Friday, 19 January 2018

All stakeholder interests align over the long term, not

This was about a month before Ryanair agreed to recognise unions:
“Frankly, most of the shareholders would rather Ryanair doesn’t fly any planes for six months than the workforce becomes unionized,” said Barry Norris, who oversees about $500 million at Argonaut Partners in London, including Ryanair shares.

Thursday, 4 January 2018

Fat Cat Day - Ladbrokes special

Today is Fat Cat Day, the day on which the High Pay Centre calculates that the average FTSE100 CEO has "earned" as much as someone on average earnings gets in a year.

As we're focused on exec pay, I thought I'd contribute an update to a blog I wrote previously about the solemn and respectful tone that Ladbrokes has adopted in response to high shareholder votes against it over executive pay. We cannot fault Ladbrokes on its commitment to listen seriously to shareholder concerns... at the last three AGMs.

In 2017, in response to a large vote against its executive pay arrangements, Ladbrokes noted respectfully that:
more than 20% of votes cast were against the Directors' Remuneration report and have been advised by some shareholders that this vote against was in respect of the salary increase of Jim Mullen, the Chief Executive Officer, at the time of the merger with Gala Coral, which was undertaken to bring his salary in ratio to the salaries of other executives joining the Board as a result of the merger. This was widely briefed to major shareholders ahead of the increase, with only one major shareholder expressing concern and that was about phasing of the award rather than quantum. Jim Mullen has not received an increase in his salary in the current year. The Chairman and the Chair of the Remuneration Committee will seek to meet with any significant shareholders who voted against the report to further identify any other issues that arose.
This was of course a one-off, and should not be seen as indicative of a systemic problem with executive at this company or more widely. Plus points too for willingness to engage with shareholders.

And we should take the same view of its 2016 AGM, when, in response to a large vote against its executive pay arrangements, showing the greatest respect, Ladbrokes stated:
The Board notes the vote in respect of the Directors 'Remuneration Report. Ladbrokes understands the concerns expressed by some shareholders towards the termination arrangement with Ian Bull.  The Board is very aware of shareholder observations and these will play a key part in the Board's thinking as remuneration is considered for the business going forward and the potential merger with Coral.
This was also a (different kind of) one-off, and, once again the commitment to take "shareholder observations" into account was very welcome.

Certainly, no link should be drawn between the 2017 and 2016 AGMs and the 2015 AGM, when, in response to a large vote against its executive pay arrangements, with a respectful tone, Ladbrokes said:
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.
(And, of course, it would be churlish to link the 2017, 2016 and 2015 AGMs to the 2011 AGM, when Ladbrokes also received a large vote against its executive pay arrangements.)

I think we can all agree, that what matters here is not getting three large shareholder protest votes in a row, or managing to irritate investors in three different ways, or that shareholder let them get away with it, and certainly not the scale of the pay! But rather we should applaud the respectful and non-inflammatory tone adopted by the company, and its commitment to engage with shareholders. It is a shining example of the consensual and non-confrontational nature of UK corporate governance working at its best. A pat on the back to all those who made this happen!

Saturday, 25 November 2017

Public ownership and UK pension funds

So, Labour is back in the game of public ownership. Various targets are now talked about for potential nationalisation, or something like it, including rail, the Royal Mail and utility companies. One of the interesting things about Labour's discussion of public ownership is the way that the amounts the currently privatised operators pay out to shareholders. The point being that under public ownership this money could be invested, not distributed to investors.

At this point, someone will almost always point out that those shareholders are the UK public. So we'd be knackering our pensions, and therefore we're not being smart by suggesting that some mysterious group of "shareholders" will bear the pain.

What I haven't seen, so far, is any kind of proper working through of these points. So I thought I would blog a few thoughts of my own.

1. The UK public's exposure to the companies that might be nationalised is likely to be higher than some in Labour hope, but lower than their opponents pretend.

I've seen the figure bandied about that only 3% of shares are held by UK pension funds (so nationalising companies wouldn't hurt them too much). I think this comes from ONS data on share ownership and on the face of it makes a basic mistake. I think this may be the % of shares held directly by pension funds, or easily identified as being held by them.

A quick review of the share registers of some of those companies on the target list will show you that you can get up to a couple of percent of shares held by pension funds very quickly. But this overlooks all the pension funds that invest via pooled funds, especially the big index funds run by the likes of L&G, BlackRock.

However, that said, it is undoubtedly true that ownership of UK PLCs in general has become more global. This is picked up in both the headline stats and the share registers. In particular there is a lot of US money. No doubt some of the money managed by Vanguard, T Rowe Price, Oppenheimer etc is run out of London for UK clients, but the large bulk of it is not. There's also quite a bit of Europe ex UK money in there these days too. You'll always see Norges Bank in the mix but also French, German, Dutch, Swedish asset managers, pension funds, and insurers.

I think all we can really say is 3% in not realistic, that overseas ownership is high, but that's about it. Someone needs to get into the detail now.

2. The nature and level of UK ownership will vary significantly by company.

It's obviously not an homogenous group of companies. To take two examples - SSE is still a publicly traded company and has a diversified shareholder base. There will undoubtedly be numerous UK pension funds that hold shares, though most won't have a significant holding. On the other hand Thames Water is privately owned, and mostly by overseas investors - though note that Hermes is a major player. So if you nationalised SSE (assuming this means compulsory purchase of equity) you'd likely have a small impact on a lot of UK pension funds. If you nationalised Thames Water you'd have zero impact on most UK funds, but hurt those that do have holdings harder.

3. Who will really bear the cost?

So if the government does buy out the current investors, and those investors feel they aren't getting a fair price, who will actually bear the cost? Well, in a DC scheme it will be you, the member. You shoulder the investment risk, so any loss eats into your assets. Bear in mind that the better off amongst us will have more exposure to equity-based savings, so in theory take a larger hit. But equally there will be more lower earners in total who take a hit.

In the the remaining DB schemes it should be the employer that takes the hit, assuming it isn't large enough to affect funding and lead to a change in benefits. Theoretically we could say it will hit the shareholders (where relevant) in the sponsoring companies, but in practice I doubt it will be meaningfully felt.

4. Will they feel it?

The first "they" is "the pension funds"  i.e. the trustees, sponsors etc.
This is an unknown. We don't know how much the government would be willing to pay to take the companies into public ownership (valuing the shares would split open the question of what shareholders actually "own"). I'm not smart enough to do this bit I'm afraid (I hope someone else in my party is doing it though!)

What we can say that pension funds that have a large exposure to all the companies would feel it the most. Equally those that have only an index-tracking exposure might not notice much. I'm reminded of when BP tanked after the Gulf of Mexico disaster. It was the biggest stock for many UK funds and responsible for something like 12% of all dividends paid by the FTSE100. But the (then) NAPF put out a statement saying it wouldn't have a meaningful effect on pension funds. It must be the case to have a group of stocks all losing value will have a worse impact, but it will depend a lot on diversification.

The other "they" is the scheme members. As above, DC scheme members will see the value of their assets affected if they have exposure, but again will depend on the number of companies held and the extent of holdings. But even so, at the risk of being cynical, I doubt most members will pay much attention. There is little member engagement with pensions in general and investments specifically, so my gut feeling is that this will pass many by. Bear in mind that UK PLC took DB pensions away from huge numbers of private sector workers without a generalised revolt.


If Labour does get elected, and does go ahead with nationalisations, we should be aware that - depending on how shareholders are compensated - this will have an impact on UK pension funds. It will vary significantly by fund, but it's daft to pretend that the impact is not there. Equally, we should not let the Right (especially the Right media) get away with pretending that this would represent some sort of apocalyptic assault on UK pensions since a) in some specific cases the impact would largely be felt by overseas investors (though these include workers' pension funds too!) and b) it might not be that significant.

If we are serious, then effort needs to go into mapping all this, preparing the ground, and considering any compensating policies that pension funds might favour. And we should be prepared for a huge Mail, Telegraph scare campaign.

Saturday, 7 October 2017

The emerging new politics of corporate governance and ownership

I wrote a piece a few months ago (prior to the election) saying that I thought that while the Left were unlikely to win the election, we were winning the battle of ideas. I don't actually think this was a particularly insightful or original take, but it does seem that this the way that things are panning out (though Labour did much better than I dared to hope). So I'm interested in where it looks we are headed, why this is, and what it means for corporate governance in the UK.
First, a few indications of the direction of travel. The government's recent corporate governance reforms tell their own story. Although defanged, they have still broken new ground, and tackled existing issues in new ways. For example, the disclosure of pay ratios is entirely aimed at addressing concerns about relative reward. It demonstrates that even within the micro politics of the executive pay debate the argument has decisively shifted away from the idea that linking pay to performance is where the action is. In addition, a Conservative government has backed the idea that workers should have some form of representation in the governance of businesses in which they work. Finally, perhaps as significant is how little emphasis was placed on the role of shareholders (this is a good indication of where some thoughtful Conservatives are at - workers should have the same rights over exec pay as shareholders!). This is in marked contrast to pretty much every major public policy intervention on corporate governance since the early 90s at best.
Zoom out from corporate governance and we can also see that there is a battle underway regarding what form of regulation and/or ownership should be in place for utilities. Once again it is a Conservative government that will be seeking to more actively control prices (through an energy price cap). This is a policy that was literally described as "Marxist" by the same party when it was advocated by Labour two years ago. For its part, Labour is now advocating returning utilities to public ownership (personally I hope "public ownership" in the 21st century is an open question rather than a direct lift from the past).
It is also worth looking at some of the rhetoric around Labour's policy in this area. This is from Jeremy Corbyn's speech to the Labour Party conference last month: "Take the water industry. Of the nine water companies in England six are now owned by private equity or foreign sovereign wealth funds. Their profits are handed out in dividends to shareholders while the infrastructure crumbles the companies pay little or nothing in tax and executive pay has soared as the service deteriorates."
A liberal and global market for corporate control has resulted in this picture (which applies much more widely than utilities obviously). It's much easier to build a populist argument for taking public control of infrastructure when it isn't even owned by our own pension funds. I can imagine some Conservatives riffing on this point in the future,
Why is all this happening though, and what does it mean for UK corporate governance? There may be some answers in some polling carried out for the right-of-centre Legatum Institute. This polling was carried out by people who are advocates for free market capitalism, but are concerned by the direction of travel in UK politics and want to understand what is driving it. Though, to state the obvious, I disagree with them politically, they seem to be asking the right questions. The full report is here.
There is too much to summarise so I'm just cherry-picking items that I think are relevant for people (regardless of political inclination) interested in corporate governance, ownership and related issues. First look at the polling on utilities. 83% of those polled think water should be in public ownership, whereas 77% think the same for electricity and gas and 76% for rail. Digging into those numbers a bit deeper, 76% of Conservative voters support nationalising water (68% for electricity, 69% for gas). And those figures are consistent across age groups too, in fact the youngest voters are slightly less keen on nationalisation than older ones.
Most adults experience utility providers on a regular basis, and most people intuitively get the idea of/problems with monopoly provision without ever picking up an economics text book. In addition, a large chunk of older voters will have experienced both public and private provision. In a nutshell, with their consumer hats on, the public do not like what they get. With this background, the polling results demonstrate why the politics around rehabilitating public ownership work. No-one loves utility companies, no-one thinks that changing provider changes the product/service, those that experienced both public and private ownership are as convinced of the desirability of change as those with no experience. How a government might approach public ownership / control is the difficult bit, but there's little doubt they would have public backing to try it.
Now look at the polling on issues relating to business in general. There is strong support for capping executive pay, for requiring businesses to consider factors other than profit, to regulate more and so on (and milder, but still majority support for workers on boards). On most of these issues there is a gap between Labour and Conservative voters, with the latter less enthusiastic for more interventionist policies. Nonetheless on the question of whether there should be a cap on executive pay versus letting companies pay executives what they want a large majority of Conservative voters favour a cap. A majority also favour businesses not being solely focused on profit. They are evenly split on workers on boards, but looks like a very slim majority say it doesn't matter.
I would say these polling results present challenges for the UK corporate governance status quo. Executive pay is the most obvious area. It's a safe bet that the vast majority of people whose employment is in some way related to corporate governance would oppose a cap on pay (in my experience many are even sceptical about pay ratio disclosure). I expect that many of those who have a formal role in setting or affirming executive pay (rem comm members, asset managers) will be amongst the most opposed to the idea. This is of course their right, and again we need to properly chew over what we mean by "capping" executive pay, what the effects might be and so on.
But the key thing is that much of the corporate governance establishment, for want of a better term, is in a very different place to the large majority of the public, and even a large majority of right-wing voters. Put simply: the people who have most influence on executive pay tend to hold the most right-wing views on the topic. Their views are further to the Right than the public in general or right-wing voters specifically. I suspect that gap in views is going to matter a lot more in future. I simply cannot imagine a future Labour government considering that if a lot of rem comm members and asset managers think executive pay is basically OK then they should leave it alone.
On similar ground, the strong support for wider business objectives rather than just profit maximisation may help explain why shareholder primacy is increasingly questioned, and not just on the Left.
I imagine that some of those who work in corporate governance who read this will be thinking that the kind of ideas that are being put talked about - public ownership, pay caps, workers on boards - are ill-informed, counter-productive, economically damaging etc so they are right to not take them seriously. I think this is wrong in two senses. First, it is important to grasp is that these issues are contestable in politics once more and therefore need to be argued over. It will be no good to simply assert that the door must remain closed. Second, it is a mistake to assume (as some appear to) that those who think differently are simply misinformed or ignorant. I think most of us (regardless of our politics) would agree that no single party or group has a monopoly on wisdom. This should apply in our corporate governance microcosm too.
If the last few years have taught us anything it is, as Yogi Berra is supposed to have said, that it's tough to make predictions, especially about the future.... Nonetheless at the moment it does look as if it is the Left that will set the terms of the debate in the UK with regards to corporate governance and related issues, and that policy interventions are likely to follow this trajectory. I am genuinely interested to hear if people agree with this, or, more importantly, disagree.

Wednesday, 27 September 2017

Union investors serve notice on XPO

News from the annual Committee on Workers' Capital conference, which took place in Berlin this year:

Union investors serve notice on XPO

Trade union investors meeting in Berlin today served notice on US-based logistics provider XPO that it must reform its labour practices.
The message was sounded by ITF (International Transport Workers' Federation) president Paddy Crumlin, speaking to a meeting of the Committee on Workers’ Capital (CWC) that included trustees of major pension funds whose assets are managed by Orbis Investment Management, XPO’s largest shareholder.                       
He told the Berlin meeting: “I’m proud to say that the CWC is playing a critical role on bringing workers’ rights issues to the forefront. We talk so much about shareholder value; we as the stewards of workers’ capital must stake our claim to what we value. 
“Active trustees are the bedrock of effective corporate engagement.  They’re the workers’ voice in the capital markets.  We need trustees to convey to corporate boards, and to our pension funds’ investment advisors and managers the issues we feel are important and let them know we are watching how well they perform in meeting our funds’ needs and values.”
He continued: “The CWC exists to enable unions to collaborate globally and to mobilise workers’ capital in support of our brothers and sisters facing insecure casualised employment, and anti-union intimidation. I hope all CWC participants will do what they can to support the XPO campaign, and make sure our capital supports XPO workers wherever they are.”
Mr Crumlin concluded: “We call on the investment managers to go to XPO management, relay our concerns and demand the company shows a transition plan for converting independent contractors to full employee status. We also ask them to call for enhanced sustainability reporting.”
In July the ITF launched a taskforce to tackle XPO’s anti-union and anti-worker tactics. XPO spends hundreds of thousands of dollars on union busters to fight workers’ attempts to organise in the United States, has slashed worker benefits and misclassifies workers as independent contractors. In Europe, XPO cut jobs despite promises it wouldn’t do so, misclassifies workers, and has denied workers toilet or water breaks. Workers across the globe are standing up to these anti-worker actions.
For more about the CWC see follow the Berlin meeting live at

Thursday, 14 September 2017

ECJ ruling challenges Ryanair's employment model

Today saw a highly important by the ECJ relating to low-cost airline Ryanair. As many people will know* Ryanair is anti-union. It also relies on extensive use of indirect employment, with many cabin crew employed by agencies like Crewlink, whilst many pilots are self-employed contractors (yes, really).

But the other striking thing about Ryanair is that a large number of staff are employed under Irish law. This happens whether they work in Ireland or, in the case today, in Belgium. By happy chance Irish law has weaker employment rights in a number of areas than other nations in which Ryanair crew work. Today's decision, which you can access here, was essentially concerned with whether staff based in countries other than Ireland could have cases heard in their own country, and plays into the question about which country's law should apply.

I won't summarise the ECJ ruling, our resident legal expert has done that here, but it is very favourable to employees on this point, and thus a major setback for Ryanair, though the company claims otherwise.

The ITF has put out a statement on the ruling, which you can read here. There is also quite a bit of media coverage, most of it good (the Telegraph news story not so much!). Interestingly, some sell side analysts have come out with negative comments about the impact on Ryanair in response to the ruling, and various figures are being knocked about regarding the potential impact on its costs. This, plus the 3%+ drop in the company's share price, should tell you that financial markets have not bought the company's claim that the ruling doesn't change anything.

To me it looks like today is just the start of the company's employment model coming under more scrutiny and challenge. If I was an investor in Ryanair I think I'd be asking whether today's bombastic statements bear much relation to the truth, and just how much risk/cost there is tied up with the current model. It's interesting that the Advocate General's opinion in this case, which came out in April, did not even get a mention in the annual report.

As if that was not enough, Ryanair has its AGM next week. Again there has been a string of stories about corporate governance advisers recommending votes against the company's remuneration report and board directors. So today's news could not come at a worse time.

It will be a turbulent couple of weeks.

* If not, here's just one recent example:
“We don’t believe it will lead to unionisation because the first people up over the barricade looking for unions will find their base either frozen or closed,” he said.

Sunday, 10 September 2017

Adolf Berle on Sports Direct

Adolf Berle, of Berle and Means fame, continued to write interesting things about corporate power and control long after The Modern Corporation and Private Property. The excerpt below is from Power Without Property: A New Development in American Political Economy from 1959. I think it applies well, almost 60 years later, to what happened at Sports Direct last week.
"In effect, the position of the institutional managers is that they will not exercise their voting power to affect the choice or the policies of corporate managements. The individuals for who the institutions are fiduciaries, holders of rights in pension trusts, of shares in mutual funds, or of insurance policies, have surrendered their voting power. The institutional managers, therefore, by their policy of non-intervention, merely insulate the corporate managements from any possible action by or influence of the ultimate, beneficial "owners" of the stock. A policy of non action by the institutional managers means that the directors and managements of the corporation whose stock they hold become increasingly self-appointed and unchallengeable; while it continues it freezes absolute power in the corporate managements."