Tuesday, 26 May 2015

EU says shareholders do not "own" companies

There's a good summary of what is going on in the Shareholder Rights Directive here. Arguably the most significant part of it is below -
Shareholders do not own corporationsThe directive will explicitly acknowledge that shareholders do not own corporations - a first in EU law. Contrary to the popular understanding, public companies have legal personhood and are not owned by their investors. The position of shareholders is similar to that of bondholders, creditors and employees, all of whom have contractual relationships with companies, but do not own them.
To which I'm tempted to respond "well that settles that then" and move on.

However, of course, this is a major issue in corporate governance policy, and from it flow decisions about the emphasis put on different interests in the corporation. Much corporate governance 'reform', drawing on Berle and Means, is intended to address the agency problem believed to arise from the separation of ownership and control, which itself is taken to result from widely dispersed share ownership. But if shareholders never owned the corporation in the first place this would seem to be a fundamentally flawed objective. Why give shareholders more powers to hold companies accountable, or put more pressure on shareholders to exercise 'stewardship', if it's not their property in the first place?

For what it's worth I agree it is hard to make the claim that shareholders "own" companies stack up both in theory and in practice. This is partly a legal issue. As the directive now says, companies have a separate legal existence, and if I remember right have also been cases where shareholders have been held not to own the assets of the company. I am not totally convinced by leaning heavily on jurisprudence though (i.e. I don't think citing Honore proves anything), since things like control rights vary significantly between different types of ownership, and we could argue that corporate "ownership" is simply one of the more watery versions of the concept. To play devil's advocate, even allowing for separate legal personality, limited liability etc it seems a bit weird to argue that no-one owns 21st Century Fox, or Sports Direct, or RBS for that matter.  

My personal view is that the killer blows to ownership as a meaningful concept in the corporate world come from the behaviour of shareholders themselves. Even many of the largest investors have heavily diversified portfolios - essentially designed to free them from having to monitor their 'property' too closely - and don't do much "ownership" activity. There is some interesting research into companies' views of shareholders, and they tend to see them as an important stakeholder (and sometimes a resource provider) with which relationships have to be handled carefully. But this doesn't equate to ownership - they generally see shareholders as traders rather than owners.

Of course, if you knock the concept of ownership away then people might start to ask why it is only shareholders that get a formal role in the governance of companies in markets like the UK. You might also ask why shareholders' views on the pay of directors should be given the weight they are. Therefore it might be in the interests of some parties to encourage the continuation of a frankly fictional view of the relationship (as it stands) between companies and shareholders.

So, in light of all that, if the shareholder rights directive continues in its current form it could open up some significant issues.

Saturday, 23 May 2015

Asset manager oversight of exec pay

There's a very telling quote early on in this piece by Jill Treanor on Fidelity's views on exec pay.
“If you approach executive pay from the point of quantum, you are setting yourself up to fail,” he said.
I think this encapsulates why there will continue to be controversy around exec pay. A lot of mainstream asset managers really don't think how much directors get paid is what they should be worried about (note we even have a corp gov jargon word - "quantum" - because we can't use words like "size", "scale" or "amount" can we?). Rather they say structure is what we should look at.

Fidelity's own ideas are at the soft end of the reform spectrum, basically tweaking long-term incentive plans that many think are fundamentally flawed. But that is a sideshow in any case, the key point is that Fidelity has "deliberately steered away from" talking about how much execs are paid.

For various reasons, the UK has put all its emphasis on addressing exec pay through company reporting and shareholder empowerment. As I constantly bore on, this means that exec pay is likely to reflect the interests of shareholders - in practice asset managers. If asset managers like Fidelity are explicit that they aren't going to tackle the amounts execs are paid, remuneration is only heading in one direction. We can see the practical expression of this view in shareholder voting on exec pay - still very timid, with actual defeats very rare (one rem report so far this season I think?).

What is more, if (big If) the economy starts motoring again we can expect to hear all the usual voices arguing more loudly that pay needs to be competitive, it's set by the market so no need to interfere etc. The limited social pressure for restraint may be lessened.

All this, to me, suggests likely renewed growth in exec pay. It will continue to be a problem for business legitimacy and reputation, but it may also bring into sharper focus the flaws in the UK system. One thing I am pretty sure of is that those who think we could try something different are likely to be provided with ammo for their arguments in the form weak shareholder oversight.

Monday, 18 May 2015

Where is labour in ESG?

About six months ago I blogged about a PRI report on policy, and the limited mentions of labour issues compared to governance and environmental issues. My belief was and is that the RI community pays significantly less attention to labour issues than other ESG factors, and is more wary of them.

Today's report by Share Action on voting at AGMs in 2014 helps make the point again. If you look at page 15 you can see a comparison between asset managers' votes on three environmental resolutions, and the resolution filed at National Express relating to human capital management. The difference is very stark. I know there are mitigating factors - for example shareholder resolutions are much more commonplace at US companies, so it's seen as less controversial to support them. Nonetheless the picture is pretty clear.

There's a job for unions to do here. Our links with the RI industry need further development, we need to make sure our trustees are not allowing workers' capital to be voted against worker interests, and maybe we need to perform more of an educational role too: explaining why labour issues matter to company success.

But maybe it's one for the RI community to ponder too - why is the disparity so striking? Is this just an area where not enough thinking has been done, or evidence provided? Are RI people more likely to come from a sustainability background and/or lack knowledge of unions/labour issues? Is there greater internal pressures against supporting labour-oriented initiatives?

If people are our greatest asset it's surprising they don't get more investor support!

Friday, 15 May 2015

A new normal in executive pay

A quick plug for the excellent report by the High Pay Centre on performance-related pay, No Routine Riches. This is the outcome of a year-long project looking at performance pay, and how it can be reformed.

If you read the report you'll get a sense of real scepticism that performance-related pay is worth the effort. Aside from the significant fundamental problems it faces (does paying for performance really improve performance? do recipients want or value variable pay? etc) in practice it has been very hard to  attribute performance to individuals or to get non-gameable targets right. In practice variable pay has ballooned to offset the fact that it's not a 'sure thing', meaning that execs are taking an ever larger slice.

The HPC says we could simply do away with performance pay (which would be my preference - scale it right back), but in the medium term it suggests getting right of LTIPs, paying in cash rather than shares and banning golden hellos in most cases. If enacted these reforms would mark a significant shift in the centre of gravity in UK corporate governance.

For what it's worth, I've lost count of the number of investors and corporates who have told me that LTIPs are rubbish, but they think they are what is expected. We currently have an executive pay system in the UK that many people think is fundamentally flawed, but it continues because it's easier to deal with some familiar even if it doesn't work.

The system is rotten - it's time to kick it over.

Monday, 11 May 2015

Company responses to high shareholder votes against exec pay

As I've blogged previously, the new version of the UK Corporate Governance Code requires companies to make a statement in response to large votes against them. This was introduced due to concerns that companies were treating near misses on exec pay votes as "wins" and carrying on as before.

In the past week or so we've already have three pretty chunky votes against exec pay at BBA, Man Group and Ladbrokes. So how have they responded? Here are their respective blurbs issued alongside their AGM results.

The Board is disappointed to note that whilst the resolution to approve the Directors' Remuneration Report was passed with the requisite majority, there were a significant number of votes opposing the resolution and a significant number of votes withheld.  We have already engaged with certain shareholders to discuss their concerns relating to our Remuneration Report and we will continue to take appropriate steps through our ongoing contact with shareholders to ensure that we fully understand their concerns.
Man Group:

While the Board notes that there were a significant number of votes cast against Resolution 2 (approval of the new Directors' remuneration policy) and Resolution 3 (approval of the Directors' remuneration report), it has found that, as part of an extensive period of engagement with the Company's major shareholders ahead of the AGM, the majority of those shareholders with whom the policy proposals were discussed were supportive.
The changes to the remuneration policy approved by shareholders provide the Board with additional flexibility to reward any higher levels of future performance at an appropriate level, taking account of the competitive dynamic of the global hedge fund industry within which Man Group operates.  The vote on the remuneration policy is an enabling vote only and actual awards will continue to be determined by performance. The Board has demonstrated its disciplined and rigorous approach to remuneration decisions in the past and will maintain these standards in future. Shareholders will have the opportunity to express their views on the Board's judgement in applying the new policy to future reward decisions through ongoing consultation and ultimately through their vote on the Directors' remuneration report each year. We will continue our efforts to engage with our shareholders and take account of their views in the coming year.

The Board notes the vote in respect of the Directors Remuneration Report. Ladbrokes has spoken with several shareholders about the termination arrangements for Richard Glynn where his contract required that any settlement had to be determined in line with UK damages principles.  The Remuneration Committee confirms that contracts of this type are not appropriate and termination arrangements for the current executive team, including Jim Mullen who was appointed CEO on 1 April 2015, are determined on payment in lieu of notice (PILON) principles in line with best practice.  The Remuneration Committee further notes that Jim Mullen was appointed on a lower salary and shorter notice period than the previous CEO.
So I think those translate roughly as "we'll keep talking to our shareholders", "we've talked to our shareholders and the ones that count agree with us, it's all good and anyway have a go again next year if you don't like it" and "fair cop, we won't do it again". Man Group looks to me to be least in line with the spirit of the Code.

UPDATE: actually I just realised that Ladbrokes was one of the companies whose previous behaviour was cited by a few people as a reason why there should be a requirement to respond to high votes. What they said in 2011 is a bit of a classic.

Sunday, 10 May 2015

A quarter of National Express shareholders revolt over labour rights

One of the things some people won't have noticed in the aftermath of the election is a very significant shareholder revolt at National Express over labour rights at its AGM last week.

A group of shareholders including LAPFF members had filed a resolution calling on the company to commission an independent review of practice in its US business Durham School Services. This was in response to ongoing allegations of anti-union activity, recently amplified by a report by two Labour MPs who flew to the US to have a look for themselves.

According to the company's RNS release, there was a 15.38% vote for the resolution, with abstentions taking the total not backing the board to over 19%. However, if you strip out the shares held by deputy chair Jorge Cosmen then the extent of the revolt amongst independent shareholders becomes clear. A chunky 18.5% voted for, with 5.5% abstaining, meaning that a quarter failed to back management.

This is very significant. My knowledge of shareholder activism at UK PLCs goes back to the late 1990s. I am certain this is the largest vote of its kind in this period. However, it is likely the largest shareholder vote against a UK company over labour issues, ever. 

National Express has managed something quite remarkable in sparking this scale of opposition. Let's see where it goes next.

Friday, 8 May 2015

What a mess

It's a lot worse than I thought.

I think the Labour result leaves us in a real mess. The lack of progress in England will strengthen the argument that Labour was pulling too far to the Left. I don't agree, but that is the claim that will be made. In contrast the wipeout in Scotland will be cited as proof that we didn't go far enough to the Left, as the SNP presented itself as the anti-austerity party.

The Lib Dems have done significantly worse than expected too, and their parliamentary party can now fit in a people carrier. But the UKIP vote held up, even if it didn't result in MPs this time. I fear this is a sign of things to come if we aren't careful. My personal view is that these two developments need to kept in mind when the inevitable arguments about where we go next take place. I'm not at all convinced that the 'centre ground' is where some people on the Right of Labour think.

For what it's worth, I thoughy John Gray's essay on Ed Miliband a couple of months back might prove to be a bit near to the mark. I share Ed's desire for a shift in direction, but my fear has been that there isn't the corresponding desire (yet?) for such a shift on the part of the electorate. John Gray's piece is very pessimistic about this, but pessimism of the intellect and optimism of the will and all that.

These bits in particular sound about right to me:
Labour risks an acute form of the voter alienation that affects all the mainstream parties. It is like other parties in drawing its leaders from a narrow and privileged social stratum: the metropolitan professional classes who can afford to live in good catchment areas or send their children to be educated privately and then support them through years of unpaid internships and think-tank positions. But the rise of this political class is a special vulnerability for a party that claims it speaks for working people. Labour’s problem is that it has only one Alan Johnson. Soon it will have none.
Contrary to Miliband’s Blairite critics, there is no way forward in trying to re­occupy the middle ground. In a time when mainstream politicians are objects of disgust and contempt, the middle ground (if it exists) is no longer a safe place to be. Voters want something different – hence the rise in support for parties of protest. 
Back to the drawing board.