Tuesday, 30 June 2015

Performance-related problems

There is a very good piece by Anthony Hilton in the Standard today taking a swing at the mainstream corp gov approach to executive pay. No surprise, but I agree with pretty much all of it but there's one thing in particular that leapt out today -
The business fails to understand that setting executive pay is an art not a science. It is about human behaviour, motivation, perceptions of fairness, feelings of self-worth and how we interact with the people around us.
But the pay industry works on the basis of it being a science — that it is about the setting of rules, the application of mathematical formulae and the definition of targets. It seeks to impose mechanical controls on biological processes and then wonders why is does not work.
This coincides with the news that former Thomas Cook chief exec Harriet Green has agreed to donate a third of her share award to charity. As the FT points out today*, she was in charge of the company when it tried to block an inquest into the deaths of two children at a hotel on a Thomas Cook holiday. But don't let that make you think that the share award was undeserved -
Her spokesman said her award was entirely in line with the share price and earnings targets set by Thomas Cook and that Ms Green fully expected the size of her award.
This is exactly the problem Anthony Hilton identifies and an inherent problem with performance-related pay. If your primary interest is tying reward to performance then there are always going to be cases when good financial performance coincides with poor ethical standards, and execs will get large awards when the company they are notionally in charge of is severely criticised. Exec pay can be fiddled about with a million times, but as targets get ever more complex common sense is eliminated from pay decisions. You can hit financial targets in the midst of a scandal and simply end up with a bit less than you would have. From memory Rupert and James Murdoch only lost part of their bonuses when the hacking scandal broke.

People inside the system may wonder what the problem is, but to the outside world it looks like very rich people just getting A Very Large Amount Of Money, as opposed to A Very Very Large Amount Of Money when the organisations they are supposed to be responsible for do bad things. And it looks like this because this is what it is. Rem comms can protest that the science of performance-related pay makes these awards defensible, the rest of us hear that if you break the law, or put a few of your customers at fatal risk, as long as you make the numbers you still get paid handsomely.

And actually Harriet Green's decision to give away a third of her share award makes the same mistake again. Why a third? Either she accepts responsibility, and the need to make a sacrifice, or she doesn't. Yet the message here is explicit - I am giving away some of my money, BUT I MADE THE NUMBERS. Perhaps it's just me, but the first thing that popped in my mind when I read this was that it sort of suggests that two children dying isn't that bad. I mean if we're getting into the calculus of this, if two children dying equals a third of the award given up, does this mean if six children had died would she have given away the whole award? I feel a bit guilty even writing that, but it is the sort of question that these decisions create.

The current system of performance-related pay repeatedly creates these kinds of reputational problems, yet the response of most of the corp gov mainstream seems to be to try and find better targets. It would be much better to see a few executives give up their awards entirely when ethical standards slip, and for investors to push for this to happen more often. Unfortunately, currently the prevailing attitude seems to be, as Stewart Lee put it: No the money is mine


* I am pretty sure an earlier version of the FT article had a further line from Green's spokesperson seeking to blame the company's stance on legal advisers. 

Complaint to the FRC about Caledonia Investments


So far no-one has come back and said I'm talking rubbish about Caledonia Investments' failure to disclose political donations in its annual report. The company's AGM is coming up in two weeks, and the first item on the agenda is the approval of the annual report. I am concerned that shareholders are being asked to approve an annual report that may not comply with company reporting regulations.
As such, I thought the best thing was to ask the FRC to investigate. I sent them the email below last week. I will post an update when I hear back.
Hi
I would like the FRC to investigate whether Caledonia Investments has met the requirement to disclose political donations as set out in the Large & Medium Sized Company Reporting Regulations.
As I understand it, these regulations require the disclosure in the director's report of political donations of more than £2000 in aggregate made in any financial year.http://www.legislation.gov.uk/ukdsi/2008/9780110806303/schedule/7
According to the Electoral Commission register, Caledonia Investments PLC made two donations of £2000 - one in December 2014, and one in March 2015.http://search.electoralcommission.org.uk/English/Donations/C0144490http://search.electoralcommission.org.uk/English/Donations/C0194204
I cannot see any reference to these donations in the company's annual report covering the year to end March 2015, although in aggregate they are greater than the amount above which disclosure is required.http://www.caledonia.com/files/file/view/id/863
Therefore I think it is possible the company has failed to meet reporting requirements.
This is time sensitive as the company's AGM takes place on 16 July and the first item is the vote to approve the annual report. If the company has failed to meet reporting requirements I am not sure shareholders should vote in favour of the resolution to approve the annual report,http://www.caledonia.com/files/file/view/id/854
Regards 
Tom

Friday, 26 June 2015

Afren's remuneration: a long-term problem

A few years back, when I was blogging more regularly, Afren was one of the companies I always used to keep an eye on. This was because it clearly had some governance challenges, not least in respect of directors' pay.

As far as I am aware it remains the only PLC to have lost the vote on its rem report twice. The first was a narrow defeat in 2011, though with a large number abstentions, the second was when it got spanked in 2013, with almost 80% voting against.

But there had been earlier warning signs. In 2010 votes against and abstentions outweighed the vote for, though it just won on the straight for/oppose split, and in 2012, after the first defeat, it still received a 28.5% vote against.

Fast forward to this year's AGM, in the wake of major governance problems at the company that have seen the removal of certain directors and the departure of others. At yesterday's AGM both the rem report and rem policy received votes against of over 25%. But look at the abstentions - add those into the mix and the company has failed to get a majority of it shareholders actively supporting its approach to executive pay for the fourth time in six years.

That must be some kind of record!

Wednesday, 17 June 2015

Why hasn't Caledonia Investments disclosed its Tory donations?

A couple of weeks back I blogged that Caledonia Investments had made two separate donations of £2000 to the Conservative Party - received in December 2014 and mid March 2015.

To be crystal clear, according to the Electoral Commission the first donation was received on 12 December 2014, the second donation was received on 13 March 2015. Both donations fall within Caledonia's financial year which runs to the end of March and the total, obviously, is £4000. And one final detail - both these donations are tagged with are the same company number and name (which are also the same as previous donations made by Caledonia) so I don't think it can be claimed they are separate legal entities (if that matters).

As I blogged previously, it wasn't necessary to seek shareholder approval for this since the aggregate amount is less than the £5000 allowed in any 12 month period. However, I did expect Caledonia to at least make some sort of statement about the donations in its annual report.

Yesterday the company announced publication of the annual report, slightly earlier than its financial calendar had suggested. I spotted this late this afternoon, and I've subsequently had a read through it.

I can't see any mention of the donations at all in the annual report. It's entirely possible I'm being thick here, so please search the annual report for yourself here and let me know if you find something. I am very happy to correct this post as necessary. This apparent lack of disclosure contrasts with previous years when donations were reported, see page 26 of their 2010 annual report for example.

What is more, if my reading of the Large and Medium-sized Company reporting regulations is right - again I welcome any guidance from more knowledgeable people here - donations of more than £2000 in any one financial year have to be disclosed. I've posted the whole of the relevant section of the regs below for info, or you can view them online here.

So my first question is whether Caledonia Investments has met the reporting requirements for disclosing political donations. (To be honest, given the previous pushback they've had from shareholders on political donations I think they should disclose them whether required or not).

Given the possibility of breaching company law in this area I think it is very important that Caledonia Investments makes absolutely clear to shareholders how much of the company's money it has actually donated. If what I say above about non-disclosure is correct then currently Caledonia shareholders may not even know about these donations unless they look at the Electoral Commission register, or stumble on this blog.

Depending on what feedback I get, I will try and raise awareness of this, which leads onto my second question - should shareholders vote for an annual report that they know does not meet reporting requirements? This is resolution 1 on the AGM agenda.

Any feedback on any of the above much appreciated.

Political donations and expenditure


3.—(1) If—

(a)the company (not being the wholly-owned subsidiary of a company incorporated in the United Kingdom) has in the financial year—

(i)made any political donation to any political party or other political organisation,

(ii)made any political donation to any independent election candidate, or

(iii)incurred any political expenditure, and

(b)the amount of the donation or expenditure, or (as the case may be) the aggregate amount of all donations and expenditure falling within paragraph (a), exceeded £2000,
the directors’ report for the year must contain the following particulars.

(2) Those particulars are—

(a)as respects donations falling within sub-paragraph (1)(a)(i) or (ii)—

(i)the name of each political party, other political organisation or independent election candidate to whom any such donation has been made, and

(ii)the total amount given to that party, organisation or candidate by way of such donations in the financial year; and

(b)as respects expenditure falling within sub-paragraph (1)(a)(iii), the total amount incurred by way of such expenditure in the financial year.

(3) If—

(a)at the end of the financial year the company has subsidiaries which have, in that year, made any donations or incurred any such expenditure as is mentioned in sub-paragraph (1)(a), and

(b)it is not itself the wholly-owned subsidiary of a company incorporated in the United Kingdom,
the directors’ report for the year is not, by virtue of sub-paragraph (1), required to contain the particulars specified in sub-paragraph (2).
But, if the total amount of any such donations or expenditure (or both) made or incurred in that year by the company and the subsidiaries between them exceeds £2000, the directors’ report for the year must contain those particulars in relation to each body by whom any such donation or expenditure has been made or incurred.

(4) Any expression used in this paragraph which is also used in Part 14 of the 2006 Act (control of political donations and expenditure) has the same meaning as in that Part.

4.—(1) If the company (not being the wholly-owned subsidiary of a company incorporated in the United Kingdom) has in the financial year made any contribution to a non-EU political party, the directors’ report for the year must contain—

(a)a statement of the amount of the contribution, or

(b)(if it has made two or more such contributions in the year) a statement of the total amount of the contributions.

(2) If—

(a)at the end of the financial year the company has subsidiaries which have, in that year, made any such contributions as are mentioned in sub-paragraph (1), and

(b)it is not itself the wholly-owned subsidiary of a company incorporated in the United Kingdom,
the directors’ report for the year is not, by virtue of sub-paragraph (1), required to contain any such statement as is there mentioned, but it must instead contain a statement of the total amount of the contributions made in the year by the company and the subsidiaries between them.

(3) In this paragraph, “contribution”, in relation to an organisation, means—

(a)any gift of money to the organisation (whether made directly or indirectly);

(b)any subscription or other fee paid for affiliation to, or membership of, the organisation; or

(c)any money spent (otherwise than by the organisation or a person acting on its behalf) in paying any expenses incurred directly or indirectly by the organisation.

(4) In this paragraph, “non-EU political party” means any political party which carries on, or proposes to carry on, its activities wholly outside the member States. 

Sunday, 14 June 2015

Making progress

Last week the NAPF launched a discussion document to address what it says is a "workforce-sized hole" in corporate reporting. In the introduction to the paper the NAPF says:

within the Environmental, Social and Governance acronym the understanding and awareness of Social issues is perhaps least developed. Indeed, the “S” is often the forgotten cousin of the ESG family. Workforces, however, clearly matter and are directly linked to the creation of value.  
The paper sets out some suggested areas for better company reporting, plus some specific metrics. The broad areas are the composition of the workforce (such as full-time vs part-time); stability of the workforce (turnover etc); skills and capabilities; and employee satisfaction. Of particular note, the NAPF also talks about "contingent employment" and specifically the use of zero hours contracts.

Needless to say, the publication of this paper is a very good thing. Given how little attention "S" issues usually get it's great to see an influential and mainstream organisation like the NAPF push this agenda.

Coincidentally, I just saw the head of the PRI also flag this up as a problem in responsible investment:
“Climate is a huge area of interest and growing,” she says. “It used to be the G [in ESG that was capturing investors’ imagination], now it’s the E. The S now seems to be the poor cousin.”
Of course, there is a bit difference between acknowledging a problem and doing something about it. In addition, unions are going to have a different take on many workplace issues than a lot of RI people - though I am sure we can find a lot to agree on. Overall, though, I think the basic message that RI has a workforce-sized blindspot is starting to get through.

Sunday, 31 May 2015

Fidelity "steers away from" own previous views?

Just a quick update, as I noted in a previous post Fidelity says it has "deliberately steered away from" addressing the question of scale/size/amount (or as they say "quantum") of executive pay.

This hasn't always been their view. It turns out that Fidelity told the Parliamentary Commission on Banking Standards that in the banking sector "both the quantum and structure of incentive awards were wholly disproportionate to the economic benefit being generated." (see Para A4 here)

Fidelity also told the PCBS that its proposals for exec pay reform would help tackle the scale of pay, and that "reducing the overall size of awards" was something that "needs attention".

"In the case of Career Shares or ex-ante performance vesting, once shares are awarded they really do belong to the recipient and hence it should be possible to achieve the same motivational effect with a lower quantum of shares. This could make a contribution to reining in the overall size of awards which is another area which needs attention." (Para C4).

So they used to think the scale of pay mattered, at least for banks, but apparently no longer do.

Saturday, 30 May 2015

Caledonia Investments Tory cash drop 2

I've blogged previously about Caledonia Investments continuing to give the company's money to the Conservative Party, this time without shareholder approval. I've just spotted that actually they have done it twice in the past few months, first in Eastleigh, secondly in Finchley and Golders Green.

Together these donations total £4,000, so less than than the threshold set by the Companies Act to require a vote from shareholders to approve them. It probably seems like small beer to people in the City, but I imagine Labour wouldn't have minded an extra £2000 in Finchley and Golders Green.

Caledonia's annual report will be published in just under three weeks according to their financial calendar, so I'll be keeping a look out for how they report these donations. The company's AGM is on 16th July, so it will be interesting to see if shareholders take any action, though as Caledonia presumably won't seek shareholder authority to make donations this time investors may need to use another resolution for any protest vote.

More generally, as I argued previously, these donations are a bit troubling as they are being made by a company which has previously received a strong signal from its independent shareholders not to spend the company's money in this way. Caledonia Investments looks to be taking advantage of a weakness in the Companies Act because it knows it would face resistance if it went over the £5000 threshold and had to seek shareholder approval.  

I'm not sure why that exemption was put in the Act in the first place, but Caledonia seems to be making a pretty good case for its removal.