Friday 31 May 2013

A few things Labour could do

Thought I'd sketch out a mixture of what Labour has committed to in the corporate governance area, what could be broadened out, and a couple of additions...

Stick with existing policy as set out in the 2010 manifesto

Tougher rules on takeovers - a higher threshold to approve deals, a qualifying period to vote on them, exploration of public interest test.

Mandatory voting disclosure - won't repeat myself here, but most important thing is to agree the disclosure framework. Who should it cover, how and when should they disclose?

Broaden out existing commitments

Labour is committed to employee representation on rem comms - why not open this out in the shape of a broader review into corporate governance? This could include both employee voice, looking at how representation on boards - not just rem comms - could work, and shareholder engagement (the Swedish nom comm model).

Extra bits

Undertake a proper review into pay, including research into the effectiveness of executive pay (does it improve performance?). There is plenty of evidence that the large proportion of variable pay executives receive is unlikely to 'work', and, in my opinion, performance-linkage instead principally serves to make high pay less open to challenge (that may be its real purpose now). Lots people in the system don't buy that it works, so why continue with it?

Make it easier to file shareholder resolutions. Drop the filing threshold to say 1% and let filers combine to meet it - eg two investors with 0.5% each.

Encourage beneficiary empowerment. It is striking how even now beneficiaries have almost no formal representation within the financial system's architecture, or when reform is undertaken. Look back at the range of people involved in the Wilson Committee, could we establish a standing body with similar stakeholder representation to look at governance/ownership issues?

Exhibit more scepticism in the face of lobbying - trade bodies will tell you that practically any reform will have disastrous unintended consequences, yet these claims often prove to be false. In addition, if we're serious about 'responsible capitalism' we can't let investor trade bodies have too much power in determining policy.

Fidelity Tory funding update

It's been a long time since I blogged about Fidelity. They are still funding the Tories - according to the Electoral Commission register Fidelity gave them £100k last year, and according to They Work For You they continue to employ Sir John Stanley as an adviser (looks like he got about £20k off them last year). They don't seem to have sponsored any more Enterprise Forum events.

Tuesday 28 May 2013

Labour and takeover policy in 2010

OK, here's what we said in the 2010 manifesto:
We now propose to extend the public interest test so that it is applied to potential takeovers
of infrastructure and utility companies. (1:7)

Too many takeovers turn out to be neither good for the acquiring company or the firm being bought. The system needsreform. Companies should be more transparent about their long-term plans for the business they want to acquire. There needs to be more disclosure of who owns shares, a requirement for bidders to set out how they will finance their bids and greater transparency on advisers’ fees.

There should be a higher threshold of support – twothirds of shareholders – for securing a change of ownership and the case for limiting votes to those on the register before the bid should be examined. (1:9)
In contrast here's what the Cox Review said:
The law on takeovers should be changed, such that all shareholders who appear on the Register during the Offer Period (as defined by the Takeover Code) have no voting rights until the outcome of the bid has been concluded. (p 39)
And as a reminder Lord Sainsbury has suggested a higher threshold should be required for deals to be voted through, and for a qualifying period (ie a requirement to have held the shares for a few years) to be introduced for shareholders in the target company to be able to vote on the deal. 

So our 2010 position covers more ground than either of the subsequent suggestions.

High pay is dangerous

Another interesting paper, available here.

Performance for pay? The relation between CEO incentive compensation and future stock price performance
We find evidence that CEO pay is negatively related to future stock returns for periods up to three years after sorting on pay. For example, firms that pay their CEOs in the top ten percent of excess pay earn negative abnormal returns over the next three years of approximately -8%. The effect is stronger for CEOs who receive higher incentive pay relative to their peers. Our results appear to be driven by high-pay induced CEO overconfidence that leads to shareholder wealth losses from activities such as over investment and value-destroying mergers and acquisitions.

Thursday 23 May 2013

Progressive Capitalism - a few thoughts

Lord Sainsbury has a new book out, called Progressive Capitalism, which aims to sketch out "a new Progressive political economy." Being the nerdy type I am, I was immediately interested in what he may have to say about corporate governance and ownership, so I bought a copy. 

I should stress I've only read the intro - which calls for a move beyond neoliberalism, but (as you would expect) not back to public ownership or anything like that - and then skipped straight to the section dealing with equity markets and corp gov. What I was looking for here was some indication of thinking about reform at the Labour supporting end of the business community.

So what does he say? Well, he shares a lot of common ground with the Kay Review, arguing that financial markets don't really serve savers or companies and often work more to the benefit of intermediaries. He argues that shareholders are insufficiently engaged with companies, with too much emphasis on trading. He also says that UK's corporate governance regime is more focused on avoidance of value destruction, rather than long-term value creation. Two symptoms he identifies as arising from the corp gov regime are the structure and scale of exec pay (he says it's now financial market style pay) and the financial bubble.

He's also scathing about the way that company/management underperformance is often dealt with, through the market for corporate control. He says: "Some poorly performing managers have been removed, many by takeovers, a tactic much approved of by investment bankers because of the huge fees involved, but not a good way of handling the problem."

No much to argue with there...

But the important bit is the proposed remedies. He argues that a Shareholder Advisory Board should be created, to advise shareholders (I think he means asset owners here) how to contract and deal with asset managers. This would be with the objective of putting a more long-term, value-creating focus into the system. It's not immediately clear who would sit on this board but, unfortunately, it sounds like he thinks the investor trade bodies would be able to nominate them. This is one thing Kay is very clear should NOT happen, and I think the experience of the ISC/IIC should make Labour very wary of this approach.

He's also a fan of the Swedish model whereby shareholders are represented on nomination committees. He says that the Shareholder Advisory Board could facilitate and promote the develop of nom comms like this. He argues that this could work so that you have an external nom comm, with shareholder reps, that proposes NEDs, and even the chair, and an internal nom comm of the board that deals with exec appointments. The external nom comm could also facilitate shareholder engagement with the company over strategy. As an aside, I have seen the Swedish example crop up in a few places now, so this might be one policy to keep an eye on.

On takeovers, he clearly wants to gum the wheels up a bit. He argues for both a higher threshold to be required for deals to be voted through, and for a qualifying period to be introduced for shareholders in the target company to be able to vote on the deal. Notably he talks about people holding the shares for "a certain number of years". This goes further than the Cox Review, and funnily enough is pretty much what the unions were arguing for post Kraft/Cadbury (tho they also wanted a public interest test), but it doesn't go any further than Labour's 2010 manifesto, or indeed the ideas that Lord Mandelson was knocking about at the fag end of the last parliament.

And that's kind of indicative of the corp gov section as a whole, I don't really see much new here. A bit more strengthening of shareholder engagement, a bit less liberal on the takeover regime. Not much to argue with, but it doesn't take us further forward. Which is fine if you think the system works OK pretty much as it is, but it's difficult to reconcile with the stated objective of a new political economy. The corporate governance proposals are, for good or ill, minor tilts within the existing framework. There's nothing bad here, but there isn't much real change either. Even on this turf, you can find more radical proposals coming from within the financial sector itself.

Probably the most disappointing bit is the failure (as far as I can see) to talk at all about what role employees might play in governance in the UK, particularly given that a) the German model is discussed b) the author accepts that shareholders have failed to rein in exec pay and c) Labour is already committed to employee representation on rem comms. I know the issue of employee voice is hardly popular with the business community, but if 'responsible capitalism' and 'an economy that works for the many not the few' are to mean anything, policy proposals cannot be restricted to what the business community thinks would be beneficial to it. I personally think we could develop proposals that both tackle the problems identified by Sainsbury (and Kay and Myners before him) and emphasise long-termism, and nod towards greater stakeholder accountability. For what it's worth I think some companies really do get this too.

I personally think we can go quite a bit further.

The performance pay shift continues...

From “Are Top Executives Paid Enough? An Evidence-Based Review” published in February: 

“Our review of the evidence found that the notion that higher pay leads to the selection of better executives is undermined by the prevalence of poor recruiting methods. Moreover, higher pay fails to promote better performance. Instead, it undermines executives’ intrinsic motivation, inhibits their learning, leads them to ignore other stakeholders, and discourages them from considering the long-term effects of their decisions on stakeholders. In particular, it is not possible to relate incentive payments to executives’ actions in an effective manner. Incentives also encourage unethical behaviour. Organizations would benefit from using validated methods to hire top executives, reduce compensation, eliminate incentive schemes, and strengthen stockholder governance related to the hiring and compensation of executives.”

Tuesday 21 May 2013

NGOs and capital market campaigning

There's a very interesting piece by Rory Sullivan here. I agree with a lot of it.

Sunday 19 May 2013

Labour and capital in practice

Given the perspective of my blog - basically a labour/Labour take on issues relating to ownership, shareholding etc - the recent noise around the National Express AGM, and the campaign it is part of, is rather interesting. This is a bit of a splurge of thoughts...

The principal claim made by US unions, the Teamsters in particular, is that in its US schoolbus business, Durham School Services, there is an anti-union culture. Furthermore they argue that the company's failure to engage with unions has knock-on negative effects on things like morale, safety etc. The Teamsters have been raising concerns about Durham for a few years now, and have made a number of trips to the UK, during which they have met investors. I think most people in the UK RI community are (or should be) aware of the issues the Teamsters have raised, whether they agree or not.

This year the Teamsters adopted a more shareholder-focused strategy and called on the company to improve the oversight and reporting of human capital issues. In lieu of this, the union called for a vote against the company's report and accounts at its AGM. Ultimately there were combined oppose votes and abstentions of about 5%. It doesn't sound like a lot but most of these votes go through with 99%+ in favour. About 3% of the vote against came from LAPFF members, who supported the call for improved oversight and reporting.

An interesting development in the run-up to the AGM was that Jim Sheridan MP wrote out to National Express shareholders on behalf of the Unite parliamentary group supporting the campaign. He also attended and spoke at the AGM. That s something I haven't seen before and may be a sign of things to come.

At the AGM both the chair and chief executive were clear that, while mistakes might be made, the company did not have an anti-union stance. The chief exec said a couple of times that he respected the right of employees to join unions. However the chair said the company would not adopt a position of 'neutrality' and would seek to put the other side of the story.

The chief executive suggested that its rival First Student, part of First Group, had suffered more problems since reaching a national agreement with the Teamsters. The clear implication here was that the company suffered a drop in performance that was closely correlated with union recognition. (I recently heard a mainstream asset manager make exactly the same point, which may show that the company's line is getting a receptive hearing). The chair made the point that labour relations in the US were different and more combative. He said the company took a view that was, basically, "when in Rome..." and would not seek to apply UK standards in the US.

So, what to make of all that? I personally think the company does take an anti-union stance in the US, and this message was, if anything, amplified at the AGM. The company may state that it respects the right of employees to join a union, but it is not within its gift for the situation to be otherwise. It might as well state that it respects the right of employees to vote for their choice of President. Whether it "respects" such rights or otherwise those rights will continue to exist because they are enshrined elsewhere. So what matters is how the company seeks to influence the exercise of that right.

Some of the documentation produced by the company in the US (which has been circulated to investors by the unions) is clearly intended to dissuade employees from joining unions, and subtle it ain't. The company's defence has been, broadly, that such material is within the law and that the unions are aggressive too. As noted above, the chair stated in the AGM that the company would not take a neutral stance. (He also said, in a semi jokey way, that the existence of unions was in a sense a reflection of management. In an ideal world unions wouldn't exist because companies would treat employees properly.) If seeking to suggest to employees that joining a union is costly/pointless/undesirable is not evidence of being anti-union, what is? Just because such a stance may be undertaken within the law does not change the nature of that stance.

If any investors were listening properly, what they will have heard is that the company does not want unions in its US operations if possible because that's the way the industry works there. In addition, the chief exec's comments suggest that the company thinks a formal agreement with the unions could harm its business.

I guess the interesting question is how the RI community views all this. As I mentioned earlier, the unions' claims about Durham are well-known. And the company has now set out its position pretty clearly, and publicly, at the AGM. The chief exec has, essentially, made a business case argument against agreeing a deal with the unions. Does a responsible investor consider this the end of the story - if you can't make a business case for not dissuading employees from joining a union, does that make such behaviour unchallengeable? Or, alternatively, is an anti-union stance unacceptable, even if it may provide a business advantage?

As I have written before, I think labour issues are hard for the RI community to address exactly because there are no easy answers here. Too often the assumption is that there is a win-win, especially if we can claim the company will see the benefit from doing the right thing "in the long term". After more than ten years in this field I'm sceptical about the value of such an approach, I think we might benefit from also asking more often "is the company's position good enough?"

Saturday 18 May 2013

Labor and Monopoly Capital

This is one of the most interesting books I have read for a long time. Obviously I don't share the author's Marxist view of the world, but for a book that came out in 1974, there is a lot of good/relevant stuff in it. The subject is the nature of work in 'monopoly capitalism'* and a particular emphasis is the way that technology can serve to deskill the workforce. Here are a few snippets.

"The mass of humanity is subjected to the labor process for the purposes of those who control it rather than for any general purposes of "humanity" as such... Machinery comes into the world not as the servant of "humanity", but as the instrument of those to whom the accumulation of capital gives the ownership of machines... [I]n addition to its technical function of increasing the productivity of labor - which would be the mark of machinery under any social system - machinery also has in the capitalist system the function of divesting the mass of workers of their control over their own labor."


"The complexity of the social division of labour which capitalism has developed over the past century, and the concentrated urban society which attempts to hold huge masses in delicate balance, call for an immense amount of social coordination that was not previously required. Since capitalist society resists and in fact has no way of developing an overall planning mechanism for providing this social coordination, much of this public function becomes the internal affair of the corporation. This has no judicial basis or administrative concept behind it; it simply comes into being by virtue of the giant size and power of the corporations, whose internal planning becomes, in effect, a crude substitute for necessary social planning."


"In the period of monopoly capitalalism, the first step in the creation of the universal market is the conquest of all goods production by the commodity form, the second step is the conquest of an increasing range of services and their conversion into commodities, and the third step is is a "product cycle" which invents new products and services, some of which become indespensible as the conditions of modern life change and destroy alternatives... In the end, the population finds itself in the position of being able to do little or nothing itself as easily as it can be hired done in the marketplace by one of the multifarious new branches of social labor...

It is characteristic of most of the jobs created in this "service sector" that, by the nature of the labor processes they incorporate, they are less susceptible to technological change... Thus while labor tends to stagnate or shrink in the manufacturing sector, it piles up in these services and meets a renewal of the traditional forms of pre-monopoly competition among the many firms that proliferate in fields with low capital-entry requirements. Largely nonunion and drawing on the pool of pauperized labor at the bottom of the working class population, these industries create new low-wage sectors of the working class, more intensely exploited and oppressed than those in the mechanized fields of production."

* just a reminder that Colin Crouch's book on neoliberalism is really good on what "actually existing capitalism" looks like - big firms do tend to dominate, and significant barriers to exist in many important industries.

Back from beyond / pay votes

I've spent the last week in and around a yurt in Cornwall, hence the total lack of blogging action. But I have a couple of (hopefully) interesting snippets/posts to come.

Also, having had a quick read through a few AGM voting results I think it is safe to say that Shareholder Spring 2: The Revolution Continues has not happened. The two (pay) votes I was particularly keeping an eye on were RSA and the Pru. The former because of the dividend cut, the latter because of the FSA fine and criticism of the chief exec. The Pru saw an 11.6% vote against well down on the 33% against last year. RSA saw an even lower vote against at 9% (up from 6.5% last year). 

The lack of action is not surprising to me or, I suspect, most people in the corp gov/RI microcosm. As I have blogged previously a) this is what we should expect based on previous experience (am thinking here of the way pay votes declined in the run up to the crisis after an initial spike) and b) we already have some indication of how a drop off in votes against would be explained by the mainstream of the investment industry.

For what it's worth I think that if votes against pay are down across the board this season this may have been an error of judgment by the UK's institutional investment community. People might start to ask what the point is of giving shareholders a binding vote on pay if they aren't going to use it. I recognise that the dynamics of shareholder engagement over pay are more complex than this. However, that isn't how it looks and arguably one of the important considerations currently is that shareholders are seen to tackle executive pay.

Tuesday 7 May 2013

Ideas matter

A those people who have persisted with my blog outpourings for some time will know, I've become quite interested in the effectiveness (or otherwise) of performance-related pay. Looking back through my own archives I can see that I started seriously blogging about this about three and a half years ago (about the half the life of my blog ago!). So back in Jan 2010 I thought there were the first stirrings of interest in the investor community about the motivational aspects of incentives.

As I've tried to make clear in my own burbling on this topic, the idea that performance pay may not be effective - at least beyond basic tasks - has been debated for some time in psychology. Of course the main burst was in the 70s with Deci et al, but you can go further back to Frederick Herzberg, Douglas McGregor etc for older theorising about motivation at work that might lead you to query incentive pay. This stuff is well known in its own field (and in HR probably) yet has been almost invisible in corporate governance until now.

Unfortunately, agency casts a very long shadow in my microcosm, and with it comes a very basic economic theory of motivation. Essentially it boils down to the idea that people - managers in agency theory - will basically shirk, or pursue their own interests, unless they are 'bonded'. Contracts, and incentives, can be used to achieve this, with the ultimate aim being behavioural control via these tools to ensure managers are aligned with shareholders.

This stuff still has a real hold on many corp gov people. People who are basically well-meaning think they can achieve something worthwhile by incentive design - either ensuring that managers are controlled or, by bringing non-financial targets into the mix, trying to encourage them to ensure social and environmental factors are taken seriously. In my experience it can be very difficult to get people to shake off these ideas, call it ideology, hegemony or whatever, but for a long time performance pay has been seen as A Good Thing in corp gov land.

However, I do think my optimism of a few years back was well placed, and there are increasing signs that the supertanker is turning. Only today I received something from the Hay Group including a discussion piece on the pros & cons of financial incentives. This follows the work PwC have done in this area - which is genuinely sceptical IMO - and I know that Towers Watson held a client seminar on the same sort of topic (which they wouldn't let me go to).

Perhaps not unrelated, at the same time there has been a steadily increasing level of interest amongst some investors in the motivational questions about pay. Most pleasing to me has been the (still rather small!) number of conversations I have had with corp gov people where they already know the outlines of the criticisms of performance pay (eg that it works for simple, measurable tasks). This was not the case until recently.

Of course, what really matters is practice, and the test of this ultimately will be whether companies shift away from their reliance on performance pay. That is going to be a battle. But I do think that the ideas here are changing, and that is why we are starting to see remuneration consultants talk about them. I think we're going to be seeing more policy discussion of this stuff, so lets hope this is start of a significant shift away from performance-related reward, and the excessive pay it results in when applied in the boardroom.