executive Director of the Columbia Institute, one of the report’s sponsors. “The proxy survey website allows shareholders to review how their proxy firm voted on environmental, social or governance issues with the click of a mouse.”

Thursday 21 February 2013

Six years of blogging

I belatedly realised the other day that I've just passed my sixth birthday blogging. So I thought I would bung up a few short thoughts on how things stand six years on....

1. My view of the world has shifted a bit. I no longer accept many of the cornerstones of mainstream corporate governance, such as the general emphasis on disclosure as a policy tool, in addition to more specific ideas such as the use of performance-related pay to guide behaviour. In broader economic terms I am ever more convinced that the declining share of wealth going to labour is at the heart of much of what has gone wrong, and that rebuilding the ability of working people to claim their fair share is a massive part of the solution.

2. Linked to that, my own focus has drifted, I've blogged less about what unions are doing, though probably more about what Labour is doing. This is probably due to my day-to-day work, where I do more policy-related work and deal less than I used to with union-specific issues. However, given my over-arching political & economic view of the world, this is something I think I need to rebalance again. There are a lot of people giving advice to Labour, not so many to labour, so I'm going to try and up the union-related content again.

3. The topics that dominate the headlines even in the microcosm I inhabit have changed. I was blogging a lot five years ago about private equity, and there was a lot of TU commentary about it. That has all gone rather quiet, at least in the UK. Instead we've seen a much greater focus on reforming the financial sector, as opposed to battling bits of it.

4. I can't write as well as I used to, which is largely because I don't have the same time to commit to the blog. This is massively outweighed by the reason I can't spend as much time on blogging these days, who has just turned four! In retrospect I am very glad I didn't stop blogging a couple of years back & I'm grateful to people for encouraging me to stick with it. 

5. On the crisis, the big point I draw from it is that a big dividing line in politics, including within the Left, is how significant it is. I tend to the view that, while it's still too early to tell where we are heading, it is very clear that it has hollowed out a lot of the intellectual architecture around markets/ownership/governance etc that existed in 2007. Some things are still left standing that I think are basically facades, and could fall if subjected to a proper push. In addition, because of the confusion over what actually works, I think ideas that have until recently seemed untouchable or unthinkable are back in play.

On the same point, I think that there is corresponding legitimacy crisis for some parts of society. Banks are the most obvious example, but there are others. I have worked in a policy environment where certain organisations' views have been given a greater weight than others because of who they notionally represent, and thus how important they are within a given sector. But in the same way they have until recently been given greater weight, they could be given lesser weight in future. For example, there is no reason why policymakers should necessarily give the views of investor trade bodies more weight than those of trade unions when thinking about governance issues.

6. Finally a couple of (hopeful) predictions for the years ahead. I hope we are beginning to see a rethinking of the value of performance-related pay. I have been expecting this for a few years now, and we're starting to see a few signs that disillusionment is setting in. I don't underestimate how much of a shift this will be, since it's been an article of faith in mainstream corp gov for two decades that you need to use pay to control executive behaviour. But if a more behaviourally-informed approach to corp gov develops I don't see how we can ignore the evidence that performance-related pay isn't suited to either complex tasks, or long-term ones.

Secondly, I think we are seeing the first signs that a concerted push on the Left for a greater employee role in governance is on the cards. I put my hands up and admit this is not something I immediately expected as the crisis hit, but that goes to show you how existing 'common sense' in corp gov as been discredited and, as such, others have been given space to develop. As I've blogged recently, there's a lot of talk now on the 'thinky' bit of the Left. If we want to see this develop we need to start getting a practical programme together.  

Wednesday 20 February 2013

Myners vs the Kay Review

The BIS select committee is currently holding an inquiry into the Kay Review. Last week saw Lord Myners give evidence to the committee, and the transcript has just been published. It is really worth a read. I suspect many people's impression of Kay is "good analysis, weak recommendations". In addition, there is a fear that the usual vested interests will smother the Review's already modest ambitions.

If that's where you sit, you'll find a lot to reinvigorate you in this transcript. I think he hits all the right targets. Labour folks reading this should also bear in mind that he's been a fund manager, he's been on the boards of major companies (like chairing M&S), and served as a Treasury minister. Very few people (especially Labour people) have tried to crack the issues around ownership at a senior level from all those perspectives. So when, for example, he talks about the way that reviews like Kay get stifled,he's talking from experience. (In fact I suspect one reason that BIS set up Kay, despite having already done a civil servants-driven consultation into the same issues, was because Myners criticised the idea of a review into such important issues not being independent of govt.)

There's a lot of info in here. The opening statement alone covers a lot of ground, but the core point is that Myners doesn't expect the Kay Review to have a significant impact. In fact, he expects it to have barely any impact at all.

Some interesting further points - he is very critical of Kay for failing to come out with any recommendation on M&A (where I think Kay essentially says govt should keep a watching brief), and instead argues for the Business Secretary to have a more interventionist role (including a public interest test). As he points out the weakness of the Review on M&A seems to be quite out of step with the rhetoric used by Vince Cable way back at the September 2010 Lib Dem conference. If Cable thinks there's a problem with M&A he will now have to over-ride Kay (which is what Myners argues is exactly what he should do).

He also backs a financial transactions tax - which was a genuine surprise to me - and from a policy perspective rather than a revenue raising one. As you might expect, a theme running through the evidence is the erosion of any notion of ownership, exacerbated since the rise of HFT but also a long-running consequence of the nature of the asset management industry. You can sense Myners' frustration that another chance to grapple with these issues has been missed, especially as Kay clearly does understand what a lot of the problems with the asset management industry are.

And the stuff on the way that lobby groups will stifle reform (especially if they get their hands on the 'investor forum') is.... well... exactly what I think too!

A point that Myners makes several times is that Cable could still get a grip of this. Again, I struggle to disagree. The longer I have worked in this area the more convinced I have become that only strong political intervention can sort some of these issues out. There will always be people telling you "now is not the best time" or that "working with the industry" is the best way to go. We have seen the weak results of such an approach.

I think it's probably almost too late for Cable. He has fluffed this process twice as far as I am concerned - once by doing the first mini-review, which wasted a year, then by not ensuring that Kay went as far as he wanted. That means the next big round of reform will (fingers crossed) be under the next Labour government in 2015. I hope we make sure we get Myners involved when we do it.

Anyway, I would recommend Labour and TU people who share my interest in these things read the whole transcript. There aren't many people on our side of the fence who can deliver this kind of thing. Below are a couple of the funnier excerpts.

On the Good Practice Statements: 
Q98 Ann McKechin: It is constant effort. Professor Kay has published a new set of principles, called "Good Practice Statements". The Government has, again, taken a rather hands-off approach, saying that they should prompt market participants to consider their current progress and inform industry-led standards of good practice. How long would you recommend that we wait to see if that approach works, or would you say that we should have moved a lot quicker?
Lord Myners: I think we could probably wait until this afternoon.
And on the idea of 'solving' the remuneration problem by requiring execs to hold shares for a much longer period:

Lord Myners: It is rather romantic. You can say that you cannot realise these shares until your retirement, but the fact is that most of us are not in wealth-accumulation mode when we get to retirement; we are in wealth distribution mode. It would be odd to live on a modest income until the age of 60, and then suddenly have wealth beyond the dreams of avarice dumped on you as the reward for 40 years of loyal service. I somehow do not think that would work.

Tuesday 19 February 2013

I love the bonus cap debate

There's a lot of comment in the press today about continuing attempts in the EU to put a cap on variable pay for bankers. Judging by some of the views expressed, this proposal is clearly driving some people nuts. Great.

Before I get into that consider what the core proposal is - that bankers can earn only 100% of salary in variable reward. This is considerably more than almost the entire working population can expect, most of whom are offered no bonus, and that level of variable pay would not have been ungenerous even for company director until relatively recently. So, essentially, opponents of a cap are arguing that the current fixed/variable split is the correct one (and implicitly they suggest that current pay is at a 'natural' level to which it will return whatever reform is enacted). I would add in passing that there is no evidence provided, as far as I am aware, as to why a ratio greater than 1:1 is required in terms of motivation.

As I've written before, there's a really dishonest argument about a bonus cap which is that it would 'drive up' base pay. Except it wouldn't, the banks would 'drive up' base pay - if they chose to - no-one is forcing them to. If the banks do decide to increase base salaries to compensate people, who are extremely highly paid, for a loss in variable pay let them justify that to their shareholders and other stakeholders - it will be their responsibility. Anyone who argues that a cap will "cause" base salaries to rise or "drive" them up is, unwittingly or otherwise, obscuring the fact that banks decide whether this will happen or not.

Pushing this on a bit, one of the reasons I really don't like large variable pay is that it obscures increases in overall reward that might be challenged if expressed in comparable increases in base pay. In reality most incentive schemes pay out something most of the time, which is why bankers come to expect their bonuses. So variable pay isn't actually that variable. But because it's notionally 'at risk' shareholders and others are willing to tolerate a lot more than they would with base pay.

Therefore, a greater emphasis on base pay would make increases in overall reward a lot more obvious, and therefore open to greater challenge. I do wonder if that is one of the reasons that banks and their hired liars hate this idea so much. After all, unless you consider that they love risk so much that they would rather have a greater proportion of their pay at risk, why would bankers complain about having a more reliable income?

Another argument put forward by the industry's shills is that restructuring remuneration in this way would make them less 'flexible'. Well, maybe. Of course banks would still have the ability to cut staff costs by a maximum of 50% through pay structure alone. But they could also learn from experience elsewhere in the private sector, or indeed the public sector. In addition to paying zero bonuses they could freeze base pay entirely, or even cut it. If the cost pressures they face are still too great they could even cut staffing levels. This is what lots of other employers have to do. And, again, if banks didn't seek to push up salaries in response to the cap they could face lower overall wage costs - it's their choice.

A final argument I find really odd has come from the CBI which says that a cap would "take the power to hold companies to account out of investors’ hands, by removing tools such as voting on pay policy and implementation"  This is simply nonsense as far as I can see. No-one is suggesting that shareholders would lose their existing powers on pay where they exist, as in the UK. If the point is that pay policy will be affected by this policy before shareholders get a say on it then that's true, but nothing new. After all, the FSA remuneration code already does this.

I think the CBI's real concern is buried elsewhere in their comments today: "We are concerned that this could be the thin end of the wedge, with Europe trying to expand this legislation to apply to businesses more generally, which could damage stability and growth."

Yep, and the rest. If you only need a 1:1 ratio for bankers, why do we need a higher ratio in other companies? This pulls you back to the questions like why we ever let (not so) variable pay become such a big chunk of the total, and what evidence there is for it being necessary. These are questions that I doubt the CBI wants opened up again, it would rather everyone kept the focus on 'performance linkage' rather than scale of pay.  

So overall I think the bonus cap proposal is actually very helpful. The nonsense it provokes from opponents shows that the current structure of pay in the banking industry and elsewhere is far more open to challenge than we might imagine. The fact that the most powerful and well-financed lobbyists think this is worth expending reputational capital on (why is the CBI sticking up for bankers' bonuses???) may tell us quite a lot.

Sunday 17 February 2013

Gifts, time and financial power

Most of us are overwhelmed with the worries arising from our daily relations with bosses, workmates or clients, and most of us take those worries with us, in our laptops and mobile phones, wherever we go - to our homes, for weekend strolls, in holiday hotels: we are never further thane a phone call or a phone message from the office, constantly at people's beck and call. Connected perpetually to the office network as we are, we have no excuse for not using Saturday and Sunday to work on e report or the project to be ready for Monday morning. 'Office closing time' never arrives. The once sacrosanct borderlines separating home from office, work time from so-called 'free time' or 'leisure time', have all but been effaced, and so each and every moment of life becomes a choice - a grave choice, a painful and often seminal choice, a choice between career and moral obligations, work duties and the demands of all those people needing our time, compassion, care, help and succour.
Obviously, consumer markets won't resolve those dilemmas for us, let alone chase them away or render them null and void; and we don't expect them to give us any of those services. But they can, and are eager to help us mitigate, even to quash the pangs of guilty conscience. They do it through the precious, exciting gifts on offer, which you can spy out in shops or on the Internet, buy and use to make some of those people who are hungry for your love smile and rejoice - if only for a brief moment. We are trained to expect the gifts supplied by shops to compensate those people for all those face-to-face, hand-in-hand hours we should have offered them but didn't. The more expensive the gifts are, the greater the compensation the giver expects them to offer their recipients, and consequently the stronger is their placating and tranquillizing impact on the giver's own pangs of conscience. 
Shopping thereby becomes a sort of moral act... Emptying your wallet or debuting your credit card takes the place of self-abandonment and self-sacrifice that moral responsibility for the Other requires. 
Zygmunt Bauman, Collateral Damage.

I think the above excerpt is very insightful, so I thought I'd quote it in full and add a few brief further thoughts on the same subject.

I think the idea that gifts are often compensation for not being around, or contributing enough, is quite true, along with the suggestion that giving a bigger gift can make us feel better. Incurring some financial 'pain' feels like we've made a sacrifice.

And yet there are some complicating factors that make me think this isn't the whole story. For one, what about the difference between cost and thoughtfulness? We can all think of occasions when a well chosen gift has meant a lot more than a more expensive one. I think that is at least in part because the recipient values the sacrifice of time/effort involved in thinking about what they would like and tracking it down. So gifts which have involved some sacrifice of time/effort can have more emotional firepower than those that cost us only financially.

Linked to this I reckon that fungibility is a negative when we think about the value of a gift. At the extreme, when we give people money as a gift aren't we often implicitly saying "you're too difficult to buy a present for" or "I don't know you well enough (anymore?) to know what to get you"? Giving vouchers is a really interesting mid-way point as we're kind of saying "I don't know what you would like but I think you'd like to get it from This Kind of Shop."

Finally, I think relying on expensiveness can backfire, socially speaking. Whilst giving a very expensive gift might be meant as an expression of financial self-sacrifice, it may be seen by the recipient as an assertion of financial power. the message that may be conveyed (whether intended or not) is not "look at the financial pain I was willing to endure" but "look at the financial pain I am able to endure". The emphasis may be read as being on the giver's financial capacity, not their willingness to sacrifice it.

One of the things going on, then, is that people are communicating in different ways through gifts. And, again, to rely on scale of expense could be seen as implicitly asserting that money trumps other concerns.

PS - should stress that obviously Bauman isn't trying to describe all the elements of gift-giving, just thought a couple of other points were worth making.

Friday 15 February 2013

Labour on takeovers etc

There was a tiny sliver of corp gov related policy in Ed's speech on the economy this week.
We will stop takeovers that are waved through on the votes of speculators and hedge funds who flood in to buy shares once a takeover bid has been announced. Because when that happens it can destroy great British companies and the good jobs that go with them.
That sounds like an argument for something like a qualifying period to me. Iain Martin on the Telegraph (who was the first politico commentator to assert 'Ed actually isn't useless') doesn't like the idea, and his blog on this is worth a read.

I don't agree that it would be difficult to enact, it would take a change to company law, but it could be done, as the Takeover Panel concluded -
the Code Committee understands that qualifying periods (or weighted voting rights) could be introduced through changes in company law. If such changes were to be made, the Code Committee considers that it would be logically consistent for the Code to be amended accordingly. In the absence of such changes, the Code Committee does not believe that the Code should be so amended.
The real question is whether it is worth doing. It will certainly prevent some people who will almost certainly vote FOR deals to go through (because they expect an uplift) from doing so. However that may not be enough to stop a lot of deals given how easily they pass. In order to really 'throw sand in the wheels' of M&A activity you would probably want to raise the voting threshold too. I think Labour proposed this latter policy in the 2010 manifesto, with the aim of raising it to a two-thirds majority I think? Would probably be more consistent with other votes to raise it to 75%. (PS - the Takeover Panel also looked at raising the threshold and again said it's doable via company law but that no-one wants it to happen.)

Those two policies combined would send a significant message about Labour's attitude towards MnA activity. It would be very unpopular with the City. I think business would be more ambivalent - some directors definitely think the takeover regime is too liberal (at one point the IoD backed a higher threshold for instance), others don't see the problem. I reckon the CBI would be opposed though.

So the political judgment is whether this is worth the fight.

The same is question arises in respect of the idea of putting employees on remuneration committees. As I've written a lot, I like this policy and I think it could be put into force without too much technical trouble, but again the question is whether it is worth the fight. I'm now of the view that, since there will be a scrap over this, Labour might as well at least try and go further - ie advocate employee directors - rather than spill blood over a relatively small shift in the membership of rem comms.

I'm no strategist, and the relative silence of the Labour frontbench (as contrasted with left-of-centre think tanks etc) on corporate governance reform might suggest that there is some nervousness about this stuff. Obviously no-one wants to be characterised as being anti-business, or adopting an old school approach to these issues.

However, I would make a couple of small points in support of Labour being ambitious. First, I genuinely think the 1990s version of corporate governance is becoming hollowed out, as we've had 20 years to try and make it work. For example, I note that the main argument that the Takeover Panel used (or said respondents used) against qualifying periods  was that it breached the 'one share, one vote' principle. Well, it is just a principle, and people like Bob Monks and Simon Wong have openly questioned whether it is necessarily always a good one, in corp gov terms. I don't think anyone can make a strong case, now, against reforming voting MnA solely by reference to the sacred 'one share, one vote' principle. It's kind of reduced to saying "we can't have that type of policy because we believe we mustn't."

Similarly the idea of employees on rem comms is currently mind-boggling for many people brought up on 1990s vintage corp gov. But again we've had a pretty good crack at trying to make shareholder empowerment plus company disclosure work. Again, opposition to employee reps generally makes reference to a certain type of corporate governance ideology - accountability should be to shareholders, employees wouldn't be 'independent etc - there's not a big legal or financial barrier (though we probably would want to look at company law). I think arguments that we only need more shareholder empowerment and more disclosure, because that's 'the system' we have and employee representation would be heretical in that system, seem pretty weak and, as such, will be easier to overcome now than in the past. In fact overall the whole 1990s corp gov consensus feels pretty flimsy to me now.

Second, as I suggested in my post about co-determination, it would be a mistake for Labour to over-estimate the attachment that shareholders (principally asset managers) have to their 'ownership' role. Many asset managers still don't really buy that 'stewardship' has a (financial) value, though they will go through the motions a bit. I think that, provided that the role and financial interest of shareholders is protected (and why wouldn't it be?), there may be less serious opposition to employee representation, than we might expect. I have no doubt that the CBI will make noise about the shift away from shareholder primacy (though I think the IoD might possibly develop a different view) and I suspect they can get some people in the investment world to parrot their lines. But I wonder whether the investment industry as a whole (ie not just the corp gov microcosm) will really want a big fight over this, particularly when what we are really talking about is who gets to go to which meeting, not whether or not shareholders still get votes/dividends/whatever.

If we want to see a big shift in corp gov I think what we need to do, and pretty quickly, is to start talking about these ideas with those we need to win over. Largely to try and get them onboard but also, and presuming that many won't shift, to gauge the breadth an depth of potential opposition. 

Wednesday 13 February 2013

Voter support for employee directors

Just spotted this, excerpt below:
Trade union campaigners say there is now widespread public support for the idea of ‘worker directors’ in UK boardrooms, with even a sizeable majority of Conservative voters backing such a move.
A poll by Survation for the Unions21 think-tank found 76% of UK employees and 89% of trade union members are in favour of workforce representatives sitting on company boards of directors.
Labour voters were most strongly in favour, with 85% in support, followed by Liberal Democrat voters with 81% and Conservative voters with 70%.
More than half of all respondents (53%) said they would support 10% or 20% of seats on company boards being reserved by law for workforce representatives.
Only 7% of employees were opposed to legally reserving any seats for workforce representatives.
Campaigners say the figures reflect growing popular demands for greater corporate accountability in the wake of the banking crisis.

Tuesday 12 February 2013

What can shareholders 'own'?

A couple of excerpts below from Governing the Firm: Workers' Control in Theory and Practice which is in a section titled 'Why firms cannot be owned'.
In a society where slavery and indentured servitude are not legally enforceable, no-one can own a firm because a firm is a set of human agents. It is of course possible for someone to own an asset used by a firm, to own a claim on the net income from the firm's activities, to control the allocation of resources trough the firm's governance structure, or even to own a controlling position within this governance structure. But the human beings constituting a firm cannot be bought and sold.
As everyday common sense suggests, firms are organisations consisting of people. The firm called General Motors includes employees of GM. There is an ultimate control group for GM - namely, its shareholders. But when someone buys a share (or even a majority of shares) in GM on the stockmarket, they are not "buying the firm." Rather they are buying a role or position in the firm, the role of being a GM shareholder. This role is defined by a bundle of rights including the right to receive dividends, the right to a share of GM's assets if they are liquidated, and the right to vote at shareholder meetings. Such roles can most certainly be treated as commodities and passed from one person to another. But the firm is not bought or sold in the process, because it is larger than its shareholders. 
Obviously these points are made in the context of a book advocating an increase in employee control of firms, but they seem pretty sound to me.

It also points up the reason why shareholders, particularly of companies that rely heavily on skilled employees, ought to be concerned about (hate the term) 'human capital'. Arguably the only evidence we see of this is in the banking sector where some shareholders have pushed for banks to keep up pay levels and hang onto key staff even if they bear some responsibility for poor behaviour. But maybe the fact that it's an exceptional case demonstrates that asset managers only rely grasp the importance of human capital in their own backyard. But if companies lose their skilled employees (perhaps in no small part due to a change in 'ownership') then the real firm is reduced even if the thing that shareholders own - control rights over the firm - is unchanged. 

Sunday 10 February 2013

Put employees on remuneration committees

I blogged previously about the fact that the bit of the UK Corporate Governance Code that is supposed to nudge companies to take account of how their own employees are doing when setting directors' pay doesn't really work.

I also mentioned the Unite commentary around the Greencore AGM. Note here that we have a case of a company cutting some employees' pay, and provoking a strike in the process. Yet it also paid out significant incentive awards to its directors. (Before anyone claims they may have been contractually obliged to make such payments, it's worth stating that the language in most contracts is very vague on bonus and incentive schemes. In addition, why has any company drafted contracts that might oblige it to breach the spirit of the Code?).

For info, at Greencore's AGM, the vote against the remuneration policy was tiny, below even the average level of opposition (resolution 5 here). So presumably shareholders felt that everything that was ok with the reumeration policy at the company.

Regardless of whether one thinks this is the right outcome, let's just think about why it's unlikely that shareholders would ever hold a company accountable if it looked like it was being 'insensitive' to pay and conditions across the group.

Well for one they may simply not know. In my experience most institutional shareholders pay very little attention to what goes on within the workforce of companies in which they invest, unless something very dramatic has happened. I suspect most Greencore shareholders wouldn't even know about the industrial dispute, and therefore it wouldn't form part of their analysis of the remuneration policy even if they decided they wanted to take account of such issues.

They may also not be interested. Again I think this is probably the default approach of most institutions. I don't mean that as a critical judgment, rather I think that they probably consider being a bit 'insensitive' is a pretty trivial offence in remuneration terms. For example, even Lonmin, which saw numerous striking employees shot dead in a violent strike last year, only got a 29% vote against its remuneration report at the following AGM (the interim CEO received an extra payment). It does make you wonder how bad pay and conditions have to be in order for a defeat to be inflicted!

Thirdly, they may consider that in a tussle between management and labour they would rather side with the former. Again, it's amazing how much institutions will put up with and how loyal they will be to an investee company management. Add to this that asset managers are more likely to have a view of the world that sees labour primarily as a cost, quite aside from any personal politics, and I reckon it's pretty clear where sympathies will lie most of the time.

As such, I find it very difficult to believe that shareholders can really do the job expected of them in respect of this bit of the Code, and I think companies routinely only play lip service to it.

However, think about that Greencore example again. What if the remuneration committee had included two employee representatives? I think it is much more likely that there would have been pressure to take account of what was going in the workforce, and therefore to restrain rewards for executives. It might only be a weak restraining force, but surely more than we have at present. If we want that bit of the Code to mean anything, there has to be a feed in taking account of worforce issues, and employee representation is by far the easiest way of doing it. 

Thursday 7 February 2013

Opponents of co-determination

Following on from my previous post, one of the things I'm reading currently is this book (PDF) about employee control within firms. What I'm most interested in is where opposition is to employee empowerment is likely to come from and how it it can be overcome.

In light of this, there's an interesting section on co-determination in Germany. What I found striking about this is that most of the opposition to co-determination came principally from employers and their associations (no surprise I guess), not shareholders. Here's a quote from another book featured in this section:
"The main challengers of the law were not shareholders, but companies and employers' associations made up of company executives... the main issue in the entire proceeding was not whether co-determination would dilute shareholder value, but whether it interfered with the interests of the corporation and how it was managed"
One could read a couple of things into this. First, it's an implicit acknowledgment that managers hold power in companies, not shareholders, and thus it is they who are most challenged by employee empowerment. Second, shareholders were not that bothered about ceding formal control provided that their financial interests were not damaged. Both perspectives don't really put much weight on accountability to shareholders, now such an unchallengeable and self-evidently 'good thing' in the UK corp gov microcosm.

It also suggests, to me, that for all the noise about how great our system is, and how important shareholder accountability is, if it came to a formal struggle over control rights many shareholders might not put up much of a fight. If you think about how little demand there has been from the mainstream for further shareholder rights perhaps this is another indication of the lack of desire for control. I'm also reminded of how often we hear the 'We don't want to micromanage' refrain from some investors.

What might be different in a discussion of workplace democracy in the UK now is that I suspect the business lobby would use their notional existing accountability to shareholders, as evidenced by things like the Stewardship Code, as a theoretical defence of their resistance to greater employee voice. 

Wednesday 6 February 2013

Individual empowerment stops at the workplace door

As is probably obvious, one of the things I am increasingly interested in is whether there is any prospect of a tilt towards to a greater role for employees in corporate governance and, if so, how this can be brought about. As I've blogged a fair bit recently, there are indications that, for the first time for quite a few years, these ideas are being knocked about again in Labour circles. I am aware of a least three bits of work going on that have relevance to this discussion that we should see this year & which I'll blog when they appear.

I think there are a number of reasons why these ideas are gaining more ground, including (in no particular order):
  • A sense that a UK-style market approach to corp gov has some big holes in it, such as the weak nature of shareholder oversight as a restraint on company behaviour;
  • A belief that labour's share of wealth has declined too far, and needs addressing (this is tied up with the view that greater economic inequality is a social problem, not only 'unfair');
  • An attempt to put some meat on the bones of 'pre-distribution';
  • An understanding that corporate governance reform is, potentially, a cheap way of doing stuff whilst we're in a period of austerity.
This is all well and good, and I share these views, but it is interesting that, so far at least, these ideas aren't being approached in terms of how individuals can be empowered in the workplace. In addition, despite the fact that there is a clear strain within their organising activity that is entirely about worker self-empowerment, I'm not seeing much recognition beyond Tigmoo, yet, of the role that trade unions could play in this.
On the first point, if there is anything that has unified the 'centre ground' of politics in recent years it has been that individuals should have greater power to determine their own path in society. That has been taken to entail greater individual freedom to make our own lifestyle choices, greater choice within public services and so on. Those Tory 'Big Society' posters in the 2010 election even had an element of Paris 1968 about them.

And yet there is a curious silence about individual empowerment in the one place that we spend most of our time - the office, factory or other workplace. Certainly the attitude of the Coalition seems to be that employers need more power relative to workers, in the name of economic efficiency (see Beecroft proposals etc), and they have spoken about making it less easy for workers to take industrial action (eg increased threshold for strike ballots). I think the prevailing view (mistaken) is that if you don't like a job you can always get another one, rather than entertaining the idea that you could think about ways that employees could seek to push back. It's the employment equivalent of "if you don't like it here, move to Russia". All the emphasis is on exit, not voice.

This contrasts, by the way, with much of the historical interest in employee empowerment at work. There has always been a strand in those discussions about how principles we observe in other areas of life could carry over into our working life, which is why we have the term 'workplace democracy' of course. So it's odd, in the era of apparent individual empowerment, that many people still consider that a very authoritarian model at work isn't worth much discussion. This has always, to me, been a gaping hole in the self-professed 'libertarianism' of those on the Right, but I'm surprised many on the Left don't get it either.

Similarly, thinking specifically about TUs, it is a bit odd that there isn't more recognition of how much organising activity is about individual empowerment (this book is well worth a read on this). Rather, lots of people seem to be of the view that a 'servicing' model of trade unionism is 'modern', even though it may not tackle power relations at work, and essentially sees the member as a pretty passive 'consumer' as opposed to someone that can become personally empowered.

So, if we're going to see a serious push on the employee role in governance, perhaps a greater stress on why empowerment at work would be desirable/effective should be part of the strategy. It would both draw attention to the disparity with policy in other areas, and demonstrate why the labour movement is relevant to such a modernising drive,

Friday 1 February 2013

Unintended consequences and exec pay again

I've been thinking more about the repeated assertion that attempts to reform executive pay have suffered from unintended consequences. You know the arguments - disclosing more info on executive pay caused it to go up further, a bonus cap would cause rises in base salary etc.

As I've set out before, I think the major conceptual flaw in these arguments is that they suggest (unwittingly or otherwise) that there are only two things to focus on - policy A, and result B. Hence if A in enacted and B is the result, and if B wasn't what we wanted to happen, then we can say "Aha, stupid reformer, there's an unintended consequence".

My point is that there are (at least) four things to keep your eye on - policy A, result C, decision D and result B. In many cases of alleged "unintended consequences" result B actually comes about because of a step in the middle - decision D - not because of policy A. And what is more result B is usually the intended consequence of decision D.

In the unintended consequences version of exec pay disclosure it works like this -

A policy of greater disclosure of executive pay (policy A) is enacted. Executive pay goes up (result B). Therefore greater disclosure of executive pay (A) caused the increase in executive pay (B) to happen.

A revised intended consequences version of the same process would look like this -

A policy of greater disclosure of executive pay  (policy A) is enacted. More data on executive pay is disclosed (result C). Companies use the resulting data to propose increases in executive pay (decision D). Executive pay goes up (result B). Therefore A causes C, and is intended to cause C, but D causes B and, again, is intended to do so. A does not directly cause B. Instead, I think, we have two intended consequences of two separate actions.

What matters in all this is objectives. When policies like executive pay disclosure have been enacted it is quite clear (including to companies) what the objectives of policymakers have been - to restrain executive pay growth. But companies (for a variety of reasons) do not share those objectives and instead have their own which they have the ability to pursue. That, in my opinion, is a better explanation of why the final result doesn't match the objectives of the policy.

Put it in a different context. Your team and my team have different objectives - I want to score a goal against you, and you want to score one against me. Just because I want to to achieve a certain objective (scoring a goal against you, restraining executive pay) does not preclude you from trying to prevent that objective or, indeed, seeking a different objective contrary to mine (scoring a goal against me, increasing executive pay). But if I seek to achieve my objective, but you prevent me and instead you achieve your objective, no-one would argue that my seeking my goal had the unintended consequence of your scoring of your goal.

Yet this (trying to score a goal against you causes you to score a goal against me) is, basically, what those who argue that attempts to control executive pay have the unintended consequences of increasing it are claiming. Right?

Personally I feel that unintended consequences claims are often very politically problematic, as they both disguise the real processes at work and undermine the belief reformers have in their ability to achieve change. The more important question, I guess, is whether those are themselves intended consequences of using this form of argument?