Saturday, 7 October 2017

The emerging new politics of corporate governance and ownership

I wrote a piece a few months ago (prior to the election) saying that I thought that while the Left were unlikely to win the election, we were winning the battle of ideas. I don't actually think this was a particularly insightful or original take, but it does seem that this the way that things are panning out (though Labour did much better than I dared to hope). So I'm interested in where it looks we are headed, why this is, and what it means for corporate governance in the UK.
First, a few indications of the direction of travel. The government's recent corporate governance reforms tell their own story. Although defanged, they have still broken new ground, and tackled existing issues in new ways. For example, the disclosure of pay ratios is entirely aimed at addressing concerns about relative reward. It demonstrates that even within the micro politics of the executive pay debate the argument has decisively shifted away from the idea that linking pay to performance is where the action is. In addition, a Conservative government has backed the idea that workers should have some form of representation in the governance of businesses in which they work. Finally, perhaps as significant is how little emphasis was placed on the role of shareholders (this is a good indication of where some thoughtful Conservatives are at - workers should have the same rights over exec pay as shareholders!). This is in marked contrast to pretty much every major public policy intervention on corporate governance since the early 90s at best.
Zoom out from corporate governance and we can also see that there is a battle underway regarding what form of regulation and/or ownership should be in place for utilities. Once again it is a Conservative government that will be seeking to more actively control prices (through an energy price cap). This is a policy that was literally described as "Marxist" by the same party when it was advocated by Labour two years ago. For its part, Labour is now advocating returning utilities to public ownership (personally I hope "public ownership" in the 21st century is an open question rather than a direct lift from the past).
It is also worth looking at some of the rhetoric around Labour's policy in this area. This is from Jeremy Corbyn's speech to the Labour Party conference last month: "Take the water industry. Of the nine water companies in England six are now owned by private equity or foreign sovereign wealth funds. Their profits are handed out in dividends to shareholders while the infrastructure crumbles the companies pay little or nothing in tax and executive pay has soared as the service deteriorates."
A liberal and global market for corporate control has resulted in this picture (which applies much more widely than utilities obviously). It's much easier to build a populist argument for taking public control of infrastructure when it isn't even owned by our own pension funds. I can imagine some Conservatives riffing on this point in the future,
Why is all this happening though, and what does it mean for UK corporate governance? There may be some answers in some polling carried out for the right-of-centre Legatum Institute. This polling was carried out by people who are advocates for free market capitalism, but are concerned by the direction of travel in UK politics and want to understand what is driving it. Though, to state the obvious, I disagree with them politically, they seem to be asking the right questions. The full report is here.
There is too much to summarise so I'm just cherry-picking items that I think are relevant for people (regardless of political inclination) interested in corporate governance, ownership and related issues. First look at the polling on utilities. 83% of those polled think water should be in public ownership, whereas 77% think the same for electricity and gas and 76% for rail. Digging into those numbers a bit deeper, 76% of Conservative voters support nationalising water (68% for electricity, 69% for gas). And those figures are consistent across age groups too, in fact the youngest voters are slightly less keen on nationalisation than older ones.
Most adults experience utility providers on a regular basis, and most people intuitively get the idea of/problems with monopoly provision without ever picking up an economics text book. In addition, a large chunk of older voters will have experienced both public and private provision. In a nutshell, with their consumer hats on, the public do not like what they get. With this background, the polling results demonstrate why the politics around rehabilitating public ownership work. No-one loves utility companies, no-one thinks that changing provider changes the product/service, those that experienced both public and private ownership are as convinced of the desirability of change as those with no experience. How a government might approach public ownership / control is the difficult bit, but there's little doubt they would have public backing to try it.
Now look at the polling on issues relating to business in general. There is strong support for capping executive pay, for requiring businesses to consider factors other than profit, to regulate more and so on (and milder, but still majority support for workers on boards). On most of these issues there is a gap between Labour and Conservative voters, with the latter less enthusiastic for more interventionist policies. Nonetheless on the question of whether there should be a cap on executive pay versus letting companies pay executives what they want a large majority of Conservative voters favour a cap. A majority also favour businesses not being solely focused on profit. They are evenly split on workers on boards, but looks like a very slim majority say it doesn't matter.
I would say these polling results present challenges for the UK corporate governance status quo. Executive pay is the most obvious area. It's a safe bet that the vast majority of people whose employment is in some way related to corporate governance would oppose a cap on pay (in my experience many are even sceptical about pay ratio disclosure). I expect that many of those who have a formal role in setting or affirming executive pay (rem comm members, asset managers) will be amongst the most opposed to the idea. This is of course their right, and again we need to properly chew over what we mean by "capping" executive pay, what the effects might be and so on.
But the key thing is that much of the corporate governance establishment, for want of a better term, is in a very different place to the large majority of the public, and even a large majority of right-wing voters. Put simply: the people who have most influence on executive pay tend to hold the most right-wing views on the topic. Their views are further to the Right than the public in general or right-wing voters specifically. I suspect that gap in views is going to matter a lot more in future. I simply cannot imagine a future Labour government considering that if a lot of rem comm members and asset managers think executive pay is basically OK then they should leave it alone.
On similar ground, the strong support for wider business objectives rather than just profit maximisation may help explain why shareholder primacy is increasingly questioned, and not just on the Left.
I imagine that some of those who work in corporate governance who read this will be thinking that the kind of ideas that are being put talked about - public ownership, pay caps, workers on boards - are ill-informed, counter-productive, economically damaging etc so they are right to not take them seriously. I think this is wrong in two senses. First, it is important to grasp is that these issues are contestable in politics once more and therefore need to be argued over. It will be no good to simply assert that the door must remain closed. Second, it is a mistake to assume (as some appear to) that those who think differently are simply misinformed or ignorant. I think most of us (regardless of our politics) would agree that no single party or group has a monopoly on wisdom. This should apply in our corporate governance microcosm too.
If the last few years have taught us anything it is, as Yogi Berra is supposed to have said, that it's tough to make predictions, especially about the future.... Nonetheless at the moment it does look as if it is the Left that will set the terms of the debate in the UK with regards to corporate governance and related issues, and that policy interventions are likely to follow this trajectory. I am genuinely interested to hear if people agree with this, or, more importantly, disagree.

Wednesday, 27 September 2017

Union investors serve notice on XPO

News from the annual Committee on Workers' Capital conference, which took place in Berlin this year:

Union investors serve notice on XPO

Trade union investors meeting in Berlin today served notice on US-based logistics provider XPO that it must reform its labour practices.
The message was sounded by ITF (International Transport Workers' Federation) president Paddy Crumlin, speaking to a meeting of the Committee on Workers’ Capital (CWC) that included trustees of major pension funds whose assets are managed by Orbis Investment Management, XPO’s largest shareholder.                       
He told the Berlin meeting: “I’m proud to say that the CWC is playing a critical role on bringing workers’ rights issues to the forefront. We talk so much about shareholder value; we as the stewards of workers’ capital must stake our claim to what we value. 
“Active trustees are the bedrock of effective corporate engagement.  They’re the workers’ voice in the capital markets.  We need trustees to convey to corporate boards, and to our pension funds’ investment advisors and managers the issues we feel are important and let them know we are watching how well they perform in meeting our funds’ needs and values.”
He continued: “The CWC exists to enable unions to collaborate globally and to mobilise workers’ capital in support of our brothers and sisters facing insecure casualised employment, and anti-union intimidation. I hope all CWC participants will do what they can to support the XPO campaign, and make sure our capital supports XPO workers wherever they are.”
Mr Crumlin concluded: “We call on the investment managers to go to XPO management, relay our concerns and demand the company shows a transition plan for converting independent contractors to full employee status. We also ask them to call for enhanced sustainability reporting.”
In July the ITF launched a taskforce to tackle XPO’s anti-union and anti-worker tactics. XPO spends hundreds of thousands of dollars on union busters to fight workers’ attempts to organise in the United States, has slashed worker benefits and misclassifies workers as independent contractors. In Europe, XPO cut jobs despite promises it wouldn’t do so, misclassifies workers, and has denied workers toilet or water breaks. Workers across the globe are standing up to these anti-worker actions.
For more about the CWC see follow the Berlin meeting live at

Thursday, 14 September 2017

ECJ ruling challenges Ryanair's employment model

Today saw a highly important by the ECJ relating to low-cost airline Ryanair. As many people will know* Ryanair is anti-union. It also relies on extensive use of indirect employment, with many cabin crew employed by agencies like Crewlink, whilst many pilots are self-employed contractors (yes, really).

But the other striking thing about Ryanair is that a large number of staff are employed under Irish law. This happens whether they work in Ireland or, in the case today, in Belgium. By happy chance Irish law has weaker employment rights in a number of areas than other nations in which Ryanair crew work. Today's decision, which you can access here, was essentially concerned with whether staff based in countries other than Ireland could have cases heard in their own country, and plays into the question about which country's law should apply.

I won't summarise the ECJ ruling, our resident legal expert has done that here, but it is very favourable to employees on this point, and thus a major setback for Ryanair, though the company claims otherwise.

The ITF has put out a statement on the ruling, which you can read here. There is also quite a bit of media coverage, most of it good (the Telegraph news story not so much!). Interestingly, some sell side analysts have come out with negative comments about the impact on Ryanair in response to the ruling, and various figures are being knocked about regarding the potential impact on its costs. This, plus the 3%+ drop in the company's share price, should tell you that financial markets have not bought the company's claim that the ruling doesn't change anything.

To me it looks like today is just the start of the company's employment model coming under more scrutiny and challenge. If I was an investor in Ryanair I think I'd be asking whether today's bombastic statements bear much relation to the truth, and just how much risk/cost there is tied up with the current model. It's interesting that the Advocate General's opinion in this case, which came out in April, did not even get a mention in the annual report.

As if that was not enough, Ryanair has its AGM next week. Again there has been a string of stories about corporate governance advisers recommending votes against the company's remuneration report and board directors. So today's news could not come at a worse time.

It will be a turbulent couple of weeks.

* If not, here's just one recent example:
“We don’t believe it will lead to unionisation because the first people up over the barricade looking for unions will find their base either frozen or closed,” he said.

Sunday, 10 September 2017

Adolf Berle on Sports Direct

Adolf Berle, of Berle and Means fame, continued to write interesting things about corporate power and control long after The Modern Corporation and Private Property. The excerpt below is from Power Without Property: A New Development in American Political Economy from 1959. I think it applies well, almost 60 years later, to what happened at Sports Direct last week.
"In effect, the position of the institutional managers is that they will not exercise their voting power to affect the choice or the policies of corporate managements. The individuals for who the institutions are fiduciaries, holders of rights in pension trusts, of shares in mutual funds, or of insurance policies, have surrendered their voting power. The institutional managers, therefore, by their policy of non-intervention, merely insulate the corporate managements from any possible action by or influence of the ultimate, beneficial "owners" of the stock. A policy of non action by the institutional managers means that the directors and managements of the corporation whose stock they hold become increasingly self-appointed and unchallengeable; while it continues it freezes absolute power in the corporate managements."

Friday, 8 September 2017

Worker directors via the UK Corporate Governance Code

As anyone who reads this blog will probably be aware, the Conservative government bottled its commitment to put workers on boards. Instead it has asked the FRC to amend the UK Corporate Governance Code to give companies three options, one of which is a worker director, under the 'comply or explain' regime.

It's worth noting that some people in corporate governance warned against the government seeking to achieve worker directors on boards through the comply or explain mechanism of the Code. For example, this was a particularly explicit call for political intervention instead of leaning on the Code:
The full-blown worker-elected director model should not be done through the corporate governance code. That is quite a big shift and requires parliamentary weight behind it to get it done. There is a risk if we try to do it through the code that we would have a very high level of non-compliance. That would cause the code to come into some discredit.
That comment was from Stephen Haddrill, head of the FRC, which is responsible for the Code, when giving evidence to the BEIS committee's corporate governance inquiry (see Q31). To be fair, Haddrill did also advocate looking at other ways of achieving representation, including NED chairing a employee committee. Nonetheless the FRC will have something in the Code that the FRC said could discredit it.

Wednesday, 6 September 2017

Sports Direct chairman scrapes through

Today was the Sports Direct AGM and, once again, chairman Keith Hellawell was in the firing line. He had previously said he would stand down if he failed to get the support of a majority of independent shareholders.

Ahead of the AGM Unite has flagged up numerous ongoing problems at the company, and its complete failure to deliver on previous pledges.  Major investors like Fidelity, Aberdeen, Hermes and Royal London all publicly announced they were voting against. Trade Union Share Owners members also voted against and called for other shareholders to do likewise. All the voting agencies also recommended a vote against.

However, Hellawell squeaked through. According the company's AGM statement he received the support of 55% of the independent vote. In raw scores, he got 63.3m in favour, whilst 55.6m voted against. Inexplicably one or more major shareholder seems to have abstained on this vote, with 6.4m abstentions. But even of they had been shifted to the against column, though the margin would have been wafer thin, Hellawell would have been OK.

I suspect there is going to be a lot of scrutiny go how individual institutions cast their votes. We know that Phoenix was voting in favour, and the likelihood is that Odey did too, but that still leaves a lot of votes unaccounted for. (Ladies and gentlemen, start your spreadsheets....)

Against predetermination, trivialisation etc

I enjoyed this book recently. I won't attempt to summarise any of it, but here are a couple of the many bits that I liked. May post up some more.

We are not predetermined. Nothing of what we do is inevitable and inescapable, lacking an alternative. Against external pressures clamouring for our obedience and insisting on our surrender, we can rebel - and all too often we do. This, however, does not mean that we are free to act as we would wish or dream: having done with the bugaboo of necessity, we find ourselves confronted face-to-face by the all-to-real dilemma of feasibility. It is the feasibility - or more precisely the accessibility - of our goals, inflected and tempered by the chances of their attainment, that draws the line between realistic and fanciful options and varies the likelihood of alternative individual choices. People choice, but within the limits drawn by the feasibility of goals - a factor not open to choice. 'Being realistic', according to Gramsci, is indeed an ambivalent stance: it enhances the probability of success - but at the price of desisting from the pursuit of other goals, cast off-limits and so beyond reach. Above all, it renders starkly visible the disconcerting complexity of the task - though only to nudge for more effort, not to prompt its abandoning and resignation. Manipulating the odds, the powers-that-be may make some choices exceedingly costly and so reduce their chances of being taken - though they could hardly succeed in the effort to render them impossible to make. The world of humans is a realm of possibilities/probabilities, not determinations and necessities.   

Trivialisation is one of the great registers that power employs in arranging the score of common feeling. The flow of collective feelings can be made to absorb the negative potential of events, which always threatens to be dangerous, by reducing the quality of particular actions and specific occurrences, their dramatic and symbolic character; or by depriving such negative potential of any vitality, handing it back to each citizen individually as an occasional sample of the daily mediocrity surrounding us, a sample which we are to eat up and digest separately, promptly turning our heads to the other side, towards the next form of mediocrity, since a collective and public reflection never really seems worth the effort or the attempt.