Saturday 25 November 2017

Public ownership and UK pension funds

So, Labour is back in the game of public ownership. Various targets are now talked about for potential nationalisation, or something like it, including rail, the Royal Mail and utility companies. One of the interesting things about Labour's discussion of public ownership is the way that the amounts the currently privatised operators pay out to shareholders. The point being that under public ownership this money could be invested, not distributed to investors.

At this point, someone will almost always point out that those shareholders are the UK public. So we'd be knackering our pensions, and therefore we're not being smart by suggesting that some mysterious group of "shareholders" will bear the pain.

What I haven't seen, so far, is any kind of proper working through of these points. So I thought I would blog a few thoughts of my own.

1. The UK public's exposure to the companies that might be nationalised is likely to be higher than some in Labour hope, but lower than their opponents pretend.

I've seen the figure bandied about that only 3% of shares are held by UK pension funds (so nationalising companies wouldn't hurt them too much). I think this comes from ONS data on share ownership and on the face of it makes a basic mistake. I think this may be the % of shares held directly by pension funds, or easily identified as being held by them.

A quick review of the share registers of some of those companies on the target list will show you that you can get up to a couple of percent of shares held by pension funds very quickly. But this overlooks all the pension funds that invest via pooled funds, especially the big index funds run by the likes of L&G, BlackRock.

However, that said, it is undoubtedly true that ownership of UK PLCs in general has become more global. This is picked up in both the headline stats and the share registers. In particular there is a lot of US money. No doubt some of the money managed by Vanguard, T Rowe Price, Oppenheimer etc is run out of London for UK clients, but the large bulk of it is not. There's also quite a bit of Europe ex UK money in there these days too. You'll always see Norges Bank in the mix but also French, German, Dutch, Swedish asset managers, pension funds, and insurers.

I think all we can really say is 3% in not realistic, that overseas ownership is high, but that's about it. Someone needs to get into the detail now.

2. The nature and level of UK ownership will vary significantly by company.

It's obviously not an homogenous group of companies. To take two examples - SSE is still a publicly traded company and has a diversified shareholder base. There will undoubtedly be numerous UK pension funds that hold shares, though most won't have a significant holding. On the other hand Thames Water is privately owned, and mostly by overseas investors - though note that Hermes is a major player. So if you nationalised SSE (assuming this means compulsory purchase of equity) you'd likely have a small impact on a lot of UK pension funds. If you nationalised Thames Water you'd have zero impact on most UK funds, but hurt those that do have holdings harder.

3. Who will really bear the cost?

So if the government does buy out the current investors, and those investors feel they aren't getting a fair price, who will actually bear the cost? Well, in a DC scheme it will be you, the member. You shoulder the investment risk, so any loss eats into your assets. Bear in mind that the better off amongst us will have more exposure to equity-based savings, so in theory take a larger hit. But equally there will be more lower earners in total who take a hit.

In the the remaining DB schemes it should be the employer that takes the hit, assuming it isn't large enough to affect funding and lead to a change in benefits. Theoretically we could say it will hit the shareholders (where relevant) in the sponsoring companies, but in practice I doubt it will be meaningfully felt.

4. Will they feel it?

The first "they" is "the pension funds"  i.e. the trustees, sponsors etc.
This is an unknown. We don't know how much the government would be willing to pay to take the companies into public ownership (valuing the shares would split open the question of what shareholders actually "own"). I'm not smart enough to do this bit I'm afraid (I hope someone else in my party is doing it though!)

What we can say that pension funds that have a large exposure to all the companies would feel it the most. Equally those that have only an index-tracking exposure might not notice much. I'm reminded of when BP tanked after the Gulf of Mexico disaster. It was the biggest stock for many UK funds and responsible for something like 12% of all dividends paid by the FTSE100. But the (then) NAPF put out a statement saying it wouldn't have a meaningful effect on pension funds. It must be the case to have a group of stocks all losing value will have a worse impact, but it will depend a lot on diversification.

The other "they" is the scheme members. As above, DC scheme members will see the value of their assets affected if they have exposure, but again will depend on the number of companies held and the extent of holdings. But even so, at the risk of being cynical, I doubt most members will pay much attention. There is little member engagement with pensions in general and investments specifically, so my gut feeling is that this will pass many by. Bear in mind that UK PLC took DB pensions away from huge numbers of private sector workers without a generalised revolt.


If Labour does get elected, and does go ahead with nationalisations, we should be aware that - depending on how shareholders are compensated - this will have an impact on UK pension funds. It will vary significantly by fund, but it's daft to pretend that the impact is not there. Equally, we should not let the Right (especially the Right media) get away with pretending that this would represent some sort of apocalyptic assault on UK pensions since a) in some specific cases the impact would largely be felt by overseas investors (though these include workers' pension funds too!) and b) it might not be that significant.

If we are serious, then effort needs to go into mapping all this, preparing the ground, and considering any compensating policies that pension funds might favour. And we should be prepared for a huge Mail, Telegraph scare campaign.

Saturday 7 October 2017

The emerging new politics of corporate governance and ownership

I wrote a piece a few months ago (prior to the election) saying that I thought that while the Left were unlikely to win the election, we were winning the battle of ideas. I don't actually think this was a particularly insightful or original take, but it does seem that this the way that things are panning out (though Labour did much better than I dared to hope). So I'm interested in where it looks we are headed, why this is, and what it means for corporate governance in the UK.
First, a few indications of the direction of travel. The government's recent corporate governance reforms tell their own story. Although defanged, they have still broken new ground, and tackled existing issues in new ways. For example, the disclosure of pay ratios is entirely aimed at addressing concerns about relative reward. It demonstrates that even within the micro politics of the executive pay debate the argument has decisively shifted away from the idea that linking pay to performance is where the action is. In addition, a Conservative government has backed the idea that workers should have some form of representation in the governance of businesses in which they work. Finally, perhaps as significant is how little emphasis was placed on the role of shareholders (this is a good indication of where some thoughtful Conservatives are at - workers should have the same rights over exec pay as shareholders!). This is in marked contrast to pretty much every major public policy intervention on corporate governance since the early 90s at best.
Zoom out from corporate governance and we can also see that there is a battle underway regarding what form of regulation and/or ownership should be in place for utilities. Once again it is a Conservative government that will be seeking to more actively control prices (through an energy price cap). This is a policy that was literally described as "Marxist" by the same party when it was advocated by Labour two years ago. For its part, Labour is now advocating returning utilities to public ownership (personally I hope "public ownership" in the 21st century is an open question rather than a direct lift from the past).
It is also worth looking at some of the rhetoric around Labour's policy in this area. This is from Jeremy Corbyn's speech to the Labour Party conference last month: "Take the water industry. Of the nine water companies in England six are now owned by private equity or foreign sovereign wealth funds. Their profits are handed out in dividends to shareholders while the infrastructure crumbles the companies pay little or nothing in tax and executive pay has soared as the service deteriorates."
A liberal and global market for corporate control has resulted in this picture (which applies much more widely than utilities obviously). It's much easier to build a populist argument for taking public control of infrastructure when it isn't even owned by our own pension funds. I can imagine some Conservatives riffing on this point in the future,
Why is all this happening though, and what does it mean for UK corporate governance? There may be some answers in some polling carried out for the right-of-centre Legatum Institute. This polling was carried out by people who are advocates for free market capitalism, but are concerned by the direction of travel in UK politics and want to understand what is driving it. Though, to state the obvious, I disagree with them politically, they seem to be asking the right questions. The full report is here.
There is too much to summarise so I'm just cherry-picking items that I think are relevant for people (regardless of political inclination) interested in corporate governance, ownership and related issues. First look at the polling on utilities. 83% of those polled think water should be in public ownership, whereas 77% think the same for electricity and gas and 76% for rail. Digging into those numbers a bit deeper, 76% of Conservative voters support nationalising water (68% for electricity, 69% for gas). And those figures are consistent across age groups too, in fact the youngest voters are slightly less keen on nationalisation than older ones.
Most adults experience utility providers on a regular basis, and most people intuitively get the idea of/problems with monopoly provision without ever picking up an economics text book. In addition, a large chunk of older voters will have experienced both public and private provision. In a nutshell, with their consumer hats on, the public do not like what they get. With this background, the polling results demonstrate why the politics around rehabilitating public ownership work. No-one loves utility companies, no-one thinks that changing provider changes the product/service, those that experienced both public and private ownership are as convinced of the desirability of change as those with no experience. How a government might approach public ownership / control is the difficult bit, but there's little doubt they would have public backing to try it.
Now look at the polling on issues relating to business in general. There is strong support for capping executive pay, for requiring businesses to consider factors other than profit, to regulate more and so on (and milder, but still majority support for workers on boards). On most of these issues there is a gap between Labour and Conservative voters, with the latter less enthusiastic for more interventionist policies. Nonetheless on the question of whether there should be a cap on executive pay versus letting companies pay executives what they want a large majority of Conservative voters favour a cap. A majority also favour businesses not being solely focused on profit. They are evenly split on workers on boards, but looks like a very slim majority say it doesn't matter.
I would say these polling results present challenges for the UK corporate governance status quo. Executive pay is the most obvious area. It's a safe bet that the vast majority of people whose employment is in some way related to corporate governance would oppose a cap on pay (in my experience many are even sceptical about pay ratio disclosure). I expect that many of those who have a formal role in setting or affirming executive pay (rem comm members, asset managers) will be amongst the most opposed to the idea. This is of course their right, and again we need to properly chew over what we mean by "capping" executive pay, what the effects might be and so on.
But the key thing is that much of the corporate governance establishment, for want of a better term, is in a very different place to the large majority of the public, and even a large majority of right-wing voters. Put simply: the people who have most influence on executive pay tend to hold the most right-wing views on the topic. Their views are further to the Right than the public in general or right-wing voters specifically. I suspect that gap in views is going to matter a lot more in future. I simply cannot imagine a future Labour government considering that if a lot of rem comm members and asset managers think executive pay is basically OK then they should leave it alone.
On similar ground, the strong support for wider business objectives rather than just profit maximisation may help explain why shareholder primacy is increasingly questioned, and not just on the Left.
I imagine that some of those who work in corporate governance who read this will be thinking that the kind of ideas that are being put talked about - public ownership, pay caps, workers on boards - are ill-informed, counter-productive, economically damaging etc so they are right to not take them seriously. I think this is wrong in two senses. First, it is important to grasp is that these issues are contestable in politics once more and therefore need to be argued over. It will be no good to simply assert that the door must remain closed. Second, it is a mistake to assume (as some appear to) that those who think differently are simply misinformed or ignorant. I think most of us (regardless of our politics) would agree that no single party or group has a monopoly on wisdom. This should apply in our corporate governance microcosm too.
If the last few years have taught us anything it is, as Yogi Berra is supposed to have said, that it's tough to make predictions, especially about the future.... Nonetheless at the moment it does look as if it is the Left that will set the terms of the debate in the UK with regards to corporate governance and related issues, and that policy interventions are likely to follow this trajectory. I am genuinely interested to hear if people agree with this, or, more importantly, disagree.

Wednesday 27 September 2017

Union investors serve notice on XPO

News from the annual Committee on Workers' Capital conference, which took place in Berlin this year:

Union investors serve notice on XPO

Trade union investors meeting in Berlin today served notice on US-based logistics provider XPO that it must reform its labour practices.
The message was sounded by ITF (International Transport Workers' Federation) president Paddy Crumlin, speaking to a meeting of the Committee on Workers’ Capital (CWC) that included trustees of major pension funds whose assets are managed by Orbis Investment Management, XPO’s largest shareholder.                       
He told the Berlin meeting: “I’m proud to say that the CWC is playing a critical role on bringing workers’ rights issues to the forefront. We talk so much about shareholder value; we as the stewards of workers’ capital must stake our claim to what we value. 
“Active trustees are the bedrock of effective corporate engagement.  They’re the workers’ voice in the capital markets.  We need trustees to convey to corporate boards, and to our pension funds’ investment advisors and managers the issues we feel are important and let them know we are watching how well they perform in meeting our funds’ needs and values.”
He continued: “The CWC exists to enable unions to collaborate globally and to mobilise workers’ capital in support of our brothers and sisters facing insecure casualised employment, and anti-union intimidation. I hope all CWC participants will do what they can to support the XPO campaign, and make sure our capital supports XPO workers wherever they are.”
Mr Crumlin concluded: “We call on the investment managers to go to XPO management, relay our concerns and demand the company shows a transition plan for converting independent contractors to full employee status. We also ask them to call for enhanced sustainability reporting.”
In July the ITF launched a taskforce to tackle XPO’s anti-union and anti-worker tactics. XPO spends hundreds of thousands of dollars on union busters to fight workers’ attempts to organise in the United States, has slashed worker benefits and misclassifies workers as independent contractors. In Europe, XPO cut jobs despite promises it wouldn’t do so, misclassifies workers, and has denied workers toilet or water breaks. Workers across the globe are standing up to these anti-worker actions.
For more about the CWC see follow the Berlin meeting live at

Thursday 14 September 2017

ECJ ruling challenges Ryanair's employment model

Today saw a highly important by the ECJ relating to low-cost airline Ryanair. As many people will know* Ryanair is anti-union. It also relies on extensive use of indirect employment, with many cabin crew employed by agencies like Crewlink, whilst many pilots are self-employed contractors (yes, really).

But the other striking thing about Ryanair is that a large number of staff are employed under Irish law. This happens whether they work in Ireland or, in the case today, in Belgium. By happy chance Irish law has weaker employment rights in a number of areas than other nations in which Ryanair crew work. Today's decision, which you can access here, was essentially concerned with whether staff based in countries other than Ireland could have cases heard in their own country, and plays into the question about which country's law should apply.

I won't summarise the ECJ ruling, our resident legal expert has done that here, but it is very favourable to employees on this point, and thus a major setback for Ryanair, though the company claims otherwise.

The ITF has put out a statement on the ruling, which you can read here. There is also quite a bit of media coverage, most of it good (the Telegraph news story not so much!). Interestingly, some sell side analysts have come out with negative comments about the impact on Ryanair in response to the ruling, and various figures are being knocked about regarding the potential impact on its costs. This, plus the 3%+ drop in the company's share price, should tell you that financial markets have not bought the company's claim that the ruling doesn't change anything.

To me it looks like today is just the start of the company's employment model coming under more scrutiny and challenge. If I was an investor in Ryanair I think I'd be asking whether today's bombastic statements bear much relation to the truth, and just how much risk/cost there is tied up with the current model. It's interesting that the Advocate General's opinion in this case, which came out in April, did not even get a mention in the annual report.

As if that was not enough, Ryanair has its AGM next week. Again there has been a string of stories about corporate governance advisers recommending votes against the company's remuneration report and board directors. So today's news could not come at a worse time.

It will be a turbulent couple of weeks.

* If not, here's just one recent example:
“We don’t believe it will lead to unionisation because the first people up over the barricade looking for unions will find their base either frozen or closed,” he said.

Sunday 10 September 2017

Adolf Berle on Sports Direct

Adolf Berle, of Berle and Means fame, continued to write interesting things about corporate power and control long after The Modern Corporation and Private Property. The excerpt below is from Power Without Property: A New Development in American Political Economy from 1959. I think it applies well, almost 60 years later, to what happened at Sports Direct last week.
"In effect, the position of the institutional managers is that they will not exercise their voting power to affect the choice or the policies of corporate managements. The individuals for who the institutions are fiduciaries, holders of rights in pension trusts, of shares in mutual funds, or of insurance policies, have surrendered their voting power. The institutional managers, therefore, by their policy of non-intervention, merely insulate the corporate managements from any possible action by or influence of the ultimate, beneficial "owners" of the stock. A policy of non action by the institutional managers means that the directors and managements of the corporation whose stock they hold become increasingly self-appointed and unchallengeable; while it continues it freezes absolute power in the corporate managements."

Friday 8 September 2017

Worker directors via the UK Corporate Governance Code

As anyone who reads this blog will probably be aware, the Conservative government bottled its commitment to put workers on boards. Instead it has asked the FRC to amend the UK Corporate Governance Code to give companies three options, one of which is a worker director, under the 'comply or explain' regime.

It's worth noting that some people in corporate governance warned against the government seeking to achieve worker directors on boards through the comply or explain mechanism of the Code. For example, this was a particularly explicit call for political intervention instead of leaning on the Code:
The full-blown worker-elected director model should not be done through the corporate governance code. That is quite a big shift and requires parliamentary weight behind it to get it done. There is a risk if we try to do it through the code that we would have a very high level of non-compliance. That would cause the code to come into some discredit.
That comment was from Stephen Haddrill, head of the FRC, which is responsible for the Code, when giving evidence to the BEIS committee's corporate governance inquiry (see Q31). To be fair, Haddrill did also advocate looking at other ways of achieving representation, including NED chairing a employee committee. Nonetheless the FRC will have something in the Code that the FRC said could discredit it.

Wednesday 6 September 2017

Sports Direct chairman scrapes through

Today was the Sports Direct AGM and, once again, chairman Keith Hellawell was in the firing line. He had previously said he would stand down if he failed to get the support of a majority of independent shareholders.

Ahead of the AGM Unite has flagged up numerous ongoing problems at the company, and its complete failure to deliver on previous pledges.  Major investors like Fidelity, Aberdeen, Hermes and Royal London all publicly announced they were voting against. Trade Union Share Owners members also voted against and called for other shareholders to do likewise. All the voting agencies also recommended a vote against.

However, Hellawell squeaked through. According the company's AGM statement he received the support of 55% of the independent vote. In raw scores, he got 63.3m in favour, whilst 55.6m voted against. Inexplicably one or more major shareholder seems to have abstained on this vote, with 6.4m abstentions. But even of they had been shifted to the against column, though the margin would have been wafer thin, Hellawell would have been OK.

I suspect there is going to be a lot of scrutiny go how individual institutions cast their votes. We know that Phoenix was voting in favour, and the likelihood is that Odey did too, but that still leaves a lot of votes unaccounted for. (Ladies and gentlemen, start your spreadsheets....)

Against predetermination, trivialisation etc

I enjoyed this book recently. I won't attempt to summarise any of it, but here are a couple of the many bits that I liked. May post up some more.

We are not predetermined. Nothing of what we do is inevitable and inescapable, lacking an alternative. Against external pressures clamouring for our obedience and insisting on our surrender, we can rebel - and all too often we do. This, however, does not mean that we are free to act as we would wish or dream: having done with the bugaboo of necessity, we find ourselves confronted face-to-face by the all-to-real dilemma of feasibility. It is the feasibility - or more precisely the accessibility - of our goals, inflected and tempered by the chances of their attainment, that draws the line between realistic and fanciful options and varies the likelihood of alternative individual choices. People choice, but within the limits drawn by the feasibility of goals - a factor not open to choice. 'Being realistic', according to Gramsci, is indeed an ambivalent stance: it enhances the probability of success - but at the price of desisting from the pursuit of other goals, cast off-limits and so beyond reach. Above all, it renders starkly visible the disconcerting complexity of the task - though only to nudge for more effort, not to prompt its abandoning and resignation. Manipulating the odds, the powers-that-be may make some choices exceedingly costly and so reduce their chances of being taken - though they could hardly succeed in the effort to render them impossible to make. The world of humans is a realm of possibilities/probabilities, not determinations and necessities.   

Trivialisation is one of the great registers that power employs in arranging the score of common feeling. The flow of collective feelings can be made to absorb the negative potential of events, which always threatens to be dangerous, by reducing the quality of particular actions and specific occurrences, their dramatic and symbolic character; or by depriving such negative potential of any vitality, handing it back to each citizen individually as an occasional sample of the daily mediocrity surrounding us, a sample which we are to eat up and digest separately, promptly turning our heads to the other side, towards the next form of mediocrity, since a collective and public reflection never really seems worth the effort or the attempt. 

Friday 1 September 2017

Wearing different hats

The excerpt below is from Hegemony and Socialist Strategy and plays into something I think a lot about today. To me it seems obvious that the Left had to shift towards a more expansive view of what people want than just what happens at work. In developed economies we don't have to be as defined by work as our predecessors were. So we are citizens, consumers etc as much as workers and we think of ourselves in that way too.

However, one of the big blunders the Third Way type 'modernisers' (they don't seem modern anymore, do they?) was to assume that because people spent less time thinking about their workplace identity, and more about other aspects, that the workplace didn't matter any more. In addition, it was too uncritical of the idea that we think like consumers about all kinds of things (public services, politics) and that therefore it was smart to relate to the public in a consumer-provider relationship and encourage this more generally.

On a slight different point, in my small corner of the world I've lost track of the amount of times trustees have told me "I take my union hat off when I go into trustee meetings". Whilst I understand the need to act responsibly (though I'd ask where the really bad examples of member trustees doing otherwise are), I do think in practice this has sometimes lead to trustees adopting far too narrow a view. And adopting an 'investor' persona can be in direct conflict with our interests as employees (or citizens or even consumers for that matter). I don't see why we shouldn't seek to develop a "union trustee" hat for our reps to mentally put on.

Anyway, here's  the blurb:
"If the worker is no longer just a proletarian but also a citizen, consumer and participant in a plurality of positions within the country's cultural and institutional apparatus; if, moreover, this ensemble of positions in no longer united by any 'law of progress' (nor, or course, by the 'necessary laws'), then the relations between them become an open articulation which offers no a priori guarantee that it will adopt a given form. There is also the possibility that contradictory and mutually neutralising subject positions will arise. In that case, more than ever, democratic advance will necessitate a proliferation of different political initiatives in different social areas... [and] each initiative [will come] to depend on its relation with the others." 

Tuesday 29 August 2017

The Conservative corp gov calamity is an opportunity

I've blogged before about the political problem that executive pay has become. The Conservative government's latest attempt to both look tough and do little is to my mind more evidence of it. I can see no positives in the outcomes for the government, though it provides short-term tactical and long-term political opportunities for the Left.

Let's recap on the details first:

  • There will be disclosure of pay ratios - a policy that is directly addressed to the "fairness" question about pay, and one which many investors originally opposed but have come around to.
  • There will not be mandatory worker representation on boards. Rather there will be a comply or explain requirement that companies have either a non-exec nominated at as a worker rep, or an employee advisory committee, or a worker director. 
  • Further clarification of Section 172 of the Companies Act. 
  • There won't be any further powers granted to shareholders, but the Investment Association will keep a record of any companies receiving 20%+ votes against.
  • There will also be some tweaks to the UK corporate governance code relating to disclosure around remuneration.

Understandably, this package of reforms has been attacked for being a much watered down version of Theresa May's original ideas, which is what it is. So to the extent that the public is following this debate at all, I suspect all they will hear is that the Government has lost its nerve and/or given in to lobbying over the pay of corporate executives. As with previous reforms in this area, the fiery rhetoric which launched the initiative is not matched by the policy that emerges at the end.

On the most trivial level, I can't see what possible benefit the Conservatives derive from this. They risk reinforcing rather than challenging (presumably the original plan) the idea that they are weak in the face of corporate power. And for what? Does anyone with any knowledge of corporate governance believe that the final package of half-hearted measures will achieve much? It might have been simpler to kill the review off, blaming the need to focus on Brexit.

On the flipside, the government's weak position gives Labour the opportunity to hammer home the idea that the Conservatives always do this, that they are in thrall to corporate and financial donors and so on.

Looking further ahead, by leaving the door ajar the government has now opened up new terrain into which campaigners from the Left must now pour. The argument is simple: if even the Tories concede that worker representation on boards is desirable, and will implement a weak as water policy on it, we need to finish the job properly. This is a straightforward campaign opportunity now for all those who agree with the policy.

But also remember the dog that did not bark. There is no extension of shareholder powers in the government's response. Indeed the role of shareholders in terms of the proposals is very limited. This is quite striking when you consider the last 20 years or so of attempts at reform. I've argued before I think future governments would put far less emphasis on the role of shareholders when trying to tackle these issues, but I'm surprised it's a Conservative one that did this first. I think this is the shape of things to come.

Still, there's still some time for some nonsense in there. The government does advocate the ICSA (company secretaries) and Investment Association (asset managers) providing guidance on how companies can take account of the views of employees and other stakeholders. I must be missing something, because I can't see why one group of stakeholders (investors) should get to advise companies on how they should talk to another (employees). Labour should attack this idea for the nonsense it is.

Tuesday 18 July 2017

A new Left alignment on corporate governance

I can't overstate how much I like the report that the IPPR has just issued on corporate governance. I've been boring on for a while now about what I see as the end of the 1990s model of corporate governance for the UK. At the same time there has been some excellent work from the TUC on both the challenges to shareholder primacy and the value of worker representation in corp gov. Plus lots of good blogging on this coming from the Left, particularly from Chris Dillow at Stumbling and Mumbling. And some sceptical voices from inside the system, like Guy Jubb and Chris Hodges.

I think what Mat Lawrence at the IPPR has managed to do is clarify really important, and increasingly evident, problems with the UK corporate governance model. Anyone coming at these issues from the Left from here on in should take Mat's analysis as one of the things they use to orient themselves. We have given the 1990s model, founded on the illusion that shareholders "own" companies, a very good try. We have reached the point that we now have codes to try and get shareholders to act like the model of how agency theory suggests they should act (even laissez-faire in capital markets has to be planned).

Conservatives in all parties talk about how disclosure of executive remuneration has had the unintended consequence of driving up pay levels. Yet they often fail acknowledge that the 1990s compact had two key elements: corporate disclosure and shareholder empowerment. They are largely silent on the failure of that second element. To me (to nick Albert Hirschman's idea) the "unrealised expectation" that shareholders would use that greater disclosure and increased power to act on pay in a way that aligns with the public, or other issues, is of critical importance. I think it's very important/encouraging that the Left acknowledges this point, as this will enable us to move on. I think the Right is still stuck in agency theory textbooks.

As I've blogged before, I think the 1990s model has run out of road. We have tried refashioning the relationship between companies and shareholders to make it work for progressive aims and it has not delivered. When I have a bit more time and headspace I will write my own Mea Culpa. I think the Left is much better advised to view the relationship between companies and investors as a field of activism in relation to specific companies (in the style of Share Action), rather than an area of public policy work. The gains from the latter have not been impressive. We would be better focusing policy work on ensuring that other voices - first and foremost that of employees - get proper representation within the firm, rather than further strengthening the position of shareholders in the hope that they will speak on our behalf.

So, go and read the IPPR report and let's get started on the alternative.

Thursday 6 July 2017

Nex Group chair costs himself £25,000

Next Group, the successor company to ICAP, just managed to publicly humiliate itself by spending company funds on political campaigns.

The company has its AGM next Wednesday and disclosed in the notice of meeting that it had spent £25,000 funding five Conservative Party candidates facing Liberal Democrat challengers in the last election. This was literally a waste of money, since three of the Tory candidates lost.

Following exposure of the donations by The Independent, backed up by a great comment piece, the company issued a statement that the donations were the initiative of the chairman, Charles Gregson, and that he would personally pay back the £25,000. In addition to the media coverage it was clear that various proxy advisers had recommended opposing the resolution at next week's AGM seeking authority to... err... make political donations, and that a number of shareholders would indeed have voted against.  

And they may still. Because there is something pretty disturbing about this case. A PLC can't make donations without shareholder approval. This will be Nex Group's first AGM, so it had not sought prior approval as Nex Group. But the forerunner company had sought shareholder approval at its AGM last year.

Here's what it put in the notes to the resolutions (my emphasis added) in their notice of meeting:

Authority to make political donations (resolution 12)
Resolution 12 is to approve the making of political donations and incurring of political expenditure by the Company and any of its subsidiary companies of up to an aggregate amount of £100,000 in the period up to the Company’s annual general meeting to be held in 2017. The Act contains restrictions on companies making donations to political organisations or incurring political expenditure without prior shareholder approval. The directors have no present intention to make political donations but, because of the broad definitions of political donations and political expenditure contained within the Act, the directors consider it prudent to obtain this shareholder approval. There has been no expenditure under the corresponding authority obtained at the 2015 annual general meeting of the Company. 
This is important. Many companies seek authority to make political donations, but do so to avoid being caught by a wider definition of "political expenditure" (paying for stands at conferences etc). When seeking these authorities companies typically explicitly state that the authority will not be used to make political donations. As you can see, ICAP strongly suggested this would be the case. But donations were made by Nex Group in any case (assuming Nex used the carried over ICAP authority).

At the least this is a breach of investor trust, and I seriously question why any shareholder would vote for the resolution next week after this has happened. But I wonder whether a shareholder could argue that this is actively misleading - I've seen cases taken over misleading IPO docs for example. Companies rarely completely fold to campaigners' demands immediately, but the fact that the chair immediately agreed to pay the money back out of his own pocket makes me wonder if the board thinks they crossed a line.

More generally, perhaps it is time that shareholders toughened up on the issue of political spending overall. Why not ask for disclosure of any spending that the company thinks falls within the wider definition of political expenditure? It might shake some interesting data out, and reveal things shareholders may be uncomfortable with.

Finally, I can't help but notice that the chair of Nex Group is also a non-executive director of Caledonia Investments, which people may remember had a bit of history of this kind of thing which also ended badly.

Friday 2 June 2017

Chantal Mouffe interviewed in 2007

“The consequence of the disappearance of a fundamental difference between the democratic parties of centre-left and centre-right is that people are losing interest in politics. Witness the worrying decline in voting. The reason is that most social democratic parties have moved so far towards the centre that they are unable to offer alternatives to the existing hegemonic order. No wonder people are losing interest in politics. A vibrant democratic politics needs to offer people the possibility of making genuine choices. Democratic politics must be partisan. In order to get involved in politics, citizens have to feel that real alternatives are at stake. The current disaffection with democratic parties is very bad for democratic politics… I am really worried by the celebration of the politics of “consensus at the centre” that exists today. I feel very strongly that such a post-political zeitgeist is creating favourable terrain for the rise of right-wing populism.” 

Thursday 18 May 2017

In praise of conflict (not just the band)

I don't read much political theory, but am very interested in Chantal Mouffe so recently bought this. Just started reading it last night and great to find that someone has properly theorised some issues where I've had my own half-baked thoughts. This stuff should be compulsory reading for those anaesthetised by the "we're all on the same side, all interests align" guff that is everywhere in ESG land.

"[P]olitical questions are not mere technical issues to be solved by experts. Proper political questions always involve decisions that require making choices between conflicting alternatives. This is something that cannot be grasped by the dominant tendency in liberal thought, which is characterised by a rationalist and individualist approach. This is why liberalism is unable to adequately envisage the pluralistic nature of the social world, with the conflicts that pluralism entails. These are conflicts for which no rational solution could ever exist, hence the dimension of antagonism that characterises human societies."


"A well-functioning democracy calls for a confrontation of democratic political positions. If this is missing, there is always the danger that this democratic confrontation will be replaced by a confrontation between non-negotiable moral values or essentialist forms of identifications. Too much emphasis on consensus, together with an aversion towards confrontations, leads to apathy and to a disaffection with political participation. This is why a liberal democracy requires a debate about possible alternatives. It must provide forms of identifications around clearly differentiated political positions."

PS The band.

Sunday 14 May 2017

Shareholders go quiet on executive pay

Once again, ahead of the UK AGM season we had the now traditional "boards braced for stormy AGM season" story. Anyone who follows this debate will know what I mean. We've all seen several times the claim that a second "shareholder spring" is coming as investors "get tough" and "crack down". This season the reheated story was spiced up with the extra line that the government is considering giving them even more powers.

Of course, the proportion of companies that lose a vote in any season is tiny (very rough guess: less than 2% of the All Share) and the "shareholder spring" itself had only a handful of defeats. So really investors only needed to turn the dial by one notch to deliver a record season. I suggested that getting defeats into double figures, while still meaning 95% of companies get shareholder approval, would send a pretty important signal.

It's pretty clear now that is unlikely to happen. So far there have only been two pay defeats - Pearson and Crest Nicholson - and both were on the advisory remuneration report vote, not the binding remuneration policy vote. This means that, for all the pre-season puffery, no companies have been given a binding direction by their shareholders because of their approach to executive pay. However you cut it, this year's AGM "fireworks" have been duds. 

However, the other thing that is being put about in the business pages is that while, yes, there haven't been the number of defeats people were expecting this is because of successful shareholder engagement behind the scenes. There are couple of examples being briefed of companies pulling resolutions before the vote to avoid defeat, or making big concessions during engagement with shareholders. 

I'm a bit sceptical for a couple of reasons. First, this is a line I have heard quite a lot over the years, primarily from asset managers that tend to vote with management most of the time. So it's not clear to what extent the engagement that has taken place this year differs from other seasons. Second, companies are not stupid. Like any good negotiators, in a tricky situation they are going to go into an engagement with a headline ask, and an acceptable fallback position. We don't know to what extent the agreements that are being agreed between companies and asset managers represent where the former party wanted to be in the first place.

Which leads onto the key point in all this. No-one outside the closed circle of corporate executives, asset managers and remuneration consultants really knows what is going on. Because asset managers prioritise confidentiality in engagement, exactly what deals are thrashed out - and who amongst them is doing the most thrashing! - is not information that is available to the public. I know there are some good people out there who do feel a responsibility to try and bring some of the public concern about executive pay into their discussions with companies. But I know there is a lot of bullshit out there too. I have been hearing the "we are engaging behind the scenes" line from asset managers that I know put little pressure on for about 15 years. 

Many of the people who exercised the votes that approved the executive pay arrangements that are apparently now egregious are still pushing the same (Vote For...) buttons. Are we sure that they have changed? In my experience, many people within asset management continue to hold views on executive pay that are well to the Right of the public (who are often considered to hold very ill-informed views about the value of executive talent). It's not obvious that we should conclude that there has been a real change unless we get some real evidence. 

So I would not advise people (including business journos) to accept the "it's all getting sorted out in private" line uncritically. More generally, I don't think the current position is going to hold for the asset management industry. Executive pay continues to be a subject of public debate, and anger. This season the headline output of what shareholders do - votes - may fall rather short of the pre-match build-up. In fact, it could be interpreted as evidence that shareholder oversight is far too weak a tool. But I don't think arguing that "we're sorting it out in private but can't tell you about it" is going to convince many waverers that actually yet another season where the vast majority of companies got approval is actually OK.

In the current environment does making private deals between corporate executives and major financial institutions, and telling the public they can't be allowed in, over an issue as politically charged as executive pay look like a great outcome? I think shareholders are going to have to become much more open about their engagement and its results, and they really need to think about the public output that voting in favour but engaging privately creates. Even so, I am not sure another season where even people who follow executive pay will have seen very little happen is going to do much to stop the the drift away from shareholder oversight as a public policy tool.

Monday 8 May 2017

Internal logic versus external stupidity

I've blogged about National Express a few times over the years, mainly in relation to its anti-union activity. But today a story in the FT about its executive pay arrangements caught my eye. I think it's a great example of why performance-related pay is a colossal waste of time, including trying to tie pay to ESG targets.

As many people may know, there was a tragic accident in the company's US school bus business last year in which six young children died. This is clearly pretty much the worst safety outcome a company that transports children can have.

Understandably, therefore, the company has reduced to zero the amount of the chief executive's bonus that is tied to safety. But, he's still going to get the rest of the bonus, which equates to over 150% of salary. Some shareholders are ticked off, and think that the company should not have paid any bonus at all, sensing that a chief executive getting a seven figure bonus in the year when the company suffered multiple child fatalities is not a good look.

To me, this sort of outcome is the inevitable outcome of the performance-related pay delusion. If you set multiple targets for variable pay you are always going to get these kinds of perverse outcomes. If you've hit your financial targets but there have been fatalities then simply not awarding the bits of pay tied to ESG criteria is logically what you should do. But it looks appalling. Applying some common sense has its own problems - for people within business/finance at least. If you scrap the bonus entirely (which is what I think they should have done) then it makes plain what a joke the system is - it is incapable of delivering sensible outcomes.

This isn't the first time this has happened in relation to fatalities involving a PLC. The CEO of Thomas Cook got in a similar mess by giving up some, but not all of her share award. To try and stick to a logical/statistical approach merely invites the question "so how many people would have to die before you didn't take any bonus/share award?". Companies - or investors - that simply hide behind the incentive design look inhumane.

There was a similar example with News Corp when the hacking scandal blew up - with James and (I think) Rupert Murdoch agreeing to give up some, but not all, of their bonuses. And, more generally, when there is a lag between performance and reward (because shareholders have asked that reward be tied to slightly more long-term performance) you get examples when exec awards vest despite performance having subsequently turned bad again.

I know I am well out of step with many ESG people here, but to me the fundamental problem is the insistence on performance-related pay. Quite aside from motivational issues, perverse incentives and the whole question of why the most highly paid need or deserve further incentives to get them to do their job, performance pay generates these ridiculous outcomes. They make sense according to the text book internal logic of incentive schemes but they look terrible to any half conscious actual human being. Instead of wasting even more time trying to tie ESG criteria to pay we should be scaling back variable reward if not scrapping it altogether.

Wednesday 3 May 2017

New guidelines for assessing company behaviour on labour issues

The Committee on Workers' Capital (CWC) has just published an important new document - the CWC Guidelines for the Evaluation of Workers' Human Rights and Labour Standards.

Its the product of a couple of years' work by a global group of trade union experts from countries including Australia, the US, Spain, Canada, the Netherlands and the UK. It also has the imprint of the ITUC, the peak body in the global labour movement. So if you're an investor or an ESG researcher looking at a company wanting to get a handle on how well it handles labour issues, these are the indicators that you should be looking at.

Press blurb below, the guidelines themselves are here.

Global Trade Unions Release Guidelines For The Evaluation of  Workers’ Human Rights and Labour Standards

Global union initiative will elevate the profile of social issues in the investment chain

VANCOUVER, CANADA, 1 MAY 2017 - Investors will be able to properly evaluate company adherence to robust labour standards and responsible employer relations as a result of a new global trade union initiative.

The Committee on Workers’ Capital (CWC) Guidelines for the Evaluation of Workers’ Human Rights and Labour Standards are a comprehensive set of key performance indicators (KPIs) for investors to evaluate companies’ social performance. The guidelines were produced by trade unions from around the globe in response to concerns that asset owners and other investment chain actors are not equipped with tools to adequately scrutinize social issues such as labour relations in their environmental, social and governance (ESG) analysis.  

The CWC Guidelines were endorsed at a meeting of the Council of Global Unions in February 2017, giving them unique status amongst ESG KPIs as an official document of the global labour movement.

“When companies like XPO Logistics or Sports Direct mistreat their workforce, they create risks for investors,” says Sharan Burrow, General Secretary of the International Trade Union Confederation. “Yet to date the ‘S’ in ESG has been the weak link in investment analysis, and investors have lacked a shared framework to assess companies’ approaches.”

The Guidelines are inspired by key international norms, standards and frameworks including the UN Guiding Principles for Business and Human Rights, the OECD Guidelines for Multinational Enterprises and the ILO Fundamental Conventions. The indicators are grouped in ten themes, which include workforce composition, social dialogue, supply chain, grievance mechanisms, workplace diversity, and pension fund contributions for employees.

 “The CWC Guidelines will help pension trustees, asset managers and rating agencies properly evaluate the social performance of investee companies,” says Burrow. “In addition to improving investors’ ESG analysis, use of the Guidelines will send positive market signals for companies that respect fundamental labour rights. Ultimately, the capital of working people in their pension funds should support the fundamental labour rights that were necessary to create pension funds in the first place.”

The CWC Guidelines were developed over the past 16 months by a multinational working group of trade union specialists from countries including the US, Australia, Spain, Canada and the UK.  The CWC will use the Guidelines to elevate the profile of decent work practices in its work with pension fund trustees and other investment chain actors such as sustainability rating agencies.

For a one page briefing on the CWC Guidelines, please click here.