Saturday 11 July 2020

Post-democratic ESG

A theme I keep returning to is the lack or decline of democracy in the small corner of world I inhabit. A long time ago, unions in the UK ran an initiative called the Campaign for Pension Fund Democracy which sought to give pension scheme members greater control over their pensions. When I first got interested in what we now call Responsible Investment in the late 90s it was because of similar thought that this would be a route to democratising capital.

Yet if anything democracy has declined. The shift from DB to DC, and towards professional trustees, has reduced direct member involvement in the governance of pension funds considerably. The shift in local government pensions towards pools has likewise in most cases reduced the control that elected politicians have over assets. Many would argue that these changes are a good thing for investment decision-making, but I personally feel we have lost something important along the way.

Meanwhile ESG has exploded in the investment world. Much of it is gimmicky, and the issues I personally care about the most seem to be those that investors spend least time on, and do badly. However the sheer amount of research and numbers of people involved have both grown enormously. 10-15 years ago I could probably name everyone in London in an investment institution (i.e. a pension fund or asset manager) that had a specific ESG job. Now there are loads of them!  

The problem is that, depsite all this, the power isn't largely shifting in the direction of beneficiaries. Instead the process is actually making asset managers more significant political players. As I've said before, this was always the danger with the focus on 'mainstreaming' ESG. Whilst it's obviously preferable that Blackrock supports shareholder proposals on climate than not, I don't think a lot of people have thought through what it means to make Blackrock (which is itself a public company with shareholders) a powerful arbiter of companies social and environmental standards.

Funnily enough I find myself agreeing with something Hayek wrote about the purpose of corporations (even if I don't agree with his conclusion that companies should focus on profit):
"To allow management to be guided in the use of funds... by what they regard as their social responsibility, would create centres of uncontrollable power never intended by those who provided the capital. It seems to me therefore clearly not desirable that generally higher education or research should be regarded as legitimate purposes of corporation expenditure, because this would not only vest powers over cultural decisions in men selected for capacities in an entirely different field, but would also establish a principle which, if generally applied, would enormously enhance the actual powers of corporations."
This really resonates with me today. Again, it's obviously better that corporations (including financial services corporations) seek to adhere to and promote higher standards of social responsibility. But it comes with dangers too, and I think the lack of democracy is a big issue that goes unremarked. It reinforces the very unhealthy tendency for CEO hero worship (*cough* Tesla *cough*). Here's a bit from the ace-a-tronic Winners Take All that nails this point:
All around us, the winners in our highly inequitable status quo declare themselves partisans of change. They know the problem, and they want to be part of the solution. Actually, they want to lead the search for solutions. They believe that their solutions deserve to be at the forefront of social change. They may join or support movements initiated by ordinary people looking to fix aspects of their society. More often, though, these elites start initiatives of their own, taking on social change as though it were just another stock in their portfolio or corporation to restructure. Because they are in charge of these attempts at social change, the attempts naturally reflect their biases. 
The initiatives mostly aren't democratic, nor do they reflect collective problem-solving or universal solutions. Rather, they favour the use of the private sector and its charitable spoils, the market way of looking at things, and the bypassing of government. They reflect a highly influential view that the winners of an unjust status quo - and the tools and mentalities and values that helped them win - are the secret to addressing the injustices. Those at greatest risk of being resented in an age of inequality are thereby recast as our saviours from an age of inequality.  
The second para above is the bit that really bothers me. Corporate-led initiatives are inevitably top-down and shot through with class bias. If you've never had a bad manager, or had to worry about your safety at work, or how much you get paid, or felt unable to speak out about something, you're not going to think these are the sorts of issues that matter.

And corporate preferences crowd out alternatives. For example, it is still under appreciated what a disastrous effect asset manager opposition to employee representation in corporate governance has had in the UK. I am still hopeful that this one will be won in the long term, but there is no doubt that by first opposing workers on boards and then by accepting/promoting the 'designated NED' fudge they have actively blocked the democratisation of companies.

By promoting non-democratic investment institutions as arbiters of social and environmental institutions, we are inevitably going to end up with companies that adhere to ESG standards that are acceptable to financial services companies.

Monday 6 July 2020

Boohoo in doo-doo

Online retailer Boohoo is in the news for a lot of bad reasons. Allegations of poor working practices in supplier factories, which in turn are linked to a Covid outbreak in Leicester, come after news its had created a new incentive scheme for directors, which it did not put to a shareholder vote.

Much of the recent scrutiny of the company stems from a report issued by the campaign group Labour Behind The Label, which you can find here. Questions about poor working practices in Leicester, including illegal underpayment of the minimum wage, have been raised for years.

What I find interesting about the story is that the risk to the company and its investors from poor labour conditions was obvious. This is a sector where there have been numerous scandals and, as the FT article from 2018 shows, specific allegations of illegal practices in Leicester were not hard to find.

Boohoo even lists labour abuses as both operational and reputational risks in its annual report.

Well it was certainly right about the reputational risk... but if you read the list of mitigating actions / policies the company lists, you might well be reassured.

And it also says it applies "strict labour standards throughout our supply chain" in the blurb about its support for the SDGs.

The lesson here is pretty obvious - you cannot just go by what a company says about labour issues in its annual report. I don't think it's any great revelation that if you only listen to what companies say about themselves you get a very partial picture. Some companies do flat out lie, but more often it's simply the very human inability to be able to see their own flaws, or why others might have a different view. It's why I cannot buy into a model of employee engagement that doesn't involve real employee voice (which to me means unions, board representation etc) and think a model of shareholder engagement on labour issues that is restricted to investors talking to senior management is fundamentally ineffective.

Either some investors don't get this, or they don't care. Having done this kind of work for a long time, I'm afraid there are some investors out there who basically think labour is a cost and unions, labour law etc are barriers that they'd rather companies could avoid. They take a punt on companies with labour practices that they know to be poor because they can make money, and they are willing to look the other way.

(Coincidentally I have a small personal link to this as my dad's side of the family are from Leicester and his mum and dad used to work in a shoe factory there.)