Tuesday, 16 September 2014

Why voting against directors matters

A couple of excerpts from Power Without Property by Adolf Berle
Concentrated economic power, whether held by private organisations and directed by their chiefs, or by the State and its chiefs, raises at once the question of "legitimacy".
Why be concerned with "legitimacy"? What difference does it make? Power comes to rest in the hands of specific groups; why not accept the fact, dealing with it merely as a fact? The answer is deeply rooted in immemorial custom and human experience. Power is a fact; but it also a fact that the human mind apparently cannot be wholly or permanently inhibited from asking certain questions. Why should this man, or this group, hold power - instead of some other, possibly more attractive, individual or group? The human animal has always endeavoured to answer his own question: power lies there because the holder is entitled to it by some test or standard. This carries a necessary corollary: the holder can be deprived of it if demonstration is made that there is no title or right in his possession of it.
....
[A]t present... the men vested with economic power - because they hold a position in a corporate or other economic organisation - got it by a method which the community recognises: through prescribed or accepted process or ritual. Boards of directors of large corporations are recognised as representing the stockholders because they have received the votes of holders of a sufficient number of shares to elect. The ritual of their election is ordinarily casting of a ballot for them, at a stockholders' meeting held for that purpose. It is not an impressive ritual... This is a far cry from the ritual coronation of a king, claiming power by inheritance and the grace of God, and assuming it in an abbey or cathedral by dramatic ceremony. Yet the rationale of the stockholders' meeting and of the coronation is the same. In both cases the ceremony is intended to affirm that this man or this group legitimately holds powder under accepted conditions. It is designed to induce (as indeed it does) general acceptance that the power has been well and truly located in the specific individual or individuals involved.
Whatever blah asset managers come out with to explain why we shouldn't read too much into voting decisions, ultimately if you vote for a director you reaffirm in public their right to power. Looking at Sports Direct, for example, the company has strong grounds for arguing that - by reference to the legitimising function of the AGM - the current board has no need of change. If you voted for the re-election of the current board don't be surprised if you get more of this kind of thing.

Saturday, 13 September 2014

Different interests in executive pay

There was a sorta, kinda interesting piece about executive pay in City AM the other day. Interesting in that it clarifies where mainstream corp gov thinking has got to, and that, in my view, it demonstrates some of the continuing confusion and/or obfuscation embedded in it.

Essentially the argument is that a really basic approach to executive pay (Level 1) is to try and fix it (as in a fixed ratio), cap it or tax it. A slightly more sophisticated approach (Level 2), it is argued, is to muck about with incentives. But what really sophisticated pay reformers (Level 3) should be looking at is long-term delivery of awards. So the big idea proposed is longer term vesting of awards.

As the article says: "Level 3 thinking thus focuses on the structure of pay."

As I say, I think this is actually where the corp gov mainstream is at - for example, it's basically the line that Fidelity has been pursuing. The focus on "career shares" is in a similar place. The core assumptions are: the most important issue is structure not scale, performance-related reward is an inherently good thing and long-term awards incentivise long-term performance.

So far, so obvious. And I disagree with all of it.

The thing I particularly want to focus on is the idea that reforming things like vesting is more sophisticated, and that other ideas (examples given in the article include fixed pay ratios and higher taxes) miss the 'real' issues in executive pay. The intro of the article makes this sort of argument -
EXECUTIVE pay is a high-profile topic which almost everyone has an opinion about, and many believe the entire system is broken. But despite being well-intentioned, many suggested reforms may not be targeting the elements of pay that are most critical for shareholder value and society.
Much of the debate is on what I call a Level 1 issue – the level of pay. The European Commission is contemplating a binding vote on the ratio of chief executive pay to median employee pay; proposals to raise taxes – most prominently made by Thomas Piketty – are a response to seemingly excessive pay levels.
While both measures address income inequality, it’s unclear that they would do much to improve firm value. Levels of chief executive pay, while very high compared to median employee pay, are very small compared to firm value. For example, pay of £5m is only 0.05 per cent of a £10bn firm. That’s not to say it’s not important – a firm can’t be blasé about £5m – but that other dimensions may be more important.
In response, I think this fundamentally misunderstands what the debate around executive pay actually involves. The simple reality is that different groups want different things and, in my opinion, it's hard to achieve all of them. It may be that - within the area of executive pay policy - there aren't proposals that reduce inequality AND increase firm value, or at least that have much impact on both. We may have to choose between them, or choose where we want to put most emphasis. It may well be true that wealth taxes, pay ratios and the like won't increase firm value (there may be better ways to achieve the same ends too, but that's another issue). But equally in the proposals that are put forward by the corporate governance mainstream I see nothing that will reduce income inequality, or even seeks to. I think it would take some work to claim that long-term vesting is going to have an impact on it, for example.

Therefore to assert, as many continue to do, that the 'real question' in executive pay is structure, not scale, is not sophistication, it's a failure or refusal to listen to and acknowledge other voices. If I have a particular concern about income inequality then it's simply false to claim the 'real issue' in executive pay is structure (or, in the article above, to claim that other dimensions than scale matter more). Not to me it isn't.

In fact, in essence, aren't those those who argue that the 'real issue' in executive pay is structure simply asserting the interests of one set of stakeholders - shareholders, but in reality principally asset managers - over others? If other stakeholders have a different view - like that the pay gap is more important than performance linkage - this does not necessarily mean that they are missing the big picture, they simply have different priorities. So to argue that the thing to focus on is structure boils down to saying that the interests of those who want such a focus should win out.

As I've blogged before, much of the corp gov/RI community is obsessive about 'win win' outcomes - what might also be called painless reforms. There is also a tendency to see dissent and disagreement as something to be avoided if at all possible. Well, one area where you can get a bit of consensus - at least between big business and big finance - is that we should be focusing on reforming the structure of pay, and less on absolute levels. By mainstream corporate governance standards, because both the CBI and asset managers can reach agreement in this territory, it is self-evident that this is where sophisticated reforms lie. (I also share Roger Bootle's view that saying focus on structure is a smart way to change the conversation, and shift it away from scale.)

It's more likely, in my view, that where it's easy to find a consensus on executive pay that's because not much is being challenged. The CBI, for example, are quite happy to bang on about 'rewards for failure' because in the narrow sense they mean it (big pay-offs to departing directors of failed/failing businesses) there aren't that many cases and you'd have to be a real corporate shill to defend them. However, go even slightly further down the same track - clawback - and you find much less support. I think the reason it is possible to reach consensus on 'sophisticated' reforms to exec pay like greater performance linkage and long-term vesting is because everyone knows the fundamentals don't really get touched. If anything I'd expect exec pay to rise a bit to offset the fact that recipients will further discount awards that are now even further in the future.

The consensus is possible because the corp gov mainstream is only trying to iron things out between directors and asset managers. Hence issues about pay disparity within firms, and rising inequality don't get a look in. If they did, consensus would be a lot harder to achieve, if at all.

Many people in corp gov dislike these issues 'becoming politicised' (as if they were not inherently political issues), usually meaning it's a bad thing that politicians and policymakers are getting interested and/or drawn in. But at least politicians are used to dealing with conflicting interests and trying to reach a compromise between them. They are used to situations in which for one objective to be achieved, or one interest to be served, another is thwarted. Sometimes everyone is left unhappy, and you just have to settle on the least worst set out outcomes. But at least compromise isn't bought at the price of simply deciding asserting the primacy of one set of interests. The sophisticated consensus envisaged in Level 3 thinking is only achievable because so much else is left off the table, and other interests ignored.

To return to the idea of levels of thinking about executive, to me Level 1 thinking is demonstrated by the argument that the structure of executive incentives should be the limit of corporate governance policy. To me greater sophistication, Level 2 and up if you like, involves acknowledging that different stakeholder interests in this debate do not always overlap, and therefore we may need to make trade-offs, perhaps significant ones. This should be the start of the discussion, not something that we try and gloss over for the sake of a sterile consensus.

Thursday, 11 September 2014

Sports Direct, hits and misses

Yesterday was the AGM of Sports Direct, one of the more 'colourful' UK public companies. It has recently been attacked for a poor approach to pay at both ends of the scale.

The company has been defeated several times in attempts to introduce an incentive scheme for Mike Ashley, hugely annoying shareholders not called Mike Ashley in the process. A scheme was passed - with a 40% vote against - earlier in the summer, though Ashley subsequently declined to participate in it. Many shareholders - and representative bodies like the NAPF, ABI and IoD - have argued that the pay issue reveals that there are real governance failings at the company. In short, Mike Ashley acts like it's his company alone, and the board don't stand up to him.

Meanwhile Sports Direct has also come under attack for its use of zero hours contracts. It is believed to be the employer with the largest number of workers employed on these terms, and the contracts also make it hard for staff to do other jobs to make up the hours. Hats off to Share Action for making the trip  up to Shirebrook to raise this issue at the AGM. And it looks like Sports Direct's problems are expanding on this issue.

The voting results from the AGM tell their own story. Just looking at the headline stats, the remuneration policy attracted the largest vote against - about 12%. But when when you strip out Mike Ashley's controlling stake it's a very large vote (40%+) against - the Telegraph think a majority of non Mike Ashleys voted against, though that looks wrong to me.

Much less impressive, however, is the vote against the chair, Keith Hellawell which looks to be about 20% of the non-Ashley vote. There has been extensive criticism, both public and private, of the Sports Direct board. A strong vote here would have been an important signal that governance needs to be improved. But, yet again, the focus has been kept on pay, surely the symptom not the problem in this case. It remains the case that asset managers - unlike a number of asset owners - don't use their legal rights to challenge incumbent directors even where there are serious concerns.

No doubt some will claim, as they always do, they are putting pressure on privately and that we shouldn't read too much into the votes. Well, in a situation where we have a cowed board and a domineering controlling shareholder I think that is a strategy that is doomed to fail (and perhaps those adopting it are well aware of this). There is still a big gap between public declarations about stewardship and what happens in practice at problem companies. If you are a pension fund trustee, I would urge you to find out how your asset manager voted on this one.

PS. This example also reminds me of why folks using the example of controlling shareholders to argue against requiring a 75% threshold to pass rem policy really missed the bigger picture. Cases like Sports Direct are surely going to be more common.

Wednesday, 10 September 2014

Bits and pieces

1. SHARE's annual key votes survey has been launched. More info here.

2. Mr Gray has a great blog on the Care UK dispute, and has had a closer look at Bridgepoint Capital.

3. Good column by Aditya Chakrabortty on why some US cleaners are much better paid than their UK equivalents. Go on, have a guess.

Tuesday, 9 September 2014

Disruption - good and bad

Perhaps we shouldn't be surprised, but in response to Leveson, global media businesses that develop intimately close relationships with senior political figures with a view to advancing their commercial interests have largely successfully managed to cast themselves as insurgent outsiders. There's plenty of rhetoric out there about how the press must be free to stand up to the establishment, and how the proposals of the Leveson are a slippery slope to a state-controlled press.

In my opinion, there's something rather pathetic about representatives of the Mail, or News Corp, or whatever, presenting themselves as challenging 'the establishment' when they are so closely bound to it. Nonetheless, since they control their own content, the coverage of Leveson etc is institutionally biased, in the same way you wouldn't expect the British Bankers Association to produce reports on socially useless finance.

The line that is pumped out is that while they might occasionally get things wrong, our free press is unruly and disruptive, and this is a good thing (which of course it is). This means that we tamper with the existing model of self-regulation at our peril. What is more, it is a positive virtue of the industry that it is refusing to bow to Parliament's will. Again the contrast with, say, banking is interesting. Actually bankers also say regulators shouldn't meddle in what they don't/can't understand, but their lobbyists also know that they simply can't get away (for now) with openly defying the will of policymakers.

The press has gone as far as to set up a regulatory body that is designed from the outset to NOT comply with some of the recommendations of the Leveson Inquiry. Once more, this is characterised as a good thing. Once you start trying to make a judgement about how accountable the press should be you have already crossed the Rubicon, we are sternly warned.

Compare all this with what the Tories are looking at doing in terms of strike ballots. Again you will see the language of "disruption" employed. But here it is A Bad Thing with the explicit intention being to minimise needless disruption. Here it is perfectly OK for the state to curtail the ability of citizens to challenge power when it comes to threats to their pay or working conditions. What is more, this is usually argued in terms of the greater good of a successful economy. The freedom to withdraw your labour without punishment is something that can be traded off against GDP.

In a previous era, it was taken for granted that, whilst they could be disruptive, trade unions were important in balancing power in the workplace. What's more unions and their members were often in the forefront of democratic struggles - as they are today. In contrast, now disruption at work, regardless of what provokes it, is seen as inherently undesirable. 

Let's make no mistake where it leads your average punter. If their employer tries to push through unpleasant changes, like a pay freeze, it will be harder for union members to resist. But at least they will be able to comfort themselves with the knowledge that they can still read Fraser Nelson telling them that Rupert Murdoch is the real victim of overpowerful government.

Disruption - it's all about who is doing it, isn't it?

Wednesday, 3 September 2014

Tony Judt

The quote I was referring to earlier from Ill Fares The Land:

“Societies are complex and contain conflicting interests. To assert otherwise – to deny distinctions of class or wealth or influence – is just a way to promote one set of interests over another. This proposition used to be self-evident; today we are encouraged to dismiss it as an incendiary encouragement to class hatred.”

"win win" versus fighting talk

There's a really irritating para I found in a McKinsey paper on long-termism that serves as a good/bad example of the obsession with 'win win' outcomes in stewardship/ownership land.

in truth there was never any inherent tension between creating value and serving the interests of employees, suppliers, customers, creditors, and communities, and proponents of value maximization have always insisted that it is long-term value that has to be maximized.

This sort of argument is made all the time in the corp gov/responsible investment world. Essentially the claim is that, if we just raise our gaze and look to the long term, all those apparent tensions between different interests both within the firm and in its relation to wider society dissolve away. I hate this with a passion.

First of all I think it's a preposterous claim. It suggests that all the conflicts between labour and capital over hundreds of years are simply a failure to think long term. What is more, the solution to these problems (which might look pretty large to those without management consulting experience) has been stumbled upon on by looking at the behaviour of institutional investors. All those millions of people working in the labour movement, or the green movement, or in business for that matter, could have saved all that time and effort by looking to the long term and learning a bit about pensions. No, it's rubbish. To quote Jim Royle, "never any inherent tension" my arse.

Secondly, despite the desire to present this as the modern, humanised face of capitalism it actually represents a rather oppressive view of society. There is a apparently an over-arching objective - long-term value creation - to which all of us can sign up without there being any 'tension' between our interests. If you don't get it, if you still feel there is a tension, that's because you haven't correctly identified your "long-term" interests. You're suffering from a sort of false consciousness if you like. This, to me, is suffocating as well as wrong. If a government, rather than a management consultant, asserted that all citizens' interests could be met under the same objective, if they would just realise it, alarm bells would start sounding. Why is it any more acceptable to claim this in the business/financial world?

There's a very good line at the end of Tony Judt's Ill Fares The Land where he says that it used to be taken for granted that their were competing claims in society that need to be mediated, but to assert this now is taken to be antagonistic. It feels very true in the microcosm of CG/RI.

I'll come back to this one later.