Changing of the guard in corporate governance

I have been blogging a lot recently about employee representation on boards. This is partly because I'm an advocate of it, partly because no-one else seems to be tracking the issue properly and partly because I think the issue is part of a significant shift that deserves more scrutiny. So I thought I'd write something a bit longer than usual looking at a few interlocking themes.

1. Employee representation at board level, state of play 

Just a quick recap, there are now four UK-listed companies with employees in their board structures:

FirstGroup
Mears Group
Sports Direct
TUI

The last one is unusual as it's incorporated in Germany but listed in the UK (and in the FTSE100). Because of its size it is required to have the co-determination model of governance, so it has a supervisory board with half employee reps, including union officials. None of the TUI employee reps are from the UK as far as I can see.

Of the the other three, two are female and one male. For completeness there is also a female UK employee director on France-listed ATOS. So I think there are (at least) four UK employee directors, three of them female. There will be more. We also know that Capita is recruiting two employee directors (which will make it the first UK PLC to have multiple reps), and there may be others going down this route that we don't know about yet.

As for companies choosing alternative models, here are those that have made public that they are designating an existing NED to represent employees:

Diageo
Hays
Legal and General
McKay Securities
Ted Baker

But there will be plenty more choosing this option. For now...

2. Opposition to and biases about employee representation 

It is worth restating that employee representation at board level has been opposed by a lot of powerful players in mainstream corp gov. This has varied from outright opposition to putting forward much weaker alternatives (like designated NEDs). I think that publicly-articulated views have been toned a bit over the past couple of years, but here's a reminder of some asset managers' positions. I'm also struck by the tone of this comment from the ICGN:

In Provision 3, we believe it does make sense for boards to understand views from the workforce, and it is important that flexibility is granted about which approach would work best for individual companies. The workforce is a critical stakeholder for long-term company success, but companies and workers must remember that the workforce of one of a number of important stakeholders—and the workforce should not become the board’s proxy for all stakeholders. 

And here is another mainstream corp gov view from Eumedion:

Although we understand these proposals [for workforce engagement] in the UK context, we believe that these proposals can have unintended consequences as they can increase tensions between stakeholders themselves and between the board and the various groups of stakeholders. Those tensions will typically appear in stretching situations, such as in the situation of an unsolicited takeover proposal or in the situation of pressure from specific short-term oriented shareholders to change the company’s strategy and policy. 

It is worth anyone interested in corporate governance probing these arguments, as there are some meaty issues (and assumptions) buried within them. I am frequently shocked by the patronising tone that many people adopt when discussing these questions, revealing a low opinion of employees. The implications are often that employees lack the ability to contribute anything constructive, or to think long-term about the company they work for, or to pick representatives who will be effective.

It reminds me of a speech I saw once by a trustee of (I think) WH Smith pension fund. He had previously been an exec at the company (possibly FD?) but had ended up becoming a member trustee for some reason. He said he found it eye-opening because he realised when he was wearing the "company" hat he simply could not see pensions issues independently, even though he thought he could. His views were shot through with the biases that came from his position. He didn't realise this until his position changed.

My point is simply that we are all biased, and we all have views that are shaped by the interests that derive from our current position. I am obviously biased, for example, because of my experience in the labour movement (see note at the end for more info about how this can screw up the way I look at things!). My argument is that in this particular discussion mainstream corp gov organisations often seem to reflect quite deep biases. Perhaps, like the trustee, they can't even see them from their current position.

3. The 'centre' has shifted to the Left, even if corp gov hasn't noticed 

Again, I have blogged about this before, but it is striking that in public policy the idea of employee representation at board level is totally mainstream. All the major political parties have committed to it, and it is the Conservatives who have made the first attempt to introduce it. We can also see from polling - in the UK and US - that the idea is popular with the public, including quite a few Right-leaning voters.

The idea is attracting more attention because of the increasingly widely held view that workers in countries like the UK and US have had a pretty rough time of it in recent history and that capitalism has to change a bit if we're to prevent political problems. We're also starting to see quite frequent pieces questioning whether shareholder primacy is part of the problem. A theme I'm trying to work on is what comes next - I think (at least) it will involve reformed directors' duties, employee representation and greater pre-distribution through ownership, profit-sharing etc. I've also argued that shareholder primacy in utilities is under threat.

I think it's entirely fair to say that these views have come almost exclusively from the Left up until the last five years or so. But now they are pretty much the centre ground in public policy.

Enter Chuka Umunna, of the newly-formed Independent Group (TIG) of MPs, who has published a new pamphlet on what 'progressives' (bleurgh!!! hate that term) believe. I'll just pull out a few relevant bits:

What would this “British model” look like? It could take as its foundation northern European elements: employee ownership trusts; workers on boards and public-spirited non-executive directors, moving towards a form of co-determination as a way of decision-making in the workplace; trade unions; incentives for innovation within firms; long-term financing; and a National Investment Bank with a network of regional banks driving Britain’s public investment rate to the G7 average of 3.5%... The defining characteristics of this hybrid model would be: collaborative workplaces and competitive practices in innovative firms that pay a decent wage, share profits with workers, and give security to those who work within them.

.....

For example, the “British model” could create new tax incentives and legal certainty for mutuals and a vast roll-out of employee ownership because the evidence shows this would encourage long-term ownership and diversify ownership of capital. It would forgo the automatic assumption that nationalisation improves performance in favour of taking a “foundation” share in privatised utilities to force them to serve public good. It would incentivise widespread membership of collaborative unions and employee representatives on remuneration committees.

.....

Too many of the rewards of these new technologies accrue to a relatively small number of individuals, exacerbating inequalities. New ownership structures must be developed to ensure greater distribution of the benefits both to workers and wider society. Employee ownership trusts can be used to spread the rewards in such companies beyond the founders to the workers at large. 

.....

An incoming progressive government could legislate to force companies providing key public services to write the provision of public benefit into their constitution, taking precedence over profit-making. It can then insist on taking a "foundation share" in each company as a condition of its operating licence. This share can be used to install non-executive directors tasked with seeing that the company delivers its newly enshrined public purpose. This would be a smart use of government power for the common good – with shareholders retaining their shares, though now constrained by the primacy of public benefit over shareholder return.

This stuff is well to the Left of New Labour, and even significantly to the Left of Labour's Miliband era shadow business secretary... if anyone remembers him? But TIG is positioning itself as very much in the centre (the pamphlet is published by Progressive Centre). And I think views of this type is pretty much where the centre is going to be in the future.

Mainstream corp gov is simply not here yet, and as such is more likely to be affected by change than to shape it. Look forward another decade and I would not be surprised to see that employee directors are common on UK company boards, that employee ownership and/or profit-sharing has become more widespread. I would like to hope that there is some kind of push to reinvigorate unions too, but I am less confident on that front.

What I don't think will happen is that most UK companies designate an existing NED to engage with their workforce and it will end there. I don't think that a future government will observe companies avoiding having proper representation and think "this is fine, job done".

-----------------------------

Mea Culpa - as an important aside, I have to remember not to blog when I've got strong emotions about a subject! When TIG split off I thought I shouldn't blog about it as I have too much emotionally invested in the state of the Labour Party. I could see a lot of people predicting how TIG would position themselves - partly out of anger, partly trying to bomb their planes before they take off - and could see it was pointless. But because my emotions got the better of me I felt compelled to write something. And because I want to see a certain outcome I projected this. Bad mistake, made worse by the fact that I knew I was making it.

Wolfgang Streeck snippets

A couple of excerpts from How Will Capitalism End that resonates with me. The first has obvious application to Brexit (though this was written before it) though it also describes how I feel sometimes looking at ESG land.

[T]he arenas of distributional conflict have become ever more remote from popular politics. The national labour markets of the 1970s, with the manifold opportunities they offered for corporatist political mobilisation and inter-class coalitions, or the politics of public spending in the 1980s, were not necessarily beyond the grasp or strategic reach of the 'man in the street'. Since then, the battlefields on which the contradictions of democratic capitalism are fought out have become ever more complex, making it exceedingly difficult for anyone outside the political and financial elites to recognize the underlying interests and identify their own. While this may generate apathy at mass level, and thereby make life easier for the elites, there is no relying on it, in a world in which blind compliance with financial investors is propounded as the only rational and responsible behaviour. To those who refuse to be talked out of other social rationalities and responsibilities, such a world may appear simply absurd - at which point the only rational and responsible conduct would be to throw as many wrenches as possible into the works of haute finance.

The second is timely given a recent outbreak of bullshit about "non-ideological" and "evidenced-based policy.

Standard economic theory treats social structure and distribution of interests and power vested in it as exogenous, holding them constant and thereby making them both invisible and, for the purposes of economic 'science', naturally given. The only politics such a theory can envisage involves opportunistic or, at best, incompetent attempts to bend economic laws. Good economic policy is non-political by definition. The problem is that this view is not shared by the many for whom politics is a much-needed recourse against markets, whose unfettered operation interferes with what they happen to feel is right. Unless they are somehow persuaded to adopt neoclassical economics as a self-evident model of what social life is and should be, their political demands as democratically expressed will differ from the prescriptions of standard economic theory. The implication is that while an economy, if sufficiently conceptually disembedded, may be modelled as tending towards equilibrium, a political economy may not, unless it is devoid of democracy and run by a Platonic dictatorship of economist-kings. Capitalist politics... has done its best to lead us out of the desert of corrupt democratic opportunism into the promised land self-regulating markets. Up to now, however, democratic resistance continues, and with it the dislocations in our market economies to which it continuously gives rise. 

Ted Baker chief exec departure and workers on boards

I'm still tracking company announcements on if/how they are complying with the UK Corp Gov Code in respect of employee voice.

I've found two more choosing to designate an existing NED as employee representative. The first is the recruiter Hays, announcement here.

The second is more interesting - Ted Baker. The news that it has designated a NED to engage with the workforce is actually buried in the announcement that chief exec Ray Kelvin has resigned (having previously been on leave of absence). This follows allegations of inappropriate behaviour stretching back years.

I find this one very interesting as it strikes me that this shows exactly why employees on boards are a good idea. I have no doubt that if there were a couple on the board of Ted Baker then these allegations would have been properly discussed at board level a lot earlier than they eventually were.

Tech bros and 'win win'

Another couple of snippets from Winners Take All. This first quote is from a tech writer called Greg Ferenstein who interviewed lots of technology founders and tried to distil their ideas into a *cough* philosophy.

"The basis of old government is the notion of a zero-sum relationship between different classes - economic classes, between citizens and government, between the United States and other countries. If you assume that inherent conflict, you worry about disparities in wealth. You want labour unions to protect workers from corporations. You want a smaller government to get out of the way of business. If you don't make that assumption, and you believe that every institution needs to do well, and they all work with each other, you don't want unions or regulations or sovereignty or any of the other things that protect people from each other.
"Most politics and most institutions are built on a zero-sum relationship between some people in the group. This ideology is unique - and the reason I call it Optimism is because of the belief that everyone can get along. Or everyone has, to be more specific, overlapping preferences."

I could not have articulated the "win-win" mindset better myself. If we're all on the same side all the time, why do we need unions or regulations?

Secondly here is a tweet from a Silicon Valley venture capitalist called Paul Graham that is quoted in the book:

"Any industry that still has unions has potential energy that could be released by start-ups"

Winners Take All

This is a really interesting book (based on the first third, anyway) looking at philanthrocapitalism. It's a long-overdue critique of the super-wealthy, such tech bros and venture capitalists who fund them,  and their efforts to tackle social problems through "win win" business-led initiatives. I'm really enjoying it.

Here's an early excerpt to give you an idea of what it covers. 

All around us, the winners in our highly inequitable status quo declare themselves partisans of change. They know the problem, and they want to be part of the solution. Actually, they want to lead the search for solutions. They believe that their solutions deserve to be at the forefront of social change. They may join or support movements initiated by ordinary people looking to fix aspects of their society. More often, though, these elites start initiatives of their own, taking on social change as though it were just another stock in their portfolio or corporation to restructure. Because they are in charge of these attempts at social change, the attempts naturally reflect their biases.
The initiatives mostly aren't democratic, nor do they reflect collective problem-solving or universal solutions. Rather, they favour the use of the private sector and its charitable spoils, the market way of looking at things, and the bypassing of government. They reflect a highly influential view that the winners of an unjust status quo - and the tools and mentalities and values that helped them win - are the secret to addressing the injustices. Those at greatest risk of being resented in an age of inequality are thereby recast as our saviours from an age of inequality.  

Stakeholder governance... in banks

Hat-tip to Responsible Investor for a fascinating news story about Dutch bank De Volksbank considering giving stakeholders such as employees and customers a vote at their AGM alongside shareholders. This is framed in terms of shift away from shareholder value / primacy to a "shared value principle".

The background to this is that De Volksbank is state-owned, having been in public ownership since the forerunner SNS Bank failed a few years back, and is expected to be privatised.

An interesting aspect of the article is the response from Eumedion: “We are sceptical whether an agency model with multiple principals will improve accountability and transparency. It may also increase complexity in decision-making by the so-called stakeholders meeting. Paralysis may be the consequence.” 

I personally think the ESG world needs to encourage more experimentation of the type being considered, but hey. Asserting that a multi-stakeholder approach is cumbersome and complex is an old defence of shareholder primacy, and feels out of step with where the governance debate is currently (see, for example, Keith Skeoch's views in the previous).

It also reminds me of the approach some investors took towards another Dutch company - DSM - back in 2007 when it tried to do something different by trying to introduce loyalty dividends. And in the end they killed it. Let's hope there will be a bit more tolerance this time.

It should also make people in the UK think about RBS. If Theresa May is serious about wanting to see more stakeholder representation in the corporate governance of PLCs, why not start where the state can make it happen? Surely it's time to walk the talk?

Asset managers and stakeholders

There's a proliferation of comment pieces from asset managers lately seeking to demonstrate that they "get it" when it comes to lack of trust in business and finance. A lot of these simply re-tread the same ground, with more exhortations to more stewardship and engagement.

As I regularly blog, I think this is too 1990s, and the future of corp gov will have to be more "multi-stakeholder" (hate the term, but you know what I mean). I think the interesting place to be now is figuring out how we get from the largely investor-centred model we have now to something different, and what we take (and junk) from what we have now.

This piece from Standard Life Aberdeen chief executive is possibly a sign that some asset managers are thinking a bit more widely. Although it does end with the usual call for "more stewardship and engagement" the middle of the article sets out views I would struggle to argue with.

Such as:

And:

These are early days, but we're going to see more of this and at some point we will see some meaningful changes. I keep blogging about workers on boards because - not for the first time - mainstream UK corp gov seems to content to ignore what is going on and keep repeating its historical arguments against. This is continuing even as worker directors are starting to be appointed to boards in the UK!

The impact of all this on public policy should be interesting. The last 20 odd years of corporate governance reform have repeatedly sought to use greater shareholder empowerment and corporate disclosure to tackle issues relating to business conduct. But now we have major shareholders stating that building an approach around equity ownership (which does not equal ownership of the company issuing equity) has flaws. That's going to call for something different.