Tuesday, 2 September 2014

Follow the money at Care UK

As many people will be aware, a group of care workers in Doncaster are involved in a pretty serious fight with Care UK. These are frontline staff who were transferred across to the private sector and are seeking a meaningful pay rise, with a minimum starting rate of the national living wage of £7.65 an hour. The company has refused to consider a pay rise, so the workers have recently decided to continue to striking in support of that demand.

As always, follow the money, as Unison have done. Care UK is actually owned by a private equity firm called Bridgepoint Capital (whose advisers include Alan Milburn). Bridgepoint has some info on its website about ESG issues, but so far it seems that the strikers have been rebuffed in their approach to the company when they've tried to speak to Bridgepoint directly.

Of course, Bridgepoint won't have bought Care UK with its own money, behind them will be limited partners such as pension funds and other institutional investors. It would be interesting to see if they are aware of what is going on at Care UK, and the stance being taken.

This also reminds me of some interesting comments from Jon Moulton a few years ago. It does look like private equity firms struggle to behave as responsible owners in the care sector. Perhaps Bridgepoint will prove us wrong by doing the decent thing and ensuring that frontline staff get the pay they deserve?

Friday, 29 August 2014

Levellers, Agitators and Diggers

I love secondhand books. On a recent trip I stumbled on a secondhand book sale in the late afternoon where they were desperate to get rid of as many books as possible. I got three books for 20p. One of them was Britain's First Socialists: The Levellers, Agitators and Diggers of the English Revolution by Fenner Brockway.

It's a great overview of some of the ideas that emerged during this time, and the political and military context in which they sprung from. It also includes a few pages of paintings of some of the key figures, and pictures of important places, plus some front covers of some of the key pamphlets. 

I was quite interested to see that some of the Levellers were early advocates of Irish independence, the abolition of the death penalty for most crimes, interest rate caps and so on, alongside more obvious political reforms like  universal male suffrage (excluding Royalists, servants and, of course, women), equality before the law etc. 

Also grimly amusing to see the content of the Treason Act passed by the Rump Parliament, and clearly intended to target the Levellers. Under this you could be charged with treason - a crime carrying the death penalty - for (amongst other things) arguing that the government was tyrannical. 

I would have definitely paid more than 7p for all this!

I thought I'd post up some good snippets of original texts and speeches. The following bits are from Levellers and supporters. I'll post some from the Diggers when I've finished that section.

Thomas Rainsborough
The poorest he that is in England hath a life to live, as the greatest he; and therefore, truly, Sir, I think it's clear that every man that is to live under a government ought first by his own consent to put himself under that government; and I do think that the poorest man in England is not at all bound in a strict sense to that government that he hath not had a voice to put himself under. 
Henry Marten
Ye have, by corruption in government, by unjust and unequal laws, by fraud, cosenage, tyranny and oppression, gotten most of the land of this distressed and enslaved nation into your ravenous claws. Ye have by monopolies, usurers and combinations engrossed all the wealth, monies and houses into your possessions; yea and enclosed our commons in most counties.
William Walwyn
The King, Parliament, great men in the City and the Army have made you but the stairs by which they have mounted to honour, wealth and power. The only quarrel that hath been and at present is but this, namely whose slaves the people shall be.  

Thursday, 28 August 2014


There's a pretty worrying development at Prosegur, reported by UNI here. Unfortunately this unprovoked physical attack on a union leader is part of a pattern of threats. UNI has already complained to the Spanish government about the company's repeated breaches of the OECD Guidelines for Multinational Enterprises in several Latin American countries. This development surely strengthens that case.

One for Prosegur's minority shareholders to have a look at too?

Wednesday, 27 August 2014

Shareholder rights are bad for business?

Another interesting piece in the FT today. He's really turned away from shareholder primacy. What interests me most about this is his emphasis on the position of employees and acceptance that they have a legitimate claim for representation in governance.

while shareholders do indeed bear risks in their role as the insurers of solvency, they are not the only stakeholders to do so. A host of others are also exposed to risks against which they cannot be fully protected by contract: long-term workers; long-term suppliers; and, not least, the jurisdictions in which companies operate. Moreover, shareholders, unlike others, and particularly employees, can hedge their risks by diversifying their portfolios. A worker cannot normally work for many companies at the same time and nobody can hedge employee income by owning shares in other people,

Monday, 25 August 2014

End of the line for the Institutional Shareholder Committee / Institutional Investor Committee

So that's it. The Institutional Investor Committee (IIC) has been wound up.

August 2014

Following the merger of the Investment Affairs division of the Association of British Insurers (ABI) and the Investment Management Association (IMA) on the 30 June 2014, the National Association of Pension Funds (NAPF) and the IMA have agreed to dissolve the Institutional Investor Committee.
Where there is a shared agenda, the IMA and the NAPF will continue to work together and advocate in the best interests of their members, in particular with respect to policy issues which impact institutional investors and their stewardship of investee companies.

The spur for this is principally the recent merger between the ABI's investment department and the IMA (a change that also seems to have played a part in Legal n General quitting the ABI). This left the IIC with just two members - the IMA and NAPF - and, as a friend in the business points out, a committee of two can just meet for coffee.

To be clear about what was just wound up, under the terms of reference agreed last year the IIC was focused on policy, and giving the trade bodies a collective voice on issues of common interest, rather than shareholder engagement. At that point the IIC stopping sharing same goals that the Institutional Shareholders Committee (ISC) had been set up to pursue. But given that last week's announcement is the end of the line in terms of organisational continuity, this seems like a good opportunity to look back on its history.

Set up at the instigation of the Bank of England under the Heath government, the original ISC was intended to do pretty much exactly what the Investor Forum has planned. The idea was to help co-ordinate and maximise the impact of the existing investor protection committees run by the investor trade bodies. The ISC was originally comprised of the NAPF plus the associations (then separate) representing unit trusts and investment trusts. The ABI's forerunner wasn't a member at launch, though it joined reasonably soon afterwards. The forerunner to the IMA didn't join until much later (I think the 1990s?).

The role of the ISC was to focus engagement (as we call it now) on under-performing companies. This is much closer to the role of the Investor Forum than I think people may realise. This is for the simple reason that 'corporate governance' didn't really exist - as topic of engagement - at the time. This was all about seeking to stimulate better economic performance through the shareholder-company relationship, rather than achieving policy or structural changes to embed shareholder interests.

It is also clear that the ISC fell short in this task. Even by the time the Wilson Committee reported in 1980 it was fairly obvious that there wasn't much life in the ISC, with a limited number of cases passed on to it and, of these, an even smaller number (7) the subject of actual action. I think it was pretty inactive by the 1980s.

In the 1980s and 1990s the ISC swung one way and then another. There was an attempt to reconstitute it along the lines originally envisaged, and a paid director general was appointed. The then chair also suggested that the ISC might even occasionally employ an external consultant to give shareholders an external resource to underpin proposals for change in strategy. But it appears this new approach wasn't popular in the industry and was quickly abandoned.

From then on, the ISC seems to have focused on policy (as in promoting investor interests) and lobbying. There is probably some interesting paperwork around from this era. I blogged previously about Roy Hattersley's comments about investor protection committee policy positions on employee share ownership and profit sharing. I also stumbled across an ISC policy paper where the important role played by employees in the success of company is made explicit, though this is largely just an echo of the previous wording of the then Companies Act:

7.1 The Companies Act 1985 states inter-alia that "the matters to which the directors of a company are to have regard in the performance of their functions include the interests of the company's employees in general, as well as the interests of its members".

7.2 The ISC considers it important that this onus placed on directors by the Companies Act should not be overlooked. Directors should appreciate the significance of the role played in a company's progress by its workforce and should always consider the interests of all those involved in working together to improve their company's performance.  

It's worth noting the changed terms of reference for the ISC. Whereas it had originally been focused on stimulating the performance of investee companies, it shifted to lobbying in support of common policy positions held by the trade bodies.

· consider whether there are any such matters on which member organisations should co-ordinate their activities or representations to UK Government and regulators; European institutions; and, any other relevant international legislative, regulatory or standard setting bodies; and
· make joint representations on occasion and by mutual agreement.

I first came across the ISC in early 2000s, when the investment management industry was pushing back against the recommendations of the Myners Review in respect of shareholder activism (there was even some discussion at this point of their being a legal requirement to intervene in failing investee companies). The compromise position was a revamped set of principles about the responsibilities of shareholders. It was intended that these could be written into mandate agreements in order that trustees could asset managers accountable for their implementation.

I did some trustee training at the TUC around this time focusing on the ISC principles, and I think a few schemes even included a reference to them in their statement of investment principles. But as an initiative it failed (or succeeded, if the intent of some parties was for nothing to change). I don't think anyone would seriously claim that the ISC principles had a noticeable impact on the relationship between companies and their shareholders. This is despite it being the industry's own response to an important element of a major public policy review addressing its effectiveness.

The ISC also came into the frame when there was pressure for asset manager transparency, specifically disclosure of shareholder voting records. Labour took a reserve power which would enable it to make such disclosure mandatory, with the intention of nudging asset managers into voluntary compliance. The ISC in turn put out a position paper on the issue which, through gritted teeth, said that public disclosure was "desirable" but that it should be up to the manager whether to disclose or not, and what to disclose (as in full record, or just votes against, or stats). If managers did not disclose they were supposed to explain why not.

At the risk of blowing my own trumpet, I think I know this issue better than most people in corp gov land. There was a small increase in the number of managers disclosing some voting data, but I can honestly say I only ever saw one statement on one non-disclosing asset manager's website explaining why they didn't make votes public. The large majority of asset managers neither complied nor explained. It was another initiative with the ISC imprint that had a negligible impact.

But what really damaged the ISC, in my opinion, was the financial crisis. Given the failure of banks, and the enormous losses suffered, it was surprising that the ISC didn't say anything publicly about what was going on. This was also pretty clear indicator of how far the ISC had shifted from an organisation intended to defend investor interests in failing companies. The ISC did put out a revised paper on the role of investors, largely at the instigation of the ABI I think. But even then there was horse trading between the trade body members. Certain proposals in the original draft - like making it easier to file shareholder resolutions and the annual election of directors - were knocked out. Given that the latter reform was introduced in any case by the FRC, it shows you that even at that point (just months after the bank recapitalisations) there was pressure not to go "too far". In the long run, the revised ISC principles became a code, and that in turn was taken over by the FRC to become the Stewardship Code.

In 2010 the ISC announced the formation of the Institutional Investor Council which was to both promote the Stewardship Code an facilitate shareholder engagement. This looked like a return to the ISC's historic mission. But in reality nothing much seems to have happened. Just over a year later the IIC was relaunched again, this time as the Institutional Investor Committee and minus both a member (the AIC) and any commitment to stewardship.

The Kay Review dealt the death blow to the ISC/IIC by promoting an investors forum, separate from the trade bodies, to facilitate shareholder engagement. That, of course, is now established. In response, the IIC's own terms of reference were later revised again to rule out any role in co-ordinating engagement activity, and instead to focus it on policy. And, to come full circle, the merger of the ABI investment department with the IMA then made that role superfluous too.

A few quick thoughts as someone who has watched the ISC/IIC as an interested, critical and outside observer. In my opinion, in the period in which I became aware of it, the ISC/IIC did not have a noticeable impact on actual shareholder engagement, and pulled its punches on policy related to it. I have occasionally asked colleagues if they ever came across the ISC/IIC as a body co-ordinating engagement and they have said no. On the policy side, I think the nature of the ISC/IIC (a collective of trade bodies) made it more likely to take small c conservative positions.

Of more relevance to current events, the history of the ISC suggests that it struggled to ever work as a co-ordinating body for engagement. And this was true even when it had backing of the Bank of England, and when institutional share ownership in the UK was both more concentrated and largely domestic in nature. From my reading of it, the ISC reoriented to focus on policy because that's largely what the industry wanted. In addition, the emergence of shareholder-friendly corporate governance reform proposals (e.g. independent non-execs, incentive pay to 'align interests') as objectives to be sought at investee companies as a substitute for direct intervention probably made a policy focus a reasonable/defensible alternative.

To me it looks like the Investor Forum is generally trying to achieve the same things as the ISC in its original version. On the plus side, shareholder engagement is more accepted as an element of the asset management business these days, and there are initiatives (Stewardship Code, UNPRI) that that prod managers to be more active. The Forum also has a greater distance from the trade bodies. On the other hand, institutional ownership is more fragmented (at least geographically), and the asset management is now a much bigger business and the people that run it know where the money really comes from. And, in defence of the trade bodies it is their members that determine how far they can go - as critical as I have been of the IMA on some policy issues in the past, I doubt many members are pushing for a more radical line.

I would also highlight that in the history of the ISC there are several occasions where there was quite a lot of rhetoric, but little happened (the ISC principles, framework on voting disclosure, first iteration of the IIC). Perhaps this was partly deliberate - promising action in order to avoid more direct political intervention, or perhaps it reflected that those involved couldn't move the industry as far as they expected to. Either way it's a bit of a recurring theme to keep in mind.

So the over-riding question, really, is how much you think the asset management industry has changed. If managers now believe being a responsible owner is both effective and conducive to being a successful business (or at least not in conflict with it) then it should be able to achieve more than the ISC. It not, then it isn't obvious why things should be significantly different this time.

Tuesday, 19 August 2014

A few bits and pieces on exec pay

1. The High Pay Centre has don't a great job crunching the data on employee vs executive pay and found that in the FTSE100 the now stands at 131:1. Of course there are some much bigger individual ratios. Martin Sorrell has earned 780 times the average WPP employee salary (which, by the way, is a very healthy £38K). Lord Woolfson earned 459 times the average Next employee.

2. There's a very interesting interview with the head of the IoD in the Guardian. They go mainly on the exec pay angle, but personally I think what he says about "stakeholders" is most interesting (and if you think about it, this doesn't sit well with his claim at the end that shareholder powers are the answer to the exec pay issues). Here's a snippet:

"We are trying to get back to the focus on governance, on running companies better and in the interests of stakeholders broadly, in the climate we are in today.
"Competition and the market have, in my view, brought greater benefits to humanity than any other movement ever and we need to remind people about that. But we also need to make sure that it is competitive and is run in the interests of all its participants. That is what governance is all about. It is about running a business properly and in accordance with its professed purpose for all its stakeholders."
There are also some digs in there about shareholder value.

3. I spotted an odd comment from BIS at the end of a story on the HPC analysis:

A spokesman for the Department for Business, Innovation and Skills said: "The government has introduced comprehensive reforms to give shareholders more powers in order to restore the link between top pay and performance, which in recent years has become excessive and increasingly disconnected.
"In October 2013 new laws reforming the governance of top pay came into force, boosting transparency by arming shareholders with more information and giving them the power to hold companies to account.
"Business secretary Vince Cable also wrote to all the members of the remuneration committees back in April urging restraint, and while we will need to wait until the end of the [annual meeting] season before we can reflect on the full impact of these actions, many firms have already seen top pay voted down."

Er... many firms?

As far as I know only one company - Kentz Corporation - has actually lost the (binding) vote on its rem policy that the government brought in. And I think there are only two rem report defeats so far this year - Kentz and Burberry.

We might think that the new exec pay regime has had an impact on many firms, perhaps by encouraging them to engage more with their shareholders and earlier (though exactly this claim was made for the advisory vote after it came into force in 2003!).

But it's plain wrong to say that "many firms have already seen top pay voted down." I think the running total this year is 2, and one of them was defeated using the existing advisory vote so it can't even be credited as a win for the new regime.

And in fact there is a much bigger point here. I reckon in the past decade less than 50 companies have lost a rem report/policy vote. Such defeats are rare. If (big if) this is a measure of the success of our governance system for exec pay then is it working?

Sunday, 17 August 2014

A bit more from Roy Hattersley on equity ownership

A few nuggets from Choose Freedom.

First a general bit on shareholdings:

The acquisition by working men and women of small shareholdings in unlikely to change the nature of society. Conservatives may call it people's capitalism. But most of the capitalist people will see their small portfolios as another form of saving which may give them a feeling of middle class prosperity which normally goes with a bank account but which does not emotionally commit them to support for the enterprise culture of stock exchange and commodity markets. For although the possession of a share certificate will provide a slice of theoretical power, the whole process of appearance or proxy (not to mention the likelihood of being swamped by institutional power) will diminish the feeling of real involvement. On the other hand, the possession of equity holdings which are organised to maximise the influence of employees within the company can induce a wholly different attitude, for the employee-shareholder is doubly involved with the company.

Attitudes of institutional investors (in the 1980s) to extended employee share ownership:

One of the principal barriers to the extension of real share ownership is the criterion laid down by the investment protection committees* of the big institutional investors - the insurance companies, the pension funds and the unit trusts. They fear that, notwithstanding the evidence of improved performance, worker share-ownership will dilute the value of traditional holdings as new shares are issued to employees. Therefore they stipulate that the the firms in which they invest should not allocate more than 5% of their pre-tax profits or 1% of their existing share issue to employee shareholders. That prejudice could be overcome by law, but even such a statute would have to be accompanied by the gradual education of slow learners. In the meantime, we need to establish trusts which can purchase existing shares on behalf of employees without diluting the value of the shares in general. Unless such new institutions are created, investment protection committees will inhibit the development of worker-shareholder schemes in a way which tax incentives do not have the power to overcome.

Employee ownership and power vs state ownership

Socialists who are serious about the extension and diffusion of power and ownership need to start thinking about how [widespread employee share ownership] can be achieved. Unity Trust Bank - the trades union bank - has begun the process. Extending it is a classic socialist cause. Ownership and wealth is being spread more evenly; the state is employed not to enhance its own power but to organise the distribution of power to the people - theoretical rights are changed into reality; the mechanisms of government, the tax system, the legislative process, are all being used to provide individuals with a greater influence over their daily lives. To fail to provide that process because of some half-digested notion about collective action, centralised planning or state ownership would be a denial both of the individual rights which ought to be at the heart of socialism and the long-held belief that the emancipation of the worker requires his relationship with his employer (and his relationship with the capital which provides his employer with power) to change...

[T]he more different schemes to extend worker control and influence proliferate - co-operatives, ESOPs, investment funds - the more the whole nature of society changed. That is surely a more noble objective than the transformation of a few private monopolies into state monopolies.

* these were the committees that dealt with 'ownership' issues and rights before corporate governance, stewardship etc (I think they were, basically, the NAPF Shareholder Affairs Committee and ABI Investment Committee, though they may have had different names at the time). The Institutional Shareholders Committee was originally an extension of the existing investor protection committees, so it's possible there is an ISC policy doc out there somewhere setting out the proposed limits on employee ownership and profit sharing. Personally I quite like the language of 'investor protection'.