Inequality, depression, unions

Today someone mentioned Angus Deaton and it reminded me of this interview with him in the FT which I always meant to blog about. It's two years old now, and took place just after Trump's victory, but there are several bits that really resonate with me.

The last bit really interests me. I'm obviously an advocate for unions, and despair of the way that the decline of unionisation has scarred society. Many people (rightly) talk about inequality in regard to this, but I'm also interested in this issue - that Deaton hits on - of the removal of representation. 

I think a much underestimated value of unions is that they give workers the ability to challenge, to argue back, to assert some agency. In these days of the consensual anaesthesia, where conflict and contestation is characterised as undesirable, and democracy and deliberation as inefficient, you can see why those who want to keep a lid on things and/or "depoliticise" them (by taking issues out realms where they might be debated) don't like unions. Now we characterise workers taking action - arguing back, working to rule and (rarely) striking - as a pain in the arse, even while we celebrate those further up the foodchain for exhibiting the same kind of approach (think about the Theresa May "bloody difficult woman" stuff).

I think this is a shabby state of affairs. In addition, as Deaton suggests, I think the destruction of the sense that you can argue back, or assert yourself, or have someone fight for you, must come at a psychological cost, especially when coupled with the decline in jobs where traditionally workers have had some agency. I also wonder about the effect that this has on democratic norms. The rise of unions paralleled growing demands for political enfranchisement. Ordinary people were familiar with being able to choose representation. If we no longer expect to be able to choose to have effective representation where most of us spend most of our adult lives (at work) do we fall out of the habit of seeking/expecting representation at all?

Like many of us, Deaton sees all this as an element of the Trump and Brexit revolts. Tying it together with his comments that Labour / Democrat leaders no longer look/sound like their voters, it also reminds me of this passage from Wolfgang Streek. I'm 100% a Remainer, but I can understand the desire to throw a spanner in the works.

   

Labour's mini Meidner plan

It's been an interesting day for those of us on the Left with an interest in issues of governance and ownership. At Labour conference it has been announced that a future Labour government would both mandate that workers form a third of the board of companies and that new funds would be created to increase worker ownership.

On the latter point, here’s what John McDonnell said: “We will legislate for large companies to transfer shares into an “Inclusive Ownership Fund.” The shares will be held and managed collectively by the workers. The shareholding will give workers the same rights as other shareholders to have a say over the direction of their company. And dividend payments will be made directly to the workers from the fund. Payments could be up to £500 a year. That’s 11 million workers each with a greater say, and a greater stake, in the rewards of their labour.”

According to media coverage, the idea is that each year 1% of the equity of public companies would be transferred to these funds, and eventually they would hit a maximum 10%. The shares could not be sold, but workers would gain from dividends paid out.

On the face of it, this is a scaled down version of the Meider Plan in Sweden, which involved the creation of sectoral “Wage Earner Funds”. Labour’s proposal seems to be pitched (sensibly in my view) more in terms of ensure that those who create wealth get their fair share of it than in terms of socialisation of the economy. But it is still quite an important development.

There are some rather over the top comments out there today from corporate groups who frequently extol the benefits of employee share ownership. I really don’t see why it’s so terrible to make this reality by proactive policy rather than being content with the very limited extent of employee ownership that exists today.

There are few other important effects of this policy that don’t seem to have been covered, so I thought I’d spell them out.

1. 1. Relations with the company: With 10% of the equity, a worker ownership fund would be one of the biggest shareholders in most PLCs, and the largest in a majority of them. To put this in context, in most cases the worker fund is going to be a bigger player than Blackrock (and the people involved with the fund are going to know a lot more about the internal workings of the company. This means that any company’s investor relations department is going to need to pay close attention to them, along with the board.

1. 2. Relations with other shareholders: Any significant shareholder interaction with a company would have to sooner or later involve the respective worker owner fund. A bidding company in a hostile takeover will have to try and win it over and the expectation has to be that in most cases the fund is going to be predisposed to reject a bid. Imagine the dynamics if a bidder can’t get them onside, and how that would affect the views of other market participants. And presumably groups like the Investor Forum would have to find a way to work with these new funds too.

1. 3. Shareholder rights: Once you get over 5% your rights as a shareholder increase substantially. That means worker owner funds could, if need be, file shareholder resolutions, or call EGMs. In practice I’d imagine that the capacity to do this would be a significant enough bargaining tool, but the powers would be there.

Taken together, employee ownership and board representation would mark an important shift in the UK model, though in reality it would only move it towards a more fully-fledged social democratic approach to the economy. You really don’t need to be a Corbynista to sign up to this.

Here, for example, is Roy Hattersley backing a Meidner-style approach in his (really quite interesting) 1987 book Economic Priorities for a Labour Government: “I am for the diffusion of wealth and power — in principle. And I rejoice that the methods of bringing such a diffusion about are likely to improve our economic performance. The creation of co-operatives and the acquisition, by employees, of shares in the companies which employ them — coupled with rights to promote employee participation — is a far more effective way of providing economic enfranchisement than the creation of vast state monopolies which are insensitive to the needs both of workers and consumers…”

And he also recognised that employee ownership could not be a subsitution for other forms of worker representation: “Unless employee share ownership schemes are coupled with rights to information, consultation and representation they may be treated with justified suspicion by many trade unionists. Giving employees more say will not come for a long time — if ever in some large and multinational companies — if we just rely on ownership schemes.”

So it’s not a “far left” plan, it’s entirely within the tradition of a thoughtful approach to political economy that really belongs within the Labour Party. I think we just set our sights too low for too long. And I am glad that Labour is getting its ambition back.

Pay ratios - an important step forward

Tomorrow will see the introduction of regulations that will make it mandatory for larger listed companied to disclose the ratio between chief executive salaries and the average pay for employees of the same firm. Although the UK has actually been beaten to this reform by the US of all places, this represents an important development for a number of reasons.

First, it is a shift away from the centrality of shareholder interests. I am unclear about the extent to which Conservative policy wonks are aware of this (or care either way) but if you've followed this debate you should know what I mean.

I don't think many people seriously believe that the disclosure of ratios will lead to the creation of greater returns for shareholders. Nor is the policy aimed at the issue which most shareholders have focused on - tying executive reward to shareholder returns. Rather this policy is all about intra-firm inequality and relative reward. Some shareholders (asset managers) care about these things, many do not. But essentially their support or opposition to the policy is taken to be far less important than would have been the case 5 years ago.

We can see the shift in focus too in the expected revised requirement for demonstrating how the range of stakeholder interests are taken into account by directors. Employees are once again highlighted as an important group. I know for many people on the Left these will seem like very minor tweaks but they do matter.

And that's partly because, secondly, these reforms represent a defeat for the corporate governance mainstream. Most people in the microcosm I inhabit still adhere to the 1990s vintage view of the world, and the policies that flow from it. This is built around disclosure and shareholder empowerment. In that cluster of policies pay ratios make no sense. And it was only a few years ago that major shareholders and their representatives were publicly opposed to pay ratio disclosure. Many still believe the whole exercise is pointless and/or an illegitimate intervention in the shareholder-company relationship. However, some have swung to support ratio disclosure, probably in part because they don't want to be too far out of line with the government, and this isn't a hill worth dying on. Nonetheless it is a defeat for the mainstream and a policy that comes very clearly from the Left is being put in practice by a Conservative government.

Which leads me on to the third reason why this policy is important - it has shifted the centre of gravity in terms of what is "reasonable" to ask for in this area. Again, it wasn't that long ago that arguing for disclosure of pay ratios was very much a left-wing position - and an aspirational one at that. Now that it is being put into practice pay ratios will shortly become the status quo. That means that on the Left we can now use this as a jumping off point for more radical policies. In my opinion we should not underestimate how important and influential having a measure of intra-firm inequality embedded into corporate disclosure will be in terms of shaping people's thinking about a) what matters in this field and b) what might be politically achievable.

It's taken a long time to get here, and there is a lot more to do. For instance we have to push on worker representation in corp gov too - the government lost its nerve, but the door has been left ajar. But the introduction of pay ratios is a win, end of. And it's the start of something.

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.

Public supports tough line on exec pay shocker

As I blogged previously, the commentariat was united last week in its certainty that Jeremy Corbyn was talking rubbish when he proposed some pretty tough positions on executive pay.

Amazingly, it turns out the the public favours taking a very tough line on executive pay. 57% support  the idea that the Government should try and make companies adopt a 20:1 internal pay ratio, with 30% opposed.  This is a policy that has only just been floated, and which is associated with Jeremy Corbyn. As such, I'd say those numbers look pretty good.

Just to be clear here, the public seems to support a ratio that defines the max top to bottom pay range within companies, not just the disclosure of what the existing ratio is. Currently we don't even require the latter, although I'd say it's pretty likely to be mandated by government. The public already holds much more radical views than those that are only just being consulted on.

A max 20:1 ratio is much lower than most publicly-traded UK companies. If investors were in tune with public opinion they should not only seek disclosure of ratios, but vote against companies whose ratio is too high. So far, we have seen more investors move into pro-disclosure positions, but I haven't seen any say they will vote against those whose ratio is too great. But if they vote FOR the remuneration policies of companies with large ratios, they aren't representing the views of beneficiaries, right?

I don't think this is sustainable. Either investors, who only have power because the public appoint them to manage their savings, start taking a much tougher line, or policymakers need to start properly scoping out alternative methods. Personally, I have concluded that we have given shareholder oversight a good try, but it hasn't done anything like enough. But AGM season is ahead, so this is an opportunity to see if sentiment is changing.

To date, there hasn't been a single year n the UK when the number of pay defeats inflicted by investors has hit double figures. So let's see if a real change can be brought about this year - let's aim for defeats in double figures in the FTSE350. That means at least 10 defeats which would be unprecedented but only equates to about 3% of the total, so >95% would still get majority support from investors. This is setting the bar very low, but let's test for a pulse before we finally declare the patient dead.  

Capping executive pay

It's fair to say that today has not been an unblemished success for Labour. Nonetheless, despite everything, there is something encouraging in what Corbyn has been saying about executive pay.

First off, let's tune out the noise. Much of the politico commentariat was united today in guffawing at how obviously dumb and wrong-headed Corbyn was to float such a stupid idea as a maximum wage. A number of these people were also commenting sagely yesterday about the wisdom in Dominic Cummings' take on dynamics of the Brexit vote victory. Interestingly, Cummings identifies the financial crisis, and the damage it did to the standing of the corporate elite, as one of the three tailwinds that helped the Out vote, and explicitly highlights unjustified executive pay. But I guess that was yesterday.

The last couple of years has taught me that most political commentators know feck all, and it's too difficult to identify who might actually be on the money, so it's largely worth ignoring them. That they are united in derision about a sledgehammer policy on top pay merely demonstrates what a closed circle - an echo chamber if you like - political commentary is. I think they are again massively out of touch on this, but hey ho.

Second, let's remember some recent figures. In 2013 in Switzerland a referendum proposal to impose a mandatory maximum pay ratio of 12 to 1 was defeated, basically 2:1. But a third of people backed it. In Switzerland, the bankers' bolt hole. A poll from Sept 2015 enthusiastically tweeted by one of the Guido Fawkes today crew showed a slim majority opposed (44% opposed, 39% in favour) to a maximum £1m a year wage. So a slim majority for the status quo over a very radical change in direction, before anyone has even started trying to campaign - sound familiar? And a CLASS poll in Oct 2014 found a 2:1 majority in favour of a maximum pay ratio of 65:1. I don't look at that set of figures and conclude that this is an unwinnable fight, and I do proper pessimism.

Thirdly, it's a trivial point, but the "mad idea" outer boundary has now moved. Putting workers on rem comms, for example, now appears a bit more reasonable. Disclosure of pay ratios, rather than enforcement of them, seems a bit... well... weedy now, doesn't it? I mean even the Tories support that now.

Fourthly, linked to this, chucking out a mad/extreme idea like this, does force people to react and poses the question - "well, what would you do then?" I saw quite a few people asking on Twitter today - what about actors? what about footballers? Well, yeah, what about them? I don't think most people would give a toss if the highly paid in others sectors got hit too. I wouldn't. And to be honest I can't get enough of Right-wing policy wonks publicly arguing that there isn't really a problem with executive pay and that it's outrageous in principle to try to limit pay at the top.

All that said, I don't think that a maximum wage is the right way to go, though I think it might be more popular than sensible people think. (Also, maybe it's better for mad ideas to be floated by shadow ministers rather than the leader). Maybe something like a maximum internal pay ratio might be a more sensible but still radical proposal, as it would pull up those at the bottom rather than just whack those at the top, and so would likely be more popular. But as I've said before, I'm a bit lost as to where  executive pay policy goes next - I'm just pretty sure it won't be more of the same.

As exhibit A here's what Corbyn actually floated as ideas on top pay in in his speech:

… We could allow consumers to judge for themselves, with a government-backed kitemark for those companies that have agreed pay ratios between the pay of the highest and lowest earners with a recognised trade union.

… We could ask for executive pay to be signed off by remuneration committees on which workers have a majority.

… We could ensure higher earners pay their fair share by introducing a higher rate of income tax on the highest 5 percent or 1 percent of incomes.

… We could offer lower rates of corporation tax for companies that don’t pay anyone more than a certain multiple of the pay of the lowest earner.

I don't see anything about greater performance linkage, more corporate disclosure or beefing up shareholder powers. Perhaps this is just Labour going nuts, as many commentators would have us believe. But personally I think in the coming years we're going to see more ideas on this sort of territory. The old regime is rotten, and the punters know it.

Corp gov reform: do something meaningful or don't bother

I blogged previously about Liam Byrne's intervention on company law etc. More recently Liz Kendall has written something for Progress that slightly touches on the same turf. There is one sentence of significance for anyone interested in left-of-centre views on company law, corp gov etc -

We need to change the system so shareholders who hold on to their shares for longer are rewarded with greater rights.

As I wrote previously, while I'm not opposed to look at differential shareholder rights we need to be aware of the downsides. Greater rights for long-term holders strengthens the position of Rupert Murdoch at Sky, Mike Ashley at Sports Direct, and index-trackers. Plus I am realistic - there would be practically zero support for this reform from mainstream investor and corp gov bodies.

Which raises the bigger question - what's the point? If Labour is going to intervene in company law issues, potentially aggravating issuers and/or investors in the process, I see no value in pursuing something so utterly weedy. I really question whether differential rights for shareholders would have any meaningful impact on the short-term pressures on companies (this is leaving aside the deeper issues of whether companies really are too short-termist, and, if they are, whether shareholders are to blame). So really what's the point?

I ended up feeling the same about putting employees on rem comms, which has much more going for it as something for Labour to champion in my view. If we're going to aggravate executives by introducing another voice into corp gov, why not put employees on boards? Just putting on the committees that set exec pay seems like a massive missed opportunity (and just giving employees a role in execs' pay seems even more likely to wind them up while not giving employees an influence over bigger issues).

So, in my view, Labour should either start floating some significant reforms that might change the direction of travel, or stop talking about it. I see no point in talking up short-termism and its effect on corporate priorities as a major public policy issue and then coming out with featherweight responses.

There are things that Labour could move that could be distinctive, change the corp gov settlement in the UK and start tackling market distributions. Reinvigorating collective bargaining, promoting employee ownership and representation on boards, changing directors' duties (something Byrne did touch on), enfranchising asset owners (rather than managers) and stripping out investment costs are some obvious things. But these need to be pushed together as a package of reforms with serious intent.

Picking a couple of individual, inoffensive (and ineffective) policies just to do *something* around company law because some companies moan about short-termism is not worth the effort.  

BVCA and the Beecroft Report

I think it's fair to say that the Beecroft report, prepared by Tory donor Adrian Beecroft, was not universally welcomed in the labour movement.

One of the more controversial elements was the introduction of employment tribunal fees. The intention behind this policy was to discourage employees from making claims, because of the presumption that many of them are frivolous and could be initiated at no cost to the employee. Under the new system, employees pay ranging from a couple of hundred quid to £1,200 depending on the complexity of the claim.

Obviously the introduction of fees changes employees' willingness to initiate a case. The question is does it just discourage frivolous cases, or does it also discourage those with genuine claims but who aren't confident of winning? What we know so far is that there has been a sharp drop in claims, with sex discrimination cases falling most. According to this parliamentary briefing they fell by 83% in the year after the fee came in.

To be clear here: either the large majority of claims of sexual discrimination claims were groundless, or the introduction of tribunal fees is contributing to protecting those employers (or those that work for them) that discriminate against women.

As a party that seeks to represent working men and women, Labour has to take these issues seriously. And indeed we committed to abolishing the fees in the manifesto (after what looks to have been a bit of stalling it has to be said). The commitment is on page 23 of the 2015 manifesto here.

Not all organisations were so opposed to either the Beecroft Report overall, or the introduction of tribunal fees in particular. For example, the BVCA, the private equity industry trade body, was an enthusiastic supporter (perhaps not surprising given that Beecroft is a private equity guy). For example, here is what they said in their 2012 Budget submission:

On employment, we fully endorse the Beecroft Report as a step in the right direction. In particular, a “no fault” termination similar to that applied in the USA where notice is given under the employment contract would create a more efficient process as well as encouraging a more flexible and fluid workforce. 

So the BVCA saw the Beecroft reports as a way to make the "workforce" to be more "flexible and fluid". I don't think the objective here was job or employment security somehow.

Luckily, Beecroft didn't get implemented in full, but obviously the introduction of tribunal fees did. And, again, the BVCA was supportive (see top of page 6 here).

As recommended in the Beecroft Report, a fee which employees themselves have to meet should be introduced into the tribunal system. 

To be honest, I wouldn't expect employers, private equity firms or their lobbyists to take a position much different from this. Successful private equity managers are exceptionally well paid, and they have an interest in keeping labour costs low and employment protections weak. They expect their trade body to fight their corner. Beecroft's report was a long howl at how difficult it was to get rid of unwanted employees. And the BVCA fully endorsed it.

That's OK, because in the same way private equity has the BVCA to lobby for its interests, including making it easier to fire workers and harder for workers to take employers to tribunals, we have trade unions, and a Labour Party, to fight the corner for employees in return. They have their views, we have ours. In the case of Beecroft these views were polarised, and on tribunal fees they were diametrically opposed.

Now I'm a moderate lefty. I favour keeping the communication channels open, even where we disagree. The labour movement needs to understand the private equity industry and how it works (including to what extent its success represents value skimming). But I would sup with a long spoon. And I'm really not convinced it's a good idea to take money off them.

Labour and infrastructure

Via twitter, I picked up this interesting piece on how Labour's stance towards business could be made a bit more coherent. I thought I would bung up some thoughts on the points made about infrastructure, and what might be achievable here.

First up, I think we have to be clear about who wants what, and when. It's not quite as simple as saying that infrastructure needs finance and investors want to invest in/own infrastructure. Politicians want non-government finance to support the construction of new infrastructure. Pension funds and other institutional investors looking for a bond substitute generally want to own infrastructure that has already been built. Politicians are focused on greenfield, pension funds are more interested in brownfield.

This is because, again generalising, the risk return characteristics of infrastructure assets change over time. In the construction phase there are lot of unpredictable risks, so investors are going to want a premium in return for shouldering them. In the operational phase everything is more predictable (though political and reputational are maybe bigger factors than assumed) and the pay-off is lower. This means that, as an investment, infrastructure looks different depending on when the investment is to take place. As one report I read put it, infrastructure assets begin like venture capital/private equity, and become more like bonds.

It also varies by the sector that the infrastructure asset relates to. If you look at the risk-return characteristics of various types of infrastructure then you may find that existent social infrastructure (schools & hospitals) provides a nice fit if you are a pension fund looking for something bond-like. It's perhaps not surprising that the first investments of the Pensions Infrastructure Platform were in the secondary PFI market. The funds bought into existing assets (or project companies tied to the assets - the ownership of the asset usually resides with the public sector) rather than funding any new construction. Other markets see more pension fund investment in greenfield, but from what I've seen most UK investment is brownfield.

You can argue that the existence of a institutional investor market for brownfield infrastructure provides an out for those that are willing to finance greenfield. So the fact there is a secondary market to sell into allows initial investors to sell up, move on and hopefully finance the next greenfield project. But that is a slightly different pitch. Alternatively you could try and attract pension fund capital looking for an inflation hedge into greenfield investments by doing something to the financing to change the risk/return characteristics, like providing an underpin. But that ups the cost of financing, and might look worse than PFI!

I think it's also important to note that, as with pension fund investment more generally, most infrastructure is undertaken through intermediaries, rather than directly. This means that the time horizons of the investor are actually those of an asset manager. This is important, as there has been some unease about the structure of some infrastructure funds, which are built with a view to the manager being able to sell on assets within a few years rather than considering that a pension fund might want to own it for decades. This is changing. Some of the largest pension funds invest directly, and some asset managers have developed so-called "evergreen" funds. But the picture in unlisted funds is broadly like private equity more generally. The holding period for a particular asset might be half a dozen years or so.

Finally, we need to be aware that ESG criteria are not well embedded in infrastructure. Of course you might consider that some infrastructure investment is inherently "responsible" since it can involve the construction of wind farms and other renewables. But, as I wrote previously' labour issues can struggle to get attention in responsible investment overall, and this definitely extends to infrastructure (see DCT Gdansk for details). This is true for asset owners as much as asset managers sometimes. More specifically, I do not believe that in the UK infrastructure investment currently considers the need to respect workers' rights. It was notable that even the Labour-commissioned Armitt Review failed to address this.

Incidentally, I think this is particularly tricky in relation to greenfield. If you are building a new rail link I think you can make some decent projections about the potential environmental impact. You know what the immediate physical impact will be, and can model carbon footprint etc. But how do you do the same for labour issues? How can you tell in advance if the employer will genuinely respect workplace rights, or, on the other hand, if they will exploit precarious work by keeping workers on temporary contracts? How do you track this if the economic employer changes when the asset is sold on post-construction?

I don't mean to sound negative above, I'm just setting out what I've discovered in my own work around infrastructure. So I would suggest a few general, if obvious, guidelines. First, and most important, pension fund investment in infrastructure should only take place if it is in the interests of the beneficiaries. Second, government should consider whether pension fund investment in infrastructure is the cheapest financing option - I do wonder if we risk creating "pension fund PFI", another off balance sheet model that is more expansive that government borrowing. We do not want to crowd out the public sector. Third, a Labour approach to this issue must promote rigorous ESG standards, particularly with respect to workplace issues. And if we get back in power there should be union representation on the National Infrastructure Commission.

Liam Byrne's speech: a bit wrong, a bit sketchy, a bit interesting

Via Chris Dillow, I picked up this speech by Liam Byrne. It's interesting to read someone who obviously disagrees with Jeremy Corbyn try and come to terms with the new centre of gravity in Labour. It's worth noting, too, he uses the term "neo-liberalism" early on, language which most Blairites usually take to be an indicator that the person using it is out of date/an idiot/a Trot/all of the above.

But what I want to look at is what he says about short-termism and corporate governance, and what he argues for as reforms. I think some of it is off-target, but it's interesting to see what a Labour moderate is saying on these issues.

Actually, the diagnosis is pretty much the same old same old. Companies focus on the short term too much, prioritising dividends and share buybacks over internal investment and employee remuneration, whilst executives still coin it in. (Larry Fink of BlackRock is cited here as someone who is concerned about these developments.)

The reasons for this are that "our asset owners are simply too short term". Note he says asset owners rather than asset managers here. He goes on to say that our pension funds are part of the problem though, rather contradicting this point, he also says they are too small compared to other countries' funds and that they don't actually own many UK equities. He goes on to note that average holding periods for shares have fallen, and so the argument is essentially shareholders are too short term, and pass this attitude on to investee companies.

More interesting is what he says about corporate governance and company law, where Dominic Barton of McKinseys gets the obligatory nod. The section on UK law is quite surprising. He argues that section 172 of the Companies Act on directors'  duties enshrines the interests of shareholders above others, and essentially embeds "shareholder value" as an operational objective. Of course, the idea of that section was to enshrine "enlightened shareholder value" as an objective - the idea that playing fair by your employees, creditors etc was not in conflict with meeting the interests of shareholders. So it's interesting to see a Blairite advance this criticism. For what it's worth I agree that it basically does promote the interests of shareholders, certainly in comparison to the 1985 version below which put employee interests up their with those of members (shareholders).

"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".

Whether directors' duties actually influence directors much is an open question. I have noticed that some companies use this to defend themselves - for example Barclays has used directors' duties to defend its decisions on both bonus pools (top of page three here) and tax avoidance.

“It is our fiduciary obligation to our shareholders - and it is the fiduciary duty of lots of our clients to their shareholders - to manage tax in an efficient way.” (from here)

So, the important bit: solutions. Looking at the shareholder side of the relationship Byrne's main big idea is... dual class shares. He notes that both France and Italy have passed laws providing greater voting rights to those who hold them for the long term, but he argues for going further. 

'Dual class shares' would allow us to go further - enabling the original founders and early venture capital supporters to control voting power.They’ve become de rigeur for the hottest tech initial public offerings, from Facebook and LinkedIn to Zynga and Groupon.
They’re allowed in the US and on the Continent. Why not here? 

(For info, I think the comment on tech companies is a straight lift from this FT article).

This bit of the speech is technically wobbly. I think I'm right in saying that Schroders still has a dual class share structure (though from memory they have voting and non-voting shares) and that UK-listed companies can still issue different classes of shares. As a comparison, I had a discussion with a BIS official several years back about differential dividends and was told company law didn't stop PLCs from introducing them, they just chose not to. The fact is that most UK companies got rid of dual class share structures, and would avoid adopting them now, because most institutional shareholders didn't like them. 

This is the problem with reforms of this nature, if the shareholders themselves don't change their attitude on the concepts of "one share one vote" or equal treatment of shareholders then simply permitting such structures (which as I say I think the UK does) wouldn't make much difference. Shareholders would oppose their introduction. We can see this opposition in the response Generation & Mercer got to their proposals on loyalty rewards or, a more practical case, when DSM tried, and failed, to introduce a loyalty dividend a few years back.

It's also important to note that shareholders didn't like dual class structures because they believed that they entrench management. Giving founder shareholders a shield against external shareholder power is certainly a double-edged sword. For example, Rupert Murdoch is a founder shareholder who benefits from a dual class share structure. One might argue that this does indeed allow him to take a long-term view, for example in his investment in Sky, but the flip-side is that it makes it practically impossible for independent shareholders to bring about change when things go wrong. We couldn't get James Murdoch off the News Corp board in 2011 despite having a clear majority of non-Murdoch shareholders onside. Another founder shareholder is Mike Ashley at Sports Direct - do we want him to have more power? 

I only say this to point out that a) we have been here before and b) there are decent reasons to have concerns about dual class structures. I'm certainly open to the idea that shareholder rights could be qualified, but it's important to be aware of the pitfalls.

Secondly, Byrne argues for a change in directors's duties and the purpose of companies. Again, what is actually being called for is a little unclear, so I'll just quote from the text:

I think we know that today’s corporate governance laws aren’t working in the national interest.
They’re not helping us think long term, or maximise investment, or pay our workers fairly for what they do.
So it is surely time for a review of corporate governance where we create the freedom for managers to think long term - that means giving greater weight to those who can't diversify their risk away: creditors, and workers past and present.
We might even go a step further and insist that directors have a fiduciary duty to declare the purpose of their business – and enshrine a fiduciary duty to maintain that purpose in the company’s proceedings. Along with, I’d suggest, reporting on how they’re doing closing the gender pay gap. 

This language sounds encouraging - giving more weight to the views of workers is obviously a good thing - though it needs to be spelled out how this would be achieved. The rest of this section seems to be suggesting something similar to what I think Colin Mayer suggested in Firm Commitment and something John Kay has also talked about - each company could set out their own purpose (i.e. we want to be the best widget manufacturer) rather than subscribing to a generic shareholder value objective.

Taken together Byrne's proposals, whilst a bit sketchy, are a fairly explicit turn away from shareholder primacy. That is interesting in its own way, given where Labour policy was on this stuff over the past 10 to 15 years.  However, I can't imagine much positive change in corporate behaviour resulting from the changes put forward.

In fact, the big problem is that on their own these proposals would principally have the effect of shielding companies against shareholder pressure. In other words, this would reduce one restraint on corporate managerial power, however weak and conflicted that restraint is. My own views here are pretty obvious - I would favour an increase in the power of those who work for companies, through board representation, perhaps tied to equity ownership but not as a pre-requisite. These kinds of changes would provide an alternative countervailing power within the firm. But this doesn't get a look in, and unions only get one mention - in relation to their weakness in the private sector.

Without introducing something along these lines I fear that simply reducing shareholder power would shift us more to a "benevolent dictator" model of corporate governance. In case you think this is over-egging it, endorsing an explicitly authoritarian governance model is exactly where another "big name" ended up on these issues:

Given the shareholder-management divide, the autocratic-CEO paradigm appears to be the only arrangement that allows for the effective functioning of a corporation. We cannot get around the authoritarian imperative of today’s corporate structure. (Alan Greenspan, from his biography The Age of Turbulence)

This approach implies a belief that, unrestricted by the bone-headed pressure of financial stakeholders who cannot and will not think long term, or employees who can't see beyond their own pay check, corporate leaders would finally implement the right strategies for their businesses, with the right levels of investment, employment and so on. Well, yeah, maybe. And perhaps this is where Blairism reasserts itself - the faith in corporate leaders as those who "create wealth" and know how to run stuff properly, if only we'd let them get on with the job.

So, a bit more thinking/talking going on with Labour that touches on the deep issues within corporate governance and ownership but, like David Sainsbury (who also used the term neo-liberalism), whilst Byrne acknowledges the evident flaws in the current model, the changes proposed in response are pretty small scale tweaks. They could even be counter-productive.

I think the renewed interest in corporate ownership and governance on the UK Left is unquestionably a good thing, and, as Byrne's contribution makes clear, the 1990s policy framework that Labour did so much to develop has pretty much reached the end of the road. But we are still quite a long way from having an alternative.

For what it's worth, my own view is that Labour must go beyond the soggy "consensus" on short-termism that exists in the comments of those such as Dominic Barton and Larry Fink. We will end up with the same old blah about amending the structure of executive pay and the need for less frequent reporting that will make no real change. Whenever there is a consensus amongst the powerful on what the 'real' problem is you can bet that this means that other options and viewpoints are being sidelined, and that the consensus 'solutions' will be pretty painless to them. If recent events in the Labour Party have taught us anything, it must be that the last thing any of us need right now is a lack of ambition, or to calibrate our ideas based on where we think the "sensible" consensus is amongst corporate leaders or advisers.  

A bit more from Roy Hattersley on equity ownership

A few nuggets from Choose Freedom.

First a general bit on shareholdings:

The acquisition by working men and women of small shareholdings in unlikely to change the nature of society. Conservatives may call it people's capitalism. But most of the capitalist people will see their small portfolios as another form of saving which may give them a feeling of middle class prosperity which normally goes with a bank account but which does not emotionally commit them to support for the enterprise culture of stock exchange and commodity markets. For although the possession of a share certificate will provide a slice of theoretical power, the whole process of appearance or proxy (not to mention the likelihood of being swamped by institutional power) will diminish the feeling of real involvement. On the other hand, the possession of equity holdings which are organised to maximise the influence of employees within the company can induce a wholly different attitude, for the employee-shareholder is doubly involved with the company.

Attitudes of institutional investors (in the 1980s) to extended employee share ownership:

One of the principal barriers to the extension of real share ownership is the criterion laid down by the investment protection committees* of the big institutional investors - the insurance companies, the pension funds and the unit trusts. They fear that, notwithstanding the evidence of improved performance, worker share-ownership will dilute the value of traditional holdings as new shares are issued to employees. Therefore they stipulate that the the firms in which they invest should not allocate more than 5% of their pre-tax profits or 1% of their existing share issue to employee shareholders. That prejudice could be overcome by law, but even such a statute would have to be accompanied by the gradual education of slow learners. In the meantime, we need to establish trusts which can purchase existing shares on behalf of employees without diluting the value of the shares in general. Unless such new institutions are created, investment protection committees will inhibit the development of worker-shareholder schemes in a way which tax incentives do not have the power to overcome.

Employee ownership and power vs state ownership

Socialists who are serious about the extension and diffusion of power and ownership need to start thinking about how [widespread employee share ownership] can be achieved. Unity Trust Bank - the trades union bank - has begun the process. Extending it is a classic socialist cause. Ownership and wealth is being spread more evenly; the state is employed not to enhance its own power but to organise the distribution of power to the people - theoretical rights are changed into reality; the mechanisms of government, the tax system, the legislative process, are all being used to provide individuals with a greater influence over their daily lives. To fail to provide that process because of some half-digested notion about collective action, centralised planning or state ownership would be a denial both of the individual rights which ought to be at the heart of socialism and the long-held belief that the emancipation of the worker requires his relationship with his employer (and his relationship with the capital which provides his employer with power) to change...

[T]he more different schemes to extend worker control and influence proliferate - co-operatives, ESOPs, investment funds - the more the whole nature of society changed. That is surely a more noble objective than the transformation of a few private monopolies into state monopolies.

* these were the committees that dealt with 'ownership' issues and rights before corporate governance, stewardship etc (I think they were, basically, the NAPF Shareholder Affairs Committee and ABI Investment Committee, though they may have had different names at the time). The Institutional Shareholders Committee was originally an extension of the existing investor protection committees, so it's possible there is an ISC policy doc out there somewhere setting out the proposed limits on employee ownership and profit sharing. Personally I quite like the language of 'investor protection'.

Old Labour policy on pension funds, takeovers etc

On holiday in Norfolk last week, I was pleased with a few great finds in second had bookshops. One of these was Economic Priorities for a Labour Government by Roy Hattersley, which was published in 1987. At that point I guess he was regarded by many as a terrible right-winger in Labour terms, so it's interesting to see just how far further to the Right (or, if you prefer, in an economically liberal direction) policy has shifted since.

So, for example, he has a whole chapter on 'Social Ownership and Industrial Democracy'. This includes support for employee representation in decision-making (though not spelt out, the references to the 5th Directive suggest this includes board representation) and the Swedish wage earner funds, also known as the Meidner Plan.

I'm particularly struck that he recognises the important point that we shouldn't rely on employee ownership alone to give employees a voice.

He writes: "Unless employee share ownership schemes are coupled with rights to information, consultation and representation they may be treated with justified suspicion by many trade unionists. Giving employees more say will not come for a long time - if ever in some large and multinational companies - if we just rely on ownership schemes."

This is a live issue, though rarely explicitly discussed, in the UK now. I think you would struggle to find anyone in politics arguing against the various benefits of extended employee ownership (most often advocated through ESOP type arrangements, rather than more extensive ownership structures). But the idea that employees should get representation or voice in governance - beyond that afforded to them through the ownership of a few shares - is far more controversial. The implication is that employees are allowed say if it's governed by a financial interest, but not as of right.

Hattersley is a proponent of a much more mixed economy, both in terms of the public/private split, and a plurality of ownership forms. And it all comes across rather well.

"I am for the diffusion of wealth and power - in principle. And I rejoice that the methods of bringing such a diffusion about are likely to improve our economic performance. The creation of co-operatives and the acquisition, by employees, of shares in the companies which employ them - coupled with rights to promote employee participation - is a far more effective way of providing economic enfranchisement than the creation of vast state monopolies which are insensitive to the needs both of workers and consumers..."

Onto my home turf, there are also chapters on 'Pension Funds and the Public Good' and 'The City, Takeovers and Mergers'. The former is largely a defence of pension funds adopting socially responsible investment policies, though there are a few barbs about fund manager behaviour, and increasing portfolio turnover (!). It's also interesting, though not surprising to see some familiar arguments deployed.

Here are a few examples:

"Socially responsible investment is not an alternative to financially sound investment - indeed its return looked at over a longer time horizon may well be better than conventional investment strategies."

"Too much concentration on takeovers tends to cause an obsession with short-term thinking by industrial managers to the detriment of the real economy. This is despite the fact that the long-term nature of pension fund liabilities ought to enable pension fund managers to take a longer term perspective."

"Despite the essential long-term interest of pension funds, the performance of their managers is often based on short-term results... That is certainly not the way to maximise the performance of the whole economy. It may not even be the best way to maximise the long-term income to the fund." 

Not a lot has changed in the following 25+ years.

Finally, he argues that the legal position regarding pension funds' involvement in SRI should become clearer but that, if necessary, "a Labour government... should legislate to clarify the position of trustees". This is, of course, what the Law Commission has just attempted. That's what's useful about reading Labour policy stuff from the 1980s - you get an insight into what might happen 30 years later... ;-) (e.g. the Wilson Committee proposed something a bit like the Stewardship Code, in 1981).

The chapter on mergers and takeovers is instructive, just to get a sense of just how interventionist Labour was willing to be. These days even minor tweaks to the system - like altering voting rights and approval thresholds - are characterised by vested interests as unreasonable meddling (or, more effectively in my opinion, as unlikely to make any difference). And, generally, the primary role afforded to shareholders in determining the outcome of deals is unchallenged, though there's been a bit of a shift here lately. In contrast the mid/late 80s Labour was proposing a far larger role for the state in determining what should be allowed. I will try and blog on this separately.

All in all, it provides a very useful sense of just how far Labour moved on policy relating to issues around finance, ownership and so on. The world of 1987 is long gone, of course. The City is more politically powerful, even after the crash, and the foundations for advocating policies within the Labour Party like those proposed by Hattersley were washed away by the Blairite tide. In my opinion, that in part explains the rather piecemeal nature of some of what is proposed now (e.g. employees on rem comms but not on boards, limited changes on M&A). We have accepted too much of the status quo as not contestable, because it is economically efficient. And in doing so the interests of working people - central to Hattersley's ideas - have become second to those of the functioning of the system itself.

Labour looking beyond shareholder value?

There's a very interesting blog by the FT's political correspondent Kiran Stacey here. He picked up something at PMQs that no-one else seems to have - Ed Miliband apparently criticising shareholder value as an operational objective for companies (or SSE in his example), rather than an outcome of what they do.

In one sense there may not be much new here. Directors' duties as set out in the Companies Act already say they can have regard to considerations like employees, environment etc, though as part of a focus on long-term shareholder value. More broadly, John Kay has written eloquently about the way that successful business deliver shareholder value as an outcome by focusing on doing what they do as well as they can.

But maybe there is something there. As I mentioned in a previous blog, the Fabians did some interesting polling on 'responsible capitalism' policies, one of which was broadening directors' duties to require attention to be paid to other stakeholder interests. I note that the idea didn't do too badly with the punters. Perhaps the re-energised debate on corporate governance going on within Labour is once again turning to stakeholder-ish ideas? 

Labour, responsible capitalism and corporate governance

The fact that Labour has kicked off a debate about 'responsible capitalism' is one of the most interesting things that has happened on the centre left for some time. Issues that were not discussed for a long time are now back in play. My interest, as always, is on the elements of the discussion that relate to things like company ownership, corporate governance, pensions reform etc.

As people will be aware, Labour is committed on paper to employee representation on remuneration committees, which, given the sterile debate in mainstream corporate governance here, is regarded as 'radical' by many people in my corner of the world. I say it's a paper commitment, as until we see Labour in government and taking the proposal forward we have to be wary of possible backsliding (because there is likely to be a wave of GC100-style lobbying against it).

That said, it should be noted how often this policy is referred to and by whom. Obviously Ed has spoken about it, and on the policy circuit I have heard several shadow BIS ministers reaffirm it without any qualification. Just in the last couple of days I have seen various people, such as Jon Cruddas, write or talk about it. I assume Labour has already road-tested the policy with business people (and had largely negative feedback), so the fact that the leader and shadow ministers still regularly mention it is hopefully a signal of intent.

More generally, this (relatively small) policy commitment has a background of renewed interest within Labour circles in corporate governance as a political, rather than technical, concern. The early Blue Labour emphasis on co-determination came first, but a number of policy groups are now actively considering corporate governance reform, albeit as part of wider analyses (of workplace democracy/empowerment, addressing low pay, rebalancing the economy etc). I think I'm on pretty safe turf to say most people looking at these issues think putting employees on rem comms is ok, but broader employee representation is what Labour should really be aiming at. As I've blogged before, I agree. If we're going to shed blood reforming corporate governance, we might as well make it worthwhile fight. Putting employees on rem comms only now seems to me like an enormous missed opportunity.

It is worth noting, too, that there is some discussion emerging about the role of shareholders and some of this is quite smart. Sonia Sodha has a really interesting piece in the All Of Our Business publication that came out with the latest Fabian Review. What I like about it is the recognition of how shareholder capitalism really works - most 'shareholders' are intermediaries (asset mangers) whose interests may be rather more short term than those of either companies or end asset owners. In practice, she says, it looks more like 'corporate management capitalism' than accountability to shareholders and is also (rightly) sceptical about the practical impact of the 'enlightened shareholder value' language in the Companies Act 2006. In terms of reforms, she talks about both putting employees on boards and giving greater voice to long-term shareholders through enhanced voting rights but also of the need for collective representation of employee, saver and consumer interests. I think there is something worth exploring here - I have wondered whether a sort of 'Beneficiaries Association' could be established to represent ordinary punters' interests as shareholders (and employees?).

That Fabian publication is also worth a read because it has some polling on various potential 'responsible capitalism' policies and how they relate to respondents' own interests. Just under half (49%) of those polled say that putting employees on boards could improve their own "living standards and future prospects", with very few (7%, there's your Right-wing libertarian vote no doubt!) saying it make it worse. That's not bad at all, though slightly more (53%) back widening directors' duties to require them to consider social/environmental/community concerns. (As an aside I note that the editorial also takes it for granted that "Companies should serve the interests of a wider group of stakeholders, and not just shareholders...")

Maybe this will all come to nothing, and it will be "stakeholder capitalism" all over again. But it is clear that a proper debate about corporate governance - going beyond the narrow range allowed in the 'corporate governance community' - is underway within Labour. With the flaws of 'actually existing shareholder capitalism' exposed by the financial crisis, but the UK corporate governance establishment demonstrating a remarkable degree of complacency about the current regime, this could be an interesting time if Labour does win in 2015.

Abso-bloody-actly

Very interesting farewell piece from David Miliband in the New Statesman, that's available free online here. The whole thing is worth a read, but what he says about empowerment and the workplace, and the (misplaced?) belief in win-win outcomes is on the money.

The sense of disempowerment can be economic, in workplaces that lack the collective power of trade unions and where employee satisfaction and opportunity are limited...

In truth, the “Third Way” discussions of the 1990s were too weak in addressing issues of economic power, in the workplace and elsewhere. There seemed to be sufficient common ground to facilitate win-win solutions. But the stagnation of wages, among other matters, has shown that this perception was optimistic at best. Economic empowerment needs a harder edge.

He also backs 'pre-distribution':

[T]he tendency of markets towards inequality and instability needs to be countered by action upstream in order to curb abuse of power, and to empower citizens and employees with rights, information and control. “Predistribution” does not fit on an electoral pledge card, but the idea is right and so is the challenge of developing new ways, either through individual rights or collective organisation, to tilt the balance of power towards ordinary people.

This is punchier than you'd get from some of Blairite supporters.

A few things Labour could do

Thought I'd sketch out a mixture of what Labour has committed to in the corporate governance area, what could be broadened out, and a couple of additions...

Stick with existing policy as set out in the 2010 manifesto

Tougher rules on takeovers - a higher threshold to approve deals, a qualifying period to vote on them, exploration of public interest test.

Mandatory voting disclosure - won't repeat myself here, but most important thing is to agree the disclosure framework. Who should it cover, how and when should they disclose?

Broaden out existing commitments

Labour is committed to employee representation on rem comms - why not open this out in the shape of a broader review into corporate governance? This could include both employee voice, looking at how representation on boards - not just rem comms - could work, and shareholder engagement (the Swedish nom comm model).

Extra bits

Undertake a proper review into pay, including research into the effectiveness of executive pay (does it improve performance?). There is plenty of evidence that the large proportion of variable pay executives receive is unlikely to 'work', and, in my opinion, performance-linkage instead principally serves to make high pay less open to challenge (that may be its real purpose now). Lots people in the system don't buy that it works, so why continue with it?

Make it easier to file shareholder resolutions. Drop the filing threshold to say 1% and let filers combine to meet it - eg two investors with 0.5% each.

Encourage beneficiary empowerment. It is striking how even now beneficiaries have almost no formal representation within the financial system's architecture, or when reform is undertaken. Look back at the range of people involved in the Wilson Committee, could we establish a standing body with similar stakeholder representation to look at governance/ownership issues?

Exhibit more scepticism in the face of lobbying - trade bodies will tell you that practically any reform will have disastrous unintended consequences, yet these claims often prove to be false. In addition, if we're serious about 'responsible capitalism' we can't let investor trade bodies have too much power in determining policy.