A decade of blogging

I realised recently that I've just completed a decade of blogging. Although the arrival of two kids means I blog a lot less often than I used to, and read a lot less to blog about, I still feel the urge to communicate. Partly I just enjoy writing, but I also feel/hope that it is worth putting an unequivocally pro-labour and pro-Left voice into the blogosphere on issues like corporate governance, ownership etc.

The benefit of blogging for this long is that I can see some of the trends that have come and go over the period and - I think - see the broad outlines of change. So here are a few general observations after ten years of doing this stuff. NB - I am speaking about the UK here primarily.

1. Obvious really, but the financial crisis had a much deeper and lasting impact than many people on the centre Left initially realised. I think people did initially expect a big shift, but because there wasn't an immediate swing to the Left in policy or in political support many concluded that this wasn't going to happen at all, and that things would carry on much as before, albeit with much constrained public spending. I think we can now see that this conclusion was wrong, but perhaps until Corbyn, Brexit and Trump quite a lot of people still thought not much would change from the 1990s.

What is particularly striking is the disconnect that has developed between technocratic policy wonk opinion and public opinion, and a seeming unwillingness on either side to meet in the middle. I think a lot of mainstream policy people still think that they got nothing much wrong over the past couple of decades, and the public are just too dense to know what's good for them. These people also have considerable influence over our politicians. Hence the tortured political positions we see post-crisis where politicians play to the public with their rhetoric and policymakers with the detail and neither group feels entirely satisfied. Perhaps it was ever thus, but the gaps between policy people and the public and between rhetoric and reality feel very large now.

2. Corporate governance reform involving shareholder empowerment no longer looks like progressive policy. From the 1990s onwards a number of influential people on the Left enthusiastically embraced the ideas that shareholders = the public, that shareholder engagement was a new/exciting way to restrain poor corporate behaviour, and that tooling up shareholders could tackle tricky issues like executive pay. I'm not sure quite when this hit the wall, but I think you would struggle to get many people on the Left to get out of bed for this agenda now.

In large part this is due to practical experience. Shareholders, which mainly means asset managers, have been overwhelming uninterested in tackling the scale of executive pay, and unwilling to engage over labour issues. I think we lost a decade - and corporates gained the same - in fiddling about trying to find ways to make asset managers do things they don't want to, and trying to redesign executive pay rather than just constrain and/or it.

During the same period the nature of the shareholders of UK business changed, so there is now much more foreign ownership. This makes it significantly harder to argue that giving shareholders more power is a good thing for people in the UK. If dividends and voting rights are going to American asset managers (who care even less about executive pay than their UK counterparts) what progressive agenda is being served by giving them a greater say?

For me personally, the way that asset managers and some of the business/finance lobby groups have responded to the question of worker representation on boards is the final straw. It wasn't a surprise, but I have still found it absolutely sickening. There is no way I would personally support any further extension of shareholder rights since many of those shareholders lobby against my interests. And in my opinion the fact that these organisations are increasingly active in public policy is net negative for the Left.

3. ESG progress, from a labour/Left perspective, has been disappointing. To many of us it looks like "responsible investment" is largely about executive pay plus climate change. Labour issues, despite labour rights being central to all the key human rights standards, are still seen as "political" and few investors (with honourable exceptions) seem willing to hold companies to account to anything like the same extent they would do over environmental issues.

I think there are several issues at play here. One is that there is a tussle over resources within the firm (forget the Mckinsey bollox that all interest align over the long term) and some investors don't want to give any ground. Undoubtedly there is a cultural element too - many people in the City hold views on various issues that are further Right than the public, even if they don't realise it. There are few union fans. There is a generational aspect - many younger ESG people have little knowledge/experience of the labour movement and are more drawn to environmental issues. And there is a class aspect to it too.

The net result, as I've said before, is that responsible investment in general gives off the vibe of being about wealthy, globally mobile liberalism. The worst sins in this world view are market imperfections and a lack of meritocracy. But this world view is given airtime through the management of the savings of millions of people who will never get into the top tax bracket or be headhunted for non-executive roles. Again as I have said before I do not think the disconnect between the views articulated by most ESG people and those of the people whose money gives them a job is sustainable.

4. Unions have remained largely focused on pensions as benefits rather than pools of capital, and potential leverage. This has started to change in the past few years but we didn't catch the capital strategies bug initially. I personally think this has been a missed opportunity, though I would prefer to see unions engage tactically with capital where they have specific, achievable objectives rather than waste time and resources trying to rebuild "the system". I've become more convinced of this over the past few years, and I say this as someone who is interested in policy and has enjoyed doing policy work. In my opinion it just doesn't deliver enough to make it worthwhile.

5. There is nothing inherently democratising about markets, widening share ownership, greater participation in the finance system etc, if anything the reverse has been true. The idea of self-determination ends at the office/factory/depot door for the large majority of people I deal with professionally. Hence the hostility towards worker representation in corporate governance. Most people in this world do not believe that business needs to be democratised, but they do believe that more functions in society should be run by the private sector. This can only lead in one direction.

And the same applies to pension funds. Whatever the theoretical merits of the "professionalisation" of trusteeship, in practice it has led to de-democratisation. Across several key markets member trustees have been denigrated and moves have been made to remove them from decision-making. As such the control of capital that belongs to the public has increasingly slipped from their grasp.

Along this path the real threats to the subversion of fiduciary duty have become clear. If you are union person with any experience in pension fund investment issues you will have had lectures about Scargill, and the need not to put political objectives ahead of the interests of beneficiaries. Imagine how terrible that would be.

But it is OK for policymakers and politicians to try and determine the asset allocation that pension funds adopt (ahem... infrastructure) through rewriting investment regulations and altering the structure of pension funds. We now have a situation where policymakers are making all kinds of regulatory tweaks in order to help funnel capital that is supposed to fund our retirements into projects that they won't raise taxes to pay for (even if this might be a cheaper option). I don't remember ever being asked to vote on this one.

Pension funds and labour standards

I recently spent quite a bit of time trawling pension fund's responsible investment policies to see what, if anything, they say about labour issues. The background to this is the long-expressed gripe that investors seem to spend less time looking at the S in ESG than the E and G, and, as a result, it can be hard to get them focused on labour issues.

What I found was that, actually, a lot of big pension funds and providers in Europe do have policy around labour issues, with many referring to the UN Global Compact, OECD MNE guidelines and ILO conventions. But there is a big geographical bias. Most funds in countries like the Netherlands, Sweden and Denmark (which all have some big funds) refer to labour standards in one way or another. But most funds in the UK do not.





This is, to put it mildly, a bit of a problem since the UK is also a country where workers have no formalised role in corporate governance. So we don't get board representation, but nor do our pension funds promote labour rights in their ESG policies.

One of the things that surprised me while doing the research was how may ex-UK pension funds still apply screens and/or divestment policies. In the UK we are a bit sniffy about this approach and personally I still think engagement is what we want at most companies for most of the time. But doing the research has firmed up my belief that the UK really has no place to tell other jurisdictions how to do RI - our funds are laggards in my opinion when it comes to international standards (for example, little discussion here about application of the OECD guidelines).

In terms of which companies are excluded because of labour issues, I specifically looked at Walmart (because I was aware it was on some funds' exclusions lists) and Ryanair (because.... well... because it's Ryanair innate?). Here's what I found


And finally there are some good examples of strong policies on labour issues out there, probably my favourite is ERAFP, below:



The full report is available on the ITF website here: http://www.itfglobal.org/en/resources/reports-publications/pension-funds-and-respect-for-workers-rights/ 

Prosegur IPO - potential investors should take note of labour risks

Just a quick plus for UNI and their excellent work exposing poor labour practices at Spanish-listed security firm Prosegur. The company is about to carry out a partial float of its cash-in-transit business, which makes this a very timely issue for investors thinking about buying stock (I guess passive managers tracking European indices will have to).

Anyhow, significantly the prospectus for the IPO makes reference to the potential reputational risk arising from allegations of poor labour practices. In addition, investors should be aware that UNI has submitted an OECD complaint. Therefore this one requires some proper due dilligence.

UNI's release on this below

Prosegur’s IPO prospectus recognizes that UNI’s charges could present a risk for investors

Prosegur, the Spanish  private security giant, is preparing to raise capital for its Cash in Transit division through an IPO in March. 

In communications with potential investors, the IPO’s  prospectus recently  recognized that UNI’s allegations “of unfair labour practices … specifically… in Latin America and India”  could damage the company’s reputation.    

For several years, UNI has complained that Prosegur has violated the rights of its employees to form and join unions, and that its actions violate internationally recognized human rights standards.

In January, 2017, UNI filed a case against Prosegur with the government of  Spain which alleges that the company continues to violate the rights of employees in Latin America and India and does not have a due diligence process in place to identify and avoid the risks of human rights violations. Such a due diligence process is a requirement of the OECD Guidelines and the UN Guiding Principles for Business and Human Rights.

UNI’s submission provides examples of union activists employed by Prosegur in Latin America who have been threatened, harassed and attacked. It also cites a report from a renowned Indian labour attorney which found that Prosegur had committed systematic breaches of minimum legal obligations under Indian law.   

UNI Global Union Deputy General Secretary, Christy Hoffman said, “Why should any  investor accept the risk that Prosegur’s faulty management systems will continue to be the subject of global criticism? There is no excuse for Prosegur’s refusal to enter into a mediated solution to address the glaring deficiencies in its so-called “flexible” and “decentralized”  management practices.  These leave the door open for an “anything goes” approach, something which is not condoned by any standard of human rights due diligence.  Its time for Prosegur to put its house in order if it plans to continue to expand into high risk areas across the world. ”  

Where are the workers?

The LSE has produced guidance on company reporting on environmental, social and governance (ESG) issues. So I searched it for references to various issues. Guess what? Like most RI/ESG initiatives, labour issues get very little attention.

Shifts in the UK corporate governance model

I've blogged a bit recently about what appears to be a significant shift in thinking about corporate governance. There are signs all over the place that faith in shareholder primacy is faltering. There have been plenty of think pieces on this subject over the past few years, so I just want to highlight two recent voices from within the system. The first is Guy Jubb, who used to be the corp gov head honcho at Standard Life. His written submission to the BEIS committee inquiry makes a number of interesting points. On Section 172 of the Companies Act he says:

This duty, which is derived from the nebulous concept of enlightened shareholder value, lacks grit, is unduly focussed on shareholders and fails to provide an effective basis for legal accountability.

And on shareholder engagement he says:

Shareholders, in general, and institutional investors, in particular, should be efficient and reliable agents for accountability and change when boards and directors are failing to fulfil their responsibilities but often they are not. Policymakers and regulators, including the FRC, should re-calibrate their assumptions to recognise the limitations of investor stewardship. They should harness its potential in order to develop a new and realistic framework of corporate accountability and shareholder engagement. The interests of the public and of the shareholders are not being served effectively by the status quo.

The whole thing is worth a read, but the thing to bear in mind is that these views come from someone who has a lot of experience engaging with companies as part of a major institutional investor.

The second person worth listening to is Chris Hodge, who was the person in charge of the UK Corporate Governance Code at the FRC for many years. His recent essay has a lot of interesting things to say about what we can, and cannot expect, from corporate governance. He is sceptical that corporate governance can bear the weight of growing public policy expectations. He makes the point (which I bang on about regularly!) that policymakers - and, I would add, those seeking to influence public policy - are too quick to reach for greater reporting/disclosure as a solution to a given problem. 

There are a couple of particularly good points that I strongly agree with. The first is about conflating shareholder interests with those of the public:

It may be tempting to believe that shareholder interest can be a proxy for public interest.
In 1992 – when 70% of shares were owned by UK pension funds, insurance companies and individuals – that might even have seemed plausible. Yet looking at the ownership base today, with over 50% of shares owned by overseas investors, it would be illogical to do so. Why should we expect the citizens of Norway or the retired teachers of California, for example, to feel they have a responsibility to look after the best interests of UK society?
While shareholder interest and public interest – or the interest of one or another group of stakeholders – may often coincide, that will not always be the case. Indeed, one of the charges laid in the current debate about directors’ duties under Section 172 of the Companies Act 2006 is that some boards have given too much weight to the interests of their shareholders at the expense of the interests of other stakeholders. If those stakeholders do not have the ability to represent meaningfully their own interests, the answer is not to ask shareholders to do so on their behalf. 

The second is about that old chestnut executive pay:

It is over 20 years since the Greenbury report first recommended that companies report to their shareholders on this issue, and since that time the reporting and voting regimes have been regularly strengthened and, it seems, may be about to be strengthened further.
This regulatory approach has arguably benefitted shareholders by enabling them to put pressure on companies to align pay with performance, and may therefore be worth preserving for those reasons.
But in over twenty years it has done nothing to slow the increase of executive pay – some would argue it has contributed to it – or to reduce income inequality. There is no evidence to support the view that those objectives can now be achieved by adding more reporting requirements and voting rights.

Again the whole thing is worth a read, and again his views are worth taking seriously given where he has seen the world from.

There are two key points I would draw from all this for people on the Left. First, recognise that the fundamentals of corporate governance are highly contestable, especially at the moment, and don't simply play within the existent system. It certainly isn't as simple as empowering shareholders being inherently good. As we've seen in the debate about worker representation on boards, big shareholders will do us over on public policy when they think our interests and theirs do not align. On exec pay, we should be clear-eyed that focusing on shareholders simply isn't going to tackle the pay gap, as Chris Hodge says. We will need different tools. 

Second, we need to shape the model that comes next. The corp gov establishment moved very quickly to try and squash the idea of workers on boards. However that is far from a lost cause, it's really just the first skirmish, and there is also a recognition that things need to change. My gut feeling is that "common sense" in mainstream corp gov will settle around ideas like reformulating directors' duties and creating new regulatory powers to tackle companies. It looks like the FRC already sees the way the wind in blowing, and is seeking to position itself as a more interventionist body. These aren't inherently bad ideas but regulatory oversight might not be massively more beneficial to workers than the current model if there isn't an effort to shape it. The Left should be ambitious and get in early so that the voice of the people that work in companies doesn't get excluded from the new model too. 

Is this what asset managers really think about executive pay?

There was a fascinating piece in The Times a couple of days ago about asset managers threatening to get tough on executive pay. You know, the news story that now appears before every AGM season, quite often accompanied by claims this could be the "stormiest" AGM season yet.

Sorry if I sound jaded, but I have heard "crackdowns" on executive pay by shareholders being threatened pretty regularly since about 2002 and the results have been pretty unimpressive. I don't think there has been a single year when less than 98% of All-Share companies have had remuneration arrangements approved.

What struck me about the piece in The Times is that attitudes may not even have changed that much. The whole thrust of the article is that asset managers need to be seen to act because if they don't government will do.

It's a "pre-emptive strike" by asset managers who are "Fearful of a tide of new corporate governance regulation". The asset managers agreed (without consulting any of us) that Government intervention *would* (not could) destroy shareholder value. And one manager states: “The last thing we want is government intervention as it could prevent British companies from attracting global talent.” 

What I don't see anywhere in the piece is the sense that high pay for executives is a problem. Rather, government sticking its nose in is the problem, and therefore asset managers need to work together to create the impression of action in order to forestall any government intervention. 

The cynicism and other worldliness on display here is pretty staggering. These people really don't seem to think there is a problem, and will use the power they derive from our savings to avoid public policy interventions.

I've said it before, but giving the people who are least concerned about the scale of executive pay the primary role in overseeing it is a questionable strategy, to put it mildly. The attitude on display in this article makes this argument far more effectively than I could. And we should say thank you to whoever briefed this line to The Times. I think they are idiotic for saying these things in public, but they have provided us with invaluable insight into how asset managers may really view the issue of executive pay. 

A corporate governance agenda for the Left

1. Explicitly remove shareholder primacy from the UK system. This should be argued on the basis that it hasn't worked, the shareholder base has changed too much to make the model work for the public (shareholders now primarily split between the City - which is conflicted - and overseas investors), and shareholders do v little in exchange for their rights in comparison to employees. This means rewriting directors' duties - why not just promote the success of the company, as the TUC has suggested? - and the UK Corporate Governance Code.

2. Remove corporate governance from the FRC's remit. This is too big an issue to fall under a financial regulator. There should be a permanent Corporate Governance Committee compromised of representation from managers, employees and investors. And no-one else. No lawyers, no accountants. This committee should oversee the UK Corporate Governance Code and revisions to it.

3. Create a specific companies regulator. This would have the functions of mandating and reviewing disclosures on ESG issues and overseeing complaints from all stakeholders about company behaviour. Perhaps it could also house the UK National Contact Point for OECD complaints?

4. Make worker representation on boards mandatory for all companies. Also institute mechanisms for all companies to share the wealth created with those that actually create it - profit-sharing and employee ownership, yes, but also collective bargaining.

5. Overhaul executive pay: reduce it to salary plus one incentive scheme as a starting position. Initiate a review of evidence relating to the use of performance-related reward for executives, including behavioural evidence. If the evidence is not compelling that performance pay works, cap incentives at much less than 100% of salary or scrap them entirely. Require disclosure of internal pay ratios, with the objective of moving towards binding maximum ratios in future - with the explicit aim of pulling up wages at the bottom and squeezing the pay gap.