Friday, 30 January 2015

Pension funds in action

Blogging is light to non-existent currently, but here are three nuggets worth flagging up.

1.  Pretty incredible win for investors worried about climate change - Shell has recommended that shareholders vote FOR their resolution at this year's AGM. Great work by CCLA, Share Action, ClientEarth and others pushing this campaign along. Anyone know if this has happened before? (Maybe at BAA years back??)

2. Railpen, PGGM continue their struggle to bring a bit of sanity to executive pay at Oracle. The company has seen a majority of its shareholders oppose it on its 'say on pay' resolution for three consecutive years, and this is with Larry Ellison controlling 25% of the votes. If you believe that executive pay needs reining in, and that shareholders are part of the solution, you should be very worried by Oracle.

3. A useful guide to help asset owners ensure that asset managers are properly taking account of ESG issues has been produced by a group of UK pension funds. It's available on the website of West Midlands Pension Fund (one of those behind the initiative) here.

Friday, 23 January 2015

Why exec pay oversight can be weak

Because I'm a geeky person, I often search Investegate for AGM results. I just found this RNS announcement from Diploma PLC from Wednesday -
All of the resolutions put to shareholders at the Annual General Meeting were passed by poll votes and the results of the AGM are announced on the Company's website at
Move along, nothing to see here? Well, I'm also a suspicious type, so whenever I see an RNS that doesn't have the actual results in but says check the website later I wonder if someone is trying to bury bad news (though to be fair it looks like this is how Diploma normally reports). So off I go to Diploma's IR site for the AGM results (PDF). And look at the result on the rem report (res 12). Not only is the vote against very big (43%) on a for/against split, if you include abstentions then only a minority actively supported the rem report.

Those of you paying attention at the back will remember that the UK Corporate Governance Code recommends companies to publicly respond to big votes. It says -

When, in the opinion of the board, a significant proportion of votes have been cast against a resolution at any general meeting, the company should explain when announcing the results of voting what actions it intends to take to understand the reasons behind the vote result.

Again to be fair to Diploma they do this. Note 4 to their AGM results, as far down the page as they can put it, says the following:

In relation to Resolution 12 (the Directors’ Remuneration Report) there was a significant proportion of votes that were cast against the Resolution. The Board will consult with those shareholders who voted against this Resolution in order to understand their views. To date six shareholders, representing ca. 10% of the Company’s shares have engaged with the Company regarding their decision to vote against or abstain on this Resolution.

I think they can say meet the requirements of the Code. But I am pretty sure, having been involved in the consultation at points on the last round of exec pay reforms, that people were thinking that companies would stick out RNS announcements about their response to big votes against.

As ever, whenever this stuff isn't properly defined some will find ways to wriggle through the gaps.

When unions meet capital markets...

Anyone interested in the capacity for trade unions to mobilise the capital sitting in our pension funds should take a look at the Global Proxy Review produced by the Committee on Workers' Capital. The Review is intended as a tool for trade union trustees to bring accountability into the investment chain.

Already unions in a number of countries carry out their own surveys of how asset managers vote on key issues each season. The CWC review is intended to provide a global overview, something that is increasingly necessary given that in a number of countries our pension funds' equity portfolios have a significant overseas element.

There is some useful commentary, too, about the problems that trustees face when they invest via pooled funds. From what I've heard, this is an issue that has cropped up in a number of markets. We all face the same problem, but it can be overcome. It is entirely possible for managers to vote a pro-rata holding, but trustees need to argue for this to happen.

Anyway, below is some more info on the Review from the CWC site. It is well worth taking the time to have a look at the Review and online resources.

The 2014 Review provides an analysis of 44 key proxy votes that raised environmental, social and governance (ESG) issues at corporations likely to be held in the global equity portfolios of pension funds. In this year’s report, highlights include:
• Key vote analysis suggesting a higher likelihood for shareholders to vote against management in the USA, the UK, Canada and Australia than in Continental Europe and South Africa;
• A section highlighting challenges related to proxy voting guidelines in line with best practice over ESG issues in pooled funds;
• The participation of nine countries, including the addition of France as a contributor.
The Global Proxy Review is a pension trustee’s guide to key shareholder votes at multi-national companies across the globe. With this oversight tool, trustees and investors can evaluate the performance of fund managers or proxy voting services on the most important environmental, social and governance issues of the year.
Access to the 2014 Report (EnEsFr) and media release.
To access previous reports and partner resources, click here   

Sunday, 18 January 2015

Standards-based voting

Just a quick point I think is worth developing. Many asset owners now use passive management for at least a sizeable chunk of their assets, usually equities in developed markets. This seems likely to grow due to a mixture of disillusionment with active management and growing pressure to reduce the fees paid to intermediaries.

So we should be clear that, in going passive, those asset owners are at least implicitly making the choice to hold certain equities on the basis of their inclusion in an index rather than because an asset manager has analysed the company and selected it for investment.

Now, one of the arguments against asset owners directing their own votes is that asset managers know or understand the companies better, and that their corporate governance activity is bound up with this. But if you go passive you are rejecting the idea that asset managers can make you money by analysing companies and trading on the basis of that analysis. If that is the case, it is not obvious why you would think they are going to be any better at knowing what corporate governance outcomes are most beneficial or the best way to vote your shares.

If that's the case, then I think there is a good argument for voting in a way that supports a consistent set of values. Obviously for asset owners that are linked to charities, NGOs and similar those values are going to suggest themselves. But even for others, why not build a policy around existing global  standards? Clearly my interest would be in getting investors to vote to promote standards like ILO principles (this in itself would be a straightforward way to stop the S in ESG being silent) but there are plenty of others.

If you don't believe that asset managers can make you money through their analysis, why not use the rights that have landed in hands through investing in equities to promote the kind of corporate behaviour you think beneficiaries would like to see? Adherence to existing and widely accepted global standards seems like a pretty low bar. Why compromise?

Thursday, 15 January 2015

Pooled funds, voting and fiduciary duty

As some people will be aware, there is a considerable degree of frustration amongst some asset owners in the UK that they are unable to vote how they want when investing through pooled funds. There isn't any technical reason why this can't happen, some asset managers will let you do it, but, at present only a few play ball.

One of the reasons that asset owners want to vote for themselves is because they don't agree with how managers vote and/or have policies of their own. I personally think there is a strong argument for this when you look at how some of the big mainstream managers vote for the large majority of what companies put in front of them. Unfortunately, as I've blogged before, the FRC has basically sided with the asset management industry on this one.

However, it struck me that the debate around fiduciary duty may require this one to be revisited. Imagine you are a trustee of an asset owner that has a very good sense of what beneficiaries views are. For example, you are a trustee of the pension fund for a charity or NGO. You may have chosen to used pooled funds because you believe they are cheaper than a segregated mandate (might not be true actually, but anyway....). Now imagine there are is a shareholder resolution, or a management proposal for that matter, where you are certain that you know what beneficiaries' views would be, but the manager wants to vote the opposite way. If the manager won't let you over-ride their policy you are contradicting beneficiaries' views.

From my limited understanding, the Law Commission doesn't quite say that you should take beneficiaries' views into account if you are clear what they are. But I do wonder what would happen if someone actually tested this out. It does seem odd that you are forced to support something that you know those you owe a duty to are opposed to.

A standard response would be to say that if you're that bothered about voting you should go down the segregated route and avoid the problem. But arguably that means imposing a financial penalty on those that want to vote, or, if you really want to point it up, charging trustees for acting in the interests of their beneficiaries. Might be worth someone testing the ground?

P.S. This could look particularly weird where the mandate is with a passive manager. In such a case you clearly haven't appointed the manager because you believe that their analysis of companies is superior, you just want to track an index, so it isn't like their voting is part of a package. I'll come back to this one.

Monday, 12 January 2015

Fraud: investor priorities and attitudes

Luigi Zingales has been involved in some interesting work on fraud. In this paper he and co-authors look at who detects and exposes fraud, and they find some perhaps surprising results. Employees are the whistle-blowers most often (and, as such, the suggestion is made that further incentives are provided to encourage more of it) followed by regulators and the media. But auditors, analysts and short-sellers are further behind, external shareholders barely get a look in. There is nuance to the picture, if you read the paper they do find that short-sellers are quicker at exposing fraud (9 months versus 21 months for employees), but they expose less of them.

Zingales has also done research into the prevalence of fraud. He and his co-authors estimate that, in any one year, there is a 14.5% probability of a company engaging in fraud. In his book on crony capitalism, Zingales says that 5% to 10% of public companies are affected by fraud every year, though some of this may not be significant in scale. He also argues that one of the reasons it may be so prevalent is because it's not really anyone's job to find it. And notably he goes on to draw a link between the failure to root out unethical behaviour like fraud and the nature of board appointments (i.e. directors are selected by existing board members).
Corporate corruption and fraud occur when controls are weak, and controls are weak when the people in charge have no incentive to challenge the CEO. Yes, there are many serious board members who do their jobs well – but they do so despite the incentives… [C]orporate board members care less about their reputation with shareholders than their reputation with CEOs
So what do we make of all that? A few things suggest themselves. First, investors should probably assume that there is fraud happening somewhere in their portfolio. It may not be a significant risk (though Zingales et al say: average corporate fraud costs investors 22 percent of enterprise value in fraud-committing firms and 3 percent of enterprise value across all firms) but it's probably there.

Second, they should support moves that increase the incentives to expose fraud and decrease/remove the incentives to hide/ignore it. Taking the latter first, this surely means trying to make the auditor as independent as possible, for example by banning or strictly limiting non-audit work. It also seems to strengthen the case for making board members more accountable to others than simply those that appointed them. And it suggests that investors might want to find ways of encouraging employees to speak out.

Finally, in my own corner of the world, I would argue that these findings also mean that corp gov people in particular ought to adopt a sceptical/suspicious approach. Financial (and other) wrongdoing may be much more prevalent than we tend to think, and the incentives for companies to tell investors the truth are... ahem... not straightforward. I can think of a couple of companies I've engaged with that were subject to controversy of one form or another where what we were told initially proved to be wildly inaccurate - and that's if I'm being charitable and assuming they believed what they were saying. It was only because we stuck with it, and probed a bit, that the stories unravelled. And as we saw with News Corp / News International, even major corporations will issue public statements that bear little relation to the truth.

It can be difficult, embarrassing, career-limiting and so on to challenge senior people like board directors when you aren't confident in what they are telling you. But, if you accept Zingales' point that no-one really has the job of exposing wrongdoing, then I think we have a duty (and not just a fiduciary one) to ask the awkward questions.

Saturday, 10 January 2015


There's an interesting article in the Economist about the 'on-demand' economy.  As you would expect, they are very positive about the rise of things like Uber, but even they recognise that this isn't a pain-free future. Here are the final few paras:
Consumers are clear winners; so are Western workers who value flexibility over security, such as women who want to combine work with child-rearing. Taxpayers stand to gain if on-demand labour is used to improve efficiency in the provision of public services. But workers who value security over flexibility, including a lot of middle-aged lawyers, doctors and taxi drivers, feel justifiably threatened. And the on-demand economy certainly produces unfairnesses: taxpayers will also end up supporting many contract workers who have never built up pensions.
...Many European tax systems treat freelances as second-class citizens, while American states have different rules for “contract workers” that could be tidied up. Too much of the welfare state is delivered through employers, especially pensions and health care: both should be tied to the individual and made portable, one area where Obamacare was a big step forward.
But even if governments adjust their policies to a more individualistic age, the on-demand economy clearly imposes more risk on individuals. People will have to master multiple skills if they are to survive in such a world—and keep those skills up to date. Professional sorts in big service firms will have to take more responsibility for educating themselves. People will also have to learn how to sell themselves, through personal networking and social media or, if they are really ambitious, turning themselves into brands. In a more fluid world, everybody will need to learn how to manage You Inc.
To be honest, the last bit about people having to develop their own personal brand sounds to me like the perfect background to some sci-fi dystopia. But the point about the individualisation of risk is what I find most interesting. This is actually part of a broader process. For example, it is undoubtedly happening in the pensions world in the UK as DB disappears and is replaced by DC. Companies made this switch precisely because they didn't want to shoulder investment risk, and their investors tend to agree. It's notable that there was a very positive response when Tesco announced, along with other moves, that it was considering planning to close its pension scheme. Similarly, labour market practices like zero hours contracts and self-employment promoted in terms of how 'flexible' they are, but again it is the individual who bears the risk. 

Often you get told that employees like this flexibility too, but I do wonder if this is in part because the risk is difficult to grasp. Certainly the DB to DC shift was accomplished in the private with little resistance, which I think was only possible because people didn't really get what was going on (maybe also because initially it only affected new employees). The same may be true of other forms of flexibility. It seems that quite a few of the Citylink drivers were self-employed, and it's when the company runs into trouble that the nature of risk becomes very real, and flexibility more double-edged.

The outcome of these processes is that actual living human beings are expected to shoulder more risk in their working lives (even if they don't quite understand it) in order that risks within companies are controlled. And this is welcomed and encouraged by market participants, who are often investment intermediaries for the same people onto whose shoulders risk is being shifted, on the basis that this is good for the company and its investors. There seems to be a disconnect between between this being a good thing at an aggregate and/or abstract level (i.e. what does it mean to say offloading risk is a good thing for companies, who specifically is benefitting?) whilst being potentially very damaging in real individuals' lives. 

FWIW I don't think the directors of the companies offloading such risk like it in their own lives. As PwC have pointed out, many directors don't like variable pay very much and, they argue, the total scale of executive reward probably partly reflects an attempt to address this. However, they seem quite comfortable making others with significantly lower incomes and less wealth take more risk.