The latest issue of Renewal has some pieces in it covering problems with relying on financial incentives for motivation. One is by Bruno Frey, who I've blogged about before, another is by... err... me!
Sunder Katwala's piece on Jon Cruddas, which is free on the site, is also well worth a read.
Wednesday, 3 October 2012
Thursday, 27 September 2012
Labour and rem comms
Interestingly, a lot of stuff I read coming from Labour MPs, commentators etc these days seems to take for granted that corporate governance reform is going to part of our programme when back in power. The extent of such change I'll come onto, but it is striking that the idea of having employee representation on remuneration committees is basically uncontested now within Labour. It is now apparently so uncontroversial that I've seen people further Right than me in the Party suggest it's pretty meaningless (or at least ineffectual, which might not come from the same perspective).
I apologise for obsessing about this one idea, but in the little corner of the world I inhabit the idea of employee involvement on rem comms is Very Radical Indeed. People in the mainstream corp gov world believe it would fundamentally challenge our model of corporate governance and/or that it will simply never happen. This is understandable on one level. After all, until recently this idea really was on the fringes of the debate about executive pay. Until the last few years pretty much the only strong public voice in favour came from the TUC. I know from my own time there that it was common to be the only person in a meeting advocating the position, and that hadn't changed much until the last year or two. If you only followed the corp gov community's opinion you could easily form the view that this still is on the edge of the debate.
Now, however, it's a firm policy position of a political party that could well be in power in a couple of years. I suspect that partly it's the work of the High Pay Centre, which managed to straddle both the mainstream of corp gov opinion on pay and some more radical terrain. This is no doubt in no small part because it did not just rely on the opinions of investors and instead included other voices. In any case the effect has been to destigmatise what was once a radical idea, at least in the policy world (as I say, I don't think the traditional corp gov community has accepted the idea and, as such, neither has it recognised that this reform really could happen).
There are a few reasons why this reform sits well with other influences on Labour thinking. The Blue Labour perspective has been associated with a push for something along the lines of co-determination (obviously a much more radical overhaul than just putting people on rem comms), in part, I think, as part of its emphasis on rebuilding the status of labour. Meanwhile, if you accept, as I do, that a focus on predistribution is a decent guiding principle when there isn't much money around to redistribute then trying to influence inequitable pay outcomes at source makes sense.
The thing is, as I've argued before, putting employees on rem comms opens up other issues. If employee involvement is good enough for remuneration issues, why not push their role wider, and look at employee representation in general? If rem comms are going to take account of employee pay, and employee views, should their scope widen beyond executive pay, and cover remuneration policy across the business?
This also opens up the discussion around executive pay. Currently the approach in corporate governance is essentially instrumental - is pay set and structured in a way that furthers shareholder interests? This can lead to the circular argument that if shareholders do not challenge executive pay, then it must be in shareholders' interests (otherwise they would challenge it) and therefore - from this perspective - it is OK. But involving employees in decisions about executive pay challenges the notion that this is just a matter for boards and shareholders (and therefore just because shareholders approve a given policy that doesn't mean it's OK). It suggests there are other questions that are valid to ask about executive pay other than whether it does a job for shareholders.
And if all this happens, presumably we will need to look again at the Corporate Governance Code (and maybe company law) which is currently built around the board-shareholder relationship.
Hopefully this shows that rem comm reform is not the small issue it may appear to be. If you pull at some of these threads other things unravel. But does that matter? One of the criticisms of Labour's rhetoric around responsible capitalism is that there isn't much behind it. Perhaps Labour ought to be really bold and push for wider governance reform that recognises the role of employees rather than just aiming at rem comms. When people like Jon Cruddas are saying we should at least be thinking of a 1979-style rupture I do wonder whether we ought to push further. I'll try and sketch out a few ideas in another post.
I apologise for obsessing about this one idea, but in the little corner of the world I inhabit the idea of employee involvement on rem comms is Very Radical Indeed. People in the mainstream corp gov world believe it would fundamentally challenge our model of corporate governance and/or that it will simply never happen. This is understandable on one level. After all, until recently this idea really was on the fringes of the debate about executive pay. Until the last few years pretty much the only strong public voice in favour came from the TUC. I know from my own time there that it was common to be the only person in a meeting advocating the position, and that hadn't changed much until the last year or two. If you only followed the corp gov community's opinion you could easily form the view that this still is on the edge of the debate.
Now, however, it's a firm policy position of a political party that could well be in power in a couple of years. I suspect that partly it's the work of the High Pay Centre, which managed to straddle both the mainstream of corp gov opinion on pay and some more radical terrain. This is no doubt in no small part because it did not just rely on the opinions of investors and instead included other voices. In any case the effect has been to destigmatise what was once a radical idea, at least in the policy world (as I say, I don't think the traditional corp gov community has accepted the idea and, as such, neither has it recognised that this reform really could happen).
There are a few reasons why this reform sits well with other influences on Labour thinking. The Blue Labour perspective has been associated with a push for something along the lines of co-determination (obviously a much more radical overhaul than just putting people on rem comms), in part, I think, as part of its emphasis on rebuilding the status of labour. Meanwhile, if you accept, as I do, that a focus on predistribution is a decent guiding principle when there isn't much money around to redistribute then trying to influence inequitable pay outcomes at source makes sense.
The thing is, as I've argued before, putting employees on rem comms opens up other issues. If employee involvement is good enough for remuneration issues, why not push their role wider, and look at employee representation in general? If rem comms are going to take account of employee pay, and employee views, should their scope widen beyond executive pay, and cover remuneration policy across the business?
This also opens up the discussion around executive pay. Currently the approach in corporate governance is essentially instrumental - is pay set and structured in a way that furthers shareholder interests? This can lead to the circular argument that if shareholders do not challenge executive pay, then it must be in shareholders' interests (otherwise they would challenge it) and therefore - from this perspective - it is OK. But involving employees in decisions about executive pay challenges the notion that this is just a matter for boards and shareholders (and therefore just because shareholders approve a given policy that doesn't mean it's OK). It suggests there are other questions that are valid to ask about executive pay other than whether it does a job for shareholders.
And if all this happens, presumably we will need to look again at the Corporate Governance Code (and maybe company law) which is currently built around the board-shareholder relationship.
Hopefully this shows that rem comm reform is not the small issue it may appear to be. If you pull at some of these threads other things unravel. But does that matter? One of the criticisms of Labour's rhetoric around responsible capitalism is that there isn't much behind it. Perhaps Labour ought to be really bold and push for wider governance reform that recognises the role of employees rather than just aiming at rem comms. When people like Jon Cruddas are saying we should at least be thinking of a 1979-style rupture I do wonder whether we ought to push further. I'll try and sketch out a few ideas in another post.
Tuesday, 25 September 2012
Corporate governance whodunnits
Anthony Bolton at Fidelity was occasionally called the silent assassin for his role in taking out leaders of underperforming companies. Events of this season, and in particular the emerging picture of asset manager voting behaviour, have reminded me of this label.
Whilst most of the attention focused on the 'shareholder spring ' (bleurgh!) has concerned remuneration issues, we've also seen a number of chief execs forced out - at Aviva, Astrazeneca and Trinity Mirror, for example.In all the three cases I mentioned, the departure of the chief executives was announced around the time of the respective company's AGM. In other words, there was an opportunity to use a formal right - the vote - both functionally (adding to a collective majority vote against the director) and as a signal (even if a majority wasn't achieved a high vote could make the director's position very difficult).
It didn't happen. Only in the case of Sly Bailey at Trinity Mirror was there a significant vote against the chief executive, and it was still well short of a majority. At Aviva and Astrazeneca the votes against were tiny. At both Trinity Mirror and Aviva there were big votes against the remuneration report. Aviva was, of course, defeated and I think I'm right in saying at Trinity Mirror the oppose votes and abstentions were greater than the votes for, but on a straight for/against split it squeaked through. The argument for this focus is that concerns about the chief exec were combined with those about rewards despite poor performance. Hence some shareholders used the rem report vote to take out their frustrations, and the chief execs went anyway. Job done. Right?
But a couple of things about this leave me uncomfortable about this, and I'm interested in whether other people are bothered too. First, what is the point of having votes on director appointments if they aren't going to be used? I accept the point that much engagement around board issues takes place well away from the AGM. But in these three examples, based on the timing of departures, it is clear this wasn't the case. Although concerns dated back further, the pressure came at the time of the AGM. The right to vote could have been used, but wasn't.
What troubles me is that the formal signal that large shareholders - stewards if you want - sent via their vote was that they supported the chief executive. Just to be clear - large majorities voted FOR these directors. Investors didn't actively abstain, or just not vote, they voted in favour. If these shareholders did not wish to see the directors concerned continue on the board then, in my opinion, their actions subverted the signalling function of voting. Other market participants will have got the impression that the directors enjoyed overwhelming support, when actually they were being knifed. This, surely, totally hollows out voting? Why have it if it gets used in a way that sends the opposite signal of the shareholders' actual views?
In addition, this means that the 'assassins' hands are clean. I, and I am sure many others, know who some of asset managers were who pushed the directors out, but do their clients? If all they get is a quarterly report with voting decisions and a bit of narrative I suspect they might not do. The client will see the vote FOR recommendation on the relevant resolution. Unless the manager also reports that they met with the board and told them the chief executive had to go their fingerprints won't be on the knife. There will be no formal trace of the intervention (to remove a couple of FTSE100 chief execs), rather the formal record will suggest the opposite.
What also bothers me about this is that 'stewardship' is being presented as both a public policy solution to some issues, and being sort of undertaken in the public interest. It's a bit convoluted but the argument runs that savers are, broadly, the public and stewardship by asset managers helps fund their pensions by improving company performance. But if this quasi public interest role is being attributed to asset managers, shouldn't the public be able to know more about how it is being carried out?
If no-one is comfortable disclosing the fact that they pushed out a CEO (though I am in two minds about whether this is necessarily an inherently bad idea), shouldn't the punters at least be able to expect that the votes asset managers cast on their behalf reflect their actual views? After all we are talking about the removal of the heads of our largest public companies by organisations who only have the power to achieve this because they have control of other people's money.
It somehow feels fundamentally wrong that only those that work in the City know whodunnit.
Whilst most of the attention focused on the 'shareholder spring ' (bleurgh!) has concerned remuneration issues, we've also seen a number of chief execs forced out - at Aviva, Astrazeneca and Trinity Mirror, for example.In all the three cases I mentioned, the departure of the chief executives was announced around the time of the respective company's AGM. In other words, there was an opportunity to use a formal right - the vote - both functionally (adding to a collective majority vote against the director) and as a signal (even if a majority wasn't achieved a high vote could make the director's position very difficult).
It didn't happen. Only in the case of Sly Bailey at Trinity Mirror was there a significant vote against the chief executive, and it was still well short of a majority. At Aviva and Astrazeneca the votes against were tiny. At both Trinity Mirror and Aviva there were big votes against the remuneration report. Aviva was, of course, defeated and I think I'm right in saying at Trinity Mirror the oppose votes and abstentions were greater than the votes for, but on a straight for/against split it squeaked through. The argument for this focus is that concerns about the chief exec were combined with those about rewards despite poor performance. Hence some shareholders used the rem report vote to take out their frustrations, and the chief execs went anyway. Job done. Right?
But a couple of things about this leave me uncomfortable about this, and I'm interested in whether other people are bothered too. First, what is the point of having votes on director appointments if they aren't going to be used? I accept the point that much engagement around board issues takes place well away from the AGM. But in these three examples, based on the timing of departures, it is clear this wasn't the case. Although concerns dated back further, the pressure came at the time of the AGM. The right to vote could have been used, but wasn't.
What troubles me is that the formal signal that large shareholders - stewards if you want - sent via their vote was that they supported the chief executive. Just to be clear - large majorities voted FOR these directors. Investors didn't actively abstain, or just not vote, they voted in favour. If these shareholders did not wish to see the directors concerned continue on the board then, in my opinion, their actions subverted the signalling function of voting. Other market participants will have got the impression that the directors enjoyed overwhelming support, when actually they were being knifed. This, surely, totally hollows out voting? Why have it if it gets used in a way that sends the opposite signal of the shareholders' actual views?
In addition, this means that the 'assassins' hands are clean. I, and I am sure many others, know who some of asset managers were who pushed the directors out, but do their clients? If all they get is a quarterly report with voting decisions and a bit of narrative I suspect they might not do. The client will see the vote FOR recommendation on the relevant resolution. Unless the manager also reports that they met with the board and told them the chief executive had to go their fingerprints won't be on the knife. There will be no formal trace of the intervention (to remove a couple of FTSE100 chief execs), rather the formal record will suggest the opposite.
What also bothers me about this is that 'stewardship' is being presented as both a public policy solution to some issues, and being sort of undertaken in the public interest. It's a bit convoluted but the argument runs that savers are, broadly, the public and stewardship by asset managers helps fund their pensions by improving company performance. But if this quasi public interest role is being attributed to asset managers, shouldn't the public be able to know more about how it is being carried out?
If no-one is comfortable disclosing the fact that they pushed out a CEO (though I am in two minds about whether this is necessarily an inherently bad idea), shouldn't the punters at least be able to expect that the votes asset managers cast on their behalf reflect their actual views? After all we are talking about the removal of the heads of our largest public companies by organisations who only have the power to achieve this because they have control of other people's money.
It somehow feels fundamentally wrong that only those that work in the City know whodunnit.
Thursday, 20 September 2012
BSkyB passes 'fit and proper' but...
The language used about James Murdoch is pretty damning:
He got a $5m bonus from News Corp this year.
a company director is required to exercise reasonable care, skill and diligence in the exercise of his functions47. He may delegate, but has a duty to supervise appropriately. We consider James Murdoch’s conduct, including his failure to initiate action on his own account on a number of occasions, to be both difficult to comprehend and ill-judged. In respect of the matters set out above, in our view, James Murdoch’s conduct in relation to events at NGN repeatedly fell short of the exercise of responsibility to be expected of him as CEO and chairman.Ofcom makes the same point several times in the report, highlighting the fact that James Murdoch had several opportunities to investigate further and/or clear the mess up - the Taylor settlement, the first Guardian story, the first DCMS committee report.
He got a $5m bonus from News Corp this year.
Wednesday, 19 September 2012
ACTU report on high frequency trading
This is the first trade union report I'm aware of on the HFT issue... good job by the ACTU. PDF here.
High-Frequency Trading - A Workers’ Capital Briefing
14 September, 2012 | Submission In August 2012 The Australian Securities & Investments Commission (ASIC) issued a consultation paper seeking views on its draft market integrity rules and guidance on automated trading.
A high profile and increasingly important form of automated trading is ‘high-frequency trading’ (HFT): a set of practices that utilises speed to generate additional returns to HFT firms and their clients.
In recent years there has been growing concern that HFT is serving to exacerbate the speculative, short-term and volatile nature of financial markets.
ASIC’s consultation is, in part, a response to such concerns.
Australian industry and not-for-profit funds are major participants in global capital markets. Via the world’s
major trading exchanges they invest billions in equities, bonds, derivatives and foreign exchange.
But unlike some other participants, super funds have little or no choice but to remain in these markets for the long-term.
Our super funds therefore have a strong interest in financial markets that are regulated to be transparent,
secure and fair. Such markets are more likely to deliver stable and reliable returns over many years – rather
than short-term speculative gains in the space of a few days, hours or seconds.
The purpose of this ACTU paper is to highlight some of the risks that HFT may present to super funds as long-term investors in global financial markets. Those who specialise in HFT earn billions in profit every year, not from long-term productive investment in jobs and communities, but from being able to trade faster than their competitors. For this ‘skill’ they are paid large fees and commissions.
In the context of the global pensions industry, payments for such short-term unproductive trading represent a growing leakage from the investment chain that connects workers’ contributions to the sources of long-term return that will ultimately help to fund their retirement.
The issues raised by HFT therefore deserve close attention by unions and super funds.
This paper is intended to serve as a brief introduction to HFT and why regulatory reform is necessary. After a brief explanation of what HFT is and how it can generate profits, the paper critically discusses the arguments commonly made in support of such trading. These arguments are found to be flawed.
The paper therefore ends by outlining some reforms that would help to counter the risks HFT now presents to financial markets and those long-term investors who have come to rely on them, and proposes some immediate steps that super funds in Australia should take.
Monday, 17 September 2012
Another big vote against a rem report
This time 33% against and its Imagination Technologies. Also some big votes against directors.
Thursday, 13 September 2012
Another remuneration report defeat
No surprise really, but Darty got spanked on the vote on its remuneration yesterday, as well as losing its chief executive. It's a record year - woohoo - for remuneration report defeats however you cut it.
The ones I know of - Aviva, Cairn Energy, Centamin, Central Rand Gold, Darty, Pendragon, Plus Markets and WPP.
Also we know the average vote against is up a fair bit on last year, and some big votes are still coming through.
Clearly some shareholders have toughened up this year, though if you look into the data in detail a few of the big houses still only oppose a fraction of companies.
The ones I know of - Aviva, Cairn Energy, Centamin, Central Rand Gold, Darty, Pendragon, Plus Markets and WPP.
Also we know the average vote against is up a fair bit on last year, and some big votes are still coming through.
Clearly some shareholders have toughened up this year, though if you look into the data in detail a few of the big houses still only oppose a fraction of companies.
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