I couldn’t fail to be impressed by a slide in a recent presentation by the community health director at the NHS Trust that I have chaired for the past eight years. It described the Team Charter developed in a programme of mutually agreed behaviour workshops in the Hammersmith & Fulham Community Independence Service in which community nurses, occupational therapists, physiotherapists, and care workers support patients to keep them out of hospital. They are a high performing team delivering a great service, facing challenging demands, working with constrained resources, juggling priorities, and taking difficult decisions. The Team Charter illustrated above speaks for itself. It may look like a “motherhood and apple pie” recipe, but it is no worse for that. And, what’s more, it provides a lesson for teams and their leaders everywhere.
A “Big Read” feature in the Financial Times recently (23rd February 2023) described how the isolation of Vladimir Putin within the Kremlin and narrowness of the circle he consults contributed to his disastrous decision to invade Ukraine and subsequent conduct of the “special military operation”. Pictures can paint many thousands of words, but if there was anything to illustrate the need for the Kremlin to take a lesson from the healthcare workers of Hammersmith & Fulham, the photograph below, used by the FT to accompany its article, does the job.
Putin with foreign minister Sergei Lavrov – would they benefit from a team charter?
Freedom, but not to do business with ESG informed institutions
Ron DeSantis, governor of Florida and fancied candidate for the Republican presidential nomination in 2024 is proving to be an unexpected enemy of investors in US businesses and the “free market”. The FT reports that he announced legislative initiatives on 13th February to ban banks and other financial groups from “discriminating against” energy companies, gun sellers and other businesses, and asset managers from considering ESG in investment decisions.
This appears to be only one of 49 legislative initiatives so far this year across the United States. To the extent that these are the result of the efforts of lobbyists working for pariah businesses, this is fair enough and – in terms of the Escondido Framework model of the firm – represents an understandable response by the managements of such businesses to the pressures they face as they attempt to shape the interface of their businesses with the suppliers of capital.
Whether it is a rational response or is likely to succeed (by reducing the cost of capital or relaxing the pressures faced by management from active investors) is uncertain. The FT reports further that the Indiana Bankers Association, representing 116 banks, is trying to frustrate legislators in the state who are trying introduce a measure to require the state to divest and cancel contracts with financial groups that consider “social, political or ideological” factors. The Chief Policy Officer of the IBA has said “A lot of my members have ESG statements [that] could prohibit an organisation being a custodian of the state’s finance as a result of this legislation.”
But the growth of ESG is a rational response of businesses to institutional investors’ concerns about the outlook for businesses who traditional activities and business models face a long term threat because of they harm that they are perceived to present to people and to the planet. Each mass shooting in the US contributes to a ratcheting up of the anti-gun lobby and, absent short term crises resulting in a profit windfall (and these invite a taxation response) the outlook for companies extracting and supplying fossil fuels is undermined by the need to move to net zero. And when it comes to good governance, the example of value destruction by an unshackled Elon Musk, reinforces the case for the “G” in ESG.
It is reasonable for climate-change-denying and gun-toting Republican elected officials to include financial institutions that do not subscribe to the “E” and “S” elements in the ESG principles among the organisations with whom they do business, providing that such organisations can demonstrate over the long term that they serve the fiduciary responsibilities of the offices to which they have been elected (it is hard to see how they can ignore the “G”). But it is conflicts with their duties and with the commitment claimed by most Republicans to market capitalism to cave in to the pressure from the pariah businesses and legislate against doing business with ESG informed investment decisions that offer better long term returns and less risk of fraud, provider capture or adverse outcomes from wacky decision making.
The Escondido Framework argues that all the market interfaces of the company (with customers for their goods or services – either B2B or B2C, labour, their own suppliers of goods and services, and providers of capital) are essentially similar.
Customers for goods and services make their decisions to purchases on the basis of a variety of characteristics of the offering: quality, product features, after-sales support, credit terms, price and more, and in relation to all of these, the competing alternatives. Employees consider not only the raw salary package, but the variety of employment terms, both hard and soft benefits, company culture and values, corporate reputation, risk, opportunities for career development, and that’s just the start of the list. Suppliers of goods and services also have complex decisions in terms of how they view their customers, whom to serve and how. It is not just a matter of price. For example: is this customer big enough to justify the effort to sell to them compared to the other potential customers out there; can we support the service levels and stock requirements to meet their demands; would our brand be damaged in the eyes of our premium customers if we sell to downmarket segments? And suppliers of funds to companies, whether equity, debt, or hybrid instruments, consider a wide range of trade-offs: risk (reflecting a wide variety of considerations: operational, financial structure, regulatory exposure), term, liquidity, income generation, value growth, portfolio diversification for starters.
So what should we make of the debate raging over ESG informed investment and rise of the vocal “anti-woke” investor?
The Escondido Framework is not a normative model, arguing over rights and wrongs of ESG investment. The model describes the world as it is, and highlights the shortcomings and incompleteness of other models of the organisation. Investors, alongside with consumers, suppliers and especially employees include ESG type considerations in the mix when deciding who to do business with and on what terms. Do I want to be complicit in the destruction of the planet, oppression of minorities, exploitation of disadvantaged populations – whether on a third world plantation or facing an early death through a predisposition to consume addictive toxins (alcohol, tobacco or opiates). ESG is a fact of life in all markets, the only question is the weight and precise form in which it plays into the consideration of all the parties (aka stakeholders) with whom companies interact.
There are conflicting accounts as to whether ESG focussed companies and investment funds deliver superior returns. Part of the problem is one of definition and the nature of the measures employed: movements in share price are a poor metric because any starting point in a share price measure has future performance expectations priced in. However, to the extent that robust taking ESG issues into considerations reflect long term strategic thinking and the combination of transparency to investors and quality in decision-making processes, it is hard to see why and how ESG would not offer great value creation over an “anti-woke” alternative.
The Financial Times has once again (Helen Thomas on 11 January, following an article by Harriet Agnew on 12 January last year) focussed on a spat between “anti-woke” investor Terry Smith of Fundsmith and the leadership of Unilever. Smith has mocked Unilever’s leadership in his annual letter to investors for highlighting its sustainability credentials and for “virtue-signalling ‘purpose’”. He takes issue with Unilever for “purposeful” brands. For example, he comments about soap that “when I last checked it was for washing” dismissing Unilever for talking about “inspiring women to rise above everyday sexist judgements and express their beauty and femininity”. But, as Thomas points out, “the huge success of Dove – one of Unilever’s biggest brands, held up as a marketing case study – suggests a bit of female empowerment and body positivity isn’t a stupid way to sell soap. Rather like efforts to make mayonnaise appealing to health-conscious millennials [Smith laid into Unilever’s account of the “purpose” of Hellman’s last year], Smith just isn’t the target market”.
He is on stronger ground in his criticism of Unilever, which has been subject to a raid by activist Norman Peltz who now has a seat on the board. He complains that Unilever has failed to engage with his fund which had been a long-term holder of Unilever stock and twelfth largest shareholder. Marketing to investors, involving both taking strategic marketing decisions about the proposition provided to the investor (ie the profile of the investment including characteristics such as those listed provide above) as well as communicating with the shareholders, is one of the core responsibilities of the chief executive.
Reading the Fundsmith shareholder letter, I take away the impression that Smith’s criticism of “virtue-signalling” reflects a politically informed discomfort with a company that responds to trends in society and to the new consensus about threats to the environment. However, his language elsewhere and his stated strategy to invest in good companies, hold onto shares for the long term, suggest that he doesn’t recognise that his fund should invest in companies that adopt the underling strategic approach of Unilever (even if not its failure to communicate adequately with large shareholders or its apparently inept approach to large transactions). Given the stated approach (effectively to emulate Warren Buffett), Smith ought to be able to leave his personal politics and any “anti-woke” tendencies outside in the carpark when he comes to work and to recognise the value of purpose and ESG when investing on behalf of his clients.
Financial communications company Tulchan’s State of Stewardship report, capturing the views of 35 FTSE company chairs (26 from FTSE 100), makes depressing reading. “Many of the chairs interviewed for this report conveyed a sense of deep unease at what they feel is a lack of alignment between their objectives and those of their shareholders” writes Mark Burgess, a Tulchan Communications partner, in the foreword to the report. And whose fault is this? According to the commentary and the chair’s quotes scattered through the report, it appears to lie with the investors.
“The report suggests….that we should recognise that board are mostly constituted by good people trying to the do the right thing for the good of their stakeholders., and invites shareholders overseeing them to start by assuming positive intent, placing accountability for stewardship where it belongs;[1] in the boardroom and working together to improve conditions for growth”.
This is a bit like a sales and marketing director blaming customers for not buying their products or services. No, you need to design your offering to meet customers’ needs, and your advertising agency (Tulchan’s equivalent in the consumer marketplace) should shape your messages to so that they demonstrate how your offer will address those needs.
Shareholders don’t “oversee” boards. Boards are accountable to shareholders, and to other stakeholders too. Their companies have a duty to provide returns that are sufficiently attractive to shareholders in terms of the balance of capital growth, dividend income, risk, timing, and alignment with ethical and any other shareholder concerns. Folded into risk are concerns about consumer and supplier market movements, competition, government intervention, financial leverage, and investors’ portfolio composition[2]. Get that right, and investors will place a higher value on your shares. Get it wrong and investors will either sell or, if they believe other directors will provide returns (taking all the dimensions list above into account) that are more attractive to them, replace you. Boards need to think of their shareholders as customers and shape their offer to them as though they were customers.
News of a chief executive’s resignation following a failed bid for more pay reminded me that back in April, the FT’s Brooke Masters wrote an article about the difficulties faced by both governments and shareholders reining in the excesses of corporate pay. Noting that in 2021 it was possible to believe that “corporate sermonising about the need to look beyond pure profit was beginning to bear fruit”, “that the pandemic had prompted most corporate chieftains to show financial restraint” and that CEO pay in the FTSE 100 had dropped by 10%, she noted that the tide had turned.
Her article was triggered by controversy around the salary to be paid to Carlos Tavers of carmaker Stellantis which attracted the ire of French presidential election candidates and was voted down by shareholders. But this contrasted with larger remuneration packages in Stellantis’s US domiciled competitors, and much large packages in the tech giants.
These big packages have been facing challenges from shareholders. Masters reports that 18% of US companies with revenue in excess of $50 billion failed to get a majority voting in favour of their executive salary resolutions, and there was a 20% increase in shareholder protest votes on pay in Europe. But often these have no effect and merely advisory, with no pain felt by boards that fail to comply with the expressed shareholder will. She indicates that she feels that the pressures for restraint in public companies are insufficient, completing her article by giving the impression that the promise from the Stellantis board that the shareholders’ vote would be “taken into account” in next years’ pay report suggests that shareholders are not being taken seriously.
In contrast, the response on 7 August of the founders of private equity company Carlyle Group to the attempt to extract economic rent from shareholders, otherwise described as a pay claim worth $300m over five years, submitted by chief executive Kewsong Lee, suggests a that they have some backbone. Admittedly, Bill Conway, David Rubenstein and Daniel D’Aniello are all billionaires and can absorb the immediate response of the stock market, a 10% decline in the share price, to the announcement of Kewsong Lee’s departure, but some of this soon recovered and the price remains 13% above the price one month ago.
But given that there is a vacancy at Carlyle and that Kewsong Lee received a total of $42 million last year (mostly in stock awards, but a fair bit of leverage on the base salary of $275,000), anyone willing to exercise a little restraint in the face of some hard-nosed shareholder may want to apply.
Norway’s population and land area may be only 0.07% and 0.08% respectively of that of the world, but through their nation’s $1.2 trillion oil wealth fund they own the equivalent of 1.5% of every listed company. If any single organisation is able to help overcome the market failure represented by the capture of economic rent by the managers (and the connivance in this of toothless or complicit remuneration committees), it is the custodians of Norway’s accumulated oil receipts.
It is reassuring to discover that Nicolai Tangen, chief executive of the fund, is on the case. Not only has it just voted against the pay packet proposed for Intel’s executives, but it voted against the remuneration proposal at Apple in March, having voted done the same at IBM, General Electric, and Harley Davidson earlier this year.
In an interview published in this weekend’s Financial Times, Mr Tangen explains that it has remuneration proposals that are not justified by performance, are opaque or not long-term in its sights. “We are in an inflationary environment, where we are seeing many companies with pretty mediocreperformance coming out with pretty big pay packages. We are seeing corporate greed reaching a levelthat we haven’t see before, and it’s becoming very costly for shareholders in terms of dilution.”
He continues by blaming shareholders for not voting their shares: “We feel to a certain extent that shareholders haven’t really done their job in this area. We are sensing abit of a shift in sentiment among the large shareholders in the world towards more scrutiny and morerequirement for alignment.” However, he argues that the fault lies primarily with the boards themselves, stating that the “main blame is clearly with the CEOs and boards.”
Blaming the CEOs may be a bit unfair, even if it suggests that they are being less than strategic and are failing to fulfil their fiduciary responsibilities given that this will probably damage the interests of the company in long term, certainly if the investment community ever gets its act together. But it does point to a failure of the board as a whole, and particularly non-executive directors.
The FT also quotes the fund’s chief governance and compliance officer who says that the fund is currently targeting US companies because this is where the problem is most egregious. This suggests that there is a particular problem in relation to governance in the US. Part of the problem may be that although the US model places, in theory, greater power in the hands of the non-executives who generally compose almost all the board other than the CEO than models elsewhere, there is a tendency towards appointing a high proportion of NEDs who are either current or former CEOs themselves. The problem is compounded further in the US in the ease, particularly in the tech sector at the IPO stage, with which corporations employ share structures that limit the voting power of external investors. In some respects, the US corporate governance is broken, but it most certainly is if other big investors fail to follow the lead of the very large investor from the very small country near the top of the world.
Sarah Butler-Sloss wins case for purpose informed financial investment by charities
Of course, a charity’s purpose should inform its investment decisions. But that was not the position that the Charity Commission argued in the High Court recently when Sarah Butler-Sloss, who chairs a Sainsbury Family Trust that addresses environmental causes, sought to exclude investments in companies who policies were not aligned to the Paris Agreement targets for limiting carbon emissions.[1]
The Charity Commission took the position that the purpose of a charity’s financial investment is “to yield the best financial return within the level of risk considered to be acceptable – this return can then be spent on the charity’s aims” and further provided guidance that ethical investing by charity’s should not result in “significant financial detriment” to the charity. But what if the activities of the company in which your charity is investing directly undermine the purpose of the charity itself? It is not just a matter of a financial return that reflects “dirty money” (either income or capital gain) but that the investments held by the charity increase the size of the mountain that the charity is seeking to climb in its charitable work. In this case in question, the Charity Commission’s position was that the Ashden Trust board had not properly balanced the potential financial detriment from its investment decision against the risk of conflict with its charitable purposes.
I recall just such discussions when chairing the finance committee, charged with managing the £200 million portfolio of Versus Arthritis (at that point called Arthritis Research UK). I argued that it was nonsensical for us not to direct our fund managers to avoid investing (as far as it was possible) in companies whose businesses contributed the problems that we were trying to solve. Fortuitously, the investment strategy of the Baillie Gifford funds in which we invested didn’t raise any difficult ethical issues for us, as well as allowing us to benefit from a bull market in the tech stocks that featured in it
Mr Justice Michael Green took the right decision when he decided that a charity’s trustees can exercise their discretion when managing their financial investments to reflect the charity’s purposes and not solely to maximise financial returns. In doing so, he set out useful principles that address not only the nonsense that investments that directly conflict with a charity’s purposes but also reflect in their turn the decisions that personal investors make in decisions that they make about their savings (witness the growth in the number of ethical or socially responsible investment funds available) but also consideration of the impact on donors to charities, many of whom are concerned that the charities they support invest their financial assets ethically or, at the very least not inconsistently with charities stated purposes.
[1] Sarah Butler-Sloss & Others v Charity Commission [2022] EWHC 974
It’s a bold step to claim to draw lessons from a war is that is not yet a month old, where the outcome is very far from clear, and the impact on the world in terms of economic disruption and political destabilisation way beyond the immediate geographic scope of the conflict.
This Russian invasion of Ukraine has so far been consistent with two of the great aphorisms about war. The failure of the Russian army in its assault on Kiev perfectly demonstrates that “no plan survives contact with the enemy”[1]. And the information coming from all sides, some understandable propaganda and disinformation, some amounting to exceptional self-deception, demonstrating the point originally made by Samuel Johnson in 1758[2] but later attributed in more pithy form to US politician Hiram Johnson in 1917 “the first casualty of war is truth”.
This war also demonstrates as well any other that existence of the three sanctions and the complex web of how they apply and interact. This is a war about the application of force and arms. It is also a war about the application of politics and persuasion. It is also a war where economic pressures are at work, where calculations about financial transactions and trade-offs are already having a huge impact.
The question is very reasonably asked how the European customers for Russian gas allow themselves to be propping up a Russian economy that Ukraine’s allies are trying to hobble through a trade embargo. Correspondingly, the world is being thrown into crisis by the impact of a shortage of Russian gas, whether held back by Russia to apply pressure on European countries or from a curtailing of imports driven by an act of policy. The impact on large parts of the world of restrictions of exports of grain from the Ukraine is likely to cause prices to rise in the affluent world and threaten famine in the less affluent.
At this stage, it is far too early even to speculate on the outcome. Will the wave of political sympathy in the West and suspicion of Russia’s motives among the former colonies of both Soviet and Tsarist empires outweigh the economic pressures that may undermine the popular support for the Ukrainians? Will the costs and potential duration of the “special military operation” undermine the political support for Putin’s irridentist claims? How does the Chinese claim on Taiwan play into the political and economic debate and super power balance?
Playing into the corporate world that is the home turf of the Escondido Framework, companies have to take into account the changes to the pressures that they work under. The virtual spaces between market interfaces within which they operate will change. This will reflect changing patterns of supply and demand for resources and for their outputs. It will also reflect changing patterns of government interference in the shape of the restrictions on where they source and where they sell. It will introduce uncertainties where previously there may have seemed a degree of foreseeability. And all this following on the heels of the pandemic and in the context of a climate crisis.
[1] “One cannot be at all sure that any operational plan will survive the contact with the main body of the enemy” Herman von Moltke in “On Strategy”
[2] “Among the calamities of war may be jointly numbered the diminution of the love of truth, by the falsehoods which interest dictates and credulity encourages” Samuel Johnson in “The Idler” 1758
I have a disability and a history degree, but you don’t need either of these to know that the most iconic hero in British history was disabled. He stands on his column in Trafalgar Square with the result of two “occupational injuries” – the lack of an arm and blind in one eye – proudly displayed, as they are in all his portraits.
Our history is full of disabled heroes, known for their achievements and not defined by their disability.
Down at the other end of Whitehall is the statue to Winston Churchill, rarely recognised as disabled, but who suffered from a recurrent depressive condition that he described as his “black dog”. Unlike Nelson, Churchill’s disability was invisible and often glossed over, so you can’t blame the sculptor for not capturing it.
Head 150 miles north-west and you find a statue that, remarkably, conveys no hint of another hero’s disability. In Stoke on Trent, outside the Wedgwood Museum, stands a statue of Josiah Wedgwood, possibly one of the greatest figures of the Industrial Revolution: entrepreneur, inventor, innovator, radical and anti-slave trade campaigner. Wedgwood had his lower leg amputated because of smallpox contracted as a child. The fact that contemporary portraits do not show his prosthesis may reflect a desire on his part to conceal his disability. But his disability meant that he couldn’t turn a kick wheel and follow the family trade as a potter himself, so directed his attention and his prodigious talent to reshaping the industry he worked in.
Disabled people don’t want to be defined by their disability. However, we do hope people make “reasonable adjustment” (to use the words enshrined in the 2010 Equality Act) to help us mitigate our disability so we can achieve and contribute to the best of our ability. For some of my colleagues in the Disabled NHS Directors’ Network (DNDN), it is a matter of ensuring that there is decent physical access in the shape of ramps and lifts. For others, it involves thinking carefully about lighting, legibility and document suitability for text to speech solutions. At the DNDN, we adopt the discipline of checking at the start of any meeting if anyone requires any adjustment.
For me, it is relatively easy. My hearing is impaired by tinnitus, taking the form of a high-pitched ringing or screeching that means that I can’t hear sibilants and hard consonants even with my hearing aids. It is genetic rather than the result of having played in a rock band, and I slightly resent that the tinnitus also experienced by my father and brother, both of whom served in the armed forces, generated an adjustment to their service pensions (paid out of my taxes) because it was diagnosed as the result of exposure to gunfire.
It helps if I can see your mouth when you speak (which means colleagues dropping their Covid masks when speaking and allowing me to choose where I sit in a meeting). In the endless round of Teams meetings, it helps if you turn your cameras on and the closed captioning facility is enabled. It also helps if you don’t mind me occasionally asking you to repeat what you have said as it is much safer than me having to guess. And finally, please don’t ask me to engage in a mindfulness session that involves sitting silently: I don’t hear silence and this sort of mindfulness session leaves me tormented by my tinnitus!
Kate Smyth, (non-executive director at Lancashire Teaching Hospitals Foundation Trust) and I established the Disabled NHS Directors’ Network in 2019 with multiple objectives. Not only did we want to provide mutual support and share experiences among NHS leaders with disabilities, but we wanted to support disabled people throughout the NHS, providing role models from people at board level to junior colleagues, increasing the representation of disabled people on boards, and raising standard of service provided to patients and services users with disabilities.
It has been an exciting time building the network, discovering colleagues with a very wide range of disabilities: sensory like mine, physically disabling, like those of Kate who is a wheelchair user as a result of multiple sclerosis, and her co-chair, Peter Reading (chief executive at North Lincolnshire and Goole Foundation Trust) who had polio as an infant, or relating to long-term mental health or neurodiversity. It is also exciting that the NHS is at last “getting” disability as it feels that, for too long, it has been the poor relation among the Equality Act protected characteristics.
And, finally, as someone who spent the winter 1976/7 (ancient history for most people reading this) studying the life and career of Josiah Wedgwood, it is also exciting to have the excuse of Disability History month to celebrate one of Britain’s disabled heroes.
This week’s news that GE is to demerge into separate energy, healthcare and aviation businesses follows the disposal of GE Capital Aviation Services in March that finally completed the dismantling of GE Capital, finalises the implosion of the business led by Jack Welch between 1981 and 2001.
Shares in GE jumped by more that 10% on the news, suggesting that, even at this stage in the disaggregation of the conglomerate’s activities, owners of GE stock took the view that the corporate entity sitting above the various businesses was destroying over $10 billion in value. To this measure of the destruction of value by the corporate parent of the underlying businesses should be added the $7 billion paid in fees to Wall Street investment banks since 2000, of which $2.3 billion related to M&A advice and $3.3 billion to fees related to bonds (not unconnected to the parent company’s top executives about the corporate structure).
The FT staff’s covering story commented that “investors welcomed the move, which will make it easier for them to decide which of the businesses they want to back.” We have moved a long way from the 1970s and 1980s approach to corporate strategy captured by the BCG 4 box matrix with its Stars, Dogs, Cash Cows and Problem Children and the idea that at a corporation could create value by shifting resources between the business in these quadrants. Jack Welch’s GE, aided by McKinsey, used a 9 box matrix, but the essence was the same.
The FT’s Brooke Masters has written a first class piece reflecting on the conglomerate cycle.[1] She cites the LSE’s Alexander Pepper: “It becomes the conventional wisdom conglomerates are no good and need to be broken up. Then we end up with companies that are so specialised that somebody decides that there is merit in vertical and horizontal integration. Ten years later you end up with a conglomerate”. Brooke Masters further observes that “the conglomerate’s resurgent appeal lies in the normal ambition to improve couple with a hubristic assumption that good managers can manage anything. Entering new business lines seems attractive new business lines seems attractive when competition rules prevent dominance in a single sector. Cynics note that chief executive pay and influence expands with company size.”[2]
The Escondido Framework approach to the conglomerate is to think of the corporate centre as a business in itself, distinct from the portfolio of businesses that it manages. Jack Welch’s GE was in the business of managing a portfolio of activities, allocating capital, buying and selling business according to a number of guiding principles (such as only buying or selling businesses that could demonstrate that they were number one or two – generally on the basis of market share – in their sector), and rolling out some common approaches (such as 6 Sigma quality) to management across the businesses it owns. How businesses in the portfolio created value themselves for their stakeholders and wider society was incidental. Jack Welch’s GE, the corporate centre of the corporation that bore the GE name, has long since failed to meet the test for an organisation to survive, that it should create value for those with whom it interacts above and beyond what is delivered by markets.
