Thursday, 9 March 2017

Prosegur IPO - potential investors should take note of labour risks

Just a quick plus for UNI and their excellent work exposing poor labour practices at Spanish-listed security firm Prosegur. The company is about to carry out a partial float of its cash-in-transit business, which makes this a very timely issue for investors thinking about buying stock (I guess passive managers tracking European indices will have to).

Anyhow, significantly the prospectus for the IPO makes reference to the potential reputational risk arising from allegations of poor labour practices. In addition, investors should be aware that UNI has submitted an OECD complaint. Therefore this one requires some proper due dilligence.

UNI's release on this below

Prosegur’s IPO prospectus recognizes that UNI’s charges could present a risk for investors

Prosegur, the Spanish  private security giant, is preparing to raise capital for its Cash in Transit division through an IPO in March. 
In communications with potential investors, the IPO’s  prospectus recently  recognized that UNI’s allegations “of unfair labour practices … specifically… in Latin America and India”  could damage the company’s reputation.    
For several years, UNI has complained that Prosegur has violated the rights of its employees to form and join unions, and that its actions violate internationally recognized human rights standards.
In January, 2017, UNI filed a case against Prosegur with the government of  Spain which alleges that the company continues to violate the rights of employees in Latin America and India and does not have a due diligence process in place to identify and avoid the risks of human rights violations. Such a due diligence process is a requirement of the OECD Guidelines and the UN Guiding Principles for Business and Human Rights.
UNI’s submission provides examples of union activists employed by Prosegur in Latin America who have been threatened, harassed and attacked. It also cites a report from a renowned Indian labour attorney which found that Prosegur had committed systematic breaches of minimum legal obligations under Indian law.   
UNI Global Union Deputy General Secretary, Christy Hoffman said, “Why should any  investor accept the risk that Prosegur’s faulty management systems will continue to be the subject of global criticism? There is no excuse for Prosegur’s refusal to enter into a mediated solution to address the glaring deficiencies in its so-called “flexible” and “decentralized”  management practices.  These leave the door open for an “anything goes” approach, something which is not condoned by any standard of human rights due diligence.  Its time for Prosegur to put its house in order if it plans to continue to expand into high risk areas across the world. ”  

Friday, 17 February 2017

Where are the workers?

The LSE has produced guidance on company reporting on environmental, social and governance (ESG) issues. So I searched it for references to various issues. Guess what? Like most RI/ESG initiatives, labour issues get very little attention.

Shifts in the UK corporate governance model

I've blogged a bit recently about what appears to be a significant shift in thinking about corporate governance. There are signs all over the place that faith in shareholder primacy is faltering. There have been plenty of think pieces on this subject over the past few years, so I just want to highlight two recent voices from within the system. The first is Guy Jubb, who used to be the corp gov head honcho at Standard Life. His written submission to the BEIS committee inquiry makes a number of interesting points. On Section 172 of the Companies Act he says:

This duty, which is derived from the nebulous concept of enlightened shareholder value, lacks grit, is unduly focussed on shareholders and fails to provide an effective basis for legal accountability.

And on shareholder engagement he says:

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. They should harness its potential in order to develop a new and realistic framework of corporate accountability and shareholder engagement. The interests of the public and of the shareholders are not being served effectively by the status quo.

The whole thing is worth a read, but the thing to bear in mind is that these views come from someone who has a lot of experience engaging with companies as part of a major institutional investor.

The second person worth listening to is Chris Hodge, who was the person in charge of the UK Corporate Governance Code at the FRC for many years. His recent essay has a lot of interesting things to say about what we can, and cannot expect, from corporate governance. He is sceptical that corporate governance can bear the weight of growing public policy expectations. He makes the point (which I bang on about regularly!) that policymakers - and, I would add, those seeking to influence public policy - are too quick to reach for greater reporting/disclosure as a solution to a given problem. 

There are a couple of particularly good points that I strongly agree with. The first is about conflating shareholder interests with those of the public:

It may be tempting to believe that shareholder interest can be a proxy for public interest.
In 1992 – when 70% of shares were owned by UK pension funds, insurance companies and individuals – that might even have seemed plausible. Yet looking at the ownership base today, with over 50% of shares owned by overseas investors, it would be illogical to do so. Why should we expect the citizens of Norway or the retired teachers of California, for example, to feel they have a responsibility to look after the best interests of UK society?

While shareholder interest and public interest – or the interest of one or another group of stakeholders – may often coincide, that will not always be the case. Indeed, one of the charges laid in the current debate about directors’ duties under Section 172 of the Companies Act 2006 is that some boards have given too much weight to the interests of their shareholders at the expense of the interests of other stakeholders. If those stakeholders do not have the ability to represent meaningfully their own interests, the answer is not to ask shareholders to do so on their behalf. 

The second is about that old chestnut executive pay:

It is over 20 years since the Greenbury report first recommended that companies report to their shareholders on this issue, and since that time the reporting and voting regimes have been regularly strengthened and, it seems, may be about to be strengthened further.
This regulatory approach has arguably benefitted shareholders by enabling them to put pressure on companies to align pay with performance, and may therefore be worth preserving for those reasons.
But in over twenty years it has done nothing to slow the increase of executive pay – some would argue it has contributed to it – or to reduce income inequality. There is no evidence to support the view that those objectives can now be achieved by adding more reporting requirements and voting rights.

Again the whole thing is worth a read, and again his views are worth taking seriously given where he has seen the world from.

There are two key points I would draw from all this for people on the Left. First, recognise that the fundamentals of corporate governance are highly contestable, especially at the moment, and don't simply play within the existent system. It certainly isn't as simple as empowering shareholders being inherently good. As we've seen in the debate about worker representation on boards, big shareholders will do us over on public policy when they think our interests and theirs do not align. On exec pay, we should be clear-eyed that focusing on shareholders simply isn't going to tackle the pay gap, as Chris Hodge says. We will need different tools. 

Second, we need to shape the model that comes next. The corp gov establishment moved very quickly to try and squash the idea of workers on boards. However that is far from a lost cause, it's really just the first skirmish, and there is also a recognition that things need to change. My gut feeling is that "common sense" in mainstream corp gov will settle around ideas like reformulating directors' duties and creating new regulatory powers to tackle companies. It looks like the FRC already sees the way the wind in blowing, and is seeking to position itself as a more interventionist body. These aren't inherently bad ideas but regulatory oversight might not be massively more beneficial to workers than the current model if there isn't an effort to shape it. The Left should be ambitious and get in early so that the voice of the people that work in companies doesn't get excluded from the new model too. 

Tuesday, 7 February 2017

Is this what asset managers really think about executive pay?

There was a fascinating piece in The Times a couple of days ago about asset managers threatening to get tough on executive pay. You know, the news story that now appears before every AGM season, quite often accompanied by claims this could be the "stormiest" AGM season yet.

Sorry if I sound jaded, but I have heard "crackdowns" on executive pay by shareholders being threatened pretty regularly since about 2002 and the results have been pretty unimpressive. I don't think there has been a single year when less than 98% of All-Share companies have had remuneration arrangements approved.

What struck me about the piece in The Times is that attitudes may not even have changed that much. The whole thrust of the article is that asset managers need to be seen to act because if they don't government will do.

It's a "pre-emptive strike" by asset managers who are "Fearful of a tide of new corporate governance regulation". The asset managers agreed (without consulting any of us) that Government intervention *would* (not could) destroy shareholder value. And one manager states: “The last thing we want is government intervention as it could prevent British companies from attracting global talent.” 

What I don't see anywhere in the piece is the sense that high pay for executives is a problem. Rather, government sticking its nose in is the problem, and therefore asset managers need to work together to create the impression of action in order to forestall any government intervention. 

The cynicism and other worldliness on display here is pretty staggering. These people really don't seem to think there is a problem, and will use the power they derive from our savings to avoid public policy interventions.

I've said it before, but giving the people who are least concerned about the scale of executive pay the primary role in overseeing it is a questionable strategy, to put it mildly. The attitude on display in this article makes this argument far more effectively than I could. And we should say thank you to whoever briefed this line to The Times. I think they are idiotic for saying these things in public, but they have provided us with invaluable insight into how asset managers may really view the issue of executive pay. 

Tuesday, 31 January 2017

A corporate governance agenda for the Left

1. Explicitly remove shareholder primacy from the UK system. This should be argued on the basis that it hasn't worked, the shareholder base has changed too much to make the model work for the public (shareholders now primarily split between the City - which is conflicted - and overseas investors), and shareholders do v little in exchange for their rights in comparison to employees. This means rewriting directors' duties - why not just promote the success of the company, as the TUC has suggested? - and the UK Corporate Governance Code.

2. Remove corporate governance from the FRC's remit. This is too big an issue to fall under a financial regulator. There should be a permanent Corporate Governance Committee compromised of representation from managers, employees and investors. And no-one else. No lawyers, no accountants. This committee should oversee the UK Corporate Governance Code and revisions to it.

3. Create a specific companies regulator. This would have the functions of mandating and reviewing disclosures on ESG issues and overseeing complaints from all stakeholders about company behaviour. Perhaps it could also house the UK National Contact Point for OECD complaints?

4. Make worker representation on boards mandatory for all companies. Also institute mechanisms for all companies to share the wealth created with those that actually create it - profit-sharing and employee ownership, yes, but also collective bargaining.

5. Overhaul executive pay: reduce it to salary plus one incentive scheme as a starting position. Initiate a review of evidence relating to the use of performance-related reward for executives, including behavioural evidence. If the evidence is not compelling that performance pay works, cap incentives at much less than 100% of salary or scrap them entirely. Require disclosure of internal pay ratios, with the objective of moving towards binding maximum ratios in future - with the explicit aim of pulling up wages at the bottom and squeezing the pay gap.

Sunday, 15 January 2017

Public supports tough line on exec pay shocker

As I blogged previously, the commentariat was united last week in its certainty that Jeremy Corbyn was talking rubbish when he proposed some pretty tough positions on executive pay.

Amazingly, it turns out the the public favours taking a very tough line on executive pay. 57% support  the idea that the Government should try and make companies adopt a 20:1 internal pay ratio, with 30% opposed.  This is a policy that has only just been floated, and which is associated with Jeremy Corbyn. As such, I'd say those numbers look pretty good.

Just to be clear here, the public seems to support a ratio that defines the max top to bottom pay range within companies, not just the disclosure of what the existing ratio is. Currently we don't even require the latter, although I'd say it's pretty likely to be mandated by government. The public already holds much more radical views than those that are only just being consulted on.

A max 20:1 ratio is much lower than most publicly-traded UK companies. If investors were in tune with public opinion they should not only seek disclosure of ratios, but vote against companies whose ratio is too high. So far, we have seen more investors move into pro-disclosure positions, but I haven't seen any say they will vote against those whose ratio is too great. But if they vote FOR the remuneration policies of companies with large ratios, they aren't representing the views of beneficiaries, right?

I don't think this is sustainable. Either investors, who only have power because the public appoint them to manage their savings, start taking a much tougher line, or policymakers need to start properly scoping out alternative methods. Personally, I have concluded that we have given shareholder oversight a good try, but it hasn't done anything like enough. But AGM season is ahead, so this is an opportunity to see if sentiment is changing.

To date, there hasn't been a single year n the UK when the number of pay defeats inflicted by investors has hit double figures. So let's see if a real change can be brought about this year - let's aim for defeats in double figures in the FTSE350. That means at least 10 defeats which would be unprecedented but only equates to about 3% of the total, so >95% would still get majority support from investors. This is setting the bar very low, but let's test for a pulse before we finally declare the patient dead.  

Tuesday, 10 January 2017

Capping executive pay

It's fair to say that today has not been an unblemished success for Labour. Nonetheless, despite everything, there is something encouraging in what Corbyn has been saying about executive pay.

First off, let's tune out the noise. Much of the politico commentariat was united today in guffawing at how obviously dumb and wrong-headed Corbyn was to float such a stupid idea as a maximum wage. A number of these people were also commenting sagely yesterday about the wisdom in Dominic Cummings' take on dynamics of the Brexit vote victory. Interestingly, Cummings identifies the financial crisis, and the damage it did to the standing of the corporate elite, as one of the three tailwinds that helped the Out vote, and explicitly highlights unjustified executive pay. But I guess that was yesterday.

The last couple of years has taught me that most political commentators know feck all, and it's too difficult to identify who might actually be on the money, so it's largely worth ignoring them. That they are united in derision about a sledgehammer policy on top pay merely demonstrates what a closed circle - an echo chamber if you like - political commentary is. I think they are again massively out of touch on this, but hey ho.

Second, let's remember some recent figures. In 2013 in Switzerland a referendum proposal to impose a mandatory maximum pay ratio of 12 to 1 was defeated, basically 2:1. But a third of people backed it. In Switzerland, the bankers' bolt hole. A poll from Sept 2015 enthusiastically tweeted by one of the Guido Fawkes today crew showed a slim majority opposed (44% opposed, 39% in favour) to a maximum £1m a year wage. So a slim majority for the status quo over a very radical change in direction, before anyone has even started trying to campaign - sound familiar? And a CLASS poll in Oct 2014 found a 2:1 majority in favour of a maximum pay ratio of 65:1. I don't look at that set of figures and conclude that this is an unwinnable fight, and I do proper pessimism.

Thirdly, it's a trivial point, but the "mad idea" outer boundary has now moved. Putting workers on rem comms, for example, now appears a bit more reasonable. Disclosure of pay ratios, rather than enforcement of them, seems a bit... well... weedy now, doesn't it? I mean even the Tories support that now.

Fourthly, linked to this, chucking out a mad/extreme idea like this, does force people to react and poses the question - "well, what would you do then?" I saw quite a few people asking on Twitter today - what about actors? what about footballers? Well, yeah, what about them? I don't think most people would give a toss if the highly paid in others sectors got hit too. I wouldn't. And to be honest I can't get enough of Right-wing policy wonks publicly arguing that there isn't really a problem with executive pay and that it's outrageous in principle to try to limit pay at the top.

All that said, I don't think that a maximum wage is the right way to go, though I think it might be more popular than sensible people think. (Also, maybe it's better for mad ideas to be floated by shadow ministers rather than the leader). Maybe something like a maximum internal pay ratio might be a more sensible but still radical proposal, as it would pull up those at the bottom rather than just whack those at the top, and so would likely be more popular. But as I've said before, I'm a bit lost as to where  executive pay policy goes next - I'm just pretty sure it won't be more of the same.

As exhibit A here's what Corbyn actually floated as ideas on top pay in in his speech:

… We could allow consumers to judge for themselves, with a government-backed kitemark for those companies that have agreed pay ratios between the pay of the highest and lowest earners with a recognised trade union.
… We could ask for executive pay to be signed off by remuneration committees on which workers have a majority.
… We could ensure higher earners pay their fair share by introducing a higher rate of income tax on the highest 5 percent or 1 percent of incomes.
… We could offer lower rates of corporation tax for companies that don’t pay anyone more than a certain multiple of the pay of the lowest earner.
I don't see anything about greater performance linkage, more corporate disclosure or beefing up shareholder powers. Perhaps this is just Labour going nuts, as many commentators would have us believe. But personally I think in the coming years we're going to see more ideas on this sort of territory. The old regime is rotten, and the punters know it.