Could Jeremy Corbyn be Prime Minister by the year end?

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There is a reason the bookies now put Jeremy Corbyn as favourite to be next Prime Minister (7:2 from Ladbroke’s).

It is certainly starting to feel we are now on tramlines heading towards a General Election.

Don’t be fooled by the fact that under Conservative Party internal rules she has 12 month’s grace from the last challenge against her in December.

The Prime Minister faces weekly hurdles to staying in office. Indeed, it is pretty remarkable she is there at all given that even with the Democratic Unionist Party in tow she only has a Parliamentary majority of five. We also know what constitutional and party rules will apply if a Conservative leadership election takes place.

To remind you, the known hurdles are:

Date Event Significance

May 14th
Expected Withdrawal Agreement Bill vote
Unlikely to pass without Labour support

May 23rd
European Parliament elections
Conservatives are only on 13% in the polls

May 23rd – 4th June
Whitsun Recess		  
June 3rd Trump state visit
Plenty of opportunity for
mischief

June 6th
Peterborough by-election
A strong showing from the Brexitparty candidate is expected

June 15th
EGM of Conservative National Convention
No legal force but possibility for embarrassment

 

It is conceivable that either after Parliament passes the Withdrawal Bill with Labour support (possible but not likely) OR after heavy defeats in both the European elections and the Peterborough by-election Theresa May finally decides the game is up. The Cabinet and the 1922 Committee of backbenchers could belatedly urge her to step down.

Who or what is an “interim Prime Minister”?

This will be the first gift to Jeremy Corbyn and the Labour party.

The position of interim Prime Minister does not exist in law. Who should be Prime Minister while a new Conservative leader is chosen? Only the Queen can appoint the Prime Minister and she must choose whoever can command a majority in the House of Commons. How will the Conservative Party and, say, the Cabinet prove that its choice can command a majority while the outcome of the Conservative leadership process is unknown?

The best solution would be for Mrs May herself to stay on as “interim” Prime Minister, having indicated her intention to resign later, after a leadership election has been concluded. But suppose she does not agree to this? And suppose that the Opposition Parties, not unreasonably, don’t support her staying in office while the Conservative Party conducts a prolonged leadership poll? They would be entirely justified in calling a vote of confidence.

Avoiding a Vote of Confidence

The House of Commons has to be sitting for there to be a Vote of Confidence. As the Government controls the Order Paper, there are various ruses it can use to avoid Parliament sitting. It can, for instance, simply say there is no business or Prorogue Parliament or put it into Recess. This is easier than it appears because there is virtually no legislation in the pipeline and the current session of Parliament – delineated by a Queen’s Speech – has already been extended.

However, one cannot help feeling that these are just the sort of antics which the Stuart Kings resorted to in order to avoid Parliament sitting- and look what happened to them.

The Conservative leadership rules

These are the second gift to Jeremy Corbyn.

The Parliamentary element of the leadership process is run by the 1922 Committee. Previously, it has allowed a week for candidates to come forward and held votes on Tuesdays and Thursdays. At each round, the weakest drops out until there are just two left. They then supposedly hold hustings up and down the country and the 150,000 odd party members vote a few weeks later.

Presumably, there is an opportunity to speed things up a bit. But even if common sense and speedy and efficient systems prevail, it is doubtful the process could be truncated to less than 4-6 weeks.

Furthermore, holding such a process in August would plainly be problematic.

A General Election

A Labour vote of confidence as soon as the leadership contest concludes, if not before, must surely be a certainty. Can we be sure that any one of the dozen or so leadership candidates would win such a vote? If, say, Boris Johnson won, several MPs are on record as saying they would leave the party and refuse to serve. Mr Corbyn would be able to make some good points about the spectacle and legitimacy of the whole process.

The deadline for the current extension to Article 50 expires on 31st October. That will be looming into view by the end of the summer holidays and dominating the political discussion by then. Surely nobody is going to be wanting to hold an election immediately before it or during it?

The only realistic window for an election is September. If, and it is a big if, the Conservative party does decide to change leader, commencing in June, the precariousness of the Parliamentary arithmetic and the inevitable hue and cry about the requirement for a fresh mandate means that must be the way to bet.

Who would win? I don’t know, but a simplistic reading of the current polls, plugged into the Electoral Calculus model, forecasts a potentially unstable Labour/SNP coalition with a majority of around 15. As for Brexit, would it be implemented at all by such a Government?

Conclusion

Put together the complexities of changing Prime Minister, and you can see it is hard to do so without running the risk of the whole process blowing up spectacularly. Inertia therefore remains Mrs May’s most powerful friend. Against that, whichever way you look at it, she has a majority of five and the clouds of defeat swirling around her could well erupt into a storm soon after the 75th anniversary of the D-Day Landings.

Theresa May is a genius – discuss?

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There, that has caught your eye.

We are accustomed to thinking that Brexit has degenerated into a shambles and Mrs May’s strategy of “kicking the can down the road” has been a disastrous humiliation. That is certainly a valid point of view. But from her own narrow self-interested perspective she remains in Downing Street and has avoided taking any of the many final decisions which might coalesce opposition to her.

That strategy marked up another success overnight when the European Council agreed an Article 50 extension until October 31st.

At Boscobel we have continuously resisted the Government’s claim that the country faced a binary choice of Theresa May’s deal or No Deal, as we believed Parliament would approve neither. That continues to be our advice.

A leadership contest?

This morning, the Today Programme was full of disinterested speculation that Mrs May will now be “forced to step down”. That is a possibility. But the fact is there is no legal or constitutional mechanism to remove her from office in the short term. And unlike most politicians she seems utterly immune to the daily hue and cry of the media, Parliament or indeed other people’s views and feelings generally.

She has particular contempt for Cabinet government, one of the many important constitutional conventions our politicians have undermined in recent years. That said, given that at least five of her colleagues now have leadership campaigns up and running, she can enter a plea in mitigation.

Investor confidence

From an investor perspective, last night’s European Council decision has its merits. There is a huge amount of deferred investment, pent up in the system. There were only three IPOS on the London Stock Exchange in the first quarter, the lowest number since the financial crisis. UK companies are holding a record 35% of GDP in cash on their balance sheets.

For managers and investors with capital to allocate and who can ignore the media, the Brexit pause should be an opportunity to make incremental decisions. Very large decisions may still be put off, as the acute political uncertainty around the UK will continue.

What is the medium term outlook?

  • The UK will almost certainly participate in the European Parliamentary elections, with candidates to be selected in the next couple of weeks. The polls suggest this will be a disaster for the Conservatives.
  • The franchise could be critical, as EU citizens resident in the UK will be entitled to vote. They have been treated appallingly by the political and bureaucratic process and are difficult to poll. One suspects, without evidence, they will vote for remain parties such as ChangeUK.
  • Relative to the hard core Remainers, at the top of which sit the eminence grises of New Labour, notably Tony Blair, the Brexiteers (especially the European Research Group in Parliament) are in disarray.
  • Experience of life suggests the longer and more frequently something big is delayed, the more likely it is to lose momentum altogether. We should start to contemplate the possibility that Brexit may never happen, or not unless the mandate is refreshed by a Second Referendum.

In EFTA, it would be in a working free trade agreement, but outside the jurisdiction of the European Court of Justice, the Common Agricultural Policy, the Fisheries Policy and the Customs Union. We would enjoy rights of consultation and veto over new laws, as they applied to us.

At Boscobel, we have supported a campaign for the so-called Norway solution. It is now commonplace in Parliament that there are, in fact, two pillars of European treaties, holding up a common-roof called the European Economic Area. The EU political treaties make up one pillar, but there is another made up of the European Free Trade Association. It still makes sense for the UK to leave the political institutions of the EU and move into EFTA.

For this policy to work it would require something to shift. But that tinkling sound you can hear is just the can being kicked down the road. Again.

Are CDC pension schemes “a game changer”?

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Amber Rudd, the Secretary of State for Work and Pensions, has announced a “revolutionary” new workplace pensions scheme – Collective Defined Contribution (CDC) – that she claims will result in improved investment returns for workplace retirement savers.

This is a potentially significant development, which could ultimately involve billions of pounds and affect thousands of workers and employers, notably large unionised workforces. Given the recently low UK savings and business investment rates and the substantial deficits in many defined benefit schemes, it could also have a major impact on labour force relations, intergenerational fairness, capital allocation and the asset management sector.

Cross party and union support

The scheme, originally proposed by the Royal Mail and the Communication Workers Union (CWU) will be introduced, “as soon as parliamentary time allows.” What is interesting is the proposal has support from the Government, the Royal Mail, the unions and, we are told, it has “cross-party support”.
Already operational in Denmark and the Netherlands, CDC schemes offer a middle ground between the declining Defined Benefit (DB) schemes and Defined Contribution (DC) schemes.

For many businesses, the introduction of this new scheme will allow them to provide pensions provisions to their employees without the burden of huge pension liabilities. There is no guaranteed benefit at retirement, rather a target benefit meaning that pensions payments will fluctuate depending on the performance of the investments. Therefore, although risk is pooled, it nonetheless falls to investors, not employers.

Pooled risk

Proponents of the CDC scheme cite a number of advantages including improved investment returns because risk is pooled, regular and relatively reliable income in retirement and reduced risk for scheme members, while cutting costs and red tape for employers. They also suggest there will be benefits for the wider economy such as the prospect of these schemes investing in longer-term assets including infrastructure projects.

The pooling of risk might also provide an excuse for the Government to raise the lifetime and annual contributions caps.
The new scheme could also be transformative for the asset management industry if it entices greater participation in savings, resulting in the potential creation of vast new funds.

Too big to fail

However, whilst the introduction of the new scheme has been hailed as a “revolutionary reform” – a number of questions remain unanswered.

Already concerns have been raised about whether this new scheme would sit easily in the UK’s pensions system or whether it is more at home in a more unionised society. Other questions have been raised about whether this is the most effective way to encourage greater savings into pensions, how will the risk profile of such schemes be managed for the benefit of all members, what demand will there be for such schemes and does it offer investors sufficient choice.

Hargreaves Lansdown has warned that CDC schemes are “similar to the with-profits funds” which let down investors in the past. It has also said that large CDC schemes could become “too big to fail” and that the Government would have to stand behind them. This makes sense. The additional political risk for large quasi-public sector funds must ultimately sit somewhere.

The Dutch and Danish schemes are highly regulated with contributions and returns effectively governed by their central banks.

Notwithstanding the numerous questions, the CDC seems initially to be a constructive development for the provision of pensions in large quasi-public sector businesses such as the Royal Mail and for the Government. Switching to an entirely defined contribution scheme would be powerfully resisted by the trade unions. As the first scheme of its kind in the UK it will be interesting to see how the Royal Mail one fares and whether other businesses or government schemes would follow suit.

Here is a truly revolutionary suggestion. If they are such a good idea, perhaps Members of Parliament could lead by example and switch their notoriously generous pension plan, where employer contributions are approaching one third of salary, into a CDC scheme.

By Charlotte Walsh and George Trefgarne

 

The EEA is a Brexit life boat for the City and the economy

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The revelation [in the Telegraph on Saturday 9th March 2019] from George Eustice, the ex-fisheries minister, that Britain’s ambassador to Norway, was primed to hand in a letter giving notice that Britain was leaving the European Economic Area (EEA) single market treaty last March, but was mysteriously ordered by the Foreign Office not to do so, is the best news about Brexit for months, especially for the City and the wider economy.

The reason is very simple. If Brexit goes belly up, we can leave the EU, but still stay in the single market, for the simple reason we haven’t yet given the required notice to leave.

The EEA delivers Brexit. It is a working free trade agreement with the EU, but outside it. It is outside the Customs Union, the Common Agricultural Policy, the Commons Fisheries Policy and the jurisdiction of the European Court of Justice, and enables us to bring in controls over freedom of movement.

The EEA is a separate treaty to the EU Treaties. We are signatories in our own right, and we can make it operative by applying to join Norway, Lichtenstein and Iceland in the related European Free Trade Association. This Brexit option is continuously dodged by the Government, because it is excessively worried that the national controls over freedom of movement in the EEA are not sufficient.

The City’s misconceptions

One thing you will hear about the EEA is that the City doesn’t want it because we would be a “rule-taker” from Brussels, as the Bank of England Governor Mark Carney said before the Treasury Select Committee in December 2018. Until about a year ago, the City wanted to stay in the single market, because it would keep its market-passporting rights, but now the consensus has now shifted.

However, it is notable that when you ask City figures why? a whole load of misconceptions pop out.

It is not true we would be a “mere rule taker” in the EEA.  Nor is it true that the Bank of England would have to take orders from the European Supervisory Agencies during a crisis, jeopardising financial stability.

How laws are made in the EEA

Less than a third of EU directives are single market ones, appropriate for the EEA.

There are three stages to law-making in the EEA. First, the European Commission comes up with some legislation which, much of the time, originates in global standards bodies on which EFTA nations sit independently. The EFTA nations then have a right to be consulted by the EU at a technical level. This is the “decision shaping process”. EFTA states do not have a vote at this stage.

Second, once a directive has become EU law it is passed on to the EEA Joint Committee, on which representatives of the EU and the EFTA states sit, for incorporation into the agreement. Its decisions must be unanimous and at this stage, the EFTA nations can delay, adapt or veto legislation either by claiming it is not “relevant” to EEA nations, or that it triggers constitutional requirements. Failure to implement the directive outright (reservation, in the jargon) results in the relevant area of the EEA agreement being suspended.

Finally, if agreed, the directive must be implemented by Parliament. If it is rejected or mangled out of shape, then the EFTA Surveillance Authority (the body which effectively polices the rules in EFTA) can bring an infringement action before the EFTA Court. Both institutions would have substantial British representation, as it would be the biggest member. Minor differences are usually overlooked by both sides.

Rows of this kind are very rare. This is because law-making in the EEA is much more collaborative than in the EU. It is effectively a form of “equivalence” in rule-making which the City has said it ultimately wants from Brexit. The EFTA Court is a more pragmatic institution than the ECJ. There is no ideological principle “of ever closer union” to follow.

Those pieces of onerous EU legislation about which one hears the most City complaints, like MIFD2 (covering find managers), or Solvency II (covering insurers), could have been revised or in extremis rejected. The latter course would, admittedly, have resulted in a massive row. But it does mean there are more sovereign protections in the EEA than we have currently as an EU member, adopting unedited rules in their entirety, as we would do also during the “implementation period” in Theresa May’s deal.

The Bank of England in charge

What about the idea that the EEA would jeopardise the ability of the Bank of England to police financial stability? This is also a misconception. The Bank would have dozens of representatives on the EFTA Surveillance Authority. EU supervisory agencies do have powers to send draft directions to the EFTA Surveillance Authority. But just as now, the Bank of England could veto a direction which “impinges on fiscal responsibilities” (ie nearly everything).

For those who care about economic growth, the EEA is the best way out of the Brexit impasse. Not only would it deliver certainty and sovereign legislative flexibility, it would allow business investment and market activity to recover. Sterling would regain its strength. Given the chronic low valuations of UK assets, there might even be a Trump-style boom.

The opportunity

Joining Norway in EFTA would also bring the world’s largest international financial centre alongside the world’s largest $1 trillion sovereign wealth fund, which Norway has thriftily accumulated from its North Sea oil revenues (incidentally, this has a disappointing average annual return of 5%, I am sure the City’s expertise could help increase that). This is a strategic opportunity for both sides. The EEA has cross party support, including from Tory MP Bim Afolami and Labour MP Seema Malhotra, both of whom used to work in financial services and co-signed a letter to the Financial Times.

Falling back on the EEA is the best Brexit life-boat to hand. It isn’t perfect, but it works. It would remove most of the political and legal uncertainty hanging over the UK.  Why not give it a go? If it does turn out that it is insufficiently flexible and the EU does use the EEA treaty to make us a mere “rule taker”, as its detractors fear, then we can move into a new arrangement and our ambassador in Oslo can hand in that departure letter, which we know has already been drafted.

This article was first published on the Reaction website

Busting the latest Brexit myths

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Theresa May has told the House of Commons that she will now bring forward three votes:

  • March 12th vote on her new revised deal
  • March 13th if that doesn’t pass a vote for No Deal
  • March 14th if that doesn’t pass a vote to extend Article 50

The pound has risen to its highest levels for nearly two years on the news, to over €1.16 and $1.32 respectively.

However, the news has also triggered the usual cacophony of over-the-top commentary. Here is a brief myth-busting guide.

Myth one – No Deal is “off the table”

While No Deal is clearly much less likely, it is still open to the House of Commons to vote for it and, in any case, a request to extend Article 50 will have to be approved unanimously by the 27 members of the EU Council. The EU might choose to hold our feet to the fire. Furthermore, a short extension may just move the cliff-edge.

Myth two – Mrs May’s deal is off

Geoffrey Cox, the Attorney General, is in Brussels negotiating some revisions to the Backstop. I don’t know him personally, but my legal friends all have supreme confidence in him. If he does come back with something, it may pass in the House of Commons. (I am glad I got 100:1 on him being next Prime Minister just before Christmas.)

Myth three – this is all a ruse to stop Brexit

Such is the level of mistrust, numerous people no longer believe each other. However, it is my firm conviction that there is a majority in the House of Commons for what one might describe as “a soft Brexit” of some kind, but with an exitable Irish Backstop.

Myth four – the EU want to trap us into staying in

Not true. If the UK is still in the EU by July, we will have to run candidates in the European Parliament elections, or the Parliament will be inquorate. This, in turn, would upturn the selection for the next President of the EU Commission. The EU does not want that to happen. It does not want British candidates in the Parliament, joining the populist mob. They would probably like to keep us in a customs union though.

Myth five – one more heave and we can be like Singapore

The European Research Group is not unanimous. Some have been hoping that by pushing the UK into a No Deal scenario, it could become a free trading entrepot, just like Singapore. Singapore is a wonderful, admirable place but there has never been a majority in this country, still less among Brexit voters (many of whom are Labour supporters), for such a low-tax, low-regulation move. Others wanted to go for a Canada Plus deal, which is more attractive but does not answer the question of what to do on March 29th.

Myth six – we are on the way to a second referendum

There is no majority in Parliament for a second referendum. Open Europe estimates that the majority against one is 46. Labour has a real problem in that many of its safe seats are for a second referendum; but the top 45 marginals it is targeting in England and Wales are 78% Leave voting; and the top 25 it is defending are 72% Leave voting.

Myth seven – Norway is dead

Some will know that I published a short book called Norway then Canada last year, arguing that, as a plan B, we should fall back on our existing membership of the European Economic Area (the separate single market treaty) as a first step when we leave the EU. This gained some traction for a few weeks but then fell victim to a barrage from the Brexiteers and Remainers who ran a “kill Norway strategy”.

However, a blog just published on the UK Constitutional Law site reminds us that the Government has not only failed to put the legislation before Parliament to pull us out of the EEA, even if it did it probably would not pass. If all else fails, we can still fall back on it.

Labour is close to supporting EEA membership, but for some reason it wants to stay in a customs union, which is a red rag to Brexiteers.

Sooner or later the politicians will burn themselves out and when they do they will have two options: vote for Mrs May’s deal as adapted by Geoffrey Cox, or go for an EEA-based option.

Time for a National Government? Lessons from 1931

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It is an interesting question as to whether the formation of a National Government would help solve the current Brexit impasse. It has certainly worked in the past.

In 1931 a National Government was formed to get us out of the Depression and overall it did a pretty good job. Britain recovered faster than any other major economy, helped by coming off the Gold Standard, restructuring War Loan, tax cuts and embarking on a housebuilding boom.

When the crisis began that year there was a minority Labour Government, the pound was under pressure and the Cabinet was divided. An Austrian bank called Credit Anstalt had gone bust and contagion had spread to London’s financial markets. The budget deficit was spiralling out of control due to faltering tax revenues and the cost of rising unemployment benefits.

During the summer, the Prime Minister Ramsay MacDonald was trying to get agreement among his Labour colleagues to cut government expenditure and raise taxes. Balancing the budget was a prerequisite to the approval of an emergency loan being arranged by JP Morgan in New York. The Conservative and Liberal parties refused to countenance the £100m in tax rises which the Cabinet agreed to and instead demanded further economies.

Throughout August the political arguments raged and there was an impasse. The critical intervention finally came from King George V, one of the most underrated monarchs in our history. The best narrative of events is in Kenneth Rose’s excellent biography of the King.

On Saturday August 22nd, having only just arrived in Balmoral, the King turned straight round to see MacDonald at Buckingham Palace the following morning.

The Prime Minister tried to resign, but the King talked him out of it at two meetings on the Sunday. The second one took place after the King had a private dinner with Edward Peacock, a director of the Bank of England and partner in Baring’s Bank, who helped manage the King’s affairs. Left-wingers claimed that Peacock was at the centre of a “bankers’ ramp” and had a role in advising the King what to do. He had been summoned at short notice, but he himself said that all they talked about at dinner was the recent fluctuation in wheat and barley prices.

The King told MacDonald he was the only one who could lead the country at that time and he believed he could depend on Conservative and Liberal support. The King then summoned all three parties to a meeting at Buckingham Palace the following day. The Conservatives were led by Stanley Baldwin and the Liberals represented by Sir Herbert Samuel, as their leader Lloyd George was convalescing from an operation.

The King told MacDonald that it was “out of the question” he should resign and told the three men to go into a room, to come to an agreement and they were not to emerge until they had drafted a communiqué which would restore confidence at home and abroad. This took about an hour and the three agreed to form a National Government under MacDonald. This was not a formal coalition, but a “co-operation of individuals” to tackle the economic emergency.

Lord Wigram, the King’s private secretary, noted in his diary:

“His Majesty congratulated them on the solution of this difficult problem, and pointed out that while France and the other countries existed for weeks without a Government, in this country our constitution is so generous that leaders of Parties, after fighting one another for months in the House of Commons, were ready to meet together under the roof of the Sovereign and sink their own differences for a common good…”

Amen to that.

The Labour party subsequently split, but the National Government won a landslide victory in an autumn election demanded by the Conservatives. Churchill transformed it into a “Grand Coalition” in 1940 and it remained in office, broadly successfully, until 1944.

Would such an approach work now? It is hard to see either the Queen intervening or the current party leaders taking a similar approach. But anecdotally, the public appetite for “banging MPs heads together so they sort things out” is very high and they are not immune to this sentiment. It is also noteworthy that first steps in cross party co-operation, both by backbenchers and in formal talks between Theresa May and Jeremy Corbyn, have already been taken. Let’s see what happens in coming weeks.

Get ready for the new EU Shareholder Rights Directive

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The EU Shareholder Rights Directive II (updating a 2007 original) comes into force in June 2019. This is potentially one of the biggest and most positive developments in corporate governance across Europe, including for London listed companies, for many years. It will occur whatever happens with Brexit because the UK has already agreed to it. Yet it has attracted remarkably little attention.

The full text can be read HERE

The Directive is intended to ensure shareholders can exercise their rights across the EU and for the most part, under the UK Corporate Governance code and the Listing Rules, we are already compliant. For instance, UK companies are already obliged to offer an annual vote on executive remuneration.

However, in two notable areas UK companies, brokers, custodians, asset managers and advisers are going to have to ensure they are up to speed and, in many cases, improving their practice. Both have implications from a financial PR perspective.

Intermediaries must enable shareholder rights, even for retail shareholders

All market intermediaries, including those who distribute shares to retail investors during a capital raise such as an IPO, are going to have to ensure that they pass both rights and information properly and in a timely manner between companies and shareholders.

Most intermediaries will claim they already do that and the S.783 of the Companies Act means shareholders can already be identified.

However, having worked for companies during contested situations, such as proxy fights, controversial general meetings or M&A, it would seem there is still plenty of inertia in the system when it comes to discovering who is the underlying owner of shares, whether they or someone else can exercise voting rights, how they intend to vote (if at all) and whether they have the correct information.

There can be numerous complications. Are shares out on loan? Is it a cross border situation? Are retail shareholders involved? Do hedge funds have voting rights or not? Having established the owner, who decides how to vote?

In theory the Shareholder Rights Directive clears that inertia in the system away. In so doing, it also paves the way for using distributed ledger technology to manage both ownership data and the exercise of shareholder rights.

The Directive says that intermediaries in Third Countries (outside the EU), such as the Cayman Islands or the British Virgin Islands, must also comply if they hold European listed shares (though it is not clear how that will be enforced).

Related to that, companies and intermediaries have frequently been neglectful of retail shareholders, usually arguing that as they hold their shares via nominee accounts, ensuring they have information and can vote is too difficult. That is likely to change. Given the growing importance of retail shareholders and platforms such as Hargreaves Lansdown in capital raises for small and medium sized companies, this is an important new development.

Large companies with big retail or employee shareholder bases, such as Centrica, BT, Royal Mail and Santander may also have to strengthen their efforts at enabling them to vote at AGMs.
Asset managers, institutions and proxy advisers will have to be transparent

The Directive creates a new “comply or explain” duty on asset managers and institutions to explain publicly their approach to shareholder engagement, including their approach to ESG (environmental, social and governance issues) and how they have voted. It explicitly references the UN Principles of Responsible Investment. Many investors already do this – and the UK Stewardship Code is already on a comply or explain basis – but it is another step in the move towards voting transparency and institutional accountability.

Proxy advisers will also have to adopt a public code of conduct and report on it. Given the variable standards in this industry, this is no bad thing.

Financial PR implications

The most obvious implication of the Directive is that, during a contested situation, it is going to be easier for the parties to establish who the shareholders are, to ensure that they have voted and to influence them, either via the media or directly.

This should enhance the dialogue between corporates and their investors. It will also mean that activists will potentially find it easier to communicate with other investors. Equally, they will find it harder to exaggerate their voting power.

The Boscobel view is that the lost Unilever redomicile vote in 2018 was a watershed in shareholder democracy, because it demonstrated how corporates can pay a heavy price for becoming disconnected from their owners. Corporate knowledge of shareholder registers and shareholder sentiment is often out of date or partial. The management of the register can sit awkwardly between the Company Secretary, investor relations and the house brokers with proxy advisers only brought in on an ad hoc basis (often when it is too late).

Asset managers and institutions must also ready themselves for continued demands for public transparency on how they have voted and why.

Ahead of the Directive coming into force, corporates should look to re-evaluate their shareholder communications to ensure compliance. Financial PR sits at the heart of this process, providing advice on best practice as well as anticipating issues (which may anyway first surface in the media) and pre-empting them with transparent and concise communications.

Christmas cheer from Thomas Chippendale – The 1721 Naval Store Act had unexpected benefits

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Earlier this year Boscobel moved into new offices at 60 St Martin’s Lane, in Covent Garden, the historic creative hub of London. Some research about a talented previous occupant shows how unexpectedly good things can come if we have the wit to encourage enterprise and civility.

A plaque by the door reminds us that it was on this site that the furniture-maker Thomas Chippendale and his son rented their workshop from Lord Salisbury. It is from here that they manufactured their distinctive elegant hard-wood furniture when the Industrial Revolution was getting into full swing from the 1750s onwards.

1721 Naval Stores Act

What is not commonly appreciated is that the very existence of Chippendale’s innovative English Rococo designs was only made possible by the 1721 Naval Stores Act, which repealed duties on commodities required by the voracious Royal Navy. Among these were mahogany from Jamaica and walnut and pine from North America.

An abundant supply of imported hardwoods stimulated domestic craftsmen, joiners and cabinet makers. Thomas was born in Yorkshire, the son of a joiner and in 1718 and later moved to London.

The Director

In 1754 Chippendale published his celebrated catalogue of slim and lightweight designs, called The Gentleman and Cabinet Maker’s Director. This, it proclaimed reflected ‘. . . MODERN TASTE, as improved by the politest and most able Artists’.

In so doing, he pioneered an interesting business model. The Director was sold to an initial 400 subscribers at £1. 10 shillings each, making him £130,000 in today’s money. Not only did this provide working capital for his business, it advertised his prowess to an influential clientele. It was reissued twice with additional plates.

The initial subscribers included 28 titled persons, 21 designated Esq, and numerous craftsmen, keen to copy his designs. Four subscribers were ladies. Many of the subscribers, such as the Countess of Shaftesbury, the Dukes of Beaufort and Norfolk, and the Earl of Dumfries, went on to commission works from Chippendale.

It was a time of abundance. The Georgian aristocracy were growing ever more wealthy on the newfound prosperity which they benefited from as investors or as landowners collecting revenues from canals and turnpikes or from the mining of coal (and in some cases, it should be admitted slave-owning plantations). There was also a growing, rising, affluent class of entrepreneurs, inventors, scientists, merchants, tradesmen, craftsmen, artists and City professionals. A step change in the human condition, originating in Britain, was underway.

Following Adam Smith’s advice

At times of uncertainty we should take comfort from history, reminders of which are frequently around us. There are lessons to be learned and it helps give perspective. When MPs passed the Naval Stores Act nearly 300 years ago, they cannot have imagined the unexpectedly good things which would ultimately come from following Adam Smith’s advice – coincidentally given to Glasgow students in the same year The Director was published: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.”

Happy Christmas and fingers crossed, on both hands, for all of you in 2019 from the Boscobel team.

Hedge funds are going long ESG

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For those involved in a corporate action situation, a remuneration vote, or implementing the sustainability policy of a large company there is one audience which you normally have not had to consider: hedge funds. However, there are signs that is changing.

In general, hedge funds are interested in generating alpha, or non-market correlated returns. The typical holding period can be quite short, somewhere between minutes and weeks, and – unless they are engaged in an activist strategy – they don’t usually vote or engage with the company on Environmental, Social and Governance (ESG) issues.

This week, Albourne, a consultancy advising the clients of hedge funds, published a manifesto in which one of the main points is to develop a standardised method of ESG reporting both for corporates and funds. Simon Ruddick, the chairman, is stepping down to promote it.

The Financial Times also carried a piece which claimed about a tenth of hedge fund strategies are now managed according to ESG principles. Half of hedge funds have also signed up to the United Nations’ Principles of Responsible Investment (UNPRI) charter.

Client’s demand

The drive for greater commitment to ESG by hedge funds is coming from their clients. According to a recent survey by the trade association AIMA, some 51% of hedge funds are seeing increased interest in their responsible investment capabilities, with the bulk of it coming from North America.

There have been some notable fund launches in this area. Jana Partners Impact Fund recently took on Apple over the addictive use of smart phones by children. It invests in companies which it, “believes are good bets but could do better for the world.” ValueAct Capital also launched its Spring Fund which invests in companies which, “are emphasising and addressing environmental and societal problems.”

To be fair to hedge funds, there are good reasons why they have not historically taken much of an interest in this area. Not only are their positions frequently of short duration, their primary objective is to generate alpha for their clients and this may in fact conflict with sustainable investing. There may be better returns to be made from a distressed security with a poor reputation. Furthermore, they may actually have a short position or stock on loan, where the votes rest with the legal owner. Or they may invest via Swaps which face the same issue.

Many hedge funds manage systematic strategies which are based on filtering and analysing data. Standardising ESG reporting by corporates, as the UNPRI is moving towards, is likely to enable them to create filters, indices and algorithms to provide ESG signals to adjust their portfolios or their votes accordingly.

Corporates take note

What are the implications for corporates? These are threefold. There is yet more of a requirement to keep the share register up to date and to establish who is the real owner and decision maker of shares out on loan or held via nominee accounts or other synthetic devices. Second, having worked that out, companies need to understand their investment or voting criteria, which may be systematic. And thirdly to engage with the funds and to emit the right signals.

Hedge funds now manage some $3.1 trillion of assets. As we saw in the campaign against the London Stock Exchange led by the TCI fund, they don’t do things by halves and even if they don’t succeed in their demands, they will make their presence felt by boards and companies and will shake things up.

The recent decision by Unilever to pull a vote on its redomicile was a classic example of things going wrong for a corporate. One suspects the company wasn’t clear who owned its shares and what they thought. Most of the names which came out against it were classic long-only funds. In the future, more hedge fund names are likely to be named publicly in such situations.

 

Introducing Section 20 of the EU Withdrawal Act

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Extending Article 50 is easier and more likely than some people let on.

The Conservative party conference is going about as expected, with the Prime Minister reportedly booed at the Association chairman’s dinner; Boris Johnson giving a witty, tub-thumping speech which ended, incongruously, with a call for everyone to back Theresa May; and every Cabinet minister jostling for leadership attention.

Nothing has changed. I doubt anyone is watching much at home. Certainly, I noticed that the YouTube figures for Boris’s speech topped out at 1,896.

None of our political leaders wants to focus their minds on the matter at hand. What happens on 30th March 2019, the day after we are scheduled to leave the EU?

Theresa May wants us to believe we will be out of the EU, but in some sort of limbo. Having handed over a cheque for £39bn, we will have won in return a political declaration for her Chequers proposals which are a complicated and unsatisfactory. Failing that, we will supposedly walk away without a deal.

Boris Johnson wants us to be in exactly the same limbo position. Only “negotiating properly” for a “Canada style free trade deal”. He apparently has no answer to the questions about the Irish border or why the EU would agree to anything he proposes. Perhaps this is why some call it “Blind Brexit”. 

Markets are sanguine

Here is another scenario, which explains why, relatively speaking, markets remain so sanguine. It is easy, from a legal point of view to extend Article 50. Even if Chequers and Canada Plus etc all fall by the wayside, there is still a strong likelihood that Britain will be limping along, obeying all the rules and doing as it is told without any say in the matter.

No wonder the IPO market remains open. Sterling is hovering around $1.30. 10-year gilts are yielding 1.6%. The economy is still plodding along.

Section 20 of the EU Withdrawal Act

The provisions the EU Withdrawal Act, paragraph after paragraph of them, all pivot on “Exit Day” which we are told in Section 20 “means 29 March 2019 at 11.00 p.m.” But later, it goes on to say that:

“A Minister of the Crown may by regulations amend the definition of “exit day” in subsection (1) to ensure that the day and time specified in the definition are the day and time that the Treaties are to cease to apply to the United Kingdom.”

Flip the pages on to Schedule 7, Part 2 (14) and the Act says:

Power to amend the definition of “exit day”.
14. A statutory instrument containing regulations under section 20 (4) may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.

So, put simply the Government of the day can change the day we leave the EU, as long as it gets approval from Parliament. More likely, Parliament would compel it to do so if dropping out without a deal looked probable.

What about the EU? How would it respond to a humiliating appeal from the British Government, perhaps initiated by Parliament, to extend Article 50?

Well, the relevant powers are in Article 50 itself. The third paragraph says:

The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.

Is No Deal really likely?

Clearly businesses have both a fiduciary and regulatory duty to prepare for No Deal. One cannot help feeling that, in reality, Limbo Land is much more likely. Extending Article 50 does not require primary legislation by either side.

If everything else falls over, our plan to use the UK’s existing membership of the European Economic Area by applying to join the related European Free Trade Association (by far the best option for 30th March 2019) remains on the table. If only politicians would admit it.

We have published Norway then Canada, a new strategy to avoid a Brexit smash, with a foreword by David Owen, on Amazon LINK.

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