Ten years or so later and we've just been through the first season of binding votes on remuneration policy. Surprisingly, this has not led to a swift reduction in levels of executive pay... Nonetheless, this got me thinking about some of the other policy positions we were advocating on institutional investment issues back then. Along with binding votes, we also said institutional investors should disclose their voting records, that abstentions were pointless on pay (given the vote was only advisory anyway) and we encouraged trustees to get the ISC principles on responsibilities of shareholders into their schemes' SIPs. (This last bit is basically a greatly watered down version of the Myners Review recommendation that there should be a legal duty on shareholders to intervene.)
At the time, these were all seen as pretty hardline positions, and, as such, were opposed by the large majority of people in the asset management industry (with the honourable exception of what was Co-operative Asset Management). I got used to being told that unions didn't really understand how this stuff really worked, and what we were proposing was nonsense. In particular I fondly remember a very angry man from Newton telling me how wrong we were to campaign for public voting disclosure, and a compliance person from Insight telling me it was legally impossible to make voting records public.
To state the obvious, these positions that we, and others, were advocating back then are now mainstream. Most large asset managers disclose their voting records, some of the big ones (i.e. Legal and General) now don't abstain on anything - a position also promoted by the NAPF, and we have the Stewardship Code, which is written into many pension schemes' SIPs. It was even a Conservative-led government that introduced binding votes on pay, and a Tory Prime Minister who fronted the policy on TV (on Andrew Marr I think). And, if anything, corporate governance 'reform' has actually gone a bit further. The Stewardship Code expects a lot more than the old ISC principles, we also have annual elections of directors and so on.
There are two things I take from this. First, and most importantly, the asset management industry talks a lot of crap. Lots of things that were claimed to be dangerous, or even impossible, to enact have been put in place. The sky has not fallen in. To the best of my knowledge, asset managers have not been threatened by shadowy single issue groups (unless you include Barclays under this label...) because of how they have voted or intend to vote. Yet this was an argument that was regularly wheeled out against voting disclosure. Companies have not spent millions unpicking directors' contracts because of the introduction of a binding vote on rem policy. Entire boards have not been voted out because shareholders misused the annual vote on director elections to gain control of companies by stealth. Asset managers haven't been sued for failing to intervene in companies.
In short, an entire wave of industry lobbying effluent crashed on the rocks of reality. Those of us who still see the need for change should remember this, because they will do it again.
Which leads on to point two: in fact, despite all the reform, not a lot has changed. Shareholders (which in practice means mainly asset managers) have been given more power and more information, and been prodded repeatedly to encourage them to act more like owners. But I remain to be convinced that actual behaviour has shifted considerably. I think the FRC has kind of hinted at this in its work on the Stewardship Code. In at least one report it suggested that companies haven't noticed a change in the nature of engagement since the Code came in.
This leaves us in an interesting position, since I don't see a lot more that can be ticked off on a shareholder-focused corporate governance program. We could make it easier to file shareholder resolutions, we could introduce a vote on business reviews, and maybe we could improve company disclosure. But essentially this would be 'more of the same', and I don't think anyone would expect much change from a list like that. The UK already has a very pro-shareholder governance regime. The problem continues to be that shareholders don't seem to keen on their responsibilities. Sooner or later this seems likely to lead to a shift in direction.
All this hasn't quite worked itself through the system yet. But I am pretty sure it's in the post. For example, as I blogged quite a lot in the past, I don't think shareholder primacy exists any longer in a meaningful sense in systemically important financial institutions. I think regulators have too little faith in shareholder oversight to see investors playing any serious quasi-regulatory role. I actually think, to the extent they are interested in shareholder activity, they probably care more about trading decisions than engagement. Shorting activity in particular gives you a sense of practical market sentiment, and may help identify problems, but the ability of shareholders to actually fix such problems is unproven. I suspect the FCA knows that big asset managers are too uninterested and conflicted to act as real guardians. (The comments from banker-turned-finance-academic Peter Hahn here are interesting in this respect.)
In my opinion, this means that for banks, and maybe other bits of the finance sector, we actually have a regulatory governance model while formally retaining the fig leaf of shareholder primacy. John Thurso may have lost his battle, via the PCBS, to explicitly remove shareholder primacy at the banks. But I think the point he was trying to make has already been accepted by some important people, even if it isn't explicitly acknowledged.
This is certainly a shift in direction, but isn't a big win for opponents of financialisation or whatever you might call it. The net result is a strengthening of regulators, but their own role is drawn pretty narrowly and this represents what I think is a desire amongst many politicians for a technocratic response. e.g. Let's get some 'experts' to make sure the banks are doing what we think they ought to be doing. What those experts in turn propose and enact will be framed in terms of economic efficiency, with other broader questions not getting a look in. Unfortunately this seems to be a good example of what Peter Mair was getting at in his comments about the 'regulatory state'.
That said, there are some interesting emerging contradictions in all this. Remember, the idea of shareholder oversight is that investors/owners have the strongest incentives to intervene, and, under shareholder primacy, have the legitimacy and power to act. So much for the theory, but it is found wanting in practice. First, the increasing interest amongst some investors in 'public policy engagement' is a recognition that they need some things doing for them (like requiring disclosure of certain types of information). Second, the existence of the Stewardship Code similarly acknowledges that market participants need to be pushed to get them to behave in the way that is supposed to be in their own interests. So the state is required both to compel companies to do things (provide certain information) that their owners can't get them to do, and to get the owners to behave like they are expected to. Both sides of the company-shareholder relationship are being structured by state power to deliver outcomes that are supposed to be market driven. So even in financial markets laissez-faire has to be planned...
On similar turf, I think the failure of shareholders to address the growing gap within companies between executives and the rest (because most asset managers don't have any interest - in either sense - doing so) will become significant. If shareholders can't/won't tackle the aspect of pay that causes the political problem - the size of it! - then either we give up, or we look elsewhere. I don't underestimate the unwillingness of a lot of people to really tackle this one, so the executive class can probably keep asking for more for a few years yet. But at some point I think the political pressure to intervene will be too great, and I think whoever is in government will have to do something quite different. And given that executive pay is the area of most shareholder engagement, if this does happen it will be quite a big knock to the whole shareholder primacy idea.
All this opens up the possibility of a more interesting change of direction, though not much more than that. I think redrawing directors' duties and introducing significant employee representation and ownership in the governance of companies are some of the things the Left should be properly exploring now (I also like the IPPR profit sharing idea). This could form the core of an alternative regime. Shareholders will always be an important component of the governance of public companies, and that will continue. But in the UK we have plenty of experience now of trying to rely on them alone to address a whole range of issues. It doesn't seem to work very well. And, as the executive pay example shows, sometimes their interests pull in a different direction to those of other stakeholders so they may be incapable of doing what is expected. So it makes sense to look at the role others can play, and the failures of recent years provide the opportunity. I think you can see the first signs of a shift in things like the interest in B Corporations, and the increasingly wide range of people who criticise shareholder-centred governance.
To reiterate what I've said before, there is nothing inevitable about such change taking hold. While the existing corporate governance regime looks like it has some big holes in it, if we want something different we need a clear idea of what it is, and what the evidence is for it (and we might have some interesting allies). In addition, as we can see from the response to relatively minor reforms - within the shareholder-centred model - vested interests will claim that such change is a threat to capitalism/wealth creation/small children and fluffy animals. There's a lot to play for, but a lot of work to do.
All this hasn't quite worked itself through the system yet. But I am pretty sure it's in the post. For example, as I blogged quite a lot in the past, I don't think shareholder primacy exists any longer in a meaningful sense in systemically important financial institutions. I think regulators have too little faith in shareholder oversight to see investors playing any serious quasi-regulatory role. I actually think, to the extent they are interested in shareholder activity, they probably care more about trading decisions than engagement. Shorting activity in particular gives you a sense of practical market sentiment, and may help identify problems, but the ability of shareholders to actually fix such problems is unproven. I suspect the FCA knows that big asset managers are too uninterested and conflicted to act as real guardians. (The comments from banker-turned-finance-academic Peter Hahn here are interesting in this respect.)
In my opinion, this means that for banks, and maybe other bits of the finance sector, we actually have a regulatory governance model while formally retaining the fig leaf of shareholder primacy. John Thurso may have lost his battle, via the PCBS, to explicitly remove shareholder primacy at the banks. But I think the point he was trying to make has already been accepted by some important people, even if it isn't explicitly acknowledged.
This is certainly a shift in direction, but isn't a big win for opponents of financialisation or whatever you might call it. The net result is a strengthening of regulators, but their own role is drawn pretty narrowly and this represents what I think is a desire amongst many politicians for a technocratic response. e.g. Let's get some 'experts' to make sure the banks are doing what we think they ought to be doing. What those experts in turn propose and enact will be framed in terms of economic efficiency, with other broader questions not getting a look in. Unfortunately this seems to be a good example of what Peter Mair was getting at in his comments about the 'regulatory state'.
That said, there are some interesting emerging contradictions in all this. Remember, the idea of shareholder oversight is that investors/owners have the strongest incentives to intervene, and, under shareholder primacy, have the legitimacy and power to act. So much for the theory, but it is found wanting in practice. First, the increasing interest amongst some investors in 'public policy engagement' is a recognition that they need some things doing for them (like requiring disclosure of certain types of information). Second, the existence of the Stewardship Code similarly acknowledges that market participants need to be pushed to get them to behave in the way that is supposed to be in their own interests. So the state is required both to compel companies to do things (provide certain information) that their owners can't get them to do, and to get the owners to behave like they are expected to. Both sides of the company-shareholder relationship are being structured by state power to deliver outcomes that are supposed to be market driven. So even in financial markets laissez-faire has to be planned...
On similar turf, I think the failure of shareholders to address the growing gap within companies between executives and the rest (because most asset managers don't have any interest - in either sense - doing so) will become significant. If shareholders can't/won't tackle the aspect of pay that causes the political problem - the size of it! - then either we give up, or we look elsewhere. I don't underestimate the unwillingness of a lot of people to really tackle this one, so the executive class can probably keep asking for more for a few years yet. But at some point I think the political pressure to intervene will be too great, and I think whoever is in government will have to do something quite different. And given that executive pay is the area of most shareholder engagement, if this does happen it will be quite a big knock to the whole shareholder primacy idea.
All this opens up the possibility of a more interesting change of direction, though not much more than that. I think redrawing directors' duties and introducing significant employee representation and ownership in the governance of companies are some of the things the Left should be properly exploring now (I also like the IPPR profit sharing idea). This could form the core of an alternative regime. Shareholders will always be an important component of the governance of public companies, and that will continue. But in the UK we have plenty of experience now of trying to rely on them alone to address a whole range of issues. It doesn't seem to work very well. And, as the executive pay example shows, sometimes their interests pull in a different direction to those of other stakeholders so they may be incapable of doing what is expected. So it makes sense to look at the role others can play, and the failures of recent years provide the opportunity. I think you can see the first signs of a shift in things like the interest in B Corporations, and the increasingly wide range of people who criticise shareholder-centred governance.
To reiterate what I've said before, there is nothing inevitable about such change taking hold. While the existing corporate governance regime looks like it has some big holes in it, if we want something different we need a clear idea of what it is, and what the evidence is for it (and we might have some interesting allies). In addition, as we can see from the response to relatively minor reforms - within the shareholder-centred model - vested interests will claim that such change is a threat to capitalism/wealth creation/small children and fluffy animals. There's a lot to play for, but a lot of work to do.
1 comment:
Great post Tom.
We are winning but it does sometimes feel like the 100 year war.
:)
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