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.”