Friday, 2 June 2017

Chantal Mouffe interviewed in 2007

“The consequence of the disappearance of a fundamental difference between the democratic parties of centre-left and centre-right is that people are losing interest in politics. Witness the worrying decline in voting. The reason is that most social democratic parties have moved so far towards the centre that they are unable to offer alternatives to the existing hegemonic order. No wonder people are losing interest in politics. A vibrant democratic politics needs to offer people the possibility of making genuine choices. Democratic politics must be partisan. In order to get involved in politics, citizens have to feel that real alternatives are at stake. The current disaffection with democratic parties is very bad for democratic politics… I am really worried by the celebration of the politics of “consensus at the centre” that exists today. I feel very strongly that such a post-political zeitgeist is creating favourable terrain for the rise of right-wing populism.” 

Thursday, 18 May 2017

In praise of conflict (not just the band)

I don't read much political theory, but am very interested in Chantal Mouffe so recently bought this. Just started reading it last night and great to find that someone has properly theorised some issues where I've had my own half-baked thoughts. This stuff should be compulsory reading for those anaesthetised by the "we're all on the same side, all interests align" guff that is everywhere in ESG land.

"[P]olitical questions are not mere technical issues to be solved by experts. Proper political questions always involve decisions that require making choices between conflicting alternatives. This is something that cannot be grasped by the dominant tendency in liberal thought, which is characterised by a rationalist and individualist approach. This is why liberalism is unable to adequately envisage the pluralistic nature of the social world, with the conflicts that pluralism entails. These are conflicts for which no rational solution could ever exist, hence the dimension of antagonism that characterises human societies."


"A well-functioning democracy calls for a confrontation of democratic political positions. If this is missing, there is always the danger that this democratic confrontation will be replaced by a confrontation between non-negotiable moral values or essentialist forms of identifications. Too much emphasis on consensus, together with an aversion towards confrontations, leads to apathy and to a disaffection with political participation. This is why a liberal democracy requires a debate about possible alternatives. It must provide forms of identifications around clearly differentiated political positions."

PS The band.

Sunday, 14 May 2017

Shareholders go quiet on executive pay

Once again, ahead of the UK AGM season we had the now traditional "boards braced for stormy AGM season" story. Anyone who follows this debate will know what I mean. We've all seen several times the claim that a second "shareholder spring" is coming as investors "get tough" and "crack down". This season the reheated story was spiced up with the extra line that the government is considering giving them even more powers.

Of course, the proportion of companies that lose a vote in any season is tiny (very rough guess: less than 2% of the All Share) and the "shareholder spring" itself had only a handful of defeats. So really investors only needed to turn the dial by one notch to deliver a record season. I suggested that getting defeats into double figures, while still meaning 95% of companies get shareholder approval, would send a pretty important signal.

It's pretty clear now that is unlikely to happen. So far there have only been two pay defeats - Pearson and Crest Nicholson - and both were on the advisory remuneration report vote, not the binding remuneration policy vote. This means that, for all the pre-season puffery, no companies have been given a binding direction by their shareholders because of their approach to executive pay. However you cut it, this year's AGM "fireworks" have been duds. 

However, the other thing that is being put about in the business pages is that while, yes, there haven't been the number of defeats people were expecting this is because of successful shareholder engagement behind the scenes. There are couple of examples being briefed of companies pulling resolutions before the vote to avoid defeat, or making big concessions during engagement with shareholders. 

I'm a bit sceptical for a couple of reasons. First, this is a line I have heard quite a lot over the years, primarily from asset managers that tend to vote with management most of the time. So it's not clear to what extent the engagement that has taken place this year differs from other seasons. Second, companies are not stupid. Like any good negotiators, in a tricky situation they are going to go into an engagement with a headline ask, and an acceptable fallback position. We don't know to what extent the agreements that are being agreed between companies and asset managers represent where the former party wanted to be in the first place.

Which leads onto the key point in all this. No-one outside the closed circle of corporate executives, asset managers and remuneration consultants really knows what is going on. Because asset managers prioritise confidentiality in engagement, exactly what deals are thrashed out - and who amongst them is doing the most thrashing! - is not information that is available to the public. I know there are some good people out there who do feel a responsibility to try and bring some of the public concern about executive pay into their discussions with companies. But I know there is a lot of bullshit out there too. I have been hearing the "we are engaging behind the scenes" line from asset managers that I know put little pressure on for about 15 years. 

Many of the people who exercised the votes that approved the executive pay arrangements that are apparently now egregious are still pushing the same (Vote For...) buttons. Are we sure that they have changed? In my experience, many people within asset management continue to hold views on executive pay that are well to the Right of the public (who are often considered to hold very ill-informed views about the value of executive talent). It's not obvious that we should conclude that there has been a real change unless we get some real evidence. 

So I would not advise people (including business journos) to accept the "it's all getting sorted out in private" line uncritically. More generally, I don't think the current position is going to hold for the asset management industry. Executive pay continues to be a subject of public debate, and anger. This season the headline output of what shareholders do - votes - may fall rather short of the pre-match build-up. In fact, it could be interpreted as evidence that shareholder oversight is far too weak a tool. But I don't think arguing that "we're sorting it out in private but can't tell you about it" is going to convince many waverers that actually yet another season where the vast majority of companies got approval is actually OK.

In the current environment does making private deals between corporate executives and major financial institutions, and telling the public they can't be allowed in, over an issue as politically charged as executive pay look like a great outcome? I think shareholders are going to have to become much more open about their engagement and its results, and they really need to think about the public output that voting in favour but engaging privately creates. Even so, I am not sure another season where even people who follow executive pay will have seen very little happen is going to do much to stop the the drift away from shareholder oversight as a public policy tool.

Monday, 8 May 2017

Internal logic versus external stupidity

I've blogged about National Express a few times over the years, mainly in relation to its anti-union activity. But today a story in the FT about its executive pay arrangements caught my eye. I think it's a great example of why performance-related pay is a colossal waste of time, including trying to tie pay to ESG targets.

As many people may know, there was a tragic accident in the company's US school bus business last year in which six young children died. This is clearly pretty much the worst safety outcome a company that transports children can have.

Understandably, therefore, the company has reduced to zero the amount of the chief executive's bonus that is tied to safety. But, he's still going to get the rest of the bonus, which equates to over 150% of salary. Some shareholders are ticked off, and think that the company should not have paid any bonus at all, sensing that a chief executive getting a seven figure bonus in the year when the company suffered multiple child fatalities is not a good look.

To me, this sort of outcome is the inevitable outcome of the performance-related pay delusion. If you set multiple targets for variable pay you are always going to get these kinds of perverse outcomes. If you've hit your financial targets but there have been fatalities then simply not awarding the bits of pay tied to ESG criteria is logically what you should do. But it looks appalling. Applying some common sense has its own problems - for people within business/finance at least. If you scrap the bonus entirely (which is what I think they should have done) then it makes plain what a joke the system is - it is incapable of delivering sensible outcomes.

This isn't the first time this has happened in relation to fatalities involving a PLC. The CEO of Thomas Cook got in a similar mess by giving up some, but not all of her share award. To try and stick to a logical/statistical approach merely invites the question "so how many people would have to die before you didn't take any bonus/share award?". Companies - or investors - that simply hide behind the incentive design look inhumane.

There was a similar example with News Corp when the hacking scandal blew up - with James and (I think) Rupert Murdoch agreeing to give up some, but not all, of their bonuses. And, more generally, when there is a lag between performance and reward (because shareholders have asked that reward be tied to slightly more long-term performance) you get examples when exec awards vest despite performance having subsequently turned bad again.

I know I am well out of step with many ESG people here, but to me the fundamental problem is the insistence on performance-related pay. Quite aside from motivational issues, perverse incentives and the whole question of why the most highly paid need or deserve further incentives to get them to do their job, performance pay generates these ridiculous outcomes. They make sense according to the text book internal logic of incentive schemes but they look terrible to any half conscious actual human being. Instead of wasting even more time trying to tie ESG criteria to pay we should be scaling back variable reward if not scrapping it altogether.

Wednesday, 3 May 2017

New guidelines for assessing company behaviour on labour issues

The Committee on Workers' Capital (CWC) has just published an important new document - the CWC Guidelines for the Evaluation of Workers' Human Rights and Labour Standards.

Its the product of a couple of years' work by a global group of trade union experts from countries including Australia, the US, Spain, Canada, the Netherlands and the UK. It also has the imprint of the ITUC, the peak body in the global labour movement. So if you're an investor or an ESG researcher looking at a company wanting to get a handle on how well it handles labour issues, these are the indicators that you should be looking at.

Press blurb below, the guidelines themselves are here.

Global Trade Unions Release Guidelines For The Evaluation of  Workers’ Human Rights and Labour Standards

Global union initiative will elevate the profile of social issues in the investment chain

VANCOUVER, CANADA, 1 MAY 2017 - Investors will be able to properly evaluate company adherence to robust labour standards and responsible employer relations as a result of a new global trade union initiative.

The Committee on Workers’ Capital (CWC) Guidelines for the Evaluation of Workers’ Human Rights and Labour Standards are a comprehensive set of key performance indicators (KPIs) for investors to evaluate companies’ social performance. The guidelines were produced by trade unions from around the globe in response to concerns that asset owners and other investment chain actors are not equipped with tools to adequately scrutinize social issues such as labour relations in their environmental, social and governance (ESG) analysis.  

The CWC Guidelines were endorsed at a meeting of the Council of Global Unions in February 2017, giving them unique status amongst ESG KPIs as an official document of the global labour movement.

“When companies like XPO Logistics or Sports Direct mistreat their workforce, they create risks for investors,” says Sharan Burrow, General Secretary of the International Trade Union Confederation. “Yet to date the ‘S’ in ESG has been the weak link in investment analysis, and investors have lacked a shared framework to assess companies’ approaches.”

The Guidelines are inspired by key international norms, standards and frameworks including the UN Guiding Principles for Business and Human Rights, the OECD Guidelines for Multinational Enterprises and the ILO Fundamental Conventions. The indicators are grouped in ten themes, which include workforce composition, social dialogue, supply chain, grievance mechanisms, workplace diversity, and pension fund contributions for employees.

 “The CWC Guidelines will help pension trustees, asset managers and rating agencies properly evaluate the social performance of investee companies,” says Burrow. “In addition to improving investors’ ESG analysis, use of the Guidelines will send positive market signals for companies that respect fundamental labour rights. Ultimately, the capital of working people in their pension funds should support the fundamental labour rights that were necessary to create pension funds in the first place.”

The CWC Guidelines were developed over the past 16 months by a multinational working group of trade union specialists from countries including the US, Australia, Spain, Canada and the UK.  The CWC will use the Guidelines to elevate the profile of decent work practices in its work with pension fund trustees and other investment chain actors such as sustainability rating agencies.

For a one page briefing on the CWC Guidelines, please click here.

Sunday, 30 April 2017

Non-alignment of interests

I've recently found something that captures important points relating to competing interests within the firm: this news story about American Airlines. More specifically, the quote from the analyst is almost perfect:
“This is frustrating. Labor is being paid first again. Shareholders get leftovers,” Citi analyst Kevin Crissey wrote in a note to clients. Investors showed their displeasure by sending American Airlines Group Inc.’s stock down 5.2% to $43.98 on Thursday. 
Why do I like it so much? First, as I've bored on about at length, there's a strain of corporate governance boosterism that seeks to deny that there is really any tussle between competing interests at all. The best/worst example I have seen, in a piece about long-termism, is this godawful claim from McKinsey:
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.
"never any tension" FFS!

Yet in this news story we see an obvious tension between the interests of labour and the interests of investors (or those speaking on their behalf). I know some may retort that these aren't the real investors and/or if they were taking a long-term perspective then maybe they would support higher wages. But in Actually Existing Capitalism, public companies consider that asset managers are the "investors"/"shareholders" (as asset managers generally do themselves), and analysts are seen as providing insight to assist investors. What's more the tension is made absolutely explicit by the analyst: if labour gets more investors get less.

Secondly, the analyst also provides a very good expression of shareholder value mission creep. The complaint is that labour is getting paid first and shareholders are getting 'leftovers'. But this is how the model is supposed to work. The company pays all necessary costs and then distributes what is left to shareholders. Yet the analysts seems to think that this is somehow out of order. This is exactly the point Colin Crouch made a few years ago:
In theory, shareholders’ earnings, their dividends, based on profits, are the residuum in a firm’s trading activities, the last claim that is made on a firm after all claims from bond-holders, employees, creditors, investment needs and other requirements have been met. This is the risk-bearing activity at the heart of capitalism that enables firms to be innovative and that justifies shareholder maximisation: if the shareholders must wait until all other contractual claims on a firm have been met then they need to be able to have the final say over how the firm is managed. Also, their rewards from successful transactions must be high, as these must compensate them for the losses that will come from risks that go wrong. 
This principle remains valid if a firm goes bankrupt; shareholders have the last claims on any assets. But during routine operations of a viable company it has been heavily compromised by the emergence of profit expectations within today’s highly volatile stock markets. Ideas spread as to what short-term return on profits ought to be available in the market; remember shares are being bought and sold with an eye primarily on the secondary markets. There will therefore be a flight from shares of firms not meeting the prevailing idea of a good return. Such firms become vulnerable to hostile takeover, something which senior managers are keen to avoid, as it often leads to them losing their jobs. Managers are therefore under strong pressure to meet or exceed a target level of return to shareholders. If necessary, investment plans, customer service and employee compensation will have to be held back to meet this target. Once this occurs, distributed profits are no longer a residuum but are an early call on a firm’s earnings.
It's obvious that the directors should not pay employees less than they think is necessary to recruit, retain and motivate them. If the board prioritised paying investors over paying staff what they think is necessary to meet the needs of the business I think that would be a breach of directors' duties. So, in technical terms, employees should get paid first and shareholders should get "leftovers" - that's the model.

Assuming the analyst knows the basics of corporate law and does not mean this literally, I guess the point is really that the board should have thought more about shareholder interests when making pay awards, with the implication that employees should have got less. Which again suggests that there are indeed conflicting interests (and note that the stock did take a hit).

So, in today's capitalism, it is clear that employees' and investors' interests can indeed be in conflict. It may not always be the case, and I do think investors often would benefit directly from employees having better terms and conditions. But there is conflict there.

In light of this, the recent discussion about worker representation in corporate governance looks even more pointed. If asset managers are responding to a consultation arguing that workers should not get any formal role they are, essentially, simply asserting that their interests should (continue to) come first in that arena. I'm not sure, to put it mildly, that those of us who want to rebuild labour's share of the wealth created within the firm have much to gain by strengthening shareholder rights further in the UK. And we should be arguing relentlessly for employees to gain more power and resources within the firm directly, because experience shows that investors (as they are currently constituted) in the main aren't reliable supporters. Or at least not yet.

In my opinion, it would much better if we were open in our discussion of corporate governance and related issues that not all interests pull in the same direction all of the time. Then at least we could make more honest decisions about who gets what, rather than pretending we can all win and, in doing so, obscuring who actually does (clue: for the last 30 years or so it hasn't been labour).

As the late Tony Judt put it:

“Societies are complex and contain conflicting interests. To assert otherwise – to deny distinctions of class or wealth or influence – is just a way to promote one set of interests over another. This proposition used to be self-evident; today we are encouraged to dismiss it as an incendiary encouragement to class hatred.”

PS. There is nothing new under the sun, the idea of praying "long-term interests" in aid of better corporate behaviour is an old one, not some startlingly fresh insight from McKinsey.

Wednesday, 26 April 2017

A decade of blogging

I realised recently that I've just completed a decade of blogging. Although the arrival of two kids means I blog a lot less often than I used to, and read a lot less to blog about, I still feel the urge to communicate. Partly I just enjoy writing, but I also feel/hope that it is worth putting an unequivocally pro-labour and pro-Left voice into the blogosphere on issues like corporate governance, ownership etc.

The benefit of blogging for this long is that I can see some of the trends that have come and go over the period and - I think - see the broad outlines of change. So here are a few general observations after ten years of doing this stuff. NB - I am speaking about the UK here primarily.

1. Obvious really, but the financial crisis had a much deeper and lasting impact than many people on the centre Left initially realised. I think people did initially expect a big shift, but because there wasn't an immediate swing to the Left in policy or in political support many concluded that this wasn't going to happen at all, and that things would carry on much as before, albeit with much constrained public spending. I think we can now see that this conclusion was wrong, but perhaps until Corbyn, Brexit and Trump quite a lot of people still thought not much would change from the 1990s.

What is particularly striking is the disconnect that has developed between technocratic policy wonk opinion and public opinion, and a seeming unwillingness on either side to meet in the middle. I think a lot of mainstream policy people still think that they got nothing much wrong over the past couple of decades, and the public are just too dense to know what's good for them. These people also have considerable influence over our politicians. Hence the tortured political positions we see post-crisis where politicians play to the public with their rhetoric and policymakers with the detail and neither group feels entirely satisfied. Perhaps it was ever thus, but the gaps between policy people and the public and between rhetoric and reality feel very large now.

2. Corporate governance reform involving shareholder empowerment no longer looks like progressive policy. From the 1990s onwards a number of influential people on the Left enthusiastically embraced the ideas that shareholders = the public, that shareholder engagement was a new/exciting way to restrain poor corporate behaviour, and that tooling up shareholders could tackle tricky issues like executive pay. I'm not sure quite when this hit the wall, but I think you would struggle to get many people on the Left to get out of bed for this agenda now.

In large part this is due to practical experience. Shareholders, which mainly means asset managers, have been overwhelming uninterested in tackling the scale of executive pay, and unwilling to engage over labour issues. I think we lost a decade - and corporates gained the same - in fiddling about trying to find ways to make asset managers do things they don't want to, and trying to redesign executive pay rather than just constrain and/or it.

During the same period the nature of the shareholders of UK business changed, so there is now much more foreign ownership. This makes it significantly harder to argue that giving shareholders more power is a good thing for people in the UK. If dividends and voting rights are going to American asset managers (who care even less about executive pay than their UK counterparts) what progressive agenda is being served by giving them a greater say?

For me personally, the way that asset managers and some of the business/finance lobby groups have responded to the question of worker representation on boards is the final straw. It wasn't a surprise, but I have still found it absolutely sickening. There is no way I would personally support any further extension of shareholder rights since many of those shareholders lobby against my interests. And in my opinion the fact that these organisations are increasingly active in public policy is net negative for the Left.

3. ESG progress, from a labour/Left perspective, has been disappointing. To many of us it looks like "responsible investment" is largely about executive pay plus climate change. Labour issues, despite labour rights being central to all the key human rights standards, are still seen as "political" and few investors (with honourable exceptions) seem willing to hold companies to account to anything like the same extent they would do over environmental issues.

I think there are several issues at play here. One is that there is a tussle over resources within the firm (forget the Mckinsey bollox that all interest align over the long term) and some investors don't want to give any ground. Undoubtedly there is a cultural element too - many people in the City hold views on various issues that are further Right than the public, even if they don't realise it. There are few union fans. There is a generational aspect - many younger ESG people have little knowledge/experience of the labour movement and are more drawn to environmental issues. And there is a class aspect to it too.

The net result, as I've said before, is that responsible investment in general gives off the vibe of being about wealthy, globally mobile liberalism. The worst sins in this world view are market imperfections and a lack of meritocracy. But this world view is given airtime through the management of the savings of millions of people who will never get into the top tax bracket or be headhunted for non-executive roles. Again as I have said before I do not think the disconnect between the views articulated by most ESG people and those of the people whose money gives them a job is sustainable.

4. Unions have remained largely focused on pensions as benefits rather than pools of capital, and potential leverage. This has started to change in the past few years but we didn't catch the capital strategies bug initially. I personally think this has been a missed opportunity, though I would prefer to see unions engage tactically with capital where they have specific, achievable objectives rather than waste time and resources trying to rebuild "the system". I've become more convinced of this over the past few years, and I say this as someone who is interested in policy and has enjoyed doing policy work. In my opinion it just doesn't deliver enough to make it worthwhile.

5. There is nothing inherently democratising about markets, widening share ownership, greater participation in the finance system etc, if anything the reverse has been true. The idea of self-determination ends at the office/factory/depot door for the large majority of people I deal with professionally. Hence the hostility towards worker representation in corporate governance. Most people in this world do not believe that business needs to be democratised, but they do believe that more functions in society should be run by the private sector. This can only lead in one direction.

And the same applies to pension funds. Whatever the theoretical merits of the "professionalisation" of trusteeship, in practice it has led to de-democratisation. Across several key markets member trustees have been denigrated and moves have been made to remove them from decision-making. As such the control of capital that belongs to the public has increasingly slipped from their grasp.

Along this path the real threats to the subversion of fiduciary duty have become clear. If you are union person with any experience in pension fund investment issues you will have had lectures about Scargill, and the need not to put political objectives ahead of the interests of beneficiaries. Imagine how terrible that would be.

But it is OK for policymakers and politicians to try and determine the asset allocation that pension funds adopt (ahem... infrastructure) through rewriting investment regulations and altering the structure of pension funds. We now have a situation where policymakers are making all kinds of regulatory tweaks in order to help funnel capital that is supposed to fund our retirements into projects that they won't raise taxes to pay for (even if this might be a cheaper option). I don't remember ever being asked to vote on this one.