Saturday, 3 December 2016

ASOS AGM action!

This week saw some great campaigning by the GMB as part of their ongoing battle against poor working practices within ASOS, which has had a particular focus on the distribution centre in Barnsley run by XPO. The GMB had a "Catwalk of Shame" outside, and a workers' annual report was handed out to shareholders. On the same day there were also claims that ASOS may not be playing by the rules in terms of pay for new warehouse staff.

Interestingly, on my turf, the company was also hit by a sizeable vote against executive pay, with 33% opposed. This generated further negative media coverage. The vote against was also double the level of opposition (16%) at the 2015 AGM, so there might be something significant going on. Notably, ASOS has not commented on the size of the vote or how it will respond. As a reminder, the UK Corporate Governance Code says (E.2.2):
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.
In practice, larger listed companies seem to make statements when they get votes against of about 20%+. ASOS is AIM-listed so it does not need to follow the Code. Nonetheless you might think that given all the adverse commentary - and the scale of the vote - it would be a sensible thing to do. And actually ASOS does make commentary about shareholder support for remuneration in this year's annual report (page 47):

At the AGM last year, 84% of shareholders voted in favour of the Directors’ Remuneration Report, providing an important level of public accountability for the Board with the suitability of our remuneration policy and its implementation. We hope that you find this year’s Remuneration Report equally informative around how ASOS leadership is remunerated, and some of the changes that we have made during the year. I look forward to seeing shareholders at the AGM, and hope that I can count on your continued support on our pay arrangements.

So it looks like they may have something to say in future reporting.

Finally, we can dig into the voting data a bit. One thing that looks likely is that the company's major shareholder, Danish retailer Bestseller, did not oppose the remuneration report. According to the list of major shareholders disclosed on the ASOS IR site, Bestseller owns 23m shares. And according to the RNS statement on the AGM, just under 14m were voted against the remuneration report. I think it's likely Bestseller either voted all of its shares or none.

If Bestseller DID vote for the remuneration report, then a very large majority of the remaining shareholders who voted will have voted against. The RNS statement shows a bit under 28m shares supporting the remuneration report, if you take 24m out, you are left with 4m in favour and 14m against.

Just to complicate things, it's worth registering that former ASOS CEO Nick Robinson owns 7m shares. Which means that it does not look possible that both he and Bestseller voted their whole holdings (23m + 7m) in favour of the remuneration report. I suppose it's possible one or both has sold down a bit, but it looks a bit strange on first glance. If Bestseller didn't vote at all, but Robinson did, and voted for, then the level of independent shareholder opposition must have been around 40%.

It's too early to get any public voting data on this AGM, but looking back to the 2015 AGM, we can see that Baillie Gifford, the largest shareholder after Bestseller, voted against the remuneration report. (PDF here, if that doesn't work then look for Q4 2015 voting disclosure report here - you will need to accept terms and conditions). You can also see that ASOS was part of Baillie Gifford's engagement in the same quarter (look at the Engagement Report for Q4 2015). My gut feeling is that, given the increase in opposition this year, Baillie Gifford probably took the same position, but that is just a guess.

We can also see that one of the UK's local authority pension funds - West Yorkshire - also opposed the remuneration report at the 2015 AGM. See page 119 here, from the fund's voting disclosure site. Here's the blurb explaining the vote:

For Nick Beighton’s promotion to the role of Chief Executive, the Committee determined that the annual base salary level should be set at £550,000, which is £50,000 higher than his predecessor, and the annual bonus opportunity increased from 100% to 150% of base salary. The increases have not been adequately justified. Likewise, to secure the recruitment of Helen Ashton the Recruitment Committee bought out a proportion of her current long-term incentives from her existing employment, by making a one-off cash payment of £204,000 and a grant of a long-term incentive award under the ASOS Long-Term Incentive Scheme, worth £340,000 as at the date of grant. The awarding of a cash payment on recruitment, without any performance conditions attached, is not considered appropriate. 
I will keep digging around for info on how shareholders have voted this year and last, and why. I will post up what I find.

So, to sum up, we have a high-profile retailer whose working practices in one of its warehouses have been subject to critical media coverage. We also see, despite a large chunk of shares accounted for by insider ownership, the same company experience significant shareholder opposition over corporate governance concerns at multiple AGMs. Remind you of anyone?

Sunday, 27 November 2016

The forward march of shareholder oversight halted

I'm going to stop blogging about corporate governance reform for a bit, as I'm starting to bore myself as I keep ending back at the same place. But the endless discussion about executive pay has helped me crystallise a couple of thoughts that I thought I would share with you lucky people. These are that a) executive pay has become a political problem of a type that is similar to immigration (though obviously a very different issue in numerous ways) and linked to this b) the next time there is a serious attempt to reform executive pay shareholder oversight won't be the major part of it.

So, first, the comparison with immigration. I think there are a number of similarities here. Most obvious is the chasm between "informed" or technocratic opinion and the public. The former argues variously that we shouldn't worry too much about exec pay because it's a small part of company expenditure; that structure is what we should look at not scale; that we should leave it up to shareholders to sort  out etc etc. The public seems to think execs are just paid too much money and have no self or external restraint. There is very little common ground, and neither pole of opinion considers the other is serious.

Technical specialists and policy makers argue that we have to proceed with caution - radical action might backfire, or could damage the prosperity that highly-paid executives apparently create for us. When political parties that try and push a little harder are attacked as "anti-business". It feels very similar to the "elite"/corporate lobbying around both the EU referendum and the Scottish independence vote. The public, righty or wrongly, hears scaremongering - Project Fear if you like.

This leads to another similarity with immigration a political issue: the gap between what politicians say and what they do in practice. Politicians recognise the public anger, but also hear the lobbying of powerful vested interests and the views of technocrats. So they try and steer a path between them. Almost invariably this leads to rhetoric that is far more fiery than the policy that is delivered. I've been through several rounds of "reform" of executive pay, or the threat of it. Each time the reforms are briefed to the media (which largely duly repeats the line) that this is a "crackdown" on "fat cat pay". Each time the actual policy proposals are modest at best, and always based on the same old same old of shareholder empowerment and greater disclosure.

I suspect to most ordinary people who don't follow this stuff closely, these kinds of reforms don't really register as a "crackdown" at all. That might involve people being fined, convicted or that kind of thing. Disclosing a bit more in an annual report and getting the very occasional vote against doesn't really move the needle.

It obviously isn't helped by the fact that despite policymakers giving shareholders ever more information and greater powers they seem to rarely use this to challenge companies. Let's be serious here: if the belief is that there is a problem with executive pay then the record of shareholders in challenging it is absolutely pathetic. Yes there are some investors that do try and push hard, yes there are a few (but very few) scalps a season. But overall there has been little serious pushback. And I personally believe this is unlikely to change.

So what the public hear politicians say - "crackdown" - and what they see in practice - exec pay going up, very little shareholder challenge - are in obvious contradiction. The impression given is that politicians are actually being shifty - making a lot of noise but not really delivering on the issue when they claim to be listening to public concern. We cannot be surprised if the public stop (or have stopped) taking the rhetoric seriously.

This leads on to my second point - what politicians will do about it. We can see with immigration that  politicians have felt the need to take more and more radical action as public belief in their commitment to act has evaporated. Eventually, and unfortunately in my personal opinion, politicians have felt compelled to take action that matches the words they use - hence the (failed) cap on immigration numbers, and now our edging towards tighter rules on freedom of movement. I suspect the development of public policy around executive pay is a few stages behind immigration, but I think it will follow the same path. Technocratic policy fixes will not be enough to convince ordinary people that the issue is being dealt with.

This leads me to conclude that the next serious attempt to tackle executive pay won't rely principally on shareholder oversight as a mechanism. I'm playing the "no true Scotsman" trick a bit here, as by definition I no longer consider that reforms largely relying on shareholders will make a dent and thus aren't serious.

I think we are (just) still in the phase with executive pay where politicians believe that using strong rhetoric will be enough, even if the policy is mild. And I don't think this can last. One thing I am pretty sure of is that another round of more disclosure and more shareholder powers will not make enough difference to change public perceptions. Not enough shareholders are motivated to act most of the time in a way that would really have an impact. I don't see any reason why a model we have been trying for 20+ years (and a shareholder vote on exec pay in the UK for almost 15) will suddenly start to work differently. Nor do I put faith in the idea we can "dissolve the people and elect another" by creating "better" shareholders through different portfolios or mandates or whatever. This is a sign of desperation caused by running out of options within the current approach.

So, sooner or later, the game is up, and politicians will look for something that really does make a difference and can be seen to be doing so. It won't happen in the imminent consultation, but I think it's in the post. Having both been through the executive pay reform process several times now, and seeing how politics is playing out these days, I am pretty certain the need to be seen to be intervening in a serious way inevitably points to something quite different. What this will look like I really have little idea, but if you think disclosure of pay ratios and employee representation on remuneration committees (which is what the Tories are talking about now) are dangerous radicalism then I suspect you're in for a bumpy ride.

Friday, 18 November 2016

Has UK corporate governance swung to the Left?

Continuing on from the theme of recent posts on workers on boards, despite some of the pushback from expected sources, what is really striking is how much corporate governance policy has shifted towards policies largely articulated by the Left in recent years.

Workers on boards is the most obvious example. It is an important policy for the labour movement in general, supported by major unions of different political orientation, the TUC as the national centre, and the Labour Party. As I've blogged previously, it's also supported by the Greens, the nationalists and the Lib Dems.

This was a policy that was on the fringes of the corp gov debate for years. Now it has been consulted on once already by government (by BIS, as was, under the Coalition) and is about to be again, plus it's being looked at by the BEIS committee. Something will change, and even if the govt cops out this time the door is open for the first time since the 1970s.

I've also blogged before about disclosure of intra-company pay ratios. Again, this has been pushed by the TUC and others for a long time. It was resisted for a long time, partly on the basis that the info wasn't any use to shareholders. Now both investors - like Hermes and Legal & General - and the asset management trade body are pushing for ratios to be disclosed. It is therefore very likely to happen either through voluntary company disclosure or, if that doesn't happen, intervention.

This is tied to a shift away from the assertion that what matters is structure rather than scale in executive pay. Pressure over the scale of executive pay hasn't just come from the Left, though it is more prevalent on my side of politics. And it was an initiative of a Left think tank (Compass) that led to the creation of the excellent High Pay Centre. Investors weren't supportive in the past - not that long ago most asset managers would argue publicly that overall amounts don't really don't matter, it's performance linkage that is most important. They don't do that any more. Perhaps this is just tactical silence, but it takes a "brave" corporate governance wonk to argue for prioritising structure over scale in the current environment.

There is also a consensus building around the need for equal treatment for workers and execs in relation to pension provision. This is one of the most unjustified aspects of exec pay in my opinion. Once more, the pressure for change had for many years come principally from unions, though there was a joint NAPF-LAPFF letter to companies about it a few years back. Now both LGIM and Hermes explicitly call for a move to equal treatment (See page 5 here and page 3 here).

Getting into the guts of executive pay, there is also growing scepticism about the value of performance-linkage on its own terms, because of the growing evidence about the mixed results of incentive pay. This one is perhaps harder to claim for the Left, though its use in the corporate governance context has again tended to come from my side of the fence. We have now seen both rem consultants and the CIPD produce interesting work on this topic. This report from last year is worth a read for example. I don't think the message has entirely got through. After all, a really behaviourally-informed approach to exec pay (and exec psychology more generally) should put LESS emphasis on long-term reward and more on the short term. But that's for another day.

We might also look at the way that policy is shifting away from disclosure as a tool. Until relatively recently it was the default position that all we need to do to correct a problem like exec pay is make more information available to market players and they will sort it for themselves. Pensions policy has shifted away from this (in large part due to the influence of behavioural economics). Corp gov is playing catch up, but the idea that it's just a disclosure/transparency problem is pretty much dead.

And finally the big one: shareholder primacy. For the whole time I've worked around corp gov this fundamental approach has been taken for granted by most people in investment and assumed to be non-ideological. But it has been increasingly attacked from the Left as a poor way of granting rights, distributing rewards and framing decision-making. The TUC again has done great work here.

As I blogged at the time, shareholder primacy was explicitly questioned during the parliamentary commission on banking standards. At the time some of those giving evidence acknowledged the weaknesses in the model, including the IoD, but the govt did not act. But since then a number of high-profile people including Andy Haldane and John Kay have also been critical. As I blogged quite a lot in the past, we've also seen regulators take a more interventionist stance in respect of financial organisations in a way which raises the question of whether shareholder primacy really exists in that sector in a meaningful way now.

What we may also be starting to see is a loss of faith on the part of people who work for investing institutions themselves. On this point, it's worth looking at the submission from Guy Jubb (former head of corp gov at Standard Life) to the BEIS committee. He says, for example:
Shareholders, in general, and institutional investors, in particular, should be efficient and reliable agents for accountability and change when boards and directors are failing to fulfil their responsibilities but often they are not. Policymakers and regulators, including the FRC, should re-calibrate their assumptions to recognise the limitations of investor stewardship.
 the nebulous concept of enlightened shareholder value, lacks grit, is unduly focussed on shareholders and fails to provide an effective basis for legal accountability
This is someone who was directly involved in the interaction between companies and investors for many years remember.

When you stand back and look at all of this, it is hard to resist the conclusion that the Left has won some battles, and that the centre of gravity on a range of corporate governance issues has shifted in our direction. I think this one area where the experience of the financial crisis has had much more impact than previously realised, perhaps most of all by exposing the weakness of shareholder oversight.

Whether this heralds a decisive or lasting lasting shift remains to be seen. What happens on the question of worker representation in corp gov is pretty critical in my view. Policy wonks may give up on shareholder primacy without shifting to a stakeholder model. Previously I would have said we were moving into a more regulatory governance model, but the shocks from Brexit, Trump and who knows what next may make this look like too much of an "insider" solution.

Nonetheless, in the whole on the policy front it definitely looks like we've made some progress from the Left. Onwards and upwards!

Saturday, 12 November 2016

Workers on boards: handle with care

Before I get into the detail of this post I just want to make me thing clear: pension funds' assets exist to fund pensions for the people that work for organisations - the workers. Those assets were also created by the labour of those workers - it is their deferred pay. So those assets should act in the interests of those workers. In addition those that manage but do not own those assets only have influence through other people's money.

With that in mind, let's consider two things. First, how are those that manage that capital, but to whom it does not belong, using the influence that derives from those assets to influence the discussion on whether workers should be represented in corporate governance, specifically through board membership? Second, how are those arguments being made?

Submissions to the BIS committee inquiry into corporate governance, which has specifically asked for views on worker representation on boards, gives us a perfect opportunity to look at both points.

Aberdeen Asset Management

Not opposed, suggests alternative:
There is a significant body of evidence showing that mixed teams make better decisionsThe best boards feature a mix of gender, ethnicities and socio-economic backgrounds.  Any board that believes it cannot be enhanced by the inclusion of views from significant parts of society is clearly suffering from closed minds in more ways than one... An alternative route for workers to have an influence on executive pay might be for an annual meeting to take place between the workforce and the remuneration committee... Worker representatives as full members of the board are possible in UK law without undermining the unitary board structure, and can add real value. FirstGroup has demonstrated this very effectively. 

Not opposed:
We do not have a strong view on this. A number of our international holdings already have such mechanisms in place, and there is no consistent discernable differentiation in terms of performance or stakeholder outcomes at these companiesWorker representatives could potentially add value, but it would depend on the skillset and motivation of the individual.

BlackRock believes all directors should first and foremost strengthen the competency of the board.  Directors therefore should bring skills and expertise in more than just one area.  Equally, directors should act in the best interests of long-term shareholders as a whole, rather than one particular subset of stakeholders, such as employees.  The latter risks the creation of special interest groups, which can act against the best interests of the company in the long term.  Instead, alternative mechanisms should be designed to ensure stakeholder feedback into the board. 

It has been suggested that employees should be represented on Boards and remuneration committees.  We are fully supportive of the principle that the voices of employees should be adequately represented at a senior level, but for the reasons given above we would be concerned with the appointment of employee Directors or any differentiation in the responsibilities of existing Directors.  We would nonetheless encourage the creation of mechanisms which facilitated the incorporation of employee and consumer perspectives into Board debates.  These could take a variety of forms but might include the creation of dedicated Board committees to address these issues.

In favour
...we believe it is appropriate that employees be given greater voice in UK governance arrangements... In the first instance we favour a non-legislative approach to promote the inclusion of employees in governance structures... In order to shift current practice, the UK Corporate Governance Code could be amended to provide an expectation that board composition includes employee representation and associated guidance included within the FRC’s soon to be updated board effectiveness guidance. Whilst we would not class employee directors as independent they would have the same fiduciary duty as their fellow directors to act in the interests of the company and not any one specific stakeholder
The Code’s criterion for board independence may need to be adjusted as would the stipulations around board composition and the guidance should be clear that the inclusion of a sole employee director should be avoided.

Opposed? Suggests alternative
The introduction of an employee sitting on a Board or establishing a shareholder committee, in our view, would significantly change the current roles and responsibilities of directors and shareholders. We continue to support the Unitary Board model in the UK and focus our efforts on how Board effectiveness can be improved within the current governance structure.
 In saying this, we also understand that directors should be accountable to other stakeholders including employees. 
One way in which there can be better alignment between employees and shareholders is for Boards to better understand the sentiment of employees in the organisation. This can be done by nominating one of the current independent Non-Executive Directors (a “Nominated Employee Non-Executive Director”) to be held accountable for seeking out employees views in the business. This nominated director will have responsibilities to meet with staff at different levels and report back to the Board the findings. Furthermore, in the Annual Report, the Nominated Employee Non-Executive Director should also provide a statement and report back to shareholders at the AGM or Annual Report of what he/she has done to fulfil their remit.

Whilst there is evidently a case for greater employee oversight, we believe that mandatory placement of an employee representative on boards will be unhelpful in the long-term. 
The role of executives is to drive a company forward for shareholders, employees and customers; to take account of the wider environmental, business and market factors. An employee representative would quite rightly be concerned with the welfare of employees, not necessarily that of the health and strategy of the business. 
It is the nature of businesses that employees focus on the short-term and day-to-day aspects of their roles rather than the long-term. The expertise required to set a remuneration policy for a global company is something that is restricted to those that have experience in the area. This is not to stay that they should not have to justify their decisions to their employees. It has become increasingly clear that employees should have a greater voice and the board in turn should have much greater oversight of the conditions of the employee base. 
In a few cases employee representatives on boards works. An example of this is FirstGroup where they have successfully incorporated an employee nominated director onto the board.

So, as you might expect, there isn't a lot of support from those who manage the assets of workers' pension funds for allowing workers to have representation in the corporate governance of UK companies. To restate, the only reason asset managers exist, and have the influence they do, is because generations of workers have deferred their wages and put them into pension funds. Therefore I find it troubling that those that manage workers' capital are arguing against greater representation for workers.

It's also worth looking at how these arguments are being made, as they reveal some issues that everyone should consider carefully, whatever your view about worker representation.

For example, to argue that workers shouldn't have board representation because they might act too much in the short term, or act only in their interests, not in the interests of the company, opens up the question of whether different interests within the firm align, or not. After all, over recent years we've been encouraged to believe that actually all our interests (those of the company, workforce and investors) are the same, at least over the long term. Here's some Mckinsey blah on this point:

in truth there was never any inherent tension between creating value and serving the interests of employees, suppliers, customers, creditors, and communities, and proponents of value maximization have always insisted that it is long-term value that has to be maximized.

But if the case is now being made that workers have different interests that might conflict with those of others if they get a formal role in corporate governance, then we surely have to explore the question of whose interests should predominate. If there is a conflict of interests then what is the case in favour of shareholders having more influence than employees? 

To my mind, employees have far more firm-specific risk than investors, and are acutely aware of the need to act in a way that does not damage their known "investment" in the business. In contrast, especially where the "shareholder" is an intermediary, investors have far less at stake in any given company, and can often act in a very short-term fashion to their own benefit, whilst the long-term interest of the company might be different. After all, the whole "short-termism" debate is about the interaction between companies and investors, not companies and their workforces.  

The current debate in the UK over corporate governance is hugely helpful for opening up these issues that have for a long time - in our system - been taken as settled. For far too long too many people involved in corporate governance in the UK have confidently asserted we have the optimum model. This has obscured the fact that any governance model involves a choice about whose interests come first (this book, which is broadly pro the shareholder-centric model, is all about this question) and that other ways of prioritising these interests which might be as good or better. Andy Haldane made this point very well in a speech a could of years ago. It's interesting that it's when defenders of the status quo argue against giving others a real voice in corporate governance that they expose the cracks that have been papered over.

As I blogged previously, I am sceptical that the Government will hold its nerve on this one, and you can see the soft alternative being put forward by the corporate/financial vested interests as a compromise - have a NED who has responsibility for talking to the workforce. But the idea of worker representation in corporate governance is now taken much more seriously than it has been at any time in my adult life, and I doubt it is going away.

Keep pushing.

Tuesday, 8 November 2016

Labour, labour and workers on boards

A very quick point about how, in my opinion, Labour should position itself in relation to the question of workers on boards. Obviously it should support the idea, but the issue is how to argue this in public.

In general terms, I would steer clear of trying to argue this on a technical/business case basis at all. It gets too complex too quickly, someone will start talking about Germany, which really isn't helpful for various reasons, and it will have zero resonance with the public. Rather, I think we should go for something like this...

Labour will give working people a say in the businesses they work for because we believe they deserve recognition for what they contribute to the success of the modern economy. In our party we value labour - the contribution of the people of Britain make when they are at work - and we believe that contribution deserves recognition in the way business is run.

Currently British workers miss out. In many major economies working people have the right to representation at the top of business through board membership. The systems differ but the idea is the same - business relies on its workforce for its success, so it's right that employees get a say in how companies are run. 

But Britain is different. Our system does not recognise the contribution of working people. In fact, it only gives power to faceless financial institutions. They alone have the right to elect people to the boards of our biggest companies.  

Labour believes this model belongs in the last century. It creates a closed circle of influence between corporate and financial interests while denying a say for working people. 

It doesn't even make sense on its own terms. In most companies investors do not contribute to the business (not even capital) most of the time. And in fact the 'shareholders' who are given power are most often intermediaries, often from outside the UK, who invest in thousands of companies and have no loyalty to any particular one. Yet currently investors alone are given a voice in business, whilst those that work for business are not.

We know from media reports that behind the scenes the business and financial vested interests are already fighting tooth and nail to defend the current governance establishment. They prefer a system where it is only the City speculators who get a say on who runs your company and whether it gets sold, or broken up. They are happy with a system riddled with conflicts where it's the lavishly paid hedge fund managers who decide whether the executives who run our companies are paid too much. And as we all know, those investors routinely rubber stamp even the most exorbitant fat cat pay deals put in front of them. 

We hope the Government holds its nerve and does not give into the corporate and financial lobbyists. But we should not be surprised if they buckle.

So Labour believes this system must change. It is time to recognise the contribution of the British workers whose labour creates the products and services that businesses sell. We should give them real influence in the businesses that they work for. We should modernise company law to correct the imbalance that denies employees a say, but gives power to hedge funds. If we give powerful voting rights to overseas investors that speculate in the shares of our major employers, then it's right to give the programmer or secretary or driver or picker who works for those businesses some power too.  

As employees you have made a very real commitment to a business, and have contributed to its success, and the Labour Party will recognise that by ensuring you have have a voice through mandatory board representation. Nothing less is fair, and anything less from this Government will represent a huge climbdown under pressure from their corporate and City paymasters.

But Labour will stand firm. We believe this reform can create a new deal - forging an alliance between the workforce and management within business. We believe this will help business take a more long-term perspective, rather than chasing the short-term demands of financial markets. This will be good for all of us, and for our economy. But most of all we will do this because it is right, and because it's fair to you, the working people of Britain. 

Wednesday, 26 October 2016

The (investment) world turned upside down

These are just a few initial sketchy thoughts, but I see some signs that something interesting is starting to happen in the world of corporate governance, and institutional investment more generally. A couple of years back I blogged a bit about a "regulatory turn" away from shareholder primacy, as, in response to the financial crisis, governments became much more sceptical about shareholder oversight as restraint on corporates and looked for other options. But overt change hasn't happened until now.

The mood music has been right for a while. A few people have clocked John Kay's claim that the era of shareholder value is closing. Justin Fox was riffing on a similar theme a couple of years back. I think we might be now seeing the first policy moves that diminish the relative position of shareholders.

To take a pretty bland example, the abolition of quarterly reporting by companies is the one thing that all "sensible" people agree should happen. Here's the CEO of Morgan Stanley on this theme just yesterday. But, if you think it through, if getting rid of quarterlies does have an impact - through reducing short-term pressure on companies - this means that investors were using the information, for example in response to analysts' takes on the numbers.

So its disclosure was not pointless, the numbers are/were being used by investors, we are just uncomfortable with the impact this was having on companies. So to get rid of quarterlies is essentially tilting the system a bit back towards companies and a bit away from investors.

We can see something similar at work in the emerging discussion over worker representation on boards that is taking place in the UK. To be honest, this has been creeping up the agenda for a while, the shock about it is that it is the Tories who are actually making it happen. If you look back to last year's party manifestos Labour, the Lib Dems, the SNP, Plaid and the Greens all committed to worker representation on boards. This is more than a detail - it shows that there is no political constituency opposed to workers on boards.

However you cut it, having worker and consumer representation on the board of a PLC strengthens the relative position of stakeholders other than investors. I know the government has talked about a further binding shareholder vote on pay in the same breath, but personally I'd take board representation over tweaked powers (that many asset managers probably won't use effectively) any day.

Possibly the most interesting aspect of the workers on boards debate is the relative lack of criticism from business. Perhaps this because no-one wants to be seen to be opposed to the idea now it looks like the government is going for it, perhaps they are sill shocked by the Brexit vote, and perhaps they are lobbying frantically against - or at least for a milder version - in private. But in public in the tone has been pretty mild. This round-up in the FT is very illustrative.

It will be very interesting to see which way the CBI jumps on this. Perhaps its members are willing to tolerate stakeholder representation in return for less shareholder pressure? We do tend to forget in the UK that there are other corporate governance models out there and that they too are capable of delivering successful businesses whose leaders seem comfortable with it. Perhaps, just perhaps, companies will review the merits of the New Industrial Compact that Tony Golding describes emerging in the 80s and 90s (I included his description of it here).

But that's only half the story. Look at what is happening in institutional investment. After years of getting fleeced, our pension funds are starting to look at whether the billions they pay over to intermediaries is well spent. And many are concluding that it is not. Big funds in the UK, US, Netherlands and elsewhere are cutting their exposure to high-fee hedge funds and private equity managers, cutting the total number of external managers and investing more on a passive basis. This is quite a sharp shift from the positions some groups in the UK took pre-crisis. (and I take my hat off to Mr Meech at Unison for making costs and charges in the investment system an issue for the labour movement, and for stirring Labour out of inaction on this too.)

These moves also open up some interesting issues. For example, if our pension funds invest an increasing proportion of our assets passively then they are giving up on the idea that whatever insight asset managers have this is insufficient to generate outperformance. They are simply seeking exposure to the market in aggregate. To boil this down further, our pension funds expect public companies overall to generate returns, but they do not think it is possible and/or worthwhile to pay an intermediary to identify which companies will perform better.

In such a scenario, where our pension funds do not believe asset managers have insight into companies that is worth paying for, there is no reason why our funds should delegate their voting rights. More fundamentally, if they are giving up on the idea of stock picking, there is no reason for a fund's RI policy to be squeezed by the constraints of trying to develop a case for doing the right thing. that is justified by relative performance. Instead, provided that trustees believe that, for example, companies respecting human rights will not damage investment returns, their RI policy could be based on the promotion of international norms. This is much preferable to fashioning some blah about long-term returns to act as cover for engagement that is really about values.

I will chuck out a point here that I have made before too. These are OUR pension funds. They are not the personal fiefdoms of CIOs and other investment staff any more than asset managers. So it is reasonable for us to expect that these policies promote the interests of beneficiaries. It is great that funds are starting to clamp down on wasteful costs and charges that eat into our retirement income. Now lets make sure these funds work in our interests while we are at work in addition to when we are retired. This means as much emphasis on the S as on the E and G, and more focus on workplace issues in particular.

Overall, there is a real opportunity for the Left here if we think big. If confidence is failing in shareholder primacy then we should be on the front foot in setting out what a good alternative is. Forget the tinkering with corporate disclosure & shareholder powers that characterised the New Labour settlement. What does a stakeholder model of the company look like in the 21st century? And what is our vision of an investment system that both delivers a decent income in retirement and promotes our interests in the accumulation phase?

Thursday, 20 October 2016

Sky vs Sports Direct

As most people will be aware, last month the non-executive chairman of Sports Direct Keith Hellawell failed to receive the support of a majority of non-insider shareholders (though he received the support of the majority of all shareholders, including Mike Ashley). This vote was clearly driven by corporate governance concerns.

Because he is designated as an independent director, this triggers a re-run of his election. This time he faces a straightforward for/against vote, and with Ashley's backing will clear it easily. But by triggering the vote re-run (for the first time at a UK PLC) shareholders have given their engagement force, and increased board accountability.

Last week, the non-executive chairman of Sky PLC James Murdoch failed to receive the support of a majority of non-insider shareholders (though he received the support of the majority of all shareholders, including 21st Century Fox). This vote was also clearly driven by corporate governance concerns.

However, because Murdoch is NOT designated as an independent director, there will be no re-run of his election.

A lot of companies with controlling shareholders can be dismissive of minority shareholders' concerns about governance. Being a bit cynical, if I was on the board of such a company looking at these two examples, I'm not sure I would designate my chair as independent. What's the upside?

I think this regime may need a tweak or two...