A Question of Balance

I was listening recently to “A Question of Balance”, the sixth album by the Moody Blues which was released in 1970, the year I was doing my O Levels. It was the band’s attempt to simplify their “lush” sound so that they would be better able to perform their songs in concert.

I’m afraid that the record has not, with the notable exception of “Melancholy Man”, stood the test of time particularly well. But the title, and the band’s pursuit of greater simplicity, got me thinking. Looking around the business world, not to mention the world of politics, there are numerous situations where balance and proportion seem to have fallen victim to fashion, over-reaction to events or just the lack of the will to make things simple.

As Mark Twain said - “I didn’t have time to write you a short letter, so I wrote you a long one”.

Perhaps it has always been this way, but I don’t think so. Let me offer a few examples and see if I can convince you.

ESG

It must be axiomatic that companies looking to the long term should, even leaving aside regulatory requirements, address:

• the implications of climate change for their businesses;
• the manner in which they engage with employees, promote diversity and make a contribution to wider society; and
• the need for high standards of governance.

But does it help or hinder to badge these three themes as ESG? As Baillie Gifford ask, “Is ESG really a thing?”. For my money the acronym obfuscates rather than elucidates (nearly as much as CHIS in Line of Duty).

Climate change is an externality that will drive fundamental changes in many businesses (take a look at Unilever’s Climate Transition Action Plan for a clearly expressed articulation of the challenges faced by a big multi-national). The “S” is not a response to an externality, that asteroid about to hit, but it is about inclusivity and decency. The “G” is the framework which will facilitate efficient pursuit of the company strategy, management of risk and, indeed, a considered approach to environmental and social issues.

All of these factors go sustainability, and will matter to investors, but to jam them all under an umbrella labelled ESG suggests to me a spurious equivalence - that they’re all kinda sorta the same.

Which brings me on to ESG Ratings. Investor interest in ESG has encouraged a plethora of agencies to provide ratings (for example, MSCI, ISS, Sustainalytics and Refinitiv) but:

• ratings often conflict with one another. A recent Paul Weiss memo cited US research finding that the correlations between six of the major ESG ratings was 0.54;
• combined ratings bringing together E, S and G can be imprecise and confusing (tipping, for example, good risk management and poor diversity into the same pot); and
• underlying data is unaudited and its quality differs as between agencies.

This is a well-known problem which is frustrating for corporates and investors alike. The data gathering also places a considerable burden on corporates. I heard a senior executive from a global retailer on a webinar recently say that they completed 600 ESG questionnaires in a year.

How can corporates bring balance to this area? Three suggestions:

• think in terms of sustainability rather than “ESG”;
• articulate clearly what is material in driving sustainability in the business. Ocado, for example, have worked with stakeholders to identify 14 material environmental, social and governance topics - from carbon emissions to employee diversity to data security - which would impact long-term value for stakeholders and they articulate crisply in their Annual Report how they plan to address them over time; and
• focus on these in interactions with investors and stakeholders - whilst also engaging with rating agencies to correct perceived inaccuracies.  

The Restoring Trust White Paper

I shouldn’t bang on about this (do look at my short critique of the White Paper here https://1drv.ms/b/s!AiNiB_DAS8su8RR7Clfl8La1y19n?e=oBlnsP if you are an enthusiast) but I would highlight three proposals in the White Paper where proportionality has gone out of the window:

• the suggestion that, in addition to the existing legal provisions which back up directors’ duties, the new regulator, ARGA, should have power to bring proceedings to sanction breaches of reporting and audit-related duties of directors. To me this would be a wholly disproportionate additional burden on directors for whom the exiting burden of work, reputational risk and potential liability is a heavy one - particularly as ARGA would be judge and jury in its own cause;
• the proposal that there should be a new profession of Corporate Auditors. The heart of audit will surely remain the domain of the accounting profession and so the complexity, cost and distraction of creating a whole new profession of, forgive me, checkers seems to me to be crackers (copyright D Cummings); and
• the notion that the Audit Committee should gather shareholder views, in advance, on the audit plan. This would be quite a process, timing could be complicated and how should companies work out which comments to take seriously? Moreover, will shareholders engage?

The consultation period for the White Paper is open until 8th July if you are moved by these points.

Proxy Advisers

I commend to you an excellent article by Oliver Shah in The Sunday Times on 9 May entitled “Anonymous box-tickers who want to block Soriot’s deserved pay rise”.

The thesis of the article is:

• ISS (claiming to advise 4,000 clients) and Glass Lewis (1,300 clients) advised voting against a revised executive remuneration policy increasing Pascal Soriot’s maximum AstraZeneca share incentive award from 5.5 times his basic salary to 6.5 times - not a huge increase for an evidently successful CEO of a company which has played a pivotal role in the fight against Covid. The resolution passed, but there was a 39.8% vote against;
• ISS and Glass Lewis took no account of context - if a scheme doesn’t fit certain criteria it’s rejected - and many institutional investors “follow them like sheep”;
• how strange that, at a time when many investment giants trumpet their ESG credentials (and here it’s the G bit), a flock of sheep have outsourced their decisions on pay to two opaque and unaccountable agencies. “It is”, Mr Shah observes, “ironic that the supposed guardian of public market standards are themselves owned by private equity (partly in ISS’s case) and subject to lower standards of disclosure”; and
• while several City fund managers, including Legal & General, take principled views of their own on matters such as pay, too many are willing to delegate these decisions to “faceless third parties”.

This is a compelling analysis and the Soriot vote is a classic example of a disproportionate result. The influence of ISS and Glass Lewis is simply out of kilter.

FAANGs

Many of us will pick up our iPhone, send a WhatsApp to our kids, look up how to fry an egg on Google, watch a handy 2-minute YouTube video on the subject, order Hamnet (vg by the way) from Amazon and scroll through the Netflix menu to decide what to watch after dinner.

It is staggering to think how the FAANGs (Facebook, Amazon, Apple, Netflix and Google) have permeated so many aspects of our daily lives, scooping up a lot of our data in the process. These five companies, plus Microsoft, represented 23.4% of the S&P 500, by market capitalisation, on 4 June 2021.

The influence held by a small coterie of big tech businesses is strikingly disproportionate.

It affects us (is our data safe, how much is an iPhone?) and it affects other businesses and their ability to compete (BT, BBC Studios, ITV).

Three observations:

1. co-ordinated action by agencies and governments will make a big difference in tackling misuse of the influence. In this context, the co-ordinated anti-trust action by 46 US states and the FTC against Facebook launched in December 2020 and the investigations announced last Friday by both Brussels and the UK into Facebook’s domination in digital advertising are noteworthy - as is the G7’s outline agreement on taxing large multinationals;
2. individual countries such as the UK should strive to nurture tech and data businesses. The 5-point plan set out in the Kalifa Review of UK Fintech should be front of mind for the UK; and
3. we can each check our stride in our addiction to the FAANGS, ordering Hamnet from Waterstones and giving first TV dibs to the BBC iPlayer or the ITV Hub.

Electric Vehicles

As someone who finds misty eyed romance in the fragrance of oil and petrol when climbing out of his old car after a long journey, I am not objective on the subject of electric vehicles.

But I do get it. In the interests of the planet, EVs (and maybe hydrogen vehicles one day) are the way of the future.

However, there is a major mismatch between the UK Government’s determination that new sales of petrol and diesel cars must cease by 2030 and the charging infrastructure, the development of which has been left to private providers.

This has resulted in a confusing mix and match array of devices, inconsistent coverage around the country and a huge investment requirement - currently connectors are being installed at a rate of 42 per day when, according to the Society of Motor Manufacturers and Traders, 700 per day are needed to reach the number that will be required in 2030.

How is the Government going to bring the vision of an EV revolution to reality - to make execution capability proportionate to ambition?

Cardigans

With apologies to cardigan fans, I have come through life thus far thinking that a cardigan is not a very exciting item of clothing.

But I find that I have been disproportionate in my view. There is much more excitement in and around the subject of cardigans than I had previously thought. Specifically:

• the cardigan was named after the 7th Earl of Cardigan who led the Charge of the Light Brigade. He apparently invented the cardigan as a practical garment after noticing that the tails of his coat had accidentally been burnt off in a fireplace;
• I had forgotten this but Steve McQueen wears a cardigan in Bullitt, famous of course for the best car chase of all time; and
• a good friend sent me this video of My Favourite Game by the Cardigans https://www.youtube.com/watch?v=u9WgtlgGAgs which, I think you’ll agree, is pure brilliance.

Christopher Saul

Christopher Saul provides independent trusted advice to senior executives and key stakeholders within publicly quoted and privately owned businesses and professional service firms. His areas of focus are governance, succession and the moderation of differences.

Send this article to a friend...