Sunday 30 April 2017

Non-alignment of interests

I've recently found something that captures important points relating to competing interests within the firm: this news story about American Airlines. More specifically, the quote from the analyst is almost perfect:
“This is frustrating. Labor is being paid first again. Shareholders get leftovers,” Citi analyst Kevin Crissey wrote in a note to clients. Investors showed their displeasure by sending American Airlines Group Inc.’s stock down 5.2% to $43.98 on Thursday. 
Why do I like it so much? First, as I've bored on about at length, there's a strain of corporate governance boosterism that seeks to deny that there is really any tussle between competing interests at all. The best/worst example I have seen, in a piece about long-termism, is this godawful claim from McKinsey:
in truth there was never any inherent tension between creating value and serving the interests of employees, suppliers, customers, creditors, and communities, and proponents of value maximization have always insisted that it is long-term value that has to be maximized.
"never any tension" FFS!

Yet in this news story we see an obvious tension between the interests of labour and the interests of investors (or those speaking on their behalf). I know some may retort that these aren't the real investors and/or if they were taking a long-term perspective then maybe they would support higher wages. But in Actually Existing Capitalism, public companies consider that asset managers are the "investors"/"shareholders" (as asset managers generally do themselves), and analysts are seen as providing insight to assist investors. What's more the tension is made absolutely explicit by the analyst: if labour gets more investors get less.

Secondly, the analyst also provides a very good expression of shareholder value mission creep. The complaint is that labour is getting paid first and shareholders are getting 'leftovers'. But this is how the model is supposed to work. The company pays all necessary costs and then distributes what is left to shareholders. Yet the analysts seems to think that this is somehow out of order. This is exactly the point Colin Crouch made a few years ago:
In theory, shareholders’ earnings, their dividends, based on profits, are the residuum in a firm’s trading activities, the last claim that is made on a firm after all claims from bond-holders, employees, creditors, investment needs and other requirements have been met. This is the risk-bearing activity at the heart of capitalism that enables firms to be innovative and that justifies shareholder maximisation: if the shareholders must wait until all other contractual claims on a firm have been met then they need to be able to have the final say over how the firm is managed. Also, their rewards from successful transactions must be high, as these must compensate them for the losses that will come from risks that go wrong. 
This principle remains valid if a firm goes bankrupt; shareholders have the last claims on any assets. But during routine operations of a viable company it has been heavily compromised by the emergence of profit expectations within today’s highly volatile stock markets. Ideas spread as to what short-term return on profits ought to be available in the market; remember shares are being bought and sold with an eye primarily on the secondary markets. There will therefore be a flight from shares of firms not meeting the prevailing idea of a good return. Such firms become vulnerable to hostile takeover, something which senior managers are keen to avoid, as it often leads to them losing their jobs. Managers are therefore under strong pressure to meet or exceed a target level of return to shareholders. If necessary, investment plans, customer service and employee compensation will have to be held back to meet this target. Once this occurs, distributed profits are no longer a residuum but are an early call on a firm’s earnings.
It's obvious that the directors should not pay employees less than they think is necessary to recruit, retain and motivate them. If the board prioritised paying investors over paying staff what they think is necessary to meet the needs of the business I think that would be a breach of directors' duties. So, in technical terms, employees should get paid first and shareholders should get "leftovers" - that's the model.

Assuming the analyst knows the basics of corporate law and does not mean this literally, I guess the point is really that the board should have thought more about shareholder interests when making pay awards, with the implication that employees should have got less. Which again suggests that there are indeed conflicting interests (and note that the stock did take a hit).

So, in today's capitalism, it is clear that employees' and investors' interests can indeed be in conflict. It may not always be the case, and I do think investors often would benefit directly from employees having better terms and conditions. But there is conflict there.

In light of this, the recent discussion about worker representation in corporate governance looks even more pointed. If asset managers are responding to a consultation arguing that workers should not get any formal role they are, essentially, simply asserting that their interests should (continue to) come first in that arena. I'm not sure, to put it mildly, that those of us who want to rebuild labour's share of the wealth created within the firm have much to gain by strengthening shareholder rights further in the UK. And we should be arguing relentlessly for employees to gain more power and resources within the firm directly, because experience shows that investors (as they are currently constituted) in the main aren't reliable supporters. Or at least not yet.

In my opinion, it would much better if we were open in our discussion of corporate governance and related issues that not all interests pull in the same direction all of the time. Then at least we could make more honest decisions about who gets what, rather than pretending we can all win and, in doing so, obscuring who actually does (clue: for the last 30 years or so it hasn't been labour).

As the late Tony Judt put it:

“Societies are complex and contain conflicting interests. To assert otherwise – to deny distinctions of class or wealth or influence – is just a way to promote one set of interests over another. This proposition used to be self-evident; today we are encouraged to dismiss it as an incendiary encouragement to class hatred.”

PS. There is nothing new under the sun, the idea of praying "long-term interests" in aid of better corporate behaviour is an old one, not some startlingly fresh insight from McKinsey.

Wednesday 26 April 2017

A decade of blogging

I realised recently that I've just completed a decade of blogging. Although the arrival of two kids means I blog a lot less often than I used to, and read a lot less to blog about, I still feel the urge to communicate. Partly I just enjoy writing, but I also feel/hope that it is worth putting an unequivocally pro-labour and pro-Left voice into the blogosphere on issues like corporate governance, ownership etc.

The benefit of blogging for this long is that I can see some of the trends that have come and go over the period and - I think - see the broad outlines of change. So here are a few general observations after ten years of doing this stuff. NB - I am speaking about the UK here primarily.

1. Obvious really, but the financial crisis had a much deeper and lasting impact than many people on the centre Left initially realised. I think people did initially expect a big shift, but because there wasn't an immediate swing to the Left in policy or in political support many concluded that this wasn't going to happen at all, and that things would carry on much as before, albeit with much constrained public spending. I think we can now see that this conclusion was wrong, but perhaps until Corbyn, Brexit and Trump quite a lot of people still thought not much would change from the 1990s.

What is particularly striking is the disconnect that has developed between technocratic policy wonk opinion and public opinion, and a seeming unwillingness on either side to meet in the middle. I think a lot of mainstream policy people still think that they got nothing much wrong over the past couple of decades, and the public are just too dense to know what's good for them. These people also have considerable influence over our politicians. Hence the tortured political positions we see post-crisis where politicians play to the public with their rhetoric and policymakers with the detail and neither group feels entirely satisfied. Perhaps it was ever thus, but the gaps between policy people and the public and between rhetoric and reality feel very large now.

2. Corporate governance reform involving shareholder empowerment no longer looks like progressive policy. From the 1990s onwards a number of influential people on the Left enthusiastically embraced the ideas that shareholders = the public, that shareholder engagement was a new/exciting way to restrain poor corporate behaviour, and that tooling up shareholders could tackle tricky issues like executive pay. I'm not sure quite when this hit the wall, but I think you would struggle to get many people on the Left to get out of bed for this agenda now.

In large part this is due to practical experience. Shareholders, which mainly means asset managers, have been overwhelming uninterested in tackling the scale of executive pay, and unwilling to engage over labour issues. I think we lost a decade - and corporates gained the same - in fiddling about trying to find ways to make asset managers do things they don't want to, and trying to redesign executive pay rather than just constrain and/or it.

During the same period the nature of the shareholders of UK business changed, so there is now much more foreign ownership. This makes it significantly harder to argue that giving shareholders more power is a good thing for people in the UK. If dividends and voting rights are going to American asset managers (who care even less about executive pay than their UK counterparts) what progressive agenda is being served by giving them a greater say?

For me personally, the way that asset managers and some of the business/finance lobby groups have responded to the question of worker representation on boards is the final straw. It wasn't a surprise, but I have still found it absolutely sickening. There is no way I would personally support any further extension of shareholder rights since many of those shareholders lobby against my interests. And in my opinion the fact that these organisations are increasingly active in public policy is net negative for the Left.

3. ESG progress, from a labour/Left perspective, has been disappointing. To many of us it looks like "responsible investment" is largely about executive pay plus climate change. Labour issues, despite labour rights being central to all the key human rights standards, are still seen as "political" and few investors (with honourable exceptions) seem willing to hold companies to account to anything like the same extent they would do over environmental issues.

I think there are several issues at play here. One is that there is a tussle over resources within the firm (forget the Mckinsey bollox that all interest align over the long term) and some investors don't want to give any ground. Undoubtedly there is a cultural element too - many people in the City hold views on various issues that are further Right than the public, even if they don't realise it. There are few union fans. There is a generational aspect - many younger ESG people have little knowledge/experience of the labour movement and are more drawn to environmental issues. And there is a class aspect to it too.

The net result, as I've said before, is that responsible investment in general gives off the vibe of being about wealthy, globally mobile liberalism. The worst sins in this world view are market imperfections and a lack of meritocracy. But this world view is given airtime through the management of the savings of millions of people who will never get into the top tax bracket or be headhunted for non-executive roles. Again as I have said before I do not think the disconnect between the views articulated by most ESG people and those of the people whose money gives them a job is sustainable.

4. Unions have remained largely focused on pensions as benefits rather than pools of capital, and potential leverage. This has started to change in the past few years but we didn't catch the capital strategies bug initially. I personally think this has been a missed opportunity, though I would prefer to see unions engage tactically with capital where they have specific, achievable objectives rather than waste time and resources trying to rebuild "the system". I've become more convinced of this over the past few years, and I say this as someone who is interested in policy and has enjoyed doing policy work. In my opinion it just doesn't deliver enough to make it worthwhile.

5. There is nothing inherently democratising about markets, widening share ownership, greater participation in the finance system etc, if anything the reverse has been true. The idea of self-determination ends at the office/factory/depot door for the large majority of people I deal with professionally. Hence the hostility towards worker representation in corporate governance. Most people in this world do not believe that business needs to be democratised, but they do believe that more functions in society should be run by the private sector. This can only lead in one direction.

And the same applies to pension funds. Whatever the theoretical merits of the "professionalisation" of trusteeship, in practice it has led to de-democratisation. Across several key markets member trustees have been denigrated and moves have been made to remove them from decision-making. As such the control of capital that belongs to the public has increasingly slipped from their grasp.

Along this path the real threats to the subversion of fiduciary duty have become clear. If you are union person with any experience in pension fund investment issues you will have had lectures about Scargill, and the need not to put political objectives ahead of the interests of beneficiaries. Imagine how terrible that would be.

But it is OK for policymakers and politicians to try and determine the asset allocation that pension funds adopt (ahem... infrastructure) through rewriting investment regulations and altering the structure of pension funds. We now have a situation where policymakers are making all kinds of regulatory tweaks in order to help funnel capital that is supposed to fund our retirements into projects that they won't raise taxes to pay for (even if this might be a cheaper option). I don't remember ever being asked to vote on this one.

Monday 24 April 2017

Pension funds and labour standards

I recently spent quite a bit of time trawling pension fund's responsible investment policies to see what, if anything, they say about labour issues. The background to this is the long-expressed gripe that investors seem to spend less time looking at the S in ESG than the E and G, and, as a result, it can be hard to get them focused on labour issues.

What I found was that, actually, a lot of big pension funds and providers in Europe do have policy around labour issues, with many referring to the UN Global Compact, OECD MNE guidelines and ILO conventions. But there is a big geographical bias. Most funds in countries like the Netherlands, Sweden and Denmark (which all have some big funds) refer to labour standards in one way or another. But most funds in the UK do not.

This is, to put it mildly, a bit of a problem since the UK is also a country where workers have no formalised role in corporate governance. So we don't get board representation, but nor do our pension funds promote labour rights in their ESG policies.

One of the things that surprised me while doing the research was how may ex-UK pension funds still apply screens and/or divestment policies. In the UK we are a bit sniffy about this approach and personally I still think engagement is what we want at most companies for most of the time. But doing the research has firmed up my belief that the UK really has no place to tell other jurisdictions how to do RI - our funds are laggards in my opinion when it comes to international standards (for example, little discussion here about application of the OECD guidelines).

In terms of which companies are excluded because of labour issues, I specifically looked at Walmart (because I was aware it was on some funds' exclusions lists) and Ryanair (because.... well... because it's Ryanair innit?). Here's what I found

And finally there are some good examples of strong policies on labour issues out there, probably my favourite is ERAFP, below:

The full report is available on the ITF website here: