Thursday, 11 February 2016

Blog on workers' capital

I've got a piece up on Left Foot Forward today about workers' capital as part of #heartunions week. Have a read here.

Sunday, 7 February 2016

Labour and infrastructure

Via twitter, I picked up this interesting piece on how Labour's stance towards business could be made a bit more coherent. I thought I would bung up some thoughts on the points made about infrastructure, and what might be achievable here.

First up, I think we have to be clear about who wants what, and when. It's not quite as simple as saying that infrastructure needs finance and investors want to invest in/own infrastructure. Politicians want non-government finance to support the construction of new infrastructure. Pension funds and other institutional investors looking for a bond substitute generally want to own infrastructure that has already been built. Politicians are focused on greenfield, pension funds are more interested in brownfield.

This is because, again generalising, the risk return characteristics of infrastructure assets change over time. In the construction phase there are lot of unpredictable risks, so investors are going to want a premium in return for shouldering them. In the operational phase everything is more predictable (though political and reputational are maybe bigger factors than assumed) and the pay-off is lower. This means that, as an investment, infrastructure looks different depending on when the investment is to take place. As one report I read put it, infrastructure assets begin like venture capital/private equity, and become more like bonds.

It also varies by the sector that the infrastructure asset relates to. If you look at the risk-return characteristics of various types of infrastructure then you may find that existent social infrastructure (schools & hospitals) provides a nice fit if you are a pension fund looking for something bond-like. It's perhaps not surprising that the first investments of the Pensions Infrastructure Platform were in the secondary PFI market. The funds bought into existing assets (or project companies tied to the assets - the ownership of the asset usually resides with the public sector) rather than funding any new construction. Other markets see more pension fund investment in greenfield, but from what I've seen most UK investment is brownfield.

You can argue that the existence of a institutional investor market for brownfield infrastructure provides an out for those that are willing to finance greenfield. So the fact there is a secondary market to sell into allows initial investors to sell up, move on and hopefully finance the next greenfield project. But that is a slightly different pitch. Alternatively you could try and attract pension fund capital looking for an inflation hedge into greenfield investments by doing something to the financing to change the risk/return characteristics, like providing an underpin. But that ups the cost of financing, and might look worse than PFI!

I think it's also important to note that, as with pension fund investment more generally, most infrastructure is undertaken through intermediaries, rather than directly. This means that the time horizons of the investor are actually those of an asset manager. This is important, as there has been some unease about the structure of some infrastructure funds, which are built with a view to the manager being able to sell on assets within a few years rather than considering that a pension fund might want to own it for decades. This is changing. Some of the largest pension funds invest directly, and some asset managers have developed so-called "evergreen" funds. But the picture in unlisted funds is broadly like private equity more generally. The holding period for a particular asset might be half a dozen years or so.

Finally, we need to be aware that ESG criteria are not well embedded in infrastructure. Of course you might consider that some infrastructure investment is inherently "responsible" since it can involve the construction of wind farms and other renewables. But, as I wrote previously' labour issues can struggle to get attention in responsible investment overall, and this definitely extends to infrastructure (see DCT Gdansk for details). This is true for asset owners as much as asset managers sometimes. More specifically, I do not believe that in the UK infrastructure investment currently considers the need to respect workers' rights. It was notable that even the Labour-commissioned Armitt Review failed to address this.

Incidentally, I think this is particularly tricky in relation to greenfield. If you are building a new rail link I think you can make some decent projections about the potential environmental impact. You know what the immediate physical impact will be, and can model carbon footprint etc. But how do you do the same for labour issues? How can you tell in advance if the employer will genuinely respect workplace rights, or, on the other hand, if they will exploit precarious work by keeping workers on temporary contracts? How do you track this if the economic employer changes when the asset is sold on post-construction?

I don't mean to sound negative above, I'm just setting out what I've discovered in my own work around infrastructure. So I would suggest a few general, if obvious, guidelines. First, and most important, pension fund investment in infrastructure should only take place if it is in the interests of the beneficiaries. Second, government should consider whether pension fund investment in infrastructure is the cheapest financing option - I do wonder if we risk creating "pension fund PFI", another off balance sheet model that is more expansive that government borrowing. We do not want to crowd out the public sector. Third, a Labour approach to this issue must promote rigorous ESG standards, particularly with respect to workplace issues. And if we get back in power there should be union representation on the National Infrastructure Commission.

Friday, 5 February 2016

TUC Fund Manager Voting Survey 2015

The TUC's annual voting survey - its 12th! - is out today. Two things I would flag up - the votes on the shareholder resolution at National Express (a rare case of a res explicitly on labour issues) and the votes on the bonus cap at the banks. Both indicate there is a long way to go.

Press blurb below, PDF of the survey itself here.

The TUC is today (Friday) publishing its latest report on fund manager voting. The survey looks at the voting records of fund managers, pension funds and proxy voting agencies in 2014. It is the 12th such survey conducted by the TUC, but the first one since the new rules have been in place to require binding votes on remuneration policy.
Companies are now required to hold AGM votes on:
  1. Remuneration policy – in 2013 the UK government introduced a binding vote for shareholders on future remuneration policy.
  2. Remuneration reports – in 2003 the UK government introduced an advisory vote focussed on directors’ remuneration over the preceding year.
  3. Bank bonuses – in 2013 the EU agreed a new cap on bankers’ bonuses of 100% of fixed pay; but it can rise to 200% if approved by a vote of shareholders.
Since their introduction in 2003, remuneration reports have typically attracted the highest level of opposition on AGM agendas. However, this is now being surpassed by even higher opposition for the new binding votes on remuneration policy.
In the current survey, median support for retrospective remuneration reports was at 40%, whereas median support for future remuneration policy was just 27%.
The TUC suggests that this may be because fund managers believe they can have more influence through remuneration policy votes, as they are forward looking, and binding. By contrast, remuneration reports are on remuneration that has already been paid, and the shareholder vote is only advisory.
The TUC welcomes the message sent to boardrooms by the votes of the survey respondents. If other shareholders had voted similarly, most remuneration policies covered in the survey would have been rejected, forcing boardrooms to rethink their pay culture.
But despite survey respondents dissenting on remuneration policies, on the specific issue of bank bonuses they were more compliant. 22 of 29 respondents approved 200% bonuses for all the banks in which they hold stock – a median support rate of 100% (and a mean support rate of 85%).
Incentive structures in place in the banking sector contributed to excessive risk taking that precipitated the financial crisis, says the TUC. It is therefore disappointing that the vast majority of fund managers have not used the new opportunity provided to shareholders to vote against bonuses above 100% of fixed pay.
Overall, while there is evidence from the survey of a significant block of investors showing concerns over boardroom pay in their AGM voting, the TUC says there is not yet enough shareholder dissent to stop there being a ‘business as usual’ attitude to remuneration and bonuses in the boardroom. All the remuneration policies covered by the survey were passed at company AGMs because fund managers who responded to the survey were outweighed by votes from other investors.
TUC General Secretary Frances O’Grady said:
“The public’s unhappiness about excess boardroom pay is being represented at company AGMs by at least some of the people who manage their savings, investments and pension funds. We hope that their influence will extend to more shareholders. AGMs should not be rubber-stamping sessions and all shareholders should recognise the responsibility they have in holding boardrooms to account.
“The lack of shareholder dissent over bank bonuses, even from investors in our survey, is a particular concern given how pay incentives contributed to the risk taking by banks that led to the financial crisis.
“These new voting rules and reports are simply not enough to produce the major culture-change needed. It’s time for executive pay in the UK to be modernised by the addition of workers representatives to remuneration committees.”
- This is the TUC’s twelfth fund manager voting survey. It is intended to give trustees and others information on how fund managers exercise voting rights in relation to controversial issues as company AGMS. It presents the full voting data, and provides voting analysis by investor, and by company. A full copy can be found at XXX.
- The survey covered 61 resolutions on which voting and engagement data was sought and was sent to 46 investors, 30 of which (65%) responded. The full list of respondents is: Aberdeen Asset Management PLC, Aviva Investors, Axa Investment Managers, BA Pension Investment Management Ltd, Baillie Gifford, Baring Asset Management, BMO Global Asset Management, CCLA, Columbia Threadneedle Investments EMEA, EdenTree Investment Management, Environment Agency Pension Fund, Fidelity Worldwide Investment, Goldman Sachs Asset Management, Henderson Global Investors, Hermes,  HSBC Global Asset Management (UK), J.P. Morgan Asset Management, Jupiter Asset Management, Kames Capital, Legal & General Investment Management, Newton Investment Management, PIRC, Royal London Asset Management (RLAM), RPMI Railpen Investments, Sarasin & Partners LLP, Schroders, Standard Life Investments (SLI), State Street Global Advisors (SSGA), TUSO (Trade Union Share Owners), Universities Superannuation Scheme.

Monday, 1 February 2016

Infrastructure investors need to respect workers too

A demonstration has been held outside the Frankfurt office of Macquarie today to protest its failure to resolve ongoing problems at DCT Gdansk (blogged about previously here), where it is the majority owner. Pic of the demo and press statement below....

ITF/ETF dockers call on Macquarie to secure dignity for Gdansk workers 

Dockworkers will hold protests in locations across Europe over the next ten days to demonstrate their objection to the poor treatment of workers in the Port of Gdansk, Poland.
Members of ITF (International Transport Workers’ Federation)- /ETF (European Transport Workers’ Federation)- affiliated union Solidarnosc who work at Deepwater Container Terminal (DCT) Gdansk, have faced constant obstruction from their employer over the past two and half years as they have sought a collective bargaining agreement (CBA). In particular there is concern over the number of union leaders and activists who have had their contracts of employment terminated during this period.DCT Gdansk SA is registered in Poland but is majority owned and managed by Australian financial services and asset management company Macquarie, which has several representatives on the supervisory board. Macquarie’s shareholding in DCT Gdansk is held through its Global Infrastructure Fund II (GIF II).Three demonstrations will take place outside Macquarie offices with senior company representatives being called on to meet with ITF/ETF officials to discuss the role they could play in bringing about a resolution to the ongoing dispute.Vice chair of the ITF dockers’ section Torben Seebold said: “Solidarnosc members at DCT are seeking a decent CBA, reinstatement of their representatives and colleagues and improvements to pay and contracts of employment. Macquarie can help to make that happen."

Thursday, 28 January 2016

Agency theory versus "shareholders are owners"

Here is Eugene Fama an early paper on agency theory:
ownership of capital should not be confused with owner- ship of the firm. Each factor in a firm is owned by somebody. The firm is just the set of contracts covering the way inputs are joined to create outputs and the way receipts from outputs are shared among inputs. In this "nexus of contracts" perspective, ownership of the firm is an irrelevant concept. Dispelling the tenacious notion that a firm is owned by its security holders is important because it is a first step toward understanding that control over a firm's decisions is not necessarily the province of security holders.

Tuesday, 26 January 2016

Reassuringly bad arguments

I haven't blogged about the High Pay Centre for quite a while. They have successfully managed to establish themselves as a sort of mirror of the Taxavoiders Alliance, with the same kind of well-evidenced but populist campaigning stance. Which is great because it gets right up the noses of TPA supporters.

But I thought it was worth giving them a plug as the reactions to their latest work on Fat Cat Tuesday give a real insight into the strengths/weaknesses of certain arguments. More specifically, I think the counter arguments that are coming from organisations like the Adam Smith Institute are reassuringly bad. It suggests that they either just don't understand the turf as well as the HPC, or they are really struggling to overturn what the HPC is managing to define as "common sense" about executive pay. Either way it's a good sign.

I won't tackle the whole of the ASI's response, as Paul Marsland at the HPC has done a good job of that here. I just want to focus on the question of shareholder involvement - the argument that we should leave executive pay up to shareholders, because it's "shareholders' money".

I think this is wrong-headed on several levels. First, let's be clear on the process here - "shareholders' money", as it relates to distributions from a specific listed company, is only "shareholders' money" when companies decide it is, for example when they pay it out to them in dividends. And this is after wages costs etc have been covered. The company decides the distribution, and by definition what it parcelled out to executives and shareholders respectively is their money. At no point are wages for FTSE100 companies, for execs or shop workers or whoever, "shareholders' money". They are separate and one does not have claim on the other. Shareholders can, and do, challenge the distribution, but not on the basis of legal ownership. Essentially they are arguing for their share in the same way unions do.

That is important because, of course, what is being suggested here is that shareholders DO have an ownership claim on the company's assets, so the money that the company gives to its executives belongs to shareholders beforehand. But this is well-trodden ground and the legal reality is that shareholders own shares, which give them some rights, but they don't own the issuer of those shares or its assets. This point has been demonstrated in practice when shareholders have received limited compensation when the government has bought them out. They are compensated for the value of their investment, not for a claim on the assets of the organisation.

Public companies are separate legal entities, limited liability means shareholders aren't exposed for anything other than the value of their investment, but it also means that they don't legally own the company. They are only a residual claimant when a company is wound up. You don't have to be a raging Lefty to believe this, I think it was Eugene Fama who attacked the idea that shareholders own companies in an early paper on agency theory (I will dig out the reference to this).

Even the prioritisation of the creation of shareholder value as a corporate objective is not hard-written into company law (though the UK Companies Act comes close, and companies often act as if it is and genuflect to it to defend controversial decisions).

In practical terms shareholders might be adding to executive pay inflation because they generally do not consider the impact on the market as a whole. So they may be making a series of individual decisions that are seemingly rational, but which add up to higher costs overall. With large investors that hold the market, they might be essentially bidding against themselves for executive "talent". Don't take my word for it, here's what Blackrock said a few years back:
One of the difficulties we face as investors is that we (rightly) assess a company’s arguments for pay changes or increases in light of that company’s circumstances. Generally, companies do present strong arguments for the changes they wish to make. But our assessment tends not to take into account the impact it will have on the trend overall.  
Finally, as Paul, me and many others have blogged at length, it isn't even the case that the "shareholders" are deciding on executive pay. In reality it is almost always the intermediary making these decisions, not the asset owner, let alone the underlying beneficiary. That intermediation brings it's own conflicts, biases (asset managers are well paid) etc. Politically this provides critics of the system with great campaigning lines - the Right wants hedge funds to decide how much corporate executives should be paid, what's the worst that could happen etc.

The reality is that in the modern public company there is no fundamental reason why shareholders should be given a privileged role in the determination of executive pay. It isn't their money, they might not be good at it, and most often the "shareholders" are highly-paid intermediaries.

These days there's a decent amount of people on the Left who do understand quite a bit about the operation of capital markets, who the players are, how their decisions are made, and how this interacts with corporate law and company objectives. So the proposition that we leave executive pay to the market because it's "shareholders' money" is easy meat. In fact it feels like it's about 10 years out of date. If this is really the best that those on the Right who wish to defend current levels of executive pay, and how it is overseen, can do then I am optimistic that we are winning this fight.

Wednesday, 20 January 2016

Union rights as an ESG issue

I've blogged a little previously about what I see as a general failure of labour issues to make it very high up the ESG agenda. As someone who has worked with and for trade unions in different ways for much of my adult life I find this frustrating, particularly as it contrasts sharply with progress on environmental issues in responsible investment. So I thought I'd go into a bit more detail.

One of the things that troubles me is the apparent tolerance some people in responsible have for poor behaviour by companies on labour rights. I very much doubt this sort of behaviour would be tolerated in respect of other ESG issues. I think it is worth restating, as obvious as it should be, that labour rights are human rights. Therefore, where unions raise concerns about companies' not respecting labour rights this should not be seen as a "difference of opinion" between employer and employee, but a potential violation of human rights. Also, unions are very often able to provide specific breaches of labour law by companies. The consequences of such breaches vary considerably between jurisdictions but the key point is that companies are breaking the law, often repeatedly.

Seen in these terms, I question why investors do not take alleged labour rights violations more seriously. Aside from the danger in being seen as tolerating abuses of human rights, I would argue that investors should see this as a serious hazard warning. If a company is breaking the rules over and over even if you don't personally like/support unions you should be concerned about whether this is indicative of a wider management attitude.

However, for some reason this message doesn't seem to get through. I doubt a company that could be shown to have repeatedly violated environmental regulations would be given the benefit of the doubt by many ESG folks, but this does happen with labour rights. To take a real life example, imagine the reaction if a company stated that it would lobby aganst certain environmental standards because it was bad for business, and if it repeatedly used lawyers to frustrate attempts to make it more environmentally responsible. I think we know that most RI people would think this was intolerable.

Yet this is exactly what happens when unions try to organise within companies. It is far more acceptable in the ESG world for a company to oppose unionisation, even when this strays into alleged breaches of the law, than it is for it to decline to adhere to voluntary environmental initiatives or targets. I have even seen an asset manager with some ESG credibility report publicly that it supports a company's right to campaign against unionisation because it thinks this is in the interests of the business.

I genuinely get it that the working lives of retail workers, or dockers, or bus drivers are to most people in the the RI world a less interesting thing to look at than climate change, particularly if those workers live in developed countries and sound a bit thick. Engaging over these issues maybe doesn't have quite the same feeling that you are contributing to something important. But actually the ability of workers to bargain for a fair share is closely linked to inequality, surely quite an important societal issue.

It's a bad news story really: the decline of trade union strength is closely correlated with increased inequality, as an IMF paper pointed out last year. The effects might be two-fold, weaker unions mean that labour is less able to bargain for a fair share, but also reduce the countervailing power that once held corporate management in check. Is it any wonder that the US, with its weak labour law and numerous anti-union companies (and union-busting firms that advise them) is so unequal? So if you are concerned by inequality you should be concerned by companies that try to prevent or reverse unionisation.

Finally, I think it's important to flag up the issue of beneficiary interest and representation. I genuinely believe that RI policies and practices should reflect beneficiary concerns where possible.
There is a lack of good info on what beneficiaries really want to see in RI policies but some of the limited info we have suggests that they put more emphasis on basic employment-related issues than the ESG community as a whole does. If this is broadly correct this may be because they see a self-interest in it. We also know that beneficiaries want to get a decent return and are worried about getting ripped off. Therefore an RI policy that was generally rooted in beneficiaries' interests might have more to say about workplace terms and conditions on the one hand, and fees and charges on the other. To state the obvious we are long way from that, although this is broadly the territory that unions seek to occupy.

I do worry a bit that the priorities expressed in responsible investment can sometimes look like the liberalism of the well off and successful. We're very good at flying around the world to conferences and signing up to global initiatives. In contrast, bus drivers complaining about shift patterns or faulty heaters can seem rather dull. If you've never done a menial job, or struggled to get on at work, you may well consider some of the complaints that union members raise to be trivial, or whiny. But these are the people whose money makes responsible investment possible. Without their pensions you and me don't have jobs. I think they have a right to expect that their voice gets a better hearing than it does currently.