There is a great bit of research out today from the TUC on the pay of FTSE100 remuneration committee members. It won't be any surprise to most people that the executives of FTSE100 companies are amongst the richest in the UK and indeed the world. But what hasn't been looked at before is how much those that set their pay - the members of FTSE100 remuneration committees - take home.
According to the TUC the average total pay of a FTSE100 rem comm member is £441,383, and this is probably a conservative estimate. That is more than 16 times full-time average earnings. This seems likely to have an influence on rem comm decision-making. If an individual is earning £441k themselves, deciding to increase an executive's salary by £27,000 (if they are on, say, £500,000) probably looks uncontroversial. To someone on £27,000 a year it it will look incredible.
The cognitive bias of anchoring may be relevant here. This seems to have a pretty strong effect even when the information is irrelevant. But what about when the first available info (the rem comm member's own earnings) is directly relevant? If rem comms are composed primarily or solely of those with very earnings themselves, should we really be surprised if they make decisions that those on more modest earnings find indefensible? It ties in quite well with the current political row over MPs with outside earnings. I suspect people like Malcolm Rifkind seem otherworldly when the complain about having to scrape by on £67,000.
Needless to say, I completely agree with the TUC that this strengthens the case for worker representation on remuneration committees, and that this needs to be more than a single rep. Again thinking about the psychology of decision-making, it's going to be easier for people to challenge the super-rich consensus if they aren't a lone voice.
Finally, the TUC also has a list in the report of the current highest-paid rem comms in the FTSE100. Probably worth keeping an eye on that group to see if they make any particularly bad decisions. Note that Burberry is the second highest paid rem comm in the list.
Thursday, 26 February 2015
Monday, 23 February 2015
The Future of Private Enterprise
One of the more interesting books I read in the past couple of years is the Future of Private Enterprise by George Goyder. It's interesting for various reasons. For one, it's a reminder that when it was published (1954) mainstream views about the nature of the firm were very different.
For example, Goyder quotes from the 1944 Riddell Lecture given by the Conservative Lord Eustace Percy as follows:
"The human association which in fact produces and distributes wealth, the association of workmen, managers, technicians and directors, is not an association recognised by the law. The association which the law does recognise - the association of shareholder-creditors and directors - is incapable of production or distribution and is not expected by the law to perform those functions. We have to give law to the real association, and to withdraw meaningless privilege from the imaginary one."
Goyder's own conception of future model of the company was broadly what we would now call a stakeholder one, balancing the interests of workers, shareholders, consumers and local community. In passing he was also critical of limited liability which he described as a "principle of evil".
Finally, it's also interesting to read a business-oriented book that draws on a wide range of sources to inform its argument. There are references to Kropotkin and R. H. Tawney in there but actually one of the quotations that I like the most is from a novel - Brensham Village by John Moore. How about this?
For example, Goyder quotes from the 1944 Riddell Lecture given by the Conservative Lord Eustace Percy as follows:
"The human association which in fact produces and distributes wealth, the association of workmen, managers, technicians and directors, is not an association recognised by the law. The association which the law does recognise - the association of shareholder-creditors and directors - is incapable of production or distribution and is not expected by the law to perform those functions. We have to give law to the real association, and to withdraw meaningless privilege from the imaginary one."
Goyder's own conception of future model of the company was broadly what we would now call a stakeholder one, balancing the interests of workers, shareholders, consumers and local community. In passing he was also critical of limited liability which he described as a "principle of evil".
Finally, it's also interesting to read a business-oriented book that draws on a wide range of sources to inform its argument. There are references to Kropotkin and R. H. Tawney in there but actually one of the quotations that I like the most is from a novel - Brensham Village by John Moore. How about this?
1.
“I
think one of the most horrible and dangerous modern tendencies is this growth
of what I’ll call anonymous tyrannies… In the old days, if a factory owner
sweated his workpeople, sooner or later, if things got bad enough they stoned
his carriage or booed him in the street. If a farmer was a wicked employer they
burnt his ricks. And if a landlord was cruel enough and oppressive enough, they
could break his windows, or at any rate march up to his house and caterwaul
outside his front door. They knew who the industrialist was, who the farmer
was, who the landlord was. Those people had names and faces, and it was common
knowledge where they lived… But this new tyranny is quite different. You don’t
know where the head of the combine lives, even if you happen to know his name.”
Thursday, 19 February 2015
Fidelity, the Tory-friendly fund manager
As the latest info from the Electoral Commission reveals, Fidelity is still funding the Tories. £25,000 donated in November took their total for 2014 up to £120,000.
They are also still paying Tory MP Sir John Stanley for advice on "business opportunities and risks" at the rate of £1,800 a month (so around £20K a year). As I've noted before his constituency is where Fidelity is based, so will be interesting to see if they continue this relationship with Sir John's successor as he stands down at this election. It's a very safe seat so will return another Tory.
For those new to this story, it's worth noting that Fidelity have also -
Voted in favour of political donations to the Tories by PLCs in which they are a shareholder
Donated £50,000 to the No campaign in the AV referendum
So, if you don't want to fund the Tories by accident you might want to check out if you have any savings managed by them and see if you can switch. I shifted our family savings away from Fidelity several years ago because of this. I continue to try and make non-Tories, including pension fund trustees, aware of this link between Fidelity and the Tories. It's up to individuals to decide if they are happy with it, or if they think it constitutes any kind of conflict, but they should at least be aware of it.
Sunday, 8 February 2015
Pension funds giving up on hedge funds is just the start
One of the more inexplicable aspects of pension fund behaviour in recent years has been their tolerance for high fees, particularly in relation to alternatives. To state the obvious, high fees - especially where the manager takes a slice of your return - inevitably make it harder to deliver the returns you need in order to fund retirement benefits. What is more, the amount that leaks out of our pension system in fees has increased in recent years as funds have stuck more into alternatives - mainly private equity and hedge funds.
If you read some of the commentary from industry insiders you get a sense that they can hardly believe that clients put up with the fee levels. For example, Simon Lack has written a whole book basically arguing that hedge funds returns aren't worth the cost and that the industry is much better at making the managers rich than the clients, and Guy Fraser-Sampson's book expresses surprise at the lack of pressure on fees in private equity, see comments here.
But perhaps things are starting to change. In the last few months there have been several high-profile moves by pension funds to cut their alternatives allocation. CalPERS has closed it hedge fund programme, blaming costs, complexity and lack of scale. PFZW (PGGM) is pulling out of hedge funds, citing complexity and costs as a reason. In the UK, Railpen is cutting its hedge fund allocation significantly because of what is says is a poor cost/return trade-off, West Midlands is pulling out and LPFA criticised the industry's '2 and 20' fee structure. CalPERS is now also planning to cut the number of its private equity managers. Again, cost reduction is a driver.
These are small moves to be sure. The fee structure for alternatives is a rip-off, but there is plenty of leakage via 'traditional' asset management too. So there is a much bigger problem to tackle. But it is encouraging that pension funds are starting to challenge at least some of the most obviously wasteful investment activity out there.
I've thought for a long time that fees/costs in the pension system are an obvious place for the Left to intervene (only we can do it - the Right relies far too heavily on finance as a source of political and financial support to be able to act effectively). Since then there has been great work done on pension costs by Labour in opposition, and also on fund management fees by Unison. But this is just the beginning.
This is surely an issue where trade union reps in the governance of pension funds can be key. There is a great opportunity to reduce the costs that cut our pensions and, in doing so, challenge "socially useless" finance. It is a challenge we should embrace.
If you read some of the commentary from industry insiders you get a sense that they can hardly believe that clients put up with the fee levels. For example, Simon Lack has written a whole book basically arguing that hedge funds returns aren't worth the cost and that the industry is much better at making the managers rich than the clients, and Guy Fraser-Sampson's book expresses surprise at the lack of pressure on fees in private equity, see comments here.
But perhaps things are starting to change. In the last few months there have been several high-profile moves by pension funds to cut their alternatives allocation. CalPERS has closed it hedge fund programme, blaming costs, complexity and lack of scale. PFZW (PGGM) is pulling out of hedge funds, citing complexity and costs as a reason. In the UK, Railpen is cutting its hedge fund allocation significantly because of what is says is a poor cost/return trade-off, West Midlands is pulling out and LPFA criticised the industry's '2 and 20' fee structure. CalPERS is now also planning to cut the number of its private equity managers. Again, cost reduction is a driver.
These are small moves to be sure. The fee structure for alternatives is a rip-off, but there is plenty of leakage via 'traditional' asset management too. So there is a much bigger problem to tackle. But it is encouraging that pension funds are starting to challenge at least some of the most obviously wasteful investment activity out there.
I've thought for a long time that fees/costs in the pension system are an obvious place for the Left to intervene (only we can do it - the Right relies far too heavily on finance as a source of political and financial support to be able to act effectively). Since then there has been great work done on pension costs by Labour in opposition, and also on fund management fees by Unison. But this is just the beginning.
This is surely an issue where trade union reps in the governance of pension funds can be key. There is a great opportunity to reduce the costs that cut our pensions and, in doing so, challenge "socially useless" finance. It is a challenge we should embrace.
Friday, 6 February 2015
Chevron challenged by unions over Gorgon claims
Chevron is telling analysts that everything is under control on the Gorgon LNG projects, despite costs ballooning and it being late. The ITF and MUA have challenged the company to come clean.
- See more at: http://www.mua.org.au/itf_time_for_an_honest_conversation_from_chevron#sthash.XHudlbkK.dpuf
ITF: ‘Time For an Honest Conversation from Chevron’
The International Transport Workers’ Federation (ITF) and Maritime Union of Australia (MUA) are urging Chevron to have an honest conversation with workers, shareholders and consumers on the state of the Gorgon project located off the coast of Western Australia.
This week, Chevron reported to its shareholders that the multi-billion dollar gas project was “just fine”.
The Australian Financial Review reported that: “Chevron chief executive John Watson has voiced confidence in the economics of the severely over-budget Gorgon liquefied natural gas project.”
ITF president Paddy Crumlin said this insistence by Chevron management that the project was ‘fine’ was misleading.
“The ITF has evidence to suggest that the Gorgon project is far from fine,” Mr Crumlin said.
“In fact, published research by University of Sydney Business School Professor Bradon Ellem contends that the Gorgon Project has been the subject of severe mismanagement.
“The union movement is very keen for there to be future investment in Australia’s oil and gas industry because it creates jobs for our members.
“To ensure that investment continues we need to have an honest conversation about where things are currently going wrong.
“We’ve been inundated with so much information challenging Chevron’s position from those who have worked closely with the Gorgon Project that we’ve had to set up a dedicated website for people to submit Chevron’s stuff ups.”
The website - www.wedontagree.net - is a joint project of the International Transport Workers’ Federation (ITF) and the Maritime Union of Australia (MUA).
It is a part of an ongoing global campaign to build awareness of management errors that have caused delays and cost overruns on Gorgon.
Local Chevron management and industry group, the Australian Mines and Metals Association (AMMA), have unfairly blamed the MUA for problems on the Gorgon project, as the union has sought to negotiate a new Enterprise Bargaining Agreement for maritime workers working in the offshore oil and gas sector.
MUA WA branch secretary Christy Cain said maritime workers had been used as scapegoats by Chevron Australia.
“Research undertaken by BIS Shrapnel found that the wages of maritime workers make up less than one percent of the US$54 billion cost of building Gorgon,” Mr Cain said.
“Despite the negligible impact of maritime wages on the total construction cost of Gorgon, the MUA and our members are portrayed by the industry and their henchmen as being responsible for all of the problems facing the Gorgon project and the LNG sector as a whole.
ITF president Paddy Crumlin said this insistence by Chevron management that the project was ‘fine’ was misleading.
“The ITF has evidence to suggest that the Gorgon project is far from fine,” Mr Crumlin said.
“In fact, published research by University of Sydney Business School Professor Bradon Ellem contends that the Gorgon Project has been the subject of severe mismanagement.
“The union movement is very keen for there to be future investment in Australia’s oil and gas industry because it creates jobs for our members.
“To ensure that investment continues we need to have an honest conversation about where things are currently going wrong.
“We’ve been inundated with so much information challenging Chevron’s position from those who have worked closely with the Gorgon Project that we’ve had to set up a dedicated website for people to submit Chevron’s stuff ups.”
The website - www.wedontagree.net - is a joint project of the International Transport Workers’ Federation (ITF) and the Maritime Union of Australia (MUA).
It is a part of an ongoing global campaign to build awareness of management errors that have caused delays and cost overruns on Gorgon.
Local Chevron management and industry group, the Australian Mines and Metals Association (AMMA), have unfairly blamed the MUA for problems on the Gorgon project, as the union has sought to negotiate a new Enterprise Bargaining Agreement for maritime workers working in the offshore oil and gas sector.
MUA WA branch secretary Christy Cain said maritime workers had been used as scapegoats by Chevron Australia.
“Research undertaken by BIS Shrapnel found that the wages of maritime workers make up less than one percent of the US$54 billion cost of building Gorgon,” Mr Cain said.
“Despite the negligible impact of maritime wages on the total construction cost of Gorgon, the MUA and our members are portrayed by the industry and their henchmen as being responsible for all of the problems facing the Gorgon project and the LNG sector as a whole.
Friday, 30 January 2015
Pension funds in action
Blogging is light to non-existent currently, but here are three nuggets worth flagging up.
1. Pretty incredible win for investors worried about climate change - Shell has recommended that shareholders vote FOR their resolution at this year's AGM. Great work by CCLA, Share Action, ClientEarth and others pushing this campaign along. Anyone know if this has happened before? (Maybe at BAA years back??)
2. Railpen, PGGM continue their struggle to bring a bit of sanity to executive pay at Oracle. The company has seen a majority of its shareholders oppose it on its 'say on pay' resolution for three consecutive years, and this is with Larry Ellison controlling 25% of the votes. If you believe that executive pay needs reining in, and that shareholders are part of the solution, you should be very worried by Oracle.
3. A useful guide to help asset owners ensure that asset managers are properly taking account of ESG issues has been produced by a group of UK pension funds. It's available on the website of West Midlands Pension Fund (one of those behind the initiative) here.
1. Pretty incredible win for investors worried about climate change - Shell has recommended that shareholders vote FOR their resolution at this year's AGM. Great work by CCLA, Share Action, ClientEarth and others pushing this campaign along. Anyone know if this has happened before? (Maybe at BAA years back??)
2. Railpen, PGGM continue their struggle to bring a bit of sanity to executive pay at Oracle. The company has seen a majority of its shareholders oppose it on its 'say on pay' resolution for three consecutive years, and this is with Larry Ellison controlling 25% of the votes. If you believe that executive pay needs reining in, and that shareholders are part of the solution, you should be very worried by Oracle.
3. A useful guide to help asset owners ensure that asset managers are properly taking account of ESG issues has been produced by a group of UK pension funds. It's available on the website of West Midlands Pension Fund (one of those behind the initiative) here.
Friday, 23 January 2015
Why exec pay oversight can be weak
Because I'm a geeky person, I often search Investegate for AGM results. I just found this RNS announcement from Diploma PLC from Wednesday -
Those of you paying attention at the back will remember that the UK Corporate Governance Code recommends companies to publicly respond to big votes. It says -
Again to be fair to Diploma they do this. Note 4 to their AGM results, as far down the page as they can put it, says the following:
I think they can say meet the requirements of the Code. But I am pretty sure, having been involved in the consultation at points on the last round of exec pay reforms, that people were thinking that companies would stick out RNS announcements about their response to big votes against.
As ever, whenever this stuff isn't properly defined some will find ways to wriggle through the gaps.
All of the resolutions put to shareholders at the Annual General Meeting were passed by poll votes and the results of the AGM are announced on the Company's website at www.diplomaplc.comMove along, nothing to see here? Well, I'm also a suspicious type, so whenever I see an RNS that doesn't have the actual results in but says check the website later I wonder if someone is trying to bury bad news (though to be fair it looks like this is how Diploma normally reports). So off I go to Diploma's IR site for the AGM results (PDF). And look at the result on the rem report (res 12). Not only is the vote against very big (43%) on a for/against split, if you include abstentions then only a minority actively supported the rem report.
Those of you paying attention at the back will remember that the UK Corporate Governance Code recommends companies to publicly respond to big votes. It says -
When, in the opinion of the board, a significant proportion of votes have been cast against a resolution at any general meeting, the company should explain when announcing the results of voting what actions it intends to take to understand the reasons behind the vote result.
Again to be fair to Diploma they do this. Note 4 to their AGM results, as far down the page as they can put it, says the following:
In relation to Resolution 12 (the Directors’ Remuneration Report) there was a significant proportion of votes that were cast against the Resolution. The Board will consult with those shareholders who voted against this Resolution in order to understand their views. To date six shareholders, representing ca. 10% of the Company’s shares have engaged with the Company regarding their decision to vote against or abstain on this Resolution.
I think they can say meet the requirements of the Code. But I am pretty sure, having been involved in the consultation at points on the last round of exec pay reforms, that people were thinking that companies would stick out RNS announcements about their response to big votes against.
As ever, whenever this stuff isn't properly defined some will find ways to wriggle through the gaps.
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