Tuesday 8 December 2015

Fidelity and the "premier supporter group of the Conservative Party"

Ahh.... Fidelity, the lure of right-wing British politics is just too strong for you isn't it?

I've blogged previously about the latest Fidelity link to the Tories - their involvement with the Leaders Group. According to the Conservative Party's own website this is the "premier supporter group" for the Tories, with an annual membership of £50,000.

As if you were in any doubt about which party Fidelity were rooting for in the General Election, the Q1 2015 disclosure of which "major donors" attended Leaders Group meals in the first quarter shows that both Barry Bateman and Simon Haslam represented Fidelity (FIL Holdings in the list). It isn't clear if the were both at one meeting, or if more than one was attended. As well as being a board member of FIL, Simon Haslam is of course also chair of Colt, where Fidelity is the major investor.

Of course the Conservative Party has embarked on a major assault on trade unions since the election, something that was trailed in their manifesto. If you are a trade unionist who is a pension fund trustee or otherwise has some involvement in this area you might want to choose asset managers who don't fund attacks on you. 

Sunday 8 November 2015

Liam Byrne's speech: a bit wrong, a bit sketchy, a bit interesting

Via Chris Dillow, I picked up this speech by Liam Byrne. It's interesting to read someone who obviously disagrees with Jeremy Corbyn try and come to terms with the new centre of gravity in Labour. It's worth noting, too, he uses the term "neo-liberalism" early on, language which most Blairites usually take to be an indicator that the person using it is out of date/an idiot/a Trot/all of the above.

But what I want to look at is what he says about short-termism and corporate governance, and what he argues for as reforms. I think some of it is off-target, but it's interesting to see what a Labour moderate is saying on these issues.

Actually, the diagnosis is pretty much the same old same old. Companies focus on the short term too much, prioritising dividends and share buybacks over internal investment and employee remuneration, whilst executives still coin it in. (Larry Fink of BlackRock is cited here as someone who is concerned about these developments.)

The reasons for this are that "our asset owners are simply too short term". Note he says asset owners rather than asset managers here. He goes on to say that our pension funds are part of the problem though, rather contradicting this point, he also says they are too small compared to other countries' funds and that they don't actually own many UK equities. He goes on to note that average holding periods for shares have fallen, and so the argument is essentially shareholders are too short term, and pass this attitude on to investee companies.

More interesting is what he says about corporate governance and company law, where Dominic Barton of McKinseys gets the obligatory nod. The section on UK law is quite surprising. He argues that section 172 of the Companies Act on directors'  duties enshrines the interests of shareholders above others, and essentially embeds "shareholder value" as an operational objective. Of course, the idea of that section was to enshrine "enlightened shareholder value" as an objective - the idea that playing fair by your employees, creditors etc was not in conflict with meeting the interests of shareholders. So it's interesting to see a Blairite advance this criticism. For what it's worth I agree that it basically does promote the interests of shareholders, certainly in comparison to the 1985 version below which put employee interests up their with those of members (shareholders).
"the matters to which the directors of a company are to have regard in the performance of their functions include the interests of the company's employees in general, as well as the interests of its members".
Whether directors' duties actually influence directors much is an open question. I have noticed that some companies use this to defend themselves - for example Barclays has used directors' duties to defend its decisions on both bonus pools (top of page three here) and tax avoidance.

“It is our fiduciary obligation to our shareholders - and it is the fiduciary duty of lots of our clients to their shareholders - to manage tax in an efficient way.” (from here)
So, the important bit: solutions. Looking at the shareholder side of the relationship Byrne's main big idea is... dual class shares. He notes that both France and Italy have passed laws providing greater voting rights to those who hold them for the long term, but he argues for going further. 
'Dual class shares' would allow us to go further - enabling the original founders and early venture capital supporters to control voting power.They’ve become de rigeur for the hottest tech initial public offerings, from Facebook and LinkedIn to Zynga and Groupon.
They’re allowed in the US and on the Continent. Why not here? 
(For info, I think the comment on tech companies is a straight lift from this FT article).

This bit of the speech is technically wobbly. I think I'm right in saying that Schroders still has a dual class share structure (though from memory they have voting and non-voting shares) and that UK-listed companies can still issue different classes of shares. As a comparison, I had a discussion with a BIS official several years back about differential dividends and was told company law didn't stop PLCs from introducing them, they just chose not to. The fact is that most UK companies got rid of dual class share structures, and would avoid adopting them now, because most institutional shareholders didn't like them. 

This is the problem with reforms of this nature, if the shareholders themselves don't change their attitude on the concepts of "one share one vote" or equal treatment of shareholders then simply permitting such structures (which as I say I think the UK does) wouldn't make much difference. Shareholders would oppose their introduction. We can see this opposition in the response Generation & Mercer got to their proposals on loyalty rewards or, a more practical case, when DSM tried, and failed, to introduce a loyalty dividend a few years back.

It's also important to note that shareholders didn't like dual class structures because they believed that they entrench management. Giving founder shareholders a shield against external shareholder power is certainly a double-edged sword. For example, Rupert Murdoch is a founder shareholder who benefits from a dual class share structure. One might argue that this does indeed allow him to take a long-term view, for example in his investment in Sky, but the flip-side is that it makes it practically impossible for independent shareholders to bring about change when things go wrong. We couldn't get James Murdoch off the News Corp board in 2011 despite having a clear majority of non-Murdoch shareholders onside. Another founder shareholder is Mike Ashley at Sports Direct - do we want him to have more power? 

I only say this to point out that a) we have been here before and b) there are decent reasons to have concerns about dual class structures. I'm certainly open to the idea that shareholder rights could be qualified, but it's important to be aware of the pitfalls.

Secondly, Byrne argues for a change in directors's duties and the purpose of companies. Again, what is actually being called for is a little unclear, so I'll just quote from the text:
I think we know that today’s corporate governance laws aren’t working in the national interest.
They’re not helping us think long term, or maximise investment, or pay our workers fairly for what they do.
So it is surely time for a review of corporate governance where we create the freedom for managers to think long term - that means giving greater weight to those who can't diversify their risk away: creditors, and workers past and present.
We might even go a step further and insist that directors have a fiduciary duty to declare the purpose of their business and enshrine a fiduciary duty to maintain that purpose in the company’s proceedings. Along with, Id suggest, reporting on how theyre doing closing the gender pay gap. 
This language sounds encouraging - giving more weight to the views of workers is obviously a good thing - though it needs to be spelled out how this would be achieved. The rest of this section seems to be suggesting something similar to what I think Colin Mayer suggested in Firm Commitment and something John Kay has also talked about - each company could set out their own purpose (i.e. we want to be the best widget manufacturer) rather than subscribing to a generic shareholder value objective.

Taken together Byrne's proposals, whilst a bit sketchy, are a fairly explicit turn away from shareholder primacy. That is interesting in its own way, given where Labour policy was on this stuff over the past 10 to 15 years.  However, I can't imagine much positive change in corporate behaviour resulting from the changes put forward.

In fact, the big problem is that on their own these proposals would principally have the effect of shielding companies against shareholder pressure. In other words, this would reduce one restraint on corporate managerial power, however weak and conflicted that restraint is. My own views here are pretty obvious - I would favour an increase in the power of those who work for companies, through board representation, perhaps tied to equity ownership but not as a pre-requisite. These kinds of changes would provide an alternative countervailing power within the firm. But this doesn't get a look in, and unions only get one mention - in relation to their weakness in the private sector.

Without introducing something along these lines I fear that simply reducing shareholder power would shift us more to a "benevolent dictator" model of corporate governance. In case you think this is over-egging it, endorsing an explicitly authoritarian governance model is exactly where another "big name" ended up on these issues:
Given the shareholder-management divide, the autocratic-CEO paradigm appears to be the only arrangement that allows for the effective functioning of a corporation. We cannot get around the authoritarian imperative of today’s corporate structure. (Alan Greenspan, from his biography The Age of Turbulence)
This approach implies a belief that, unrestricted by the bone-headed pressure of financial stakeholders who cannot and will not think long term, or employees who can't see beyond their own pay check, corporate leaders would finally implement the right strategies for their businesses, with the right levels of investment, employment and so on. Well, yeah, maybe. And perhaps this is where Blairism reasserts itself - the faith in corporate leaders as those who "create wealth" and know how to run stuff properly, if only we'd let them get on with the job.

So, a bit more thinking/talking going on with Labour that touches on the deep issues within corporate governance and ownership but, like David Sainsbury (who also used the term neo-liberalism), whilst Byrne acknowledges the evident flaws in the current model, the changes proposed in response are pretty small scale tweaks. They could even be counter-productive.

I think the renewed interest in corporate ownership and governance on the UK Left is unquestionably a good thing, and, as Byrne's contribution makes clear, the 1990s policy framework that Labour did so much to develop has pretty much reached the end of the road. But we are still quite a long way from having an alternative.

For what it's worth, my own view is that Labour must go beyond the soggy "consensus" on short-termism that exists in the comments of those such as Dominic Barton and Larry Fink. We will end up with the same old blah about amending the structure of executive pay and the need for less frequent reporting that will make no real change. Whenever there is a consensus amongst the powerful on what the 'real' problem is you can bet that this means that other options and viewpoints are being sidelined, and that the consensus 'solutions' will be pretty painless to them. If recent events in the Labour Party have taught us anything, it must be that the last thing any of us need right now is a lack of ambition, or to calibrate our ideas based on where we think the "sensible" consensus is amongst corporate leaders or advisers.  

Tuesday 27 October 2015

Caledonia Investments update

Just keeping this one warm. As it stands, the Electoral Commission register of donations continues to list two donations from Caledonia Investments PLC worth £4000 in the financial year to 31 March 2015. As previously noted these were not disclosed in the company's annual report and were not covered by previous authority granted by shareholders (Fidelity voted in favour, natch) to make such donations.

As it stands, the FRC has told me that the company has "confirmed" to them that it did not make the donations. The Electoral Commission has told me that it is in discussions with the Conservative Party about the donations. On this basis of the info I currently have, I assume that the donations were wrongly logged by the Party, possibly because they were made by the Cayzer Trust (though I'm just speculating here). Otherwise, if the donations were made by Caledonia, I think company law has been breached.

Thursday 15 October 2015

Behavioural insight as a weapon

I've blogged on an off over the years about behavioural economics and what lefties can usefully learn from it. It seems like the surge of interest on the Left in the UK in this area has subsided a bit compared to a few years back. But I'm sure the same is not true of the Tories. The Behavioural Insights Team (or 'Nudge unit') is now a company arm's length from government, but is still beavering away on all kinds of topics.

They popped into my head today when I was thinking about the Trade Union Bill. From a behavioural perspective a lot of elements of this Bill seem to do the wrong thing in terms of engaged membership. For example, take the remove of Deduction of Contributions at Source (DOCAS). This removes the ability of potential union members to have subs deducted via payroll, and will require unions to sign them up individually by direct debit.

This is the opposite of what the Behavioural Insights Team advises in other areas. For example, in this 2013 paper on increasing charitable giving (which can still be done via payroll deduction!) they say: "One of the most important lessons from the behavioural science literature is that if you want to encourage someone to do something, you should make it as easy as possible for them to do so."

Getting rid of DOCAS makes it more difficult for employees to pay union subs. So we might reverse the message and say: if you want to discourage someone from doing something you should make it as difficult as possible. Seen in this way, the DOCAS proposal makes a lot of sense - if behavioural science is being applied with the objective of discouraging employees from joining unions.

Or look at the proposal on the political levy. Here the shift is from an opt-out to an opt-in model, with the added requirement that members are required to opt in again after five years. In behavioural terms this is changing the 'default'. Again, it's useful to quote the Behavioural Insights Team itself. The text below comes from the doc "Four Simple Ways to Apply Behavioural Insights" (my emphasis added):

1.1 Harnessing the power of defaults
We have a strong tendency to stick with the ‘default’ option, which is the outcome that occurs if we do not choose otherwise. Understanding the default and how it can be changed can significantly improve uptake of a service.
Some of the most famous policy examples from the behavioural economics literature relate to changing the default option. For example, when individuals are automatically enrolled onto pension schemes but can choose to opt out, they are much more likely to end up with a pension plan than if they have to actively opt in (see Box 1.1).
Similarly, organ donation schemes can be set to automatically enrol people. Or tax systems can be put in place that automatically deduct individual’s income tax without an individual having to take any action (as in the UK’s Pay-As-You-Earn system). In these examples the default option can be a very powerful tool for encouraging different outcomes. But because of the power of these particular policy tools, they will also require careful consideration of what might be acceptable politically and to the public at large.
If we look at what is proposed in relation to the political levy we might look at this line in particular:  Understanding the default and how it can be changed can significantly improve uptake of a service.

Currently the political levy default is opt-out, encouraging members to stay in (but having the option to leave). But it is being shifted to opt-in which will encourage members to stay out. What's more the added requirement of a 5 year re-approval of your own decision if you do opt in adds another encouragement for members not to participate.

Once again we see that the policy makes sense - if we reverse the objective. The Tories want less take-up, not more. I think they do indeed understand that the default is a very powerful tool, and they are using this knowledge by changing the default (to opt-in) in order to significantly reduce the take-up of paying the political levy. To use the Behavioural Insights Team example of pensions, if this approach was applied by a pension scheme - you have to actively join, and have to choose again after 5 years - we would assume the sponsor didn't want people in it.

To me it's pretty obvious the Government knows exactly what it is doing with theses interventions - making it harder for employees to join unions, and making it harder for them to pay the political levy. What is significant is that these policies are well-designed from a behavioural perspective if the objective is to reduce union membership and weaken union political activity. What we see here, then, is behavioural science being used as a weapon by the Right against the labour movement. We need to learn a lesson here.

The only question I really have is whether the Behavioural Insights Team was consulted or advised on the Bill, and I can imagine that it wouldn't look good if it emerged that the Government was using psychological tactics to weaken unions. So I was interested to see one stray reference to "behavioural insight theory" in the BIS paper on balloting (para 79 on page 16 here).


Monday 12 October 2015

Taxpayers' Alliance and corporation tax

There is a fantastic quote from the Taxpayers' Alliance in this BBC story about Facebook that makes explicit the trouble they have as a "taxpayer" body commenting on this issue.

"Taxpayers will be justifiably confused and angry about this tax bill. But Facebook is right to say that it is complying with UK law, which shows that the problem lies with our complex tax code, and that is what politicians should address as a matter of urgency. We have to ensure our taxes are simple to eliminate loopholes, and that taxes are low to increase our competitiveness, so that companies choose to base themselves here."

So taxpayers will be justifiably angry that Facebook is paying so little tax, but Facebook is right to pay so little tax, and our politicians need to make sure that corporation tax is low so that companies like Facebook operate here. Pick the bones out of that one as they say. The lack of a clear message from an organisation whose messaging is usually very straightforward (and effective) should tell you that they struggle with this issue.

The bottom line, as most people know, is that the TPA is a right-wing pressure group masquerading as a body that represents taxpayers. Ideologically its position is that low taxes, including low corporate taxes, are good. Which is fine, but that means they find it really hard to articulate a position on corporate tax avoidance that is both in line with their real views and doesn't muck up their populist campaigning stance. Really when they see Facebook paying (chuckle) £4327 in corporation tax the TPA don't see a problem, because the company is simply 'optimising' it's tax planning in line with the law. But they know they can't say that out loud because (rightly or wrongly) most actually-existing taxpayers will think Facebook is taking the piss. Hence you get that tortured quote above.

Friday 9 October 2015

Sports Direct chief exec faces criminal charge over USC collapse

Even since I blogged earlier things have got worse for Sports Direct. The Grauniad broke the news that the company's chief executive Dave Forsey is facing a criminal charge over the USC collapse.
David Forsey, the chief executive of Sports Direct, has been charged with a criminal offence relating to the collapse of its fashion retailer USC.
The 49-year-old businessman is accused of failing to notify authorities of plans to lay off warehouse staff in Scotland, around 200 of whom were given just 15 minutes notice by USC’s administrator in January that they were losing their jobs. Forsey was sent his summons in July and his case is scheduled to be heard at Chesterfield magistrates’ court next week.
The UK Insolvency Service said: “We can confirm that criminal proceedings have been commenced against David Michael Forsey. He is charged with an offence contrary to section 194 of the Trade Union and Labour Relations (Consolidation) Act 1992.
“The investigation into the conduct of the directors is ongoing. The inquiries are at an early stage and given the criminal proceedings it is not possible nor would it be appropriate to comment any further.”
This also reminded me of these comments from one of Sports Direct's major investors shortly before last month's AGM.
[A] top ten Sports Direct institutional shareholder has privately accused the retailer’s critics of having a “fundamental illiteracy of capitalism”.
“Unions and capitalism are not a natural fit but it is important to remember that Sport Direct has not broken any laws," the City investor, speaking on the condition of anonymity, told The Telegraph.
Well, now it looks like Sports Direct may have broken the law. What is more, I can't believe that anyone who has followed this company can be surprised by this development. The warning signs have been there for a long time, was simply a question of when they would trip up. In fact, the entire commentary from the mystery investor in that Telegraph piece is worth reading just to remind yourself of the education job people in the labour movement working on capital stewardship have to do. Some of these asset managers just don't seem to understand capitalism...

Sports Direct: you can't say you weren't warned

Sports Direct is back in the news, for all the wrong reasons. This week alone we have seen the following:

  • A BBC documentary revealed that ambulances were called to Shirebrook dozens of times in 2013 and 2014 because of employee illness. Some of these were clearly life threatening.
  • A couple who supplied workers to Sports Direct - at Shirebrook again - have gone on trial accused of modern slavery.
  • A group of former workers at Sports Direct's USC business have been awarded a protective award of 90 days pay after they were fired with 15 minutes notice. The parter representing them attacked Sports Direct for "disgraceful and unlawful employment practices".    

Sports Direct is a FTSE100 company, meaning that it's almost certainly sitting in your pension fund's investment portfolio. There are warning lights blinking here - both on employment practices and corporate governance - so Sports Direct's shareholders have a real responsibility to tackle it. No-one can claim they haven't been warned.

Monday 5 October 2015

LGPS fund merger on the way

Blurb below from Osborne's conference speech today. Directly linked to infrastructure investment, not sure if the intention is to invest back in the local region, which might raise a few issues...

At the moment, we have 89 different local government pension funds with 89 sets of fees and costs.
It’s expensive and they invest little or nothing in our infrastructure.
So I can tell you today we’re going to work with councils to create instead half a dozen British Wealth Funds spread across the country.
It will save hundreds of millions in costs, and crucially they’ll invest billions in the infrastructure of their regions.

Thursday 1 October 2015

Another Fidelity - Conservative Party link

I've blogged a lot previously about the many links that exist between the asset manager Fidelity and the Conservative Party. I've just discovered a new one that provides a bit more insight into how significant the relationship is.

The Leader's Group is one of the Tories' donor clubs. In fact, according to their own blurb, this is the "premier" supporters group:

Annual membership: £50,000 Chairman: Howard Leigh
The Leader’s Group is the premier supporter Group of the Conservative Party. Members are invited to join David Cameron and other senior figures from the Conservative Party at dinners, post-PMQ lunches, drinks receptions, election result events and important campaign launches.
It's not cheap either, at £50,000 for an annual membership. Helpfully the Tories provide some data on who meets who in this club, and look who turns up in their disclosure for Q4 2013:

FIL Holdings (UK) Ltd (represented by Barry Bateman, Director )

I had vaguely heard of Barry Batemen so I had a google around, and it turns out he's the vice-chairman of the UK business. This is a very senior position in the firm.

So in addition to funding the Conservative Party, employing a Conservative MP, sponsoring meetings of the Conservative Party's business liaison organisation and voting in favour of PLCs making political donations to the Conservative Party, Fidelity had one of its most senior UK people at an event organised by the Conservative Party's "premier supporter group".

Thursday 24 September 2015

Don't let your capital cut your own throat

Across the world we can see conservative political parties engaged in an attempt to destroy the power of unions in the workplace, weaken their resources and squeeze their financial support reformist political parties. This is a concerted attempt to destroy industrial and political opposition. Even the FT described the Trade Union Bill as crossing the road to pick a fight.

It is clear that these attacks are as much about political funding as they are about unions themselves. Unions remain an important source of funding for socialist / social democratic parties and extreme elements on the Right want to cut this off in order to weaken political opposition.

The labour movement should should learn a lesson here. Every day we allow workers' capital, our deferred wages in pension funds and other vehicles, to be used to cut our own throats. There are union trustees on the boards of funds that employ asset managers, hedge funds etc that finance those who want to destroy organised labour and its political allies. This cannot be allowed to continue, especially in an era in which conservative parties have, as the FT says, decided to pick a fight with us.

Pension funds and other benefit schemes should - at the least - adopt policies or write mandate agreements that require any firm employed to make an explicit statement before appointment on any donations to political parties or campaigning organisations made by the firm or its senior executives. Once appointed, firms should be required to make an annual statement to the board on any such activity. Let trustees decide if they want to appoint asset managers that lobby against their interests. There is a role for policy here too - in the retail market why not firms to make a statement on the front page of their website about any political activity, in order that customers can make an informed choice?

There is no need to bar donations outright - though individual funds might wish to adopt a policy of not employing firms that do. Rather this can be approached as an issue of disclosure, choice and avoidance of conflicts of interests. The Right has got away for far too long with skimming money off our pensions and savings to fund attacks on us, our unions and our political allies. It's time to stamp this out.

Sunday 20 September 2015

Playing The Long Game

Short-termism, on the part of corporates and investors, is an issue that apparently will just not go away. The first wave of criticism seems to have broken in the early 1990s. Michael Porter's work on the subject is probably most famous, but also worth a read is the Century Foundation task-force report (which involved Robert Shiller). Around the same time, in the UK frustration and concern about short-term pressure from financial markets was expressed by many corporate leaders. This lead the then trade body for asset managers, IFMA, to commission a response from Paul Marsh (Short-termism On Trial) which, perhaps unsurprisingly, absolved investors of any responsibility and put the blame back on corporates.

Looking back on this period two things are worth noting. First, many corporate leaders were willing to speak out, and be openly critical of pressure from financial markets. Second, the types of proposals that were put forward by those looking at the subject were fairly significant structural changes, such as amending shareholder rights, changing the tax system or creating new types of investment vehicles (remember "relational investing" anyone?). I think if we look back on this period what we really see is corporates and grappling with the emerging relationship with institutional investors. Many were worried about their power being usurped and their priorities being set for them by a new, powerful set of external actors.

To take an example from the time, in 1990 Sir Hector Laing, then chair of United Biscuits and later Conservative peer, contributed an essay to an NAPF report entitled Creative Tension in which he compared the power of concentrated share ownership in the hands of a few institutional fund managers to the power of the trade unions that the Tories had seen off. He even warned that this concentration of power was an equivalent threat to the UK's economic performance.

If we wind forward a couple of decades, we find that short-termism is still being discussed as issue of concern. What is more, many would argue that the problem has got worse. The average holding period for shares has continued to drop, in part driven by the rise of high frequency trading which makes a mockery of the idea that much equity trading is based on an assessment of the prospects of the companies to which they relate. In addition there is concern about the extent of investment undertaken by companies in countries where financial markets play a significant role in corporate finance.

However, what we see - in general - is that corporate leaders speak out much less often than they did in the past, and that the policy solutions put forward are much less ambitious. Partly this is explained by corporates (for whatever reason) accepting the agenda of financial markets. I personally think Tony Golding nailed this in his book on the City:
Industrialists no longer make speeches about ‘short-termism’ because the rules of the game have changed. The 1990s saw the emergence of a New Industrial Compact between senior management and institutional investors. Today’s CEOs and FDs accept the process of regular dialogue, the mantra of shareholder value, target setting and performance appraisal as a fact of life… [T]he evidence points to the conclusion that managers have adjusted to institutional timescales rather than vice versa. What is clear, however, is that where once there was a mismatch, there is now an identity of interest.
And if you want to see an example of this New Industrial Compact in practice, remember that the bodies representing the interests of the big corporates on the one hand (CBI) and the big asset managers on the other (IMA) clearly collaborated in their submissions to a consultation undertaken by the government in 2011 on... err... short-termism.  

Alongside this has occurred the gradual codification of shareholder rights in various regulations, codes etc and the associated acceptance of a basic model in policy of how markets work and how problems are best dealt with. The elements of this model seem to me to be: a general scepticism about the efficacy of direct regulatory intervention (with the law of unintended consequences frequently invoked); a belief that market failure can be addressed by increased disclosure and empowerment of principals; and a belief that individuals respond to financial incentives in a relatively straightforward way that can be manipulated.

I think these factors combined help explain why, despite continued concern at the potential of short-term pressure from financial markets, recent proposed policy interventions seem well short of the scale required. For example, both Alfred Rappaport and Andrew Smithers have written very impressive books about the problems of short-term pressures in the current set up. Yet both, to me, have an heroic faith in the ability of tweaked financial incentives to tackle these forces. Or, in the investor world, look at the negative response that the Mercer/Generation research into potential 'loyalty' rewards for shareholders received from large shareholders themselves. A lot of people come to these issues with a lot of priors. We now have (at least) a second generation of people coming to these issues who take ideas like "equal treatment of shareholders" as well-established fundamental truths. This does not make for a very wide-ranging discussion of options.

In light of this it is very encouraging that some people are willing to think quite a bit differently. A recent addition to the small library you can assemble on short-termism is Playing The Long Game by Laurie Fitzjohn-Sykes. According to his bio, if I understand it correctly Laurie is an ex sell side analyst, which brings an interesting perspective, especially given John Kay's view on his former profession!

I won't beat around the bush - I like this book, and I say that as someone who has read a fair bit of material on these issues. First, some general comments. The book is short and well written, so if you are a newbie to this area you won't find yourself out of your depth, or giving up in the early pages of a monster. On the other hand, despite the path being pretty well trodden, I was pleasantly surprised to find Laurie references some papers etc that I haven't read, and which I will go and have a look at.

Now to the guts. From the outset he accepts the argument that short-termism is a problem, and cites in evidence factors such as low investment by corporates and levels of cash returned to shareholders, and argues that this a problem for all parties. Importantly, given what I've said above, he also states as  early as the first chapter that previous proposed reforms have been too small in scale. I won't summarise the commentary on the evolution of the current situation (such as the growth of institutional investors) save to highlight that he (rightly) skips over Drucker's "pension fund socialism" quickly. It's a beguiling idea that too much time has been wasted on, given that we know what came next. Socialism it wasn't.

Along with other critics, he sees the introduction of short-term share-based management compensation (managerial heroin I think Buffett called it?) as a driver of the short-termism that has arisen in the system. He also shares the view of Rappaport and others that analysis based on short-term financial results is also part of the problem, given the uncertainty attached to looking further into the future. Because management know more than investors, but are incentivised to keep the share price up, they can choose paths that achieve this even if they believe this nay not deliver long-term success. And the whole process is turbo-charged because the "investors" are typically asset managers who themselves face business risk as a result of the pressure for short-term from clients like pension funds.

Turning to alternatives, Laurie provides a pretty even-handed brief review of the other models, or varieties of capitalism if you prefer! The arguments here are familiar to most - arrangements like block-holding and different governance structures (co-determination etc) can allow companies to take a longer term perspective, but also makes them less flexible. Interestingly, he also uses examples of tech companies with controlling founder shareholders. These can often be *horrible* from a mainstream corp gov perspective, but would they have been able to develop the way they have with a regime more friendly to minority shareholders. But he also makes the point that this may not be sustainable or desirable over the long term.

This section is also where I have the greatest disagreement with Laurie, since he is critical of a shift towards a stakeholder model. His arguments are principally that this would put too much power with management, and would be difficult to implement. I don't want to take up too much of a review setting out my own thoughts but I have some quick responses to this. I believe employee representation plus ownership / profit-sharing should be introduced because: employees generally contribute more and take higher risk than shareholders; they are better placed and better motivated to monitor management than shareholders; I think shareholder value can be created without it being an operational objective / codified in company law etc. More generally, if we look at firm structure as an issue of political economy, rather than just economic efficiency /market failure, I think there is a compelling case for employees to have a greater stake, particularly as this might help tackle inequality. But here endeth the lesson....!

So finally come the solutions. Here, in line with his earlier comments, Laurie goes for a range of policies tackling different aspects. He is sceptical of the value of greater board independence on its own to improve governance, or of board reforms to tackle short-termism. He suggests instead that directors be encouraged (financially) to speed more time on their duties, and that they could have greater poet to commission external advice. But he is clear this isn't a big part of the solution.

On exec pay, he first proposes the classic combo of greater disclosure and greater shareholder power which has not been much of a success to date. But he also suggests a penal tax rate of 80% for directors' earnings over a certain level (say £500k) unless this in invested in the company's own shares for 10 years. And he proposes directors' pension contributions be locked up in the company too. For reasons I won't rehearse I'm sceptical about the potential for much behavioural change from exec pay reform, but at least we get some radicalism here.

Turning to investors, he proposes the creation of a tax advantaged savings vehicle that would have to hold shares for a minimum average of 3 years. The suggestion is to make this attractive using a corporate tax reform rebate, which I will come back to later. The idea is that by reducing turnover this would force fund managers to take a long term view, rather than chasing quarterlies and dividends. Again, the detail needs to looked at, but I'm attracted to the willingness to make a structural change.

Where I don't agree is Laurie's suggestion that this menu of reforms be made attractive to companies and investors by offering corporation tax rebates. Full disclosure: I've just spent two days at a union conference on tax avoidance and I am worried by the race to the bottom on corporate tax rates, so I'm very resistant to the idea of further "base erosion" (especially given the impact on developing countries who rely disproportionately on corporate taxes). But there is no reason this couldn't be tweaked, if only presentationally. Perhaps one option is that the default is the new set-up, but with corporates able to pay more to opt out?

Finally, he also makes recommendations for the improvement of third-party financial analysis. These are aimed at the scaling up of researcher providers, distancing research from investment banks, and making the research available widely. An interesting idea here is that that institutional investors be subject to a research levy, based on AUM. I can see this would be controversial, but it would perhaps tackle the problems caused by current research allocations by asset managers. As an aside I wonder if Laurie has looked at the experience of the Enhanced Analytics Initiative which also tried to achieve change in the type of research provided by changing the way research budgets are allocated. This had an ESG slant, but was aiming at ensuring long-term thematic issues were properly covered. Unfortunately, I'm not sure it worked.

To draw things to a close, I'm not on the same page as Laurie on some points, and I would certainly favour a shift in stakeholder representation and voice within companies. As I said earlier this is partly because these are deeply political issues and therefore I don't think should be considered solely in terms of market efficiency, but that's a debate for another day. But I am impressed with his willingness to put forward a broad range of proposals that should be introduced together.

Whatever disagreements I might have with the specifics this more likely to achieve change than many ideas that come from within the system and seem to envisage that only what is reported (disclosure) and how people are paid are worth looking at. In addition, with the idea of an alternative regime into which companies andinvestors could opt, Laurie shares some important common ground with Colin Mayer's ideas in Firm Commitment (which is closer to my own personal views). If there are some broad outlines emerging they may be these: variations of the corporate form - even within markets - can and should be encouraged; and it is OK to make trade offs between liquidity, rights and reward provided that participants are able to choose, rather than being forced down one path.

Perhaps, we can see the early signs of escaping the unchallenged assumptions that have prevented meaningful debate this highly important area for years.

Sunday 13 September 2015

A few shadow BIS ideas

A few quick thoughts from my corner of the world (corp gov etc) -

Introduce requirement for profit-sharing and/or employee share-ownership, to ensure that wealth is divided more evenly in line with contribution before we get to the tax & benefits system.

Employee representation on boards to balance and complement the interests of shareholders. This would recognise the major role employees play in successful businesses, compared to providers of capital.

Revisit a public interest test for takeovers, in line with LFIG proposals.

Mandatory disclosure by financial intermediaries during beauty parade / tender process of any political donations made.

Mandatory disclosure of all fund management fees and transaction costs in standardised format.

Disclosure by companies of details of lobbyists employed and fees paid. Shareholder approval required in the case of PLCs.

Reduce threshold for filing shareholder resolutions to enable more asset owners to participate more easily.

Radical simplification of executive pay in line with High Pay Centre recommendations.

Onwards and upwards, backwards and sideways

Thought I'd try and blog a few of my own thoughts about the Labour leadership etc, since no-one else seems to be voicing an opinion...

Something like this has been on the cards for a long time. A lot has been written about the fraying of party loyalties and the rise of populist politicians, but that doesn't really explain enough about the developments specifically in Labour in the UK. So a few things from my own experience are worth chucking out.

It has been noticeable in recent years that a number of left-leaning friends, neighbours etc have felt unable to vote Labour. Some went Lib Dem (!) in 2010 then Green in 2015. These are people whose instincts are absolutely left-of-centre but something has made them unhappy to vote Labour for some time. But a number of them have come back into the fold as a result of Jezmania (whether they stay or not is another question...).

Even as someone who has only ever voted Labour, I too have felt the repulsion from my own tribe in various ways. For instance, I think some Labour people underestimate just how bad it looks when ex-ministers take up corporate advocacy gigs after leaving office. I don't care how much of their earnings they subsequently feed back into the party, or into charity. I don't think Labour politicians should use the influential voice that the movement has given them in support of JP Morgan, Bridgepoint Capital etc. For one, these fcukers can always find someone willing to say anything for money. Far more importantly when our people do it then it makes us look unprincipled, hypocritical and on the make. We look like the other lot.

On a related point, when I've done policy work I've been surprised by how small c conservative some Labour types are. I've sat in meetings and would have been genuinely unable to tell who the Labour person was if they didn't have their badge on. I know some will see this as A Good Thing, as Labour needs to be mainstream, to understand the industry etc, but I know my turf quite well, and I know lobbying bullshit when I smell it. Too often we have been willing to repeat it without challenge for fear of being see as too radical / anti-business.

Finally I personally have found the dominance and intolerance of Blairite voices in the media very irritating. I don't think it is good for Labour in general that they have been over-represented for so long, and nor has it been good for their own favoured candidates in the last two elections. Blairism in political terms has become a conservative force mainly concerned with telling the party what it can't do, whilst putting forward policies that sound like business change management programmes. Needless to say this has not proved popular, yet Blairites have belted out the same old tunes, even louder, whilst insulting those who don't sing along. In this election in particular they have deployed exactly the same "no compromise with the electorate" approach they (rightly) criticise the party haven taken in the past. And 95% of the electorate gave them two fingers.

We would be much better served by a broader array of Labour commentators, who have different ideas. Particular low points for me have been the claim that the mansion tax is "anti aspiration" which simply comes across as acquiescing to the interests of the very rich in London, and the incessant drumbeat for military action. I quite like David Aaronovitch et al, but I feel I could tune out for years and when I tune back in they would still be bellowing for us to commit troops, and that we would be failing our moral duty to do so, and it would be only the target that had changed. Syria is a case in point. The same people who screamed for us to bomb Assad two years later want us to bomb Daesh now without any acknowledgment of the obvious contradiction.

For all these reasons I can totally understand why many people wanted to kick back. I don't share their obvious desire to rub the Blairites' noses in it but this has been in the post for years. I thought Liz Kendall ran a decent campaign, the low vote she got is explained by much bigger factors than the personal strengths of the candidate.

But, reflecting on why we got here doesn't help much. We have now elected a genuinely left-wing leader by a large margin and we have to figure out what to do. I'll try and blog about that next.

Thursday 10 September 2015

Sports Direct governance in a nutshell

This comment from Keith Hellawell is almost too good:

“This is not Mr Ashley’s company,” Hellawell replied. “He is a major shareholder, but it has a life of its own. I can assure you that we on the board, unless Mike wants to disagree with me, are satisfied.”

From The Grauniad

Wednesday 9 September 2015

Sports Direct, unions, capitalism and client relations

Sports Direct had its annual general meeting today. Coverage of the AGM has been dominated by criticism of the company's governance, its remuneration policy and its employment practices. A quick google shows how much criticisms of employment practices like the use of zero hours contracts are embedded in media reporting of this meeting. Unite has done a fantastic job there.

Unions also got in on the AGM action by running a Vote No campaign on chairman chairman Keith Hellawell. This was run by Trade Union Share Owners, the collaborative group set up by the TUC, Unison and Unite in 2013 (and which the ITF joined earlier this year). The TUSO campaign was focused on both the crappy governance of the company and infamous working practices. There is a good background explainer to this here.

We drew blood this time - the company received large votes against from independent shareholders on several resolutions. Hellawell saw almost 30% vote against or abstain on his re-election, up from about 20% last year. And the remuneration policy resolution looks to have received the support of less than 50% of the free float. So another AGM dominated by a scrap with shareholders, and we know that some of them have followed up with the company on the issues raised by unions.

Not everyone is happy. An anonymous (aren't they always?) "top 10" investor in Sports Direct has accused unions of a "fundamental illiteracy of capitalism". The mystery asset managers says that:

  • "unions and capitalism are not a natural fit" 
  • the company "has not broken any laws"
  • companies that tick the right governance boxes "are also the most cumbersome"
  • the Sports Direct team is "under-remunerated" (you could just say paid too little) compared to its peer group

To state the obvious, this is a crock of shit. It also encapsulates why initiatives like TUSO are necessary. We simply cannot trust asset managers who are paid with our money to manage our money to act in our interests.

First there is the worrying lack of knowledge on display here. To claim unions and capitalism are not a natural fit says far more about the ignorance of some in the asset management industry of the world around them than anything else. Unions have co-existed with capitalism for a very long time - they have certainly been around a lot longer than the professional asset management industry in the UK which only really emerged in the 1970s (for example Warburgs tried to sell their asset management business, which became Mercury Asset Management, to Flemings for £1 in 1979 because they saw no future in it). Unions exist because capitalism on its own generates unacceptable outcomes for workers and therefore out of self-interest those workers combine to bargain for a better deal. One creates the conditions for the other to exist. I read about this in books...

Second, lets look at whats being said here about the company. To state that the company hasn't broken any laws is to imply that how Sports Direct employs and pays its employees is basically OK. You might not like it, but it's not illegal. Leave that for and a moment and look too at what they say about the board - it may be under-paid compared to its peer group. Put those two things together and it becomes clear that what our asset manager sees when they look at Sports Direct is a company where the bigger problem is not that thousands of workers are treated poorly, but that the management team isn't paid enough. What the actual fuck. Again this says a great deal about the warped perspective on real people's lives that working in the City can create. I have little doubt they will consider their own views rational and reasonable.

Remember this asset manager only has a job because millions of workers deferred their wages, thus creating pools of capital that are investable. The mystery manager almost certainly manages workers' capital right now in the shape of pension fund mandates. And look at the sort of crap they come out with about one of the most notorious employers in the UK. To use a phrase from the corp gov microcosm - there is simply no alignment of interests. After all, we know from NAPF research that scheme members are more interested in seeing engagement on pay and conditions for employees than exec pay.

At the least we are going to have to increase accountability for voting and engagement activity in these cases where employment issues are front and centre, and if we don't like what we see we need to direct more of it. I would certainly urge trustees of other union pension funds to get them to join TUSO so we can maximise our impact. But in the wider world its important that employee trustees follow up on cases like this. Otherwise we will continue to see workers' capital used to advocate for poor employment conditions and higher executive pay.

Saturday 5 September 2015

Responsible investment in infrastructure

DCT Gdansk is a new deepwater port development in Poland. It is majority owned by Macquarie's Global Infrastructure Fund II, with several Australian superannuation funds amongst the investors, along with another infrastructure manager/adviser Whitehelm Capital.  

The Polish union Solidarnosc (yes, that one) has been seeking a collective agreement with the management of DCT Gdansk to resolve a bunch of issues, like keeping workers on temporary contracts for years, low pay etc. Unfortunately, management's response has been to get rid of union activists, most recently a leader called Maciek Konopka.

In response the ITF has launched an online campaign to call on DCT Gdansk for Maciek's reinstatement and to agree Solidarnosc's demand for a collective agreement (you can sign it here). This campaign is also directed at Macquarie as the majority owner. Macquarie is represented on the board of DCT Gdansk so must be aware of these issues and is well placed to help resolve them. 

This story was picked up last week by Infrastructure Investor, and hopefully as a result it will get noticed more widely. Where investors have concentrated ownership of infrastructure assets they cannot shrug their ESG responsibilities. Let's hope Macquarie sees sense and does the right thing.

Thursday 3 September 2015

Trade Union Share Owners group calls for Sports Direct Chair to be voted out

Unions in the UK increasing capital strategies activity - TUSO calls time on poor corp gov and employment practices at Sports Direct. TUC release (from here) below -

The Trade Union Share Owners (TUSO) group has today called on shareholders at Sports Direct to vote against the re-election of company Chair Keith Hellawell – citing long-standing concerns over the company’s governance and treatment of its workforce.
TUSO, a coalition of trade union funds (comprising the TUC, Unite, Unison and the International Transport Workers Federation) with over £1.5bn assets on the capital markets, has shareholdings in Sports Direct.
TUSO has written to Sports Direct’s other shareholders urging them vote out Mr Hellawell at the company’s AGM on Wednesday 9 September.
The call comes after MPs on the Scottish Affairs Select Committee accused Mr Hellawell and his board of running Sports Direct like a “backstreet outfit”.
Mr Hellawell and Sports Direct have faced widespread criticism following the collapse of Sports Direct’s subsidiary company USC in January, which left 88 staff redundant and £15.3m of debts to suppliers and landlords.
The Institute of Directors has described Sports Direct’s board’s handling of the USC crisis, which also left taxpayers with a £700,000 bill, as “dysfunctional” and “not acceptable” for a FTSE 100 company.
TUSO has outlined the following arguments against Mr Hellawell’s remaining as Chair of Sports Direct:
• His lack of knowledge and oversight during the collapse of USC
• His failure to tackle bad employment practices at Sports Direct, such as the extensive use of zero-hours contracts which account for the vast majority of the company’s workforce
• The continued practice of holding board meetings at which key members are not in attendance
• His failure as Chair of the board’s nomination committee to meet the Davies Review target for 25 per cent of board members to be women
TUSO fears that the performance of the Sports Direct Board is affecting the company’s performance and value. Morgan Stanley earlier this year put a 20 per cent discount on Sports Direct shares because of poor governance.
TUSO also notes evidence of growing unease among shareholders. One in five independent shareholders at last year’s AGM voted against Mr Hellawell and TUSO is urging more to follow suit.
TUC General Secretary Frances O’Grady said: “Shareholders and workers both have an interest in reform at Sports Direct. We all want to see a successful business, but this success needs to be built on strong governance and good employment practices, not zero-hours contracts.
“Mr Hellawell is ultimately responsible for the performance of his board and must be held accountable for its actions. Without root and branch changes Sports Direct’s reputation will continue to be dragged through the mud.”
Unite General Secretary Len McCluskey said: “There are serious questions about the corporate governance and employment practices of Sports Direct. An estimated 3,000 agency workers are on zero-hours contracts at its Shirebrook depot, earning just above the minimum wage and being subjected to working conditions that are more akin to a workhouse than a FTSE 100 company.
“Separately, by Mr Hellawell’s own admission, a further 75 per cent of staff across its UK stores are also on zero-hours contracts, with Sports Direct accounting for a fifth of all such contracts in the retail sector. These employment practices combined with weak corporate governance mean a change of chair is needed to lead reform of Sports Direct and avoid lasting reputational damage.”

Thursday 27 August 2015

Murdoch paper reports police raid on union that never happened

This is massively off topic, but I thought it deserved a blog. I follow a few Aussie unions, union leaders, activists etc on Twitter and this morning I saw people from the CFMEU tweeting about a story in the Murdoch-owned Herald Sun.

The story said that there had been a police raid at the CFMEU's offices in Melborne. What's more the story stated the following:

Rank and file CFMEU members at the office said there were several police there.

It's clearly fair to infer from this that the journalist spoke to more that one CFMEU member (it says "members" after all) at the office who confirmed the presence of police.

I can't link to the actual news story, because it has subsequently been taken down and replaced with this one. The first para is below:

VICTORIA Police have confirmed that there was not a raid at the CFMEU offices in Melbourne this morning.A report on heraldsun.com.au incorrectly reported that the raid had occurred.
The report said Taskforce Heracles, which was set up to investigate claims raised in the Royal Commission, had visited the union’s Swanston Street offices. The error was made by the reporter.    
Now I'm old enough to know that journos sometimes make up quotes, I don't just mean that they make the quotes sound/read better. Some of those "A close friend of Harry Styles said..." are clearly fabricated. But they typically relate to an event/person/object that actually exists.

What we seem to have in the case of the Herald Sun story are made up comments about a fictional event. Non-existent bystanders have confirmed an event that never happened. This is pretty impressive, and to call it an "error" doesn't do it justice, it's more like a thought experiment - can a fictional event have bystanders? In any case career in chidrens' fiction seems to beckon for this journo.

The background to all this is, of course, the ongoing attacks by the Abbott "government" on the labour movement in Australia, which has been roared on by Murdoch and his mouthpieces. The wheels are already coming off though, just Google Dyson Heydon for details, and helpfully now a Murdoch paper has joined the Keystone Cops by running a clearly defamatory story about something that never even happened.

Look out for a one para apology on page 8.

Tuesday 25 August 2015

One share, one vote

I've only followed the progress of the Shareholder Rights Directive at a distance, but it strikes me that    it provides a fairly important indicator that something is up. The abandonment of the 'One share, one vote' principle, and the encouragement of alternative structures that actively undermine it, seem to me to be one of the most dramatic shifts in direction in corporate governance policy for some time.

It wasn't that long ago that Charlie McCreevey was trying to push through one share one vote, now the SRD is leading in completely the opposite direction.

I personally don't have a particularly strong view either way on this one. From memory McCreevey's efforts were stalled at least in part because the EC's own research could find no evidence for the economic benefits  of one share one vote (though I have no doubt that other factors were at play in the decision). That seems pretty important to me and added with the wider issues of limited shareholder commitment I lean towards favouring loyalty rewards, but I know most investors hate this kind of thing and even vote against it.

But my views aside, the about turn seems pretty significant. The optimist in me wants to see this as a willingness to think a bit more deeply about governance and the fact that the extension of shareholder "rights" is not comparable with political enfranchisement when the "electorate" is largely comprised of often conflicted intermediaries. It may be a further sign of disillusionment with the US/UK model of corporate governance, and almost certainly reflects the UK's diminished status when lobbying in Europe over these kinds of issues. Maybe, even less positively, it reflects lobbying from corporates who don't want activist funds breathing down their necks.
Whatever the mix of factors is, something important in corporate governance has happened here, and it leaves the UK on the periphery again. Perhaps this a good time to reflect on whether this is just corporatist Europeans failing to understand why our system is superior, or we're just making our arguments badly or if, maybe, we need to rethink our own assumptions.  

Thursday 20 August 2015


"[T]he power of enclosing land and owning property was brought into the creation by your ancestors by the sword; which first did murder their fellow creatures, men, and after plunder or steal away their land, and left this land successively to you, their children. And therefore, though you did not kill or thieve, yet you hold that cursed thing in your hand by the power of the sword; and so you justify the wicked deeds of your fathers, and that sin of your fathers shall be visited on the head of you and your children to the third and fourth generation, and longer too, till your bloody and thieving power be rooted out of the land."   

Friday 7 August 2015

Private equity is still a "force for good"

A few years back, I noticed that the phrase "a force for good" was being used with remarkable consistency by people in, or working with, the private equity industry. So I thought I'd do a quick google to see if that was still the case. No real surprise, but it is, and organisations ranging from the UK trade body to free market spin tanks still use the term regularly.

A few quick examples -

Here the BVCA uses the phrase in the headline of a press comment in relation to the care sector - one where the industry has faced a lot of criticism.

Here the American Enterprise Institution has an article (co-authored by Kevin "Dow 36,000" Hassett) with the phrase in its title.

Here is a report (PDF) of a roundtable private equity hosted by a PE firm that also uses the phrase in the headline and the text.

There are plenty of others.

Tuesday 14 July 2015

Caledonia update

I've had a response from the FRC, which has been in touch with the company. Apparently the company "confirms" that it has not made any donations since 2010. However, as of today the two donations are still on the Electoral Commission website and attributed to Caledonia, so I've been in touch with the Commission, who in turn say they are talking to the Conservative Party.

Curiouser and curiouser...

Tuesday 7 July 2015

Long-termism in executive pay = more pay overall

The news that some companies are sounding out investors about steep increases in base salary in response to longer deferral periods should come as a shock to no-one. Here's The Grauniad from yesterday:
Some of the UK’s biggest companies are sounding out shareholders about pay rises for their bosses in a move that risks reigniting the controversy over excessive executive pay.
The potential increases to salaries would further inflate overall boardroom remuneration as annual bonuses and long-term incentive plans are all hinged on basic pay.
The increases appear to be driven by changes in the way company directors receive their bonuses. Shareholders have insisted bonuses be paid out over longer periods.
The trait of hyperbolic discounting - discounting rewards that are in the future, and discount them more the further away they are - is well-known. So when corporate governance 'reformers' demanded that execs have to wait longer for their loot it was pretty obvious that the knock-on effect would be a demand in response for more reward overall.

Another example showing why performance-related pay for executives is a fundamentally crap idea.