Monday 31 December 2018

Employee representation at board level: first steps

As most people will be aware, the revised UK Corporate Governance Code kicks in next year, and an important element of it relates to "employee voice". At the risk of overstating things, the change in the Code is significant as, for the first time in its existence, the text recognises the importance of the workforce.

As I've blogged over the years, the question of employee representation at board level (part of a wider discussion about the role of the corporation) has been rising up the policy agenda for five years or so. By the time of the 2015 election all the major parties, bar the Conservatives, had language in their manifestos backing some form of employee representation. And once Theresa May became PM the Conservatives followed suit.

Anyway, back to the Code: there is limited information from companies so far on their approach. What we do know is that two companies - First Group and Mears Group - now have employee directors and that a third - Capita - is currently recruiting (and may appoint two). I suspect that there will be more companies that go down this route, probably those where unions have a stronger presence and industrial relations are more formalised. I do wonder too if it will be companies that have a fairly simple geographical spread, with UK-oriented employers more likely to find it easy to appoint a "representative"... err... representative.

We also know that several companies have gone down the nominated NED route - Legal & General, Sthree and Diageo, for example. I am aware that other companies are looking at this model though there is little public information yet. My gut feeling is that this will be the most common model adopted by companies. Some arguments you hear for this include that it ensures that the employee representative is acting in the interests of the company, not the workforce, that it ensures that there is an informed voice at board level and so on.

Finally, the only other example I know out there is Sports Direct, which has appointed an employee representative but who isn't a director. Weird that they are out of line with mainstream corporate governance practices eh?

A couple of things to note. First, appointing employee directors is the favoured option of the TUC and those unions that have commented on this issue (including Unite). In contrast, the nominated NED idea has largely been backed by mainstream corp gov people and some major investors. I need some persuading that PLCs ending up with a model of employee representation that is favoured by management and capital, but opposed by labour, is a) a great look and b) going to hold for long.

When the UK decided that it needed to tackle the issue of gender diversity at board level, companies were not given the option of nominating an existing non-executive to represent women. Everyone can see how ridiculous that would be. But I'm not convinced that designating an existing non-executive as a representative of employees is much more reasonable. Advocates of greater gender diversity and employee representation at board level do so because they believe that this would improve the dynamics of the board. If our expectations of any board member is that they act in the interests of the company I'm not sure there is a massive difference between promoting gender diversity and employee voice.

As I've blogged before, I think implicit in this discussion is the idea that employee directors would seek to favour their own interests over those of the company and/or the shareholders. But if we take this at face value it is reasonable to ask to further questions: whose interests *should* predominate in corporate governance, and in what circumstances? And does the absence of employee voice at present mean that the interests of employees are under-represented in board discussions? After all if interests conflict, and the presence of a representative of an interest group enhances their ability to assert their claims, presumably their absence must weaken it? Status quo bias springs to mind here.

Secondly, we need to recognise that we are at the very start of the process here. The idea of employee representation at board level is still fairly new to many people in the microcosm that I inhabit, and the revised Code is the UK's first stab at trying to address it. But it won't be the last. For example, I think there is a fairly decent chance that Labour will end up back in government in the next few years. Even if this was as part of a coalition it's unlikely it would face a political problem getting its policy of mandatory worker directors through. It's a cost-free, symbolic policy that likely coalition partners would support.

Finally, let's not forget the "storm in a teacup" nature of discussions of ideas that fall outside the corp gov mainstream. For example, I was rereading some material about annual election of directors the other day and it reminded how overblown many of the arguments were. Entire boards would be voted out, and directors would be put under intolerable pressure. In reality, the huge majority of directors of UK PLCs face no threat whatsoever of being voted off the board. To my knowledge no entire boards were removed. Shareholders have used their powers sensibly, as proponents of annual elections said they would. But annual elections have enabled them to repeatedly challenge unpopular directors like Keith Hellawell.

My priors are that companies are smart enough to want to recruit good employees, and that good employees are smart enough to want to pick representatives who can handle the demands of being a board director. So, ultimately, I think employee directors will become the norm over time. The corp gov playing field will tilt slightly more towards labour, some people will freak out, and a decade later we will wonder what all the fuss was about.

Saturday 29 December 2018

Kier Group ownership changes

Following the mess that was Kier Group's rights issue last week there are some interesting regulatory filings that provide some idea of what is going on under the surface.

Here is Aberdeen Standard increasing its holding (relatively speaking) to become (after some other moves) the largest shareholder with 15.85%. And here is Woodford's holding coming down to 13.58%, presumably because it didn't take up its full allocation under the rights issue. 

More interesting is Peel Hunt - one of the underwriters that was left on the hook after the rights issue flopped. Left with unshifted stock on their hands they briefly ended up with 17% of issued shares on the 20th, only to dump them on the 21st, reportedly for 360p.

There's a nice bit by Alistair Osborne here (though the total shorts in Kier Group were - I am told - more than double the level if you add up those disclosed by the FCA).

And talking about those shorts, the FCA list now shows a total of just 4.62% - a big drop after the rights issue as you would expect. BlackRock's short position - which had been at 2.73% up till last Wednesday was reduced to 0.76% on Friday. (graph below nicked from Shorttracker - only FCA data in this tho).

I imagine that the combination of underwriters dumping of a large block of stock on the cheap and the need to close out short positions means that some of these folks made out pretty well last week. 

Wednesday 19 December 2018

Interserve / Kier Group short selling update

Update on my update: I'm reliably informed that other data sources suggest the actual total short position in Kier Group is more than double that in the FCA list. Interserve 50% higher than the totals on the FCA list.


I've been looking through the publicly available short data again to see if anything interesting has been happening. Both Kier Group and Interserve have continued to face a lot of bad press.

However what had happened was that the shorts in both companies looked like they were dropping away. So in Kier Group they fell back from a high of about 14% at the end of November to under 11% at the end of last week. As a reminder 14% was the highest the short had been in the past 5 years (chart nicked from Shorttracker)

Similarly the shorts in Interserve were at nearly 6.5% at the end of Nov/start of Dec, but they also fell back (though in this case they had been at a high of over 9% when Carillion tanked).

In the past couple of weeks we've seen the bad news shake out at both companies, so I had assumed that this might explain a tail off in shorts. But they seem to be coming back at both companies, and there is some interesting detail.

For example, looking at Kier Group, BlackRock's short of 2.73% is the highest it has been so far, and has been taken to this level in the past couple of days. Similarly, Marshall Wace now has a total short of 4.7% across both Marshall Wace LLP (where it's current position of 3% is about the highest it's been) and Marshall Wace Asia (1.7%, the highest it has been). And Millennium International Management has shown up with a 0.5%+ position for the first time this week.

It is quite possible that the subset of data I can access is too small/volatile to read too much into. One investor going above or below the 0.5% threshold obviously makes quite a big difference. But then I question why the FCA sets the bar at 0.5% - in large cap companies it costs a lot of dough to get to 0.5%. It's also possible that the shorts edging up and down a bit don't mean that much. But it doesn't quite feel like that. So, I'll keep on keeping an eye on it.

Friday 7 December 2018

Interserve / Kier Group short selling etc

Following on from Kier Group (and Carillion, of course) it looks like Interserve is facing some serious financial pressure. According to the FT there are "rescue" talks underway that involve a debt for equity swap that would largely wipe out existing shareholders. It is also suggested that subsequently the company would attempt a rights issue (if I'm reading it right). I can't imagine that would be a popular one, and there is an anonymous quite from a banker suggesting as much.

Anyhow, I thought I'd take a look at the short positions. Bear in mind that this is only capturing shorts disclosed by the UK regulator that are above 0.5% (you can get better/more extensive data from from IHS Markit but I don't have access to it). The 0.5%+ positions currently stand at 5.69% for Interserve - actually down a bit from last week. Here's a screenshot from Shorttracker (which just captures the FCA data) that shows the historical trend.

The share price didn't do much today buy has nearly halved in the past month and is down roughly 80% this year. Given that the FT story has just broken there might be some action on Monday.

Also had a quick look at Kier Group. Its share have more than halved over the past month, mostly of the loss in response to the emergency rights issue. The short position is also down, from about 14% to 12%.

Again, remember that actual total shorts will inevitably likely be higher (presumably there are some out there between 0% and 0.5%). Dunno if the slight downward trend means anything or not. Maybe some shorts feel they've made their money? Maybe some stock lenders want their shares back?

Anyway, will keep an eye on both

Thursday 6 December 2018

Capita recruits employee directors

Just a "workers on boards" nugget, but Capita has announced it is seeking to recruit two employee directors. You can read the press blurb here or the story in the Times here.

When I dug around a bit I discovered that this had actually been announced back at the start of August in the H1 results:

So that's three companies so far that I know that will have worker directors next year (First Group, Mears Group and Capita). This will obviously go higher. I reckon in a few years it could be quite commonplace.

Sunday 2 December 2018

Major shareholder turns against Ryanair board

Just a quickie, but I spotted last week that Baillie Gifford had voted against the re-election of both David Bonderman (chair) and Kyran McLaughlin (SID) at the Ryanair AGM in September.

Why does that matter? Because Baillie Gifford is a large (4%) and long-standing Ryanair shareholder and, as far as I can see, has not opposed any board members in recent years.

Another straw in the wind I think.

Kier Group in trouble

Kier Group's shares took a nosedive on Friday afternoon, after the company announced a £250m rights issue intended to pay down its debt. The background to this, according to Kier Group, is a mixture of lenders pulling back from the construction sector, more scrutiny of debt levels by potential customers and pressure to reduce payment times to suppliers.

Some of the comments in the coverage from Friday are toe-curling. For example, here's a snippet from the FT:
Alastair Stewart, an analyst at Stockdale Securities, said: “This was clearly an emergency rescue rights issue, required by some of their lenders at breakneck speed. A few years ago Kier were seen by the industry including rivals as probably the most conservative, solid company in the sector. Now it looks like the banks have given them a month to save themselves.”
Kier Group is one of the most heavily shorted UK stocks. According the FCA's list of disclosed short positions (which only lists 0.5%+ positions) total shorts at that level and above are almost 14%. That is the largest total short position in the list, and given that there are likely to be other shorts out there below 0.5% the real total could be a few points higher. (I think I can see about another 2%)

Here's a chart nicked from ShortTracker showing how FCA disclosed short positions in Kier Group have changed over time. Obviously negative sentiment has been on the rise throughout 2018.

Who is behind it? Below is a list of the firms reported by the FCA as currently shorting Kier Group. Note that Marshall Wace actually has two short positions held by different bits of the firm, totalling 4%.

After that the next biggest short is BlackRock, with 2.44%. BlackRock also has a long position. According to the most recent annual report, this stood at 5.9% as at 19th September. So as well as having the second largest short position in Kier Group, it also has (or had) the third largest long position.

And for good measure BlackRock also appears to manage some legacy Kier Group pensions.

And another notable player in the Kier Group shorts list is Naya Capital. This firm gave the Tories £100k in the run-up to last year's general election. So another public sector contractor being shorted by a firm that funds the party in power.

If any of this sounds familiar, that's because there are a lot of similarities with Carillion. The same firms shorting, and similar links. Let's hope the company has a rather better outcome.

Back on the long side, Woodford and Aberdeen Standard have very big positions (14%ish and 13%ish respectively according to CapitalIQ). In the latter case there is a decent chunk of UK pension fund money in the mix. Looking further down the share register, it is notable that the BAE pension scheme is also heavily exposed with 2% (one of a number of large positions they hold in UK companies that I have come across).

Coincidentally Kier Group just held its AGM. On the ballot were two resolutions seeking authority to disapply pre-emption rights. Not uncommon, but a bit more meaningful now. Both passed with spanking majorities. I can only see a couple of disclosed investor votes on the AGM so far - NBIM and BMO - and no oppose votes on either. But they aren't major holders anyway, NBIM having cut its position right back.

Finally, in case you were wondering, the total disclosed short position in Interserve on the FCA list stand at 6.4%. We might expect to see that creep up as concerns about the sector spread.