GMB pay analysis

Straight lift from the GMB site:

A new GMB analysis of pay by occupation for April 2007 shows that directors and chief executives of major organisations earned an average of £214,062 per year. This is 714% of the UKaverage wage of £29,999 for full time staff. It is 20 times what those at the bottom earn. Next were brokers on £101,627 or 339% of the UK average. They were followed by financial managers and chartered secretaries on £84,063 (280%) and medical practitioners £78,882 (263%). Fifth in the occupational pay league were senior officers in national government on £69,404 (231%) followed by aircraft pilots and flight engineers on £65,285 (218%).

At the other end of the league in the bottom ten, the lowest in 341stposition were waiters and waitresses on £11,303 (38%), School middayassistants on £11,439 (38%) were the next lowest. Also in the bottom ten were playgroup leaders/assistants earning £11,550 (39%) and above them were retail cashiers and check-out operators on £12,295 (41%). On around £12,500 or 42% of the UKaverage are a group occupations including kitchen and catering staff, laundry staff, florists and bar staff. Just above them are hairdressers and barbers on £12,928 (43%).

There is a group of occupations earning around the UK average of £29,999. These are storage and warehouse managers, rail construction and maintenance operatives, engineering technicians and researchers (not elsewhere classified).

Train drivers at 55th in the league are the highest paid manual workers earning an average of £37,234 (124%). Journalists are in 79th position earning £33,203 (111%). Nurses come 138th earning £27,234 (91%).

The construction trades workers are as follows: scaffolders, stagers and riggers £29,215 (97%), electricians £26,952 (90%), steel erectors £26,205 (87%), plumbers £25,885 (86%), bricklayers £23,561 (79%), welders £23,354 (78%), carpenters and joiners £23,147 (77%), plasters £21,901 (73%) and roofer, roof tillers and slaters £21,212 (71%).

Paul Kenny, GMB General Secretary said, "There are some people at the top earning forty and fifty times those at the bottom. We are asked to believe that those at the top need to be 'incentivised' by multi-million pay packages to maintain a dynamic economy, while at the same time those at the bottom in the public sector must make sacrifices for the good of the economy.

GMB members do not buy this logic. Those at the top are unnecessarily being paid too much and there is no evidence that there is any benefit from this except to line the pockets of an elite. GMB want to see the tax system used to even out the rewards and GMB want the National Minimum Wage to rise to £7 per hour to help those at the bottom."

Age Shock and financial cadres

Another book I have on the go at the moment is Age Shock by Robin Blackburn. It's an interesting read, not least the review of the corporate scandals in the US, and in particular the major conflicts of interest in the financial services industry. It is genuinely shocking to remind yourself how poorly Wall Street has treated its customers in recent history.

For example I would recommend anyone who isn't familiar with the story to read up about the famous email exchange between Citigroup's Sandy Weill and Jack Grubman. It's shocking both because you realise corrupt practices went right to the top of the company and because the trust millions of punters was being abused in exchange for (relatively) petty personal favours.

The book also details Blackburn's suggestion of a share levy on companies. These shares would then be held by a network of public pension trust funds. Blackburn argues that these funds could (or should) become a significant voice in the governance and stewardship of the companies in which they were invested. He acknowledges that this is not without potential problems:

"[S]me fear that the mass of beneficiaries would become no less wedded to thecult of shareholder value and the bottom line than Wall Street. Of course this would be a danger - indeed shareownership is widespread enough to make it already a danger... [T]here would be argument about how pension trust fund votes should be used..."

He then replies with a run through of why he doesn't think the funds would develop in such a way, but it's the following line a couple of pages on that caught my eye.

"Because the network of pension funds would have significant power in corporate affairs, it would need to develop its own cadre of financial specialists..."

Regardlesss of what you think of Blackburn's central idea of the share levy (which looks similar to the idea of wage-earner funds in Sweden) I think the above point is a key one that needs to be applied more widely. If we are ever to get the financial services industry to ever work in the interests of working people (who are its customers afterall) I think this is exactly what we need. The labour movement needs trained people who understand the financial system technically, but also have a good grasp of what we might call the 'politics of capital' and have some power within the system. Basically we need financial cadres.

At the moment (in the UK at least) we are miles away from this. TU members who are pension fund trustees typically have little understanding of the political nature of their role, and some are even hostile to the idea that they should have a political approach. I actually think longer term it would not just be trustees that we would need to think about, but also service providers. For example, we either need to indentify - or create - progressives in the actuarial field (there are some already). Maybe we also need to think about is the creation of labour-oriented service providers?

I accept that at present these ideas may sound pie in the sky but a) I get the impression that people in the labour movement in other countries are thinking this way and have had some success and b) personally I have come to the conclusion that if we are really going to have an impact we need to think big.

Local authority pension funds as activists

This week I was down at the annual Local Authority Pension Fund Forum (LAPFF) conference in Bournemouth. Coincidentally it was taking place in the same week as the big Unite-T&G and GMB conference on the LGPS (see a report from that one here). The LAPFF has been promoting collaborative shareholder activism by local authority funds for over 15 years now, and deals with both corporate governance and CSR issues.

There were a couple of publications launched that are worth flagging up. First LAPFF itself launched a guide for trustees about mergers & acquisitions. This is intended to give trustees an overview of M&A activity and encourage them to engage with an acquirer if a deal looks potentially flawed. I think this is the first time that pension funds in the UK have been encouraged to really think about M&A and in my opinion it is long overdue. Remember the background to this is the systematic failure of many deals to create value (many destroy value) whilst at the same time often resulting in significant job losses. See for example the KPMG study quoted on page 6 of this NEF doc.

Secondly UKSIF launched a self-assessment tool for funds and an analysis of local government funds' practice in respect of responsible investment. You can download it from their website here. They have ranked local authority funds and only give one fund - the Environment Agency - top marks.

I won't give a detailed report of the conference as it would take a long time to write and probably be quite boring to read. So instead I will focus on the two bits I found most interesting. First was the session on behavioural finance related themes. This included a presentation from ex-DTI man Sheetal Radia and one from Rick Di Mascio from Inalytics. To massively oversimplify, Sheetal set out the theoretical background to behavioural finance, whilst Rick explained that some of its insights can be seen at work in the activity of fund managers. Again I'm simplifying but Rick said that fund managers were much less skillful at dealing with 'losers' in their portfolios than 'winners' which would seem to bear out the idea of loss aversion (as opposed to risk aversion). So it is interesting to see that behavioural finance can actually be of use to trustees, though I suspect we are long way from it happening on a significant scale.

Secondly the session on private equity was interesting because of how polarised it was. Basically there were four presentations in favour of it, and then a bit from Paul Maloney of the GMB criticising the role of private equity at the AA. I say the debate was polarised for two reasons. First, clearly the industry and the unions see the value or otherwise of private equity very differently. But more importantly, to me anyway, was the clear separation of the debate about private equity as an asset class, and debate about private equity as a public policy issue. There is very little overlap between the two areas and as such it makes for a very bizarre conference session. The discussion of PE as an asset class was all very positive, with much focus on the stellar returns. But this is, apparently, a different world to the mass redundancies and declining service highlighted by the GMB.

And when I thought about this more I remembered a good example of investors almost explicitly abdicating their role in the public policy debate. Back in the summer, the chair of the NAPF wrote a letter to the FT to say that the tax paid by the partners at PE houses was 'irrelevant' to institutional investors. At the time I simply thought it was a bit sycophantic, but it now strikes me as an odd stance to take. As a comparison, imagine if he wrote to the FT saying that it was irrelevant to investors how the directors of public companies paid themselves. Or, if you think PE firms are more like fund managers (I think they fall somewhere between the two but that's for another day) imagine if he wrote to the FT saying that the way that fund management fees work was irrelevant. I think most people would think these would be unacceptable stances for an investor trade body to take - why is OK in respect of private equity? So I think there really is a gap here for someone to develop a critical investor perspective on PE.

Finally, it is worth noting that over recent years there has been more involvement from unions, both as delegates and speakers. In addition to Paul Maloney from the GMB the similarly-named Paul Moloney from Nautilus (formerly NUMAST) spoke about health and safety. Also there has been quite a bit of involvement of the US unions who are of course much more active in the shareholder engagement world than we haave been in the UK to date. This year Scott Zdrazil from the union-owned Amalgamated Bank was also amongst the speakers.

Pay disclosure improves on the quiet

This is a straight lift from the PIRC website:

Blink and you would have missed it, but without fanfare the Government has suggested a small but relatively significant tweak to executive remuneration reporting. Buried deep in draft statutory instruments issued by the Department for Business, Enterprise and Regulatory Reform (DBERR) in the Autumn comes the following clause:

“The directors’ remuneration report must contain a statement of how pay and employment conditions of employees of the company and of other undertakings within the same group as the company were taken into account when determining directors’ remuneration for the relevant financial year.”

If you want to find it look at page 142 of the snappily-titled ‘The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008’ (see address below). It will look familiar to many readers as it is similar in wording to a rather famous, and famously ignored, piece of guidance in the Combined Code. In a supporting principle, the Code states that remuneration committees “should also be sensitive to pay and employment conditions elsewhere in the group, especially when determining annual salary increases.”

Critics of remuneration reporting often use this as an example of where companies provide boilerplate reporting. Trade unions, who have long argued for the inclusion of comparable information about employees’ and directors’ pay and benefits, believe that the Code guidance is routinely ignored.

If the proposed change goes through it will come into force from April 2008. As it stands it puts some pressure on companies to provide some kind of commentary, but PIRC believes the lack of guidance on the type of information to include will reduce the measure’s potential value. Given that this is a rare opportunity to improve remuneration reporting to address a long-standing criticism, we believe a bit more prescription is in order. Surely the clause could be redrafted to specify the provision of some basic comparable data on pay, pensions and other benefits?

DBERR link:

http://www.berr.gov.uk/files/file40447.doc

The crooked timber of governance

I was at a corporate governance seminar yesterday. It was Chatham House do, so I'm not supposed to attribute comments and I won't. The most interesting thing for me was to hear one former chairman and chief exec (he had held both roles, as well as combining them - naughty!) talk about the value of good governance, and non-exec directors. I noticed that he mentioned the importance of objectivity several times, which was quite telling I thought.

He said that when he had been a chief exec he had wondered what the value of NEDs was, since they couldn't possibily have access to all the information that he had, and therefore couldn't be as informed. But he has subsequently changed his view and realised that 'internal' people often don't want to tell the boss bad news and as such tend to tell a good story because they fear confrontation. Non-execs can challenge this. He also criticised both the combination of chairman and chief exec roles (on the basis that power corrupts...), and chief execs going on to become chairman (err... HSBC).

It reinforced the point for me that any governance system is dependent on the people within it. Good structures cannot turn bad managers into good ones, though they can perhaps prevent bad managers doing too much damage.

The discussion later on was about the role of investors in governance, and in particular what pension fund trustees can do. One speaker made the point that you couldn't even describe trustees as apathetic about corporate governance, as this would imply that they had thought about it and decided it wasn't worth bothering with, rather than the reality that most hadn't even considered it. Again you are reliant on good people doing the right thing for the system to work as text books tell you it ought to.

I seemed to annoy a couple of people in the audience (not deliberately!) as I said I thought if you really wanted 'owners' to play an active role you should strip the ownership function out of fund managers. My argument for this is that these are businesses that were created - and are paid - to make money out of trading, so why expect them to carry out the ownership bit to any standard? This is turn is based on my assessment that most fund managers don't take corporate governance massively seriously. Their voting records are, from my perspective, unimpressive and I doubt that most have the staff to carry out extensive engagement (whatever that term means).

Walking back to the tube station after the seminar I wondered if I was being a bit harsh. Maybe what fund managers do is simply 'good enough' rather than 'very good'. In my experience you can identify in advance the fund managers that are likely to take a tougher stance on a given governance issue. It's hard not to conclude that once again it's about individuals being willing to take a position.

Maybe we simply shouldn't expect too much of either corporate or investor governance given that at the end of the day it is dependent on human beings, with all their faults, to make any system work?

Hat tip: Immanuel Kant

Unite reaction to Virgin named as favourite buyer by Northern Rock

Just a lift from the Unite website:

Graham Godard, Unite Deputy General Secretary said: “We will be meeting with Northern Rock tomorrow afternoon to seek confirmation on the full details of the deal. We are glad the speculation is over but will be looking for all the reassurances we've been demanding. The company are due to sign the Charter that Unite set out last week but at the moment it looks like they are already ticking some of the boxes including job security and a UK successor. On the surface this appears to be a positive move.”

-Ends-

For further information please contact Jody Whitehill 020 7420 8938 or 07768 693956

Unite Charter for Northern Rock and Future Stakeholders

Recognition of Unite as a stakeholder in the future of Northern Rock
To ensure the long term job security for the employees of Northern Rock
To protect and improve terms of employment for employees
To protect the existing pension arrangements
To continue the work of the Northern Rock Foundation
To retain Northern Rock as a UK listed company.

Pension funds as owners - a view from the beach

Here's a brief bit from a much longer paper I wrote on a beach on holiday in Greece about 2 years ago when I was a bit sceptical about the prospects for pension fund activism. It's a bit dated, as the National Pension Saving Scheme is now called Personal Accounts for example, but I haven't changed my views substantially.

Pension funds’ ownership function in the future

The role of pension funds going forward will involve some contradictory themes. It is clear that some pension funds have responded to the impetus provided by Government interventions such the requirement to disclose voting and SRI policies, and the shareholder engagement thread within the Myners review process. A small but growing number of trustees are using the opportunities such interventions provide to have more interaction with their fund managers over ownership issues.

Practically this will for the most part continue to be limited to interrogating service providers over how they exercise ownership on behalf of clients. A number of initiatives have sought to formalise the provision of such information from service providers to clients. As such this is a trend that can be realistically be expected to increase.

As more pension funds clear or reduce the deficits they have incurred in recent years this might provide more breathing space for trustees to explore these issues. This will be in contrast to the past five years or more when the agenda of most trustee boards has been dominated by deficits.

However there are factors that may limit this. The recent experience, for employers, of large deficits and associated significantly increased pension contributions has likely terminally damaged the inclination for many to play a significant role in pension provision in the future. The closure of most defined benefit schemes to new members is just one element of this. As pension funds clear their deficits there might be closures to all accrual, as employers seek to completely lock down their pension liabilities.

The implications of the closure of DB schemes are twofold. First, closed schemes will inevitably become increasingly mature and as such will move out of equities into bonds and other assets. The proportion of shares held by DB schemes will be in long-term decline.

Secondly, the structure of the defined contribution schemes that are being established will become increasingly important. Many employers, believing themselves scarred by experience of playing an active role in pension provision, may opt to set up contract-based DC schemes where responsibility lies largely with the service provider. In such funds there will be even less oversight of the ownership function, if any at all. This will further reinforce the trend of the transference of ownership from pension schemes to fund managers.

A potential countervailing trend is the impact of the Government’s pension reform agenda, specifically the role of the proposed National Pensions Savings Scheme. The structure of the NPSS is still under discussion, however the model outlined by the Pensions Commission envisaged something close to an occupational DC scheme with a committee playing a role similar to that of a trustee board.

This scheme would seek to provide pensions for the many working people currently without provision. In addition it is likely that many employers may see it as a no-hassle way to provide pensions for their staff, they need simply pay in a contribution. As such it is expected that the NPSS would grow rapidly in terms of assets. The role of a national DC scheme with large assets has already attracted excitable comment, being described variously as ‘Stalinist’ and ‘nationalisation through the back door’ .

The influence the NPSS actually has will depend on how ownership issues are addressed. If responsibility is delegated to fund managers appointed by the scheme, or by the employer or carousel if an alternative model is introduced, this will mark a decisive and arguably final shift away from the notion that pension schemes or their members are in any real sense owners.

In contrast, if the scheme is established as envisaged by the Pensions Commission the governance body responsible for oversight could set an ownership strategy for the fund which mirrors the expectations set out by the Government set out in the SRI disclosure regulation and Myners. If the NPSS does adopt this role it should be expected that there will be significant criticism from some quarters on the grounds that it represents political interference in the capital markets and British business.