Saturday 27 October 2018

What comes next?

I think that the outlines of a future corporate governance model for the UK are increasingly clear. Whilst I'm a long-term, strong proponent of such a change, I think the range of voices in favour is a good indication that it is likely. In very broad terms I see three linked planks:

1. A move away from shareholder primacy. I know that some argue that actually section 172 of the Companies Act a) doesn't really have much practical impact and b) does sort of promote a wider interpretation of shareholder value. But I don't see a really strong argument against a formal shift. It is an increasingly widely made point that workers have long-term firm-specific risk in companies that deserves to be recognised. That needs to be captured in company law.

2. A formal role for employees in corporate governance. As I've blogged before, all the major political parties have made manifesto commitments to workers on boards in different forms. The Tories have actually gone ahead and made the FRC promote this - in a heavily fudged form - in the UK Corporate Governance Code. Although there are to date only a couple of examples of workers on boards (FirstGroup and Mears Group) the door is clearly open now.

3. Ensuring that workers derive a greater share of the wealth that they create at the point of production. This might be worker-ownership funds, or profit-sharing or some other mechanism. Again it is an increasingly widely heard idea (and Ed Miliband deserves a nod, because this is absolutely what he was aiming at with talk of pre-distribution).

This is a mixture of policies which would have been characterised as "far Left" a few years ago, and they are probably still viewed as such by some in the corp gov microcosm. But I could see them commanding a wide range of support across politics (and this is pretty mainstream social democracy in reality).

A couple of things to think about. In the event of a No Deal Brexit it's possible that the radical Right of the Conservatives take control go down a much more Thatcherite route, in which case this stuff will not happen. So nothing is inevitable.

Secondly, alternatively if this mix does look likely to come into force then we have to think about the relative position of shareholders. Strengthening the role of labour means weakening the relative position of capital even if their rights remain the same. This process needs managing. Time to get thinking caps on.

Sunday 14 October 2018

Patisserie Holdings

Just a couple of bits of info relating to Patisserie Holdings - the company behind Patisserie Valerie.

I had a quick look at filings to see if there was anything of note. One interesting disclosure is this TR1 notice showing that back in April Blackrock cut its position from just under 10% (second only to Luke Johnson) to under 5%. I don't know if Blackrock has a typical index holding in AIM-listed stocks, but in any case that's obviously quite a big cut. It came shortly before the H1 results.

Separately, looking back to the January AGM there was a fairly sizeable level of opposition to Johnson's re-election as executive chair. There was a 2.97% vote against, but many more abstentions. In total 18.5% didn't vote in favour (though voting turnout was low). Having had a quick look at voting disclosures, it appears that managers that abstained included Baillie Gifford, Hermes and Royal London. It looks to me like there might also be a proxy adviser recommendation at play here.

There were also 3%+ votes against the report and accounts and the appointment of the auditor. To be honest if I was Grant Thornton I'd be a little bit concerned by this week's events.  

Saturday 13 October 2018

Workers on boards round-up

Just a quick round-up of some news that relates to the issue of worker representation on boards. I think the fact that there is quite a bit is indicative of the shift in thinking that is going on.

1. This is old, but I had totally missed it. Mears Group has appointed an employee director, having been elected at the AGM earlier in June with almost zero opposition. It looks like the director was chosen by management, rather than elected by the workforce. Nonetheless we now have at least two UK  companies with employee directors on the board (FirstGroup being the other).

I'll have a dig into the voting on these directors when I have time. However having a quick look at the AGM results it must be the case that some investors that have been lukewarm at best on the issue of employee representation on board in their public policy positions have voted for the election of employee directors in practice.

I can see some interesting voting issues ahead in the next AGM season, but that's for another day.

2. The ICSA has published a poll showing that the large majority of companies are opposed to the idea of worker directors (though 19% are in favour). I assume, given the ICSA's orientation, that respondents are likely to be company secretaries. There is some useful info on how companies are thinking (or not) about the revised UK Corporate Governance Code:
When questioned as to whether or not they had deliberated the UK Corporate Governance Code’s proposals for getting the workforce voice into the boardroom, 29% of companies have not yet considered them and 15% have, but taken no action. Of those companies that have considered the Codes’ proposals, 25% favour the designated non-executive director option, 14% are inclined to combine one or more of the options, 7% are in favour of a works council or similar, 5% have other ideas, 2% would prefer to have an employee on the board and 1% are unsure.

3.  The ICAEW has published a report encouraging companies to consider the benefits of employee directors on boards. This is very welcome, though it's a shame that unions do not get a mention in there. Still, interesting that one group of professional advisers is taking a more positive line on this.

4. Jim Moore on The Independent has published a comment piece criticising Legal & General for going down the nominated NED route.

5. The Evening Standard has published a letter from Luke Hildyard of the High Pay Centre responding to a previous comment piece (which praised L&G) and arguing that employee directors are indeed a good thing.

6. The Bank of England's Andy Haldane has voiced his support for employee representation on boards.

7. The ETUC held a rally outside the European Parliament calling for greater worker participation within companies, including representation on boards.

Saturday 6 October 2018

Legal & General vs workers on boards

A little bit of news about workers on boards (or the lack of them) in the UK. Legal & General is the first big PLC that I have seen set out how it will address workforce engagement.

Perhaps no big surprise, but they have adopted the nominated NED option:
The Company is also pleased to announce the appointment of Lesley Knox as designated non-executive director for engagement with the Company's workforce, in line with the provisions of the UK Corporate Governance Code (July 2018), with immediate effect. Lesley is currently Chair of the Company's Remuneration Committee and so is well-placed to engage effectively with the Company's workforce.
And it's also worth remembering that is in line with the position adopted by its asset management business LGIM.
The introduction of an employee sitting on a Board or establishing a shareholder committee, in our view, would significantly change the current roles and responsibilities of directors and shareholders. We continue to support the Unitary Board model in the UK and focus our efforts on how Board effectiveness can be improved within the current governance structure. In saying this, we also understand that directors should be accountable to other stakeholders including employees. One way in which there can be better alignment between employees and shareholders is for Boards to better understand the sentiment of employees in the organisation. This can be done by nominating one of the current independent Non-Executive Directors (a “Nominated Employee Non-Executive Director”) to be held accountable for seeking out employees views in the business. This nominated director will have responsibilities to meet with staff at different levels and report back to the Board the findings. Furthermore, in the Annual Report, the Nominated Employee Non-Executive Director should also provide a statement and report back to shareholders at the AGM or Annual Report of what he/she has done to fulfil their remit.
Equally obviously this is going to fall a long way short of the expectations of unions and other advocates of meaningful worker representation. It will be interesting to see if other PLCs follow suit. I can imagine some tension ahead.

Finally, on a related note, there's a piece in the Evening Standard opposing workers on boards and supporting L&G's alternative. There's an interesting bit suggesting that opponents of workers on boards have argued against by reference to directors' duties:
Businesses successfully lobbied that being forced to hire a workers’ rep as a director would make them hostage to unions and get in the way of fleet-footed decision-making.
Besides, they pointed out, the law says directors’ primary duty is to shareholders, not staff. So, under Section 172 of the Companies Act, a director charged with looking out for workers’ interests above all else is breaking the rules.
I think this is a bit off target. For one, as currently formulated the Companies Act does give priority to shareholders but also says they've got to consider impact on workers, environment etc. In addition, if the claim above were true then First Group would have been in breach of the Companies Act for years, since it has a worker on its main board.

Nonetheless, if corporate lobbyists are using this as an argument (and I've also seen section 172 prayed in aid of tax avoidance, large bonuses at banks etc) then it strengthens the case for reform of directors' duties in any case.

PS. Here's what the Companies Act 1985 (section 309) said about directors' duties to employees:

309Directors to have regard to interests of employees

(1)The matters to which the directors of a company are to have regard in the performance of their functions include the interests of the company's employees in general, as well as the interests of its members.
(2)Accordingly, the duty imposed by this section on the directors is owed by them to the company (and the company alone) and is enforceable in the same way as any other fiduciary duty owed to a company by its directors.

(3)This section applies to shadow directors as it does to directors.