Two quick links

1. The High Pay Centre's report on interviewees with German employee directors (and shareholder directors) is well worth a read. Think we're seeing the beginning of a proper discussion of the merits of employee representation in corporate governance.

2. The NAPF has put out a nice report summarising the 2013 AGM season. One notable point for me is that we are definitely seeing more shareholder pressure around audit issues.

In defence of conflict and argument in corporate governance

The more you dig into public policy work undertaken in corporate governance, the more obvious it is what a narrow range of opinion is expressed. In reality, a relatively small number of organisations and individuals dominate, much networking goes on between them, and significant differences of opinion are hard to detect. I am not making a conspiratorial point here, but rather highlighting a simple fact that on important issues about the governance of companies a relatively small number of voices count, quite a few of them talk to each other, and they tend to say the same thing.

To people within the system this no doubt looks unproblematic. Why wouldn't organisation A talk to organisation B about policy isssues, especially if they are usually on the same page about things? From here it really isn't a big leap to base your consultation response on one written by another organisation, or to copy and paste chunks from your sector's representative body and stick your company's letterhead on the top. Given that there are 'common sense' and 'obviously right' positions on most issues, is there really anything controversial about this?

I do think there is a deeper problem here. The repeated emphasis on 'consensus', and avoiding 'unintended consequences' resulting from even the mildest reform, leads to an incredibly small c conservative approach involving little real debate. As I've blogged before, the public expression of dissent - even in an area as important at the way companies are run - is actively discouraged. Where dissent is expressed, through the exercise of voting rights, this is often characterised as a failure, rather than an entirely legitimate disagreement, or even a potentially creative moment. 

My personal view, which I don't expect to be at all popular in corporate governance land, is that UK corporate governance has become very insular and uncreative. The constant characterising of consensus as desirable and conflict as problematic in practice leads to an instinctive defence of the status quo whatever the issues. For example, a move away from unitary boards (or even to employee representation on unitary boards) would be considered 'extreme' by the terms of the soggy UK consensus we have currently. This is despite the fact that other successful nations have such systems. Similarly, 'one share one vote' and equal treatment of shareholders are unchallengeable beliefs, despite the possibility that in some circumstance there might be better alternatives. Or just look at the wave of conservative opinion unleashed in response to relatively mild proposals put forward by the Competition Commission - and look at how many different groups it encompasses. Investor groups on the same side as the corporate lobby, the Big Four and the FRC. It only makes sense if there really is a 'correct' stance to take, rather than some rather contestable claims about the dangers of change.

I would prefer to see more argument and more conflict. In another field I think that it would taken as read that the existence and discussion of a diverse range of views was a desirable thing. In contrast in UK corporate governance, no chance is missed to admininster the anesthetic of consensus. The results are complacency (certainly about the superiority of our model) and the bizarre sight of investors repeatedly arguing against an extension of their own rights.

I'll end with a quote from Colin Crouch's latest book which is relevant.

"We often manage to achieve positive-sum outcomes between markets and compensating measures for them, but not usually through coherent planning. Rather they come through conflict and confrontation... The interests served by intensifying markets and those served by protections from it are usually different, and they are usuallydistinguished by different degrees of income and wealth. It is probably as well that things remain that way, for conflict and contestation increase our chances of finding new solutions to problems - and of evading rule by benign dictators who claim to be working for us all."

Demoralising incentives

One of the books I've taken a punt on recently is Practical Wisdom by Barry Schwartz and Kenneth Sharp, which is a psychologically informed take on developing virtue (or as the strap line says "the right way to do the right thing"). Barry Schwartz is probably known to some as the author of The Paradox of Choice (well worth a read) but he's also obviously quite interested in Edward Deci type views of motivation.

Practical Wisdom has a whole chapter in it on the problems of relying on incentives to get people to do the right thing (incidentally, the book is also critical of relying on 'rules' to achieve this). None of this will be that new to anyone who has been following the intrinsic motivation vs behaviourism debate, but it's interesting to see it put in the context of a discussion about professional virtue. And the point that the authors are keen to make is that incentives can de-moralise decisions, as in undermine or eliminate the moral content (a version of motivation crowding).

He gives a couple of examples. One is the famous Israeli daycare centre one, where the introduction of a fine for picking kids up late led to an increase in people picking their kids up late. The argument here is that the fine enabled parents to reframe the fine as a payment for a service (an extra 15 mins or whatever of childcare). The other example he gives is of an experiment where people were asked by a stranger to help load a sofa into a van, with some of the subjects offered a payment and others simply asked to do it as a favour. Again this is a way that the application of an incentive can reframe the way  a person views a situation, and if an action becomes seen as a transaction they may be less willing to undertake it, unless the rewards are large.

Unsurprisingly, I find this compelling, and it underlines why I think, for example, trying to use financial incentives to improve corporate oversight of ESG issues may be a bad thing (rather than simply ineffective). However, it also makes me think about the use of fines to 'punish' companies (am thinking Pru /AIA deal as an example). It's possible that fines may become seen by executives as a reasonable cost to endure - or, more damagingly, a reasonable payment to make - to ensure that they can undertake the action they wish to in the manner they desire.

Tax avoidance and fiduciary duty

Good work by the Tax Justice Network, who commissioned a legal opinion on directors' duties in relation to tax. There's a really irritating bit of 'common sense' blah about company tax avoidance, that (when argued most strongly) suggests that directors have a fiduciary duty and responsibility to shareholders to minimise the amount of corporate tax paid. Anyone who has bothered to read the section of the Companies Act on directors' duties will surely have been left scratching their head at this claim as such duties are drawn very widely. Nonetheless the pro tax avoidance interpretation is still the most commonly heard one.

As such, this is really helpful.

This morning the Chief Executives of every company in the UK's FTSE100 index will be receiving a letter from Tax Justice Network drawing their attention to a legal opinion prepared for us by the prestigious law firm Farrer & Co.

The opinion provides an unequivocal and authoritative view on whether or not company directors have a duty to their shareholders to avoid tax: no such duty exists in English law. The legal opinion is available here. A press release accompanying this legal opinion is available here. The Guardian newspaper has written about this here.

Although this legal opinion in itself only directly applies to the UK, it potentially has wide international relevance, as we have noted before.

It's important to note that this doesn't mean that companies shouldn't undertake tax avoidance, it simply makes clear that they directors are not in any way compelled to do it. I suspect this will have a similar effect to the work Freshfields did for the PRI a few years back on fiduciary duty and consideration of ESG issues in investment strategy. It doesn't overnight change anything, but it helps cut away at some of the arguments that are used to bolster unthinking defence of the status quo.

Another Fidelity/Conservative snippet

Doing a bit more digging around on links between the Conservative Party and Fidelity, I came across this piece on Open Democracy (from last March) which lists peers' financial interests related to healthcare reform. It includes a little bit on Lord (Bob) Edmiston -

Lord Edmiston: Shareholdings in Bupa Finance plc where Baroness Bottomley is a director. Bupa provides health insurance, private hospital and care group in direct competition with the NHS. Shares in Fidelity International Ltd, which acquired Telehealth Solutions Ltd in 2011. Telehealth has partners in the NHS and private health-care - and has several contracts with the NHS.  Telehealth is rapidly expanding and works to give people treatment from home, and is seen by Health Secretary Andrew Lansley as a way to save the NHS millions.

A quick look on the Electoral Commission register of donations shows that Lord Edmiston (who became a Lord in 2010) has - like Fidelity - been a big Conservative donor in the past, giving them £250,000 in 2004, though donations have been rather smaller lately (£9,000 in 2011). He also famously lent the Tories money. In 2006 he was also revealed to be one of the members of the Midlands Industrial Council, a business group that funds the Tories. These financial links to the Tories meant that a few eyebrows were raised when he became a peer.

But how did he end up with shares in Fidelity International? I found this profile piece from the Birmingham Post in 2011, which looks like part of a list of top regional business leaders. In it there is reference to a sale of properties to Fidelity:

His business – the IM Group – had a difficult recession in both its car import business and property interests, affecting the value of the business. Net assets of the two sides of the group amount to around £280 million.

The Coleshill-based business sold a portfolio of properties to Fidelity International in August, and that sale realised £22.7 million. The buildings are let to 13 tenants, including Severn Trent, Allied Dunbar and Staffordshire Police as well as a range of industrial clients.

So it's possible - note: possible, I am just guessing here - that shares in Fidelity were part of the deal.

For the sake of completeness, note that Lord Edmiston's parliamentary profile does not list shares in Fidelity in his register of interests. So presumably he sold them.

UPDATE: if you scroll down here, you can see that Lord Edmiston's interest in Fidelity was deleted in 2011.

New cut and paste lobbying tactics?

I've blogged at length about PLCs using generic text in their consultation responses. I think I've scored a few hits, given the nature of some of my blog traffic, and judging from some responses since I started blogging about this. But you can't keep a sneaky tactic down.

The Competition Commission is currently on the receiving end of a full-on lobbying effort to try and prevent some of its proposals on shaking up the audit market being implememted. I've noticed in the latest responses more come from individual PLC directors rather than companies. No doubt concerned individuals want to speak out. But it is somewhat surprising that some do so using some identical sentences.

For example, open this submission and this one, then search for the word "deep", or "reside". Because by pure coincidence, both individuals believe "It takes time for an audit firm to gain the deep understanding of a group" and that "The new auditor would not immediately be able to judge where in a complex group the major audit issues reside".

Funnily enough, in that second submission above, the respondent is concerned that "the transition [to a new auditor] would inevitably adversely affect audit quality initially". The same point was made in this submission, where the author is concerned "that the transition to a new auditor will inevitably adversely impact audit quality in the first and possibly second year". Both respondents believe the Commission's proposal for mandatory tendering after five years would have "damaging consequences and should be dropped".

This is just what I found in half an hour of free time on paternity leave. Imagine what else is out there. 

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