What’s the purpose of purpose? (III)

It is two years on from the Business Roundtable’s supposedly historic ‘restatement’ of the role of the corporation in the US. In a further excoriating article, my friend Harvard law professor Lucian Bebchuk and his colleague Roberto Tallarita have again shown the lie of this restatement, demonstrating that it is no more than a cover for business as usual.

A year ago, Bebchuk and Tallarita had already suggested this might be the case (see also What’s the Purpose of Purpose? (II)). Now they bring forward further evidence.

The BRT’s Statement on the Purpose of a Corporation was signed by 181 corporate CEOs. Bebchuk and Tallarita study the 136 US public companies that were involved, assessing their public documents and statements to see if anything had changed because of the Statement, in particular if there had been any switch from a shareholder-centric approach to one that more fairly accommodated the interests of stakeholders. They studied the companies’ governance guidelines (whether or not updated since the Statement was published), their bylaws, their proxy statements, and also the assertions of companies in opposition to the more than 40 shareholder proposals asking for implementation of the Statement. Bebchuk and Tallarita’s findings contrast strongly with the BRT’s own recent assertion that “Two years later, CEOs have powerfully demonstrated their commitment to work for the benefit of all stakeholders.”

In short, the evidence shows that these companies see the Statement as meaningless and as not making any difference to their ongoing shareholder focus:

  • Of the 99 companies (73%) that have amended their corporate governance guidelines since the Statement was published, 92 have left their corporate purpose unaltered, and 57 left shareholder primacy intact as the core driver for director decision-making; this does not include a large group of companies still employing a traditional US formulation of directors’ duties as acting “in the best interests of the company”, which (in the US at least) is not generally understood to encompass stakeholder interests.
  • Companies whose CEOs were directly involved in drafting the Statement are if anything less likely to have adopted stakeholder-friendly language in their governance guidelines.
  • Of the 136 companies, their bylaws emphasise the primacy of shareholders; only five mention social or environmental issues at all, though even then not to an extent that implies a stakeholder approach. Mentions of employees are restricted to discussions of senior executives and governance practicalities. The sole exception identified is consumer goods company Procter & Gamble which states that the interests of company and employees are “inseparable”, giving rise to an expectation of some form of profit sharing and voice for employees in the conduct of the business. This more stakeholder viewpoint (at least with regard to a single stakeholder group) is apparently unique among this group of US corporations.
  • Fully 117 of the 136 companies included no reference to the Statement in their proxy statements (the formal US annual disclosures to shareholders on governance matters) – though note that the academics excluded from consideration mentions forced on companies by the presence of shareholder proposals on these issues. Of the 19 that did reference the Statement, fully 10 asserted that it made no difference as it simply reflected their longstanding approach to business.
  • Perhaps most striking is the corporate reaction to the 43 shareholder proposals that were submitted to 27 signatory companies of the Statement in either 2020 or 2021, calling for an implementation of the Statement’s aims. 15 companies sought SEC permission not to put these proposals before their shareholders, 11 of them saying that the Statement made no difference to them as that was how they already ran their businesses (among them, pharma business Johnson & Johnson, pointing to its Credo). In total, 28 proposals went forward onto the AGM agendas of 21 companies over the two-year period. All companies opposed the proposals, 12 of them explicitly saying that they already applied the Statement’s expectations prior to signing it.

The academics accompanied their formal article with a Wall Street Journal op-ed published on the second anniversary of the publication of the BRT’s Statement. This op-ed easily lives up to the bluntness of its headline, Stakeholder Talk Proves Empty Again. As Bebchuk and Tallarita say: “If CEOs weren’t intending to deliver value to all stakeholders, what were they trying to do with their statement? One potential motivation is to make corporate leaders less accountable to shareholders…Another potential motivation is to release pressure for stakeholder-protecting regulation.” Neither represents an edifying conclusion, nor one that moves companies towards fairness.

See also: The living dead: rise of the zombie company

What’s the purpose of purpose? Will the focus on corporate purpose deliver real change in the way companies behave?

What’s the purpose of purpose? (II)

Will Corporations Deliver Value to all Stakeholders? Bebchuk, Tallarita, forthcoming, Vanderbilt Law Review Vol 75 (May 2022)

The Illusory Promise of Stakeholder Governance, Bebchuk, Tallarita, 106 Cornell Law Review 91 (2020)

Statement on the Purpose of a Corporation, Business Roundtable, August 2019

‘Stakeholder’ Talk Proves Empty Again, Bebchuk, Tallarita, Wall Street Journal, August 19 2021

The living dead: rise of the zombie company?

This morning, Vectura, a UK pharmaceutical business specialising in the treatment of lung ailments which has developed unique inhaled drug delivery technologies, announced the success of a takeover offer from Philip Morris International, the global arm of the Marlboro cigarette business. Fully 74% of Vectura’s shareholders have accepted a bid around 60% above the undisturbed share price, in spite of the qualms that many had over turning over a pharmaceutical operation to a company whose core business causes the deaths of around half its customers.

While some have called it a greenwashing transaction, it is easy to see a commercial reason for the deal from PMI’s perspective. The company states that it is aiming to go ‘Beyond Nicotine’ and has built a series of inhalation operations, including inhaled over-the-counter and prescription therapies. A cynic might note that advanced inhalation technologies may also be useful for delivering its preferred approach in substituting for declining cigarette demand – the delivery of nicotine through heat-not-burn tobacco products.

It is this apparent attempt to reinvent the PMI business that is the theme of this blog. Given that the world economy must decarbonise over the next few decades, many – even most – company business models will need to be wholly reshaped. The decision is most stark for the fossil fuel businesses, and the association between PMI’s transition and the oil transition is brought to life by the ‘Beyond Nicotine’ slogan, with its clear echoes of the now largely notorious bid by Lord Browne to reinvent BP as ‘Beyond Petroleum’, while largely maintaining investment across its oil and gas businesses.

The key question is whether such businesses should reinvent themselves or whether they should stop reinvesting except on a care and maintenance basis, and instead run themselves for cash and run themselves down. Should they turn themselves into the living dead, zombie companies? With the need to decarbonise the whole economy, the corporate world may become littered with zombies if that is the route chosen.

‘Beyond’ businesses

Just as with BP’s unconvincing rebrand nearly two decades ago, it is important to put PMI’s ‘reinvention’ into context. The company’s stated aim is to achieve $1 billion in revenues from ‘Beyond Nicotine’ activities by 2025. Its net revenues for the 2020 year were $28.7 billion (deducting the $47.3 billion in excise taxes PMI pays from total revenues of $76 billion). While disclosure does not allow analysis of the different margins for non-nicotine businesses, one assumes that the pricing power enabled by a highly addictive product enables much greater profitability from nicotine than is possible ‘beyond’ it.

If we are to shift the world economy to a low carbon one, the transformation of fossil fuel businesses will need to be more real than this change appears to be. Replacing former businesses with new ones goes to the heart of Austrian economist Joseph Schumpeter’s vision of capitalism as ‘creative destruction’. This sees capitalism as a way to shift money from old and historic activities into newer and more innovative businesses that offer the prospect of greater profits. Money seeks the opportunity to make more money, which will often be in places other than where money has been made in the past. The old and the historic is left to decay, or is destroyed more actively as the new takes its place.

The key question is whether this is best done within individual companies, or whether it is better delivered by those historic companies being replaced by new innovators in fresh business structures. And that gives rise to the key question for the directors of those old businesses: should they be seeking to reinvent their companies, to go beyond whatever their own inheritance is, or alternatively turn themselves into zombie businesses? When faced with directors’ duties – in the UK expressed as ‘promoting the success of the company’ – is it a valid decision to work towards the destruction of the company?

Companies do not have a right to persist forever, and the assumption that they will is in many ways an odd one. Indeed, the original companies were established for limited periods, covering single trading journeys, the creation of specific infrastructure, or for terms fixed by an arbitrary number of years. Even when the law changed so that they were no longer limited by time, the role of each company was constrained by the objects clause in its constitution, which tied the business to a certain set of activities. Careful legal drafting of objects clauses made these constraints obsolete even before the 2006 Companies Act swept them aside altogether. But whether it is right – economically coherent and in stakeholders’ interests – that companies should be free simply to reinvent themselves is another question.

The discipline of the objects clause, which could only be changed with the voting support of a super-majority of shareholders, had a real value. Shareholders being able to express a clear view before the nature of their business is changed beneath their feet is powerful. After all, not every transformation works or adds value. Many investors still bear the scars from the transformation of the UK’s GEC into Marconi through selling off its aerospace and defence businesses and becoming a pure telecoms equipment business. Deals at the height of the dotcom bubble led to a spectacular business failure. This is but one particularly painful failed transformation that greater constraints on reinvention might have prevented.

This cannot be a call for ossification. The flexibility for companies to persist and to change has had huge benefits. It is one of the theses of Duke professor Timur Kuran’s persuasive and remarkable The Long Divergence that the restrictions of Islamic commercial structures are one of the main reasons that European economies were able to overtake the Middle East’s former business leadership between 1000 and 1800CE. The greater flexibility of corporations under European legal systems, and the growth of the banking sector, enabled developing business models and the build-up of capital to reinvest into the necessary changes. But clearly the flexibilities of modern banking and financial services mean that we face little risk of economic stagnation even if individual companies are hindered from reinventions.

With responsive investors, creative destruction can happen as readily through the creation of entirely new companies as it occurs through the repurposing of existing businesses (and, to be clear, I would classify the relaunch of cash shells as the former rather than the latter). Think electric vehicles: it is far from certain that Tesla and its fellow new electric insurgents will win out against the incumbent manufacturers, but it is clear that there is a good deal of creativity going on, as well as plenty of destruction of prior business models.

Fair use of shareholder funds?

As some of my new colleagues have pointed out, reinventing a corporate business model is a risky activity, and shareholders should want to see that they are properly compensated for shouldering that risk. The ratings of the incumbent carmakers suggest that the market does indeed derate transitioning businesses such that this risk is at least in part priced in. That protects investors from some further downside, but it does not guarantee that there will be none, and nor does it mean that investments into new businesses will be money well spent. It is far from certain that incumbents will have a competitive advantage in the new business lines they seek. Further, the urgency of the need for transition – and the application of arbitrary timelines and targets (such as PMI’s $1 billion revenues by 2025) – increase the risk of overpayments for acquisitions and misallocated capital.

It turns out it is indeed possible within directors’ duties to dismember a company and bring its existence to an end. When challenged to come up with examples of companies that have in effect run themselves down, rather than involuntarily failed, the one that comes to my mind is Old Mutual PLC. The South African insurer in 1999 became a dual-listed entity, with linked corporations in South Africa and the UK, using the London arm as the base for a series of acquisitions. The tacit aim appeared to be geographical diversification away from Africa. By 2016 this geographic expansionism was seen not to be in shareholders’ interests, and through a process of ‘managed separation’ Old Mutual PLC tore itself to pieces, selling off the US operations, and demerging the UK wealth business and the bulk of the South African bank. The rump of Old Mutual PLC has now been subsumed as a largely dormant subsidiary of the continuing Old Mutual in South Africa. Through many discussions with the PLC board over this time, it was clear that their decision-making was not in any way constrained by concerns about whether dismembering the company was a fulfilment of their duty to ‘promote the success of the company’ but rather they saw their central challenge as being how to keep and motivate the central team to the end of a process that would inevitably lead to their losing their jobs.

So it can be done. Carbon Tracker has done some typically great work on how run-down of businesses may actually drive greater returns for shareholders than continuing to pursue investment in lower returning assets (their 2014 report on ExxonMobil is a great example). And the argument that winding down fossil fuel exposure is within directors’ duties is even stronger, for the UK law definition places promoting the success of the company in the context of shareholder interests, and also the interests of broader stakeholders – explicitly including “the impact of the company’s operations on the community and the environment”. Thus, where there is a clear environmental interest in the ending of a business model, it may be easier to explain such a move as being fully consistent with directors’ duties.

The zombies already among us

The boundary between involuntary failure and run-off is not as clear as might be assumed. A number of the retailers that have failed on both sides of the Atlantic in recent times were taken into private equity (or other private) hands and run for cash. Typically, the first step of this process was to load the companies with high levels of debt, and their failures came when the declines of the businesses in the face of the shift to online trading (and often, long-term underinvestment) meant they could no longer sustain their significant debt burdens. Private markets always tend to value low-growth companies – of which zombies would be a particularly extreme form – much more highly than public markets have, largely because of this scope to gear up their balance sheets to levels which traditionally companies with public traded shares have always baulked at.

In many ways this may be what the future of the fossil fuel business looks like: taken into private hands, loaded with further debt so that they have in large part paid for their own takeovers and the equity financing is skinny. This juices up the private returns while reducing risks for the owners. Run for cash with maintenance minimised, they will become zombies. And they will fall over when the change in the world economy means that they can no longer prosper from the public subsidy that comes from being able to externalise the costs of their carbon footprint onto the environment and wider society.

In effect, a number of such zombies already walk amongst us. The US unconventional oil business already looks very like this, with most of its financing coming from the higher yield end of the debt markets. Equity markets increasingly are dominated by lower carbon tech, financials and healthcare businesses (summing to around 46% of the MSCI ACWI, for example), with energy and utilities each only about 3% of the indices. In contrast, debt markets, particularly in the US and particularly in high yield, are much more skewed to energy, utilities and basic industry – typically collectively more than 20% of US debt makets – with commensurately greater carbon footprints. Energy is the largest sector in US high yield, driving typical carbon footprints of portfolios invested in these markets above 450t CO2e/£m invested, in contrast to the nearer 150t CO2e/£m invested in the MSCI ACWI. This tripling of the carbon intensity is the footprint of the zombies already among us. From my discussions with asset owners, these zombie companies will face increasing refinancing risks.

Many in the ESG investment community worry about the sale of fossil fuel businesses to private holders. Perhaps they need not worry so much: potentially, this is the destruction side of creative destruction in action; it is these businesses entering their living dead zombie phase. These companies will fail, no matter who their owners are, if the governments of the world take the right policy decisions and move to make the world economy shift from its fossil fuel dependency. As we know, COP-26 in November is the crucial moment for this to happen.

However, if the signals from our politicians are unclear and the shift does not happen rapidly, then the zombies will be with us a while longer. But the simple inevitability of a shift to a lower carbon world, including a carbon price in one form or another, will lead these zombies to stagger more quickly under the weight of their debt finance – particularly as mainstream investors become increasingly queasy about funding them.

Ensuring fair process

One of the things that some less scrupulous private equity players or other private investors have profited from is an arbitrage between the strict legal requirements and the moral and reputational standards which public companies feel the need to espouse. Any world of the living dead may need to have stricter legal requirements, and stricter enforcement of them, in order to ensure that moral expectations are not avoided.

This may be critical to minimising the collateral harms of these business failures when they inevitably come. In the absence of such greater legal protections, we may see more profits struck while workers’ pensions are denuded, worker pay and benefits cut, and governments bilked of taxes due. Particularly critical legal constraints for fossil fuel businesses will need to be the proper funding of care and maintenance capex, and of the remediation of sites after extraction ends. Both costs must fall on the businesses that have profited from their damage (and their owners if need be) rather than falling to taxpayers to cover. Given that analysis of company accounts indicates that remediation costs continue to be postponed far into the future even while the urgency of the carbon transition grows, there is an increasing risk that not enough money has yet been put aside to cover these costs.

The zombies, if that is what the world’s fossil fuel businesses become, must be required to tidy up their own mess, and not allowed further to offload the burdens onto the shoulders of society. Engagement surely has a significant role to play here, in encouraging companies towards the zombie phase, and then in keeping them on the public markets while they are undead. If they remain on the public markets, accountability and transparency will be greater and the world will have greater assurance that these companies are doing the right thing and playing fair.

PMI, for one, seems determined not to become a zombie. Only time will tell whether that’s the right decision for its own shareholders – or for Vectura’s.

See also: What’s the purpose of purpose? Will the focus on corporate purpose deliver real change in the way companies behave?

What’s the purpose of purpose? (II)

The Long Divergence: How Islamic Law Held Back the Middle East, Timur Kuran, Princeton University Press, 2010

Response to Exxon: An analytical perspective, Carbon Tracker, March 2014

MSCI index carbon footprints

Climate Accounting Project

Flying blind – The glaring absence of climate risks in financial reporting, Carbon Tracker, September 2021

Playing fair: the oddly inequitable world of sport

“People — for all our differences politically, regionally, economically — most folks understand sports. Probably because it’s one of the few places where it’s a true meritocracy. There’s not a lot of BS. Ultimately, who’s winning, who’s losing, who’s performing, who’s not — it’s all laid out there.”

So said US President Obama in a March 2012 interview with Bill Simmons of ESPN, setting out his view of why sport seems so engaging*.

It’s a view shared by many.

Yet in a summer of much remarkable sport, including events in 2021 proudly badged as 2020, having been delayed because of the Covid-19 pandemic (congratulations, Italy; thank you, Tokyo), the stories that stick particularly are more suggestive of unfairness and the sense in which elite sport has become unhealthily detached from the rest of humanity – perhaps even detached from reality. Meritocracy may not matter as much as Obama says; community definitely does matter.

The sight of Indian Premier League (cricket) games continuing with all the razzmatazz of that competition whilst the latest wave of the pandemic swept by outside the stadiums felt almost obscene. Rarely has the language of Covid ‘bubbles’ for sports competitors seemed a more apt term. The reason the League (the richest competition in cricket) finally gave for calling off the tournament in May was safety of players and support staff, so it cannot be said with confidence that the IPL had come to its senses and recognised that the contrast inside and outside stadiums was unsupportable. But no doubt player embarrassment played some part in the decision-making, as well as the fear of illness.

That obscene sight occurred at the same time as the obscenity of the greed of the attempted breakaway European Super League for 12 of the continent’s leading football (soccer) clubs. Announced on April 18th, the concept had fallen apart within just 48 hours as the six English clubs withdrew. That withdrawal was remarkable as none of the clubs involved can have imagined the announcement would have been welcomed. Indeed, the fury of fans – who feel they have greater ownership of their clubs than those with mere legal title to them – was entirely predictable. The extent to which either fan pressure or political influence led to the abandonment perhaps will never be known, but the sight of politicians who care nothing for football talking about the importance of its traditions was at least a source of brief amusement.

These two parallel events suggest that the apparent meritocracy of sport may make some active in it believe that they are above criticism. It does seem to be true that there is more perfect information about skill and performance commitment in sport than in most careers (“it’s all laid out there,” as Obama says), enabling a more vigorous negotiation on the value that individuals bring to sporting clubs. Particularly in situations where there is free negotiation on salaries because of an absence of salary caps (introducing such caps was an important element of the European Super League plans – seen as necessary to make the financials work) and scope for player transfers between clubs, player salaries can rise dramatically.

For example, Lawrence Kahn (now a professor at Cornell) in a study of the US sports labour market notes a 38% rise in salaries in the year free agency arrived in baseball, and a further 22% rise the following year. Scope for such negotiation enables leading sporting stars (more specifically, their agents) to negotiate for greater reward, in effect taking the bulk of the benefit of increased media revenues. It is this that leads many clubs, despite their millions in revenues, to remain in precarious financial positions. As with many over-levered companies, the Covid-19 pandemic created additional pressure which made these debt burdens unsupportable – this seems to have been the key driver for the announcement of the European Super League.

But those events show also that the source of those media revenues, the fans, still have some influence. The fact is that strong tribalism about teams persists even despite the footloose international ownership of clubs and the mercenary guns-for-hire nature of many star players. This visceral tribalism, and its political sway, turns out to be enough to influence decision-making even among those divorced from the reality of the lives of those fans.

The community nature of sports, their grounded reality in society, turns out to be more important than many may have believed. The freedom that the apparent sporting meritocracy brings – whereby stars believe they are worth the huge sums that they are paid, and others around the sports also enjoy inflated salaries and inflated self-worth through proximity – turns out to be less important than the ongoing consent of the fans. Fans do not tend to complain about player salaries (unless an individual clearly underperforms the riches lavished upon him or her) or the broader excesses of the sporting world, but there is a sense in which this is only acceptable because of ongoing communal consent. Clubs take risks if they overstep the mark and lean too far on the apparent meritocracy of sport.

There is some sense too that meritocracy still has further to travel. Perhaps the story of the sporting summer was the distinct unfairness of the treatment of American Football players with brains damaged by repeated shocks to their head in the crashing contacts that make the sport such a spectacle.

Under so-called race-norming, black players were assumed to have had a lower starting cognitive ability than their white counterparts and so would receive smaller pay-outs from the $1 billion fund established to settle claims related to concussion and brain damage. According to the latest report on awards (which do not disclose racial statistics), more than 3,200 claims have been considered and nearly 1,300 are payable, with under 1,100 denied; average pay-outs are over $0.6 million. A number of black former players argue that their claims have been denied entirely because of the racism inherent in race-norming. The NFL only belatedly agreed to abandon the process in June this year.

Racism persists across sport. The shocking response by a few to the English football team’s failure (yet again) in a penalty shoot-out, no doubt permissioned in part by the response by some who should have known better to booing of players taking the knee against racism, shows that. But the strength of the anger that answered that racism, and the majority strong support for the players for taking the knee, shows that racism is eroding. Many fans recognised that the taking of the knee was a part of the team bonding as a team greater than the sum of its parts, and so played a key role in its progress through the competition. That team-building was (coach) Gareth Southgate’s gift to a mostly grateful nation.

Again, community appeared to triumph against a noisy minority. We have some way to go to real fairness, but sport – for all its tribalism – continues to work to bring people together.

I disagree with Obama. I don’t think it is seeming meritocracy that attracts people to sport. I think it is the sense of shared endeavour – a sense that exists even for those who only spectate. Of course, playing fields must be fair and referees and umpires unbiased. But it is the shared experience, the drawing of a community together, that is the key to why sport moves us. Long may it work to bring us together in joy.

See also: Bowling Together

* I am grateful to Michael Sandel’s remarkable The Tyranny of Merit for referencing this quote.
Read the book. It will change how you think.

I am also grateful to my friend Ben for encouraging me to write in this area, and for the thoughts inspired by his university dissertation.

US President Barack Obama interview with Bill Simmons of ESPN, the BS Report podcast, March 1 2012

VIVO IPL 2021 Postponed, IPL press release, May 4 2021

The Sports Business as a Labor Market Laboratory, Lawrence Kahn, Journal of Economic Perspectives, Vol 14 No 3, Summer 2000

NFL Concussion Settlement August 2021 summary report

NFL pledges to stop ‘race-norming,’ review past scores for potential race bias, June 2 2021

Diversity and fairness

Diversity in business is mainly driven by performance concerns: more diverse teams are shown to take better decisions, and recruitment and promotion approaches that fail successfully to encompass the whole population restrict the talent available to an organisation. But fairness is also one of the drivers for diversity in the business context. 

Advancing those who have previously been denied advancement is a matter of fairness, and a move to greater fairness sends a message to the wider organisation, its business partners, and to prospective recruits about the nature of the business and the role it wants to play in the world. Many will thereby see the company as a better business partner, a better potential employer, and a favoured choice for consumers.

According to my friends and former colleagues at Australian responsible investment shop Regnan, however, the role of fairness in diversity goes further than this. Their recent study of the literature reveals that diversity may deliver little on its own, unless it is accompanied by both equity and inclusion. By equity, they mean “fair arrangements that enable all people to access opportunities” and by inclusion, “workplace conditions that enable all individuals to make their fullest contributions at work”.

To deliver fair and equitable employment practices – a pre-requisite, they say, for delivering on the promise of the diversity agenda – Regnan argues that companies must eliminate bias throughout employment processes, including recruitment, remuneration, development and progression. To be most effective, this requires leaning proactively against biases and existing power imbalances. They highlight areas of focus to deliver this, and discuss metrics that may help to reveal more about it.

“Equitable employment practices and inclusive decision-making are direct levers for improving performance, irrespective of diversity. Failure to adopt these practices may indicate broader business issues (such as entrenched management)”

The paper is a thought-provoking and highly recommended read.

Beyond Diversity: Equity and inclusion as an overlooked opportunity for investors, Regnan, July 2021

Unfair food: the hunger trap

“It shouldn’t have taken a global pandemic to make us pay proper attention to dietary inequality. It has long been visible to the naked eye. A modern diet of cheap junk food has the peculiar quality that it can make you simultaneously overweight and poorly nourished.”

So states the National Food Strategy, a recently published independent review for the British government of national food policy – or of what a national food policy might look like. A key focus is inequality, or unfairness. Whether the government is likely to accept the recommendations of the report it has commissioned seems sadly in doubt – the knee-jerk negative anti-tax response to its first recommendation, for taxes to be raised on sugar and salt, suggests a lack of willingness to listen thoughtfully to the arguments that are made.

The independent review was led by Henry Dimbleby, a co-founder of healthy eatery chain Leon. If Dimbleby’s passion for the subject wasn’t clear from that heritage, it comes across clearly in the report, and dynamically in an interview for BBC Radio 4’s Food Programme. There, he urges a change in culture that will deliver a food system that is “designed to deliver health and nature and happiness and love and care”.

As he summarises the report, it is seeking to encourage two things: over time to change way people think about the food system, and to promote several things that the government can do now to start that change. The four things the govt needs to do now, Dimbleby argues, are:

  1. Break the junk food cycle: “exercise, education and willpower alone is not going to change diets”.
  2. Reduce health inequalities: “We need to focus particularly on the poor. People who are poorest have the worst diets and by far the worst health outcomes.”
  3. Farming transition to use the land better. “For a long time now…we have really just used the land for food. We now need to use it to restore biodiversity, to sequester carbon, to produce energy and to produce food.”
  4. Change food culture in the long-term, including changing the way government operates.

This is actually the second National Food Strategy report. The government’s reception for the interim one last year, which urged that the lessons of the Covid-19 pandemic be learned, is not encouraging. There were seven recommendations in that Part One report. The government seemed to ignore most, including those on ensuring trade protections for agricultural standards and the extension of free school meals. That hasn’t stopped DImbleby and the group repeating those calls in the Strategy’s final 14 recommendations.

Naturally, this blog focuses on the recommendations regarding efforts to reduce diet-related inequality (though there is much to commend in the wider report). The report summarises that inequality: 

“Children from the least well-off 20% of families consume around 29% less fruits and vegetables, 75% less oily fish, and 17% less fibre per day than children from the most well off 20%.”

But it is the consequences of that inequality that are if anything still more stark (both in graphic form and in the text that explains it):

“People living in the most deprived decile are almost twice as likely to die from all preventable causes, compared to those in the richest decile. They are 2.1 times more likely to die from preventable heart disease; 1.7 times more likely to die from preventable cancer; and 3 times more likely to have tooth decay at age 5. Their children are nearly twice as likely to be overweight or obese at age 11.” Covid [CVD on the chart] mortality is double amongst those from the most deprived areas.

Recognising that many of these harms are built in from childhood, four of the 14 overall recommendations are purely focused on delivering change during schooling:

Recommendation 3. Launch a new “Eat and Learn” initiative for schools

Recommendation 4. Extend eligibility for free school meals

Recommendation 5. Fund the Holiday Activities and Food programme for the next three years

Recommendation 6. Expand the Healthy Start scheme

The upfront costs of these would be funded from the proposed tax on sugar and salt which is the report’s first recommendation (which, it says, will raise significant revenues as well as inevitably driving positive reformulations of processed food products). In the long-term, the expectation is that these changes would more than pay for themselves through reduced healthcare costs. It accepts a need to provide additional support for the poorest because the report concludes that eating well is difficult for the poor. Healthy diets are regressive, in the sense that healthy food “is more expensive per calorie than unhealthy food (especially when you factor in the opportunity cost and difficulty of cooking from scratch)”. Hence the need for the state to lean against this burden.

This focus on the issues in childhood makes sense according to global analysis of deprivation. “[C]hildren are hardest hit by poverty. Deprivation causes life-long damage to the mind and body of infants and small children. Child development, especially in the first years in life, is a succession of biological developments for which there is seldom a second chance. Infant malnutrition, for instance, leads to irreversible damage to health. It impedes the learning capacity of the child, which cannot be repaired later in life,” states Unicef in Equity begins with Children, a study on poverty and childhood. It is also likely that failing to address poverty will perpetuate it to the next generation: “Investing in children is a prerequisite for breaking the poverty cycle.” And it is good economics: “No country has ever sustained economic growth on the basis of high levels of illiteracy, widespread malnutrition and rampant morbidity.” The National Food Strategy’s charts on childhood height, where the UK average sits well below those of other developed economies, shames us – and should shame us into action.

But the Strategy does not focus solely on children. In particular, recommendation 7 would have a broad application across deprived communities. This recommendation calls for a trial “Community Eatwell” programme, supporting those on low incomes to improve their diets. Among other elements of this is a proposal to adopt ‘social prescription’ whereby GPs could prescribe fresh fruit and vegetables rather than drugs, as well as building knowledge to put that fresh food to good use. It notes success in a trial of such a programme in Washington DC. The problem is not a small one:

“While almost everyone in the UK eats too little fruit and vegetables, the problem is particularly acute among the most disadvantaged. The poorest 10% of British people eat on average 42% less fruit and vegetables than recommended, while the richest eat 13% less.”

The report quotes 2019 figures that diets low in fresh fruit accounted for over 10,000 early deaths, and a further 200,000 years of reduced life expectancy (on a disability adjusted basis); diets low in fresh vegetables had impacts that were around half each of these numbers (based on Global Health Data Exchange analysis).

To those who argue that this sounds like the nanny state intervening in how people live their lives, Dimbleby is clear: the costs to the state are substantial of not intervening, and at present it is much harder for the poor to eat well than to eat badly. Unhealthy calories are cheaper, which may be the decisive factor for those with hungry mouths to feed on a small budget. And simple practicalities like time and accessibility of quality food shopping weigh against healthier decisions. A wise state would assist its people more, to save state healthcare costs in the long-run – and if that happens to be described as nanny statism, I suspect Dimbleby would accept that.

The opportunity from this is clear – or perhaps what is more clear is the opportunity cost of not taking these steps. Poor diets build up problems for later life and are one of the major drivers of poor health in older age. An excellent recent paper The Cost of Inequality – putting a price on health from the thoughtful people at CSFI tries to identify the fiscal drag from poor health outcomes in older age, highlighting the discrepancies in the experience of old age between different parts of the UK. It notes that the end of life is usually preceded by years of poor health, but before that there are healthy years after work (what the report calls inactive healthy years). The date boundaries between these and working life are highly variable across the country, dependent on relative poverty and other factors, as this chart shows:

The report states that: “a one-year extension in healthy life expectancy would add around 3.4 months to working lives and 4.5 months to overall life expectancy”. That is a wonderful gain, but it also brings a clear fiscal dividend as well: this “could reduce income taxes by 0.6 percentage points based on current data and policies”.

If there is to be levelling up, it is these sorts of discrepancies that need to be thought of. The epidemic of poor health associated with poverty and poor diet needs to be a core element of any such approach. These ideas deserve to be taken seriously, for the health of our economy as well as our health.

National Food Strategy

Plate of the Nation: Second Serving, the Food Programme, Radio 4, July 18 2021

Equity begins with Children, Jan Vandemoortele, Unicef Social and Economic Policy Working Paper 1201, 2012

Global Health Data Exchange

The Cost of Inequality – putting a price on health, Les Mayhew, Centre for the Study of Financial Innovation, July 2021

Trapped by expectations; the poverty of ambition

There has been a confected row in the UK in recent days. A parliamentary select committee report on the educational attainment of poorer pupils, what it refers to as the white working class, was reported in the media as an attack on the theory of ‘white privilege’.

In particular, the recommendation that schools avoid promoting the concept of white privilege was essentially the only report recommendation that gained any media coverage. That is in spite of the fact it was only one of at least 20 recommendations in the report (this is the lowest possible count; several of them bundle various individual points), and despite the fact that the committee found no evidence that any school anywhere in the country has ever actually promoted the concept of white privilege.

It’s a shame because the confected row masks the important truths revealed in the report: that the poor, from all races, are underserved by our education system. Poverty seems to foster a poverty of expectation, and limit educational outcomes. That blights achievement levels, and it blights lives and communities. 

It’s not universally the case, of course – there are exceptions, both school and individual – but there is a general truth here. It also masks the fact that London, which has spent more trying to address the issues, significantly reduced the disparity. The Select Committee cites a Kings Fund report that the London Challenge enhanced the success of the city’s poorer students, and its national statistics seem to bear this out. Poverty tends to constrain educational outcomes. But with targeted policy, it can be addressed.

A report from more than 15 years ago may cast some light on what is going on – though of course it is just one study and its cultural context is very different.

It is a study concerning India’s caste system, which still seems to shape belief and expectations even when it has been leant against for decades. Lower and higher caste schoolkids solved mazes, and achieved equal success when their caste background was not made relevant. Once caste was mentioned, whether within a mixed group or within segregated groups, the lower caste children’s success rate fell by 23%. Having applied various control experiments, the study shows that merely by sensing that the system was again stacked against them, the lower caste kids’ achievement levels fell dramatically. 

The study sums up its conclusions very simply: 

“Mistrust undermines motivation.”

This chart highlights the impact visually:

The study makes clear that it is the expectation of others’ treatment that demotivates, not some inner lack of confidence or belief. This means that reversing this sense should not be impossible, indeed it should not be costly – it is notable how relatively cheap were the measures in the London Challenge process. Many involved overdue spending on school buildings, which may have been enough to communicate to the schoolkids that they matter.

But it does argue that the issue needs to be addressed honestly and directly. Ingrained beliefs need to be challenged, and spending money, even small amounts, is likely to be needed. It is just a shame that a report that talked in large part about ways in which this needs to be done – not least that there need to be genuine work opportunities for young people to aspire to – was spun as a story about non-existent racial framing by schools.

The forgotten: how White working-class pupils have been let down, and how to change it, House of Commons Education Committee, June 16 2021

Case Study: The London Challenge (part of Making Change Possible), the Kings Fund, July 2015

Belief Systems and Durable Inequalities: An Experimental Investigation of Indian Caste, Karla Hoff, Priyanka Pandey, World Bank Policy Research Working Paper 3351, June 2004

The maybe fair tax deal

It was claimed (by those who negotiated it) to be not just “historic” but “seismic”. But the G7 tax deal may turn out to have been rather lower on the Richter scale of seismic activity than the politicians and the excited media coverage may have implied. 

If you believe the formal announcements, the G7 agreement on tax is all about fairness:

  • Italy’s prime minister Mario Draghi called it a “historic step towards a fairer and more equitable society for our citizens”
  • Rishi Sunak, UK chancellor of the exchequer, said the deal would require “the largest multinational tech giants to pay their fair share of tax in the UK”
  • US treasury secretary, Janet Yellen, said the agreement would “ensure fairness for the middle class and working people in the US and around the world”

During Fair Tax Week, such comments in themselves may be encouraging. But whether the deal lives up to the promise of fairness is somewhat doubtful.

The deal comes in two parts. Pillar 1, applying to the largest 100 multinationals with profit margins greater than 10%, would allow 20% taxation of profits above this 10% threshold to be taxed in the country of operation. Pillar 2 would set a global minimum tax rate of 15%. Pillar 1 is about taxing new economy businesses and the US government was apparently arguing that European nations’ digital tax regimes should be abandoned the moment the G7 agreement was reached. Pillar 2 is aimed at eliminating a race to the bottom in corporate tax rates whereby countries welcome activity (or just brass plate operations) on the basis of low tax regimes. 

There are already doubts about whether the deal will last at all. Caroline Lucas MP at a Fair Tax Week event talked about the deal “already being watered down” as we see noise about the UK government seeking exemption for financial services from the scope of the regime. Other countries are reportedly in discussion with their own national champions and considering what the impacts may be.

In any case, the G7 ‘deal’ is in effect nothing more than a proposal to be considered by the rest of the world. There is an ongoing OECD and G20 process on tax and this G7 deal is an attempt to make progress in those discussions, an offer made to the broader group. Whether the other nations in the process will welcome it – and whether it will be seen by them to be fair – seems very much in doubt. The G24, the forum for developing economies seeking to influence the world’s economic institutions (and which includes six of the G20 nations), was blunt in its assessment of the approach: “G-24 is of view that the proposed scope of the Pillar 1 limited to top 100 MNEs will result in smaller distributable residual profit available for market developing countries”. They do not seem any more keen on the Pillar 2 aspects. 

But the G7 deal may fail even on its own terms. One of the low-taxed companies that is most often mentioned in European circles as evidence of the need for tax reform is Amazon. It appears to have been deliberately targeted in the French and UK digital taxes. Yet under the G7 agreement, Amazon would be unaffected because its margin – though it has increased steadily in recent years – remains below 6.5%, well beneath the 10% threshold. Amazon thus might face less tax outside the US under the G7 deal than it does at present.

And that 10% profit margin threshold also appears to invite structuring to reduce profits. Most obvious of these would be leverage, removing cashflows from the taxable base by switching them from profits to debt repayments. What is within the taxable base will remain a vital consideration – in this Pillar and also in Pillar 2, where the key question (alongside whether 15% is a fair level of tax) is to what tax base will that 15% rate be applied. Without more clarity on this, the 15% rate is largely meaningless.

As ever with tax, the devil is in the detail. At present, there is simply no detail in what the G7 have announced.

There appear to be as many questions as answers from this G7 ‘deal’. Whether it will amount to a fair proposal frankly seems very much in doubt.

See also: Taxing gains, closing loopholes

Simplifying tax is fairness

Talking with the taxman about fairness

Fair tax reflections from investors (II)

Fair tax reflections from investors

G7 Finance Ministers & Central Bank Governors Communiqué, June 5 2021

Fair Tax Week 2021

Climate and Tax Justice: Time to Act? June 10 2021

Comments of the G-24 on the Pillar One and Pillar Two proposals being discussed by OECD/G20 Inclusive Framework on BEPS, May 17 2021

FCA unpacks fairness: the Consumer Duty

Retail investors have too often tended to be treated badly by financial institutions. The scale of the multi-billion pound restitutions for mis-sold payment protection insurance (PPI) are strong evidence of that, as are the ongoing issues of poor advice regarding the use of pension freedoms. There are many smaller and less publicised ways in which consumers have been exploited. Is upping the ante on fairness the answer to this running sore?

The Financial Conduct Authority (FCA, the UK’s financial regulator) seems to think so. It already expects retail investors – ordinary consumers – to be treated fairly by the financial industry. This is in its Principle 6: 

“Customers’ interests: A firm must pay due regard to the interests of its customers and treat them fairly”

The FCA is now consulting on what it calls a Consumer Duty. Essentially, it seems that the regulator is seeking more teeth to enable better enforcement of this existing requirement of fair treatment. It is nearly 15 years since what was then the FSA (Financial Services Authority) opined on the need for fairness to be embedded in financial institutions’ management information. And already 3 years have passed since the FCA first discussed a duty of care to consumers. It seems to have concluded that much more is needed, though it is a shame it has taken so long to reach this conclusion. 

The current Consumer Duty consultation – open until the end of July – states its aim as “we want to see firms putting themselves in their customers’ shoes, asking themselves questions such as ‘would I be happy to be treated in the way my firm treats its customers?’, or ‘would I recommend my firm’s products and services to my friends and family?’.” The core question is what outcomes would consumers fairly expect of their interaction with the financial institution, and how the institution will ensure that it consistently delivers on those fair expectations.

Stymied by their weaker bargaining position and asymmetries of information, consumers too often lose out when buying financial services. The FCA concludes that it is not fair for financial institutions to take advantage, and that greater efforts must be made by the industry to protect consumers. The FCA finds that too often institutions do in fact exploit their customers. Its description of what it calls ‘sludge practices’ – delaying tactics that place friction in the way of consumer action – is particularly effective. Sludge ensures that consumers cannot change providers as they might want, making this a far from perfectly competitive market, which in economic theory should be frictionless. 

What the FCA is attempting is to set out what it means by fair treatment of consumers with more clarity and bite. Its proposals are relatively simple but if enforced effectively could have profound implications. It puts forward two options for its planned Consumer Principle: either “A firm must act to deliver good outcomes for retail clients” or “A firm must act in the best interests of retail clients”. The first seems the better, though naturally this blog would prefer ‘fair outcomes’ to ‘good’ ones – a move that would have the benefit of not removing all the burden of responsibility from the shoulders of consumers, which the FCA states to be part of its aim.

The chosen Principle would be supported by 3 underpinning behaviours, proposed as requiring financial services firms to:

  • Take all reasonable steps to avoid causing foreseeable harm to customers.
  • Take all reasonable steps to enable customers to pursue their financial objectives.
  • Act in good faith.

None of these seems terribly ambitious nor a particularly high bar to reach, unfortunately. It is not at all clear that delivering these behaviours would result in a delivery of the Consumer Principle. It is therefore this area where I would argue more work is needed if the proposals are to have any practical effect.

The Consumer Principle and behaviours would be supported by 4 outcomes, relating to: Communications; Products and Services; Customer Service; and Price and Value. This is odd as the FCA already has similar, and perhaps better, fairness outcome standards. For all its failings as a regulator (among them not effectively enforcing its rules on TCF, treating customers fairly), the FSA’s 6 TCF consumer outcomes continue to stand up to scrutiny. They are still in place today, and the FCA acknowledges that the new proposals would sit alongside them, though it considers disapplying them when the Consumer Principle applies. Yet these outcomes should remain core to our ambition for a fair financial industry, and perhaps would be a better articulation of what is meant in practice by the Consumer Principle:

  1. Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture. 
  2. Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly. 
  3. Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale. 
  4. Where customers receive advice, the advice is suitable and takes account of their circumstances. 
  5. Consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and as they have been led to expect. 
  6. Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint

The one way in which the FCA’s new proposals seem stronger than these is in specifically stating that firms should set prices so that they represent fair value for their target customers. The new proposals are weaker in a number of ways, not least the loss of the expectation that products should perform as consumers have been led to expect, surely a core element of fair consumer protection.

In many ways the proposals feel like an extension of the FCA’s recent Guidance on the fair treatment of vulnerable customers: “We want vulnerable consumers to experience outcomes as good as those for other consumers and receive consistently fair treatment across the firms and sectors we regulate.” Perhaps the conclusion was that expecting vulnerable customers to be treated as well as other consumers did not deliver enough protection, given the financial industry’s track record in relation to consumers as a whole.

Certainly, when one reads some of the statements in this Guidance about what is expected of financial firms, it is hard to see how these expectations should be restricted solely to situations of consumers who are particularly vulnerable. Take for example: “Embed the fair treatment of vulnerable consumers across the workforce. All relevant staff should understand how their role affects the fair treatment of vulnerable consumers.” Or: “Senior leaders should create and champion a firm culture that prioritises the fair treatment of vulnerable consumers. They should ensure that governance, processes and systems support staff to meet the needs of vulnerable customers when carrying out their role.” This is simply an articulation of what is necessary to deliver fairness, and should apply more generally.

One hopes that this will be delivered by the FCA’s current consultation. For the sake of all of us as consumers, we should hope that the bulk of the proposals survive the consultation process without being notably watered down, and that there is an intent properly to enforce the standards. The length of the process leaves scope for such dilution: there will be yet another consultation on detailed rules before the end of this year, and the new rules would be introduced only in July 2022. Let’s be clear: enough time has been spent on this already, with the original discussion paper on a duty of care to consumers dating back to July 2018. The new duty needs to be delivered.

It’s a shame that it takes a regulator’s intervention to deliver greater fairness for customers. A healthy industry should deliver that by its nature – and clearly some financial services businesses already do – but where the odds are so stacked against the ordinary consumer, in terms of asymmetries and complexity, it may be little surprise that the regulator needs to intervene. It is already beyond time for it to do so. Let’s hope change, either on the ground or by the regulator, doesn’t have to wait for yet another 12 months. 

The simple aim that “consumers need to be able to trust that the range of products and services they choose from are designed to meet their needs, and offer fair value” should not be too much to ask.

See also: Fairness for customers

A new Consumer Duty, CP21/13, Financial Conduct Authority, May 2021

Treating customers fairly – guide to management information, Financial Services Authority, July 2007

Guidance for firms on the fair treatment of vulnerable customers, FG21/1, Financial Conduct Authority, February 2021

Approach to consumers, Financial Conduct Authority, 2018

Discussion Paper on a duty of care and potential alternative approaches, DP 18/5, Financial Conduct Authority, July 2018

Sea level rise: the most unjust transition

Lawyers are preparing for a time when certain entire nations cease to exist because of climate change.

A committee of the International Law Association is tasked with considering two challenges:

  1. to study the possible impacts of sea level rise and the implications under international law of the partial and complete inundation of state territory, or depopulation thereof, in particular of small island and low-lying states; and
  2. to develop proposals for the progressive development of international law in relation to the possible loss of all or of parts of state territory and maritime zones due to sea level rise, including the impacts on statehood, nationality, and human rights.

Somehow there is something very powerful about the use of clinical legal language in discussing what will be multiple thousands of individual human tragedies. The unjust transition, the unfairness, of sea level rise’s destruction of entire nations comes home very clearly.

As we know, in most cases those affected in this way are among the people least responsible for climate change and least able to finance its consequences. Those who have most benefited from the economic growth that fossil fuel use has powered are unfairly imposing traumatic consequences on those who have gained limited benefits and have limited scope to cope. That is the greatest unfairness, the great injustice, of this transition.

Sea-levels have already risen around 20cm or so since 1880, with the pace increasing from around 1.4mm a year in the 20th century to 3.6mm in more recent years. About two-thirds is due to melting glaciers and ice-sheets, one-third because of the thermal expansion of the water as it heats up. This ratio used to be nearer 50:50 but melting has accelerated in the last decade. Projections from here vary, just as the path of global politics makes it impossible to predict with any certainty the path of future carbon emissions. But the lowest estimates see rises of at least 0.3m by 2100; the more extreme pathway suggests it could be 2.5m. In storms, the rise that is experienced will be still greater.

It is of course not the first time that land inhabited by humans has been subject to inundation. The number of cultures with ancient stories of great floods is ample testament to that, as is the existence of Doggerland, territories walked by our mesolithic ancestors now beneath the waters of the North Sea. But it is probably (pace Utnapishtim, Noah and the rest) the first time that humankind has known what is coming, and it is certainly the first time since we invented nation states and have created laws of the sea.

This issue of sea level rise and inundation is about nation states, but it is at its heart a human tragedy at the scale of individuals. Which is why the case of Ioane Teitiota – called by some the ‘first climate change refugee’ – is so interesting. Teitiota is a national of Kiribati, one of the Pacific island nations seen to be most at risk from sea level rise. He sought refugee status in New Zealand on the basis of the risk to his life from climate change, and having failed through the New Zealand process he took the case to the UN Human Rights Committee for adjudication in 2015. The Committee issued its ruling towards the end of 2019.

The Committee agreed that forcibly returning a person to a place where their life would be at risk due to the adverse effects of climate change has the capacity to violate their right to life, one of the core human rights that most states have agreed to uphold. However, the majority opinion of the committee found, with two dissenters, that though there were indeed significant threats these were not imminent and they were not personal to Teitiota (officially called the author of these proceedings), as the law requires.

As so often, it is among the dissenting opinions that the clearest and most powerful statements are found. Committee member Duncan Laki Muhumuza stated: “The author presents evidence, which is not disputed by either the State party or the rest of the Committee, that sea level rise in Kiribati has resulted in the scarcity of habitable space, causing life endangering violent land disputes, and in severe environmental degradation resulting in contamination of the water supply and the destruction of food crops”. He goes on to say: “In my view, the author faces a real, personal and reasonably foreseeable risk of a threat to his right to life as a result of the conditions in Kiribati. The considerable difficulty in accessing fresh water because of the environmental conditions should be enough to reach the threshold of risk, without needing to reach the point at which there is a complete lack of fresh water.”

This lack of fresh water, and its worrying health consequences, are among the most striking elements of the evidence in the case. In part they are striking because saltwater infiltration contaminating freshwater supplies is a fundamental concern, not only in terms of the health of individuals but because it is one of the indicators of an island no longer being inhabitable – something which in law (as a shorthand) renders them no longer islands at all, but rocks, with much reduced status under the UN Convention on the Law of the Sea. Any such reclassifications would be fundamental, for example: “if the island of Kapingamarangi, the southernmost island in the Federated States of Micronesia, located some 300 kilometres south of the nearest island were to be reclassified as a rock, the Federated States of Micronesia would lose more than 30,000 square nautical miles of its exclusive economic zone” according to a 2020 report from the International Law Commission.

And this issue of the extent of the exclusive economic zone really matters: fisheries exports account for 94.7% of total exports for Federated States of Micronesia, 81.9% for the Cook Islands, 73% for Palau, 61.5% for Samoa and 23.8% for Tonga. As the extent of their land above sea level shrinks, the nations’ maritime waters will increasingly become high seas and these revenue sources will disappear.

It’s for this reason, as well as tradition and sentiment, that these states are arguing that rather than maritime boundaries shifting as land gets inundated, they should remain fixed. And that they should be fixed even after the point that the entire nations are fully submerged, or otherwise become uninhabitable. That at least would secure a revenue source for the displaced nation as it tried to build lives elsewhere above the waves. 

There aren’t really alternatives. Maintaining territorial waters by artificial maintenance of land above sea level is prohibitively expensive, so much so that it “raises considerations of equity and fairness”, the International Law Commission states. Even wealthy Singapore baulks at the cost. It feels the need to prepare for a local mean sea level rise of 1 metre by 2100, quite fundamental for an island where around 30% is less than 5 metres above mean sea level. A comprehensive approach to coastal defences “could cost S$100 billion or more over the next 50 to 100 years”.

Lawyers are preparing for a time when certain entire nations will no longer exist, and are proposing legal ways forward in respect of those extraordinary circumstances. The basic conclusion that they are reaching, in support of these island nations, is that though the nations may cease to exist, their rights over the relevant pieces of ocean – their territorial waters – should persist. The hope being that this would provide at least some financial protection for their impoverished nationals.

I was initiated into these discussions by a remarkable series of webinars hosted by the great British Institute of International and Comparative Law, called Rising Sea Levels: Promoting Climate Justice through International Law. Despite the best efforts of some campaigning lawyers, the lack of justice, the lack of fairness, in what is happening is what came across to me most powerfully from these four thoughtful sessions.

So, on earth day, a blog on the sea, a blog on the impending loss of earth in perhaps the most fundamental of ways. A blog on the most unjust transition of all.

See also: Just transitions and gilets jaunes

This wonderful Tortoise photo essay brings these issues to life in a way that my words do not.

Report of the Committee on International Law and Sea Level Rise, International Law Association, 2018

Teitiota v Ministry of Business, Innovation & Employment, New Zealand. UN Human Rights Committee, CCPR/C/127/D/2728/2016

UN Convention on the Law of the Sea (1982)

Sea-level rise in relation to international law: First issues paper, Bogdan Aurescu, Nilüfer Oral, International Law Commission, 2020

Rising Sea Levels: Promoting Climate Justice through International Law, BIICL webinar series, March 2021

The unfairness of dual class shares

Today Deliveroo has delivered, for some at least. The tech business linking hungry people to immediate gratification literally on the backs of gig economy workers has listed at a slightly reduced, though still steep price for a heavily loss-making business that offers no prospect of a dividend “in the foreseeable future”. However, the share price tumbled steeply on its first day of trading on the London market and at the time of writing is down more than 20% from its 390p launch price (still valuing the company at approaching £6 billion).

Stuttering though its reception may be, Deliveroo could be a harbinger of more to come. For its dual class share structure, with a share class with 20 votes each retained by the founder and CEO, Will Shu (who will enjoy 57.5% of the voting rights and so retain entire control), looks like a model that many are urging as part of the brave new future for the London market.

For the debate about dual class shares has been revived. Following the Hill UK Listing Review, London is the latest market apparently determined to further undermine shareholder rights in order to encourage the listing of technology companies, on the strange understanding that this is the only way that tech founders can keep control and so be willing to bring their companies to the market. 

The Review proposes allowing the inclusion of dual class share structures on the premium segment of the London market, as well as just the standard level – this would mean they would be included in the main market indices, which means many investors would invest in them automatically. Yet the whole point of public markets is surely that business leaders do cede some control, and invite other owners in to participate in business success, but also to have influence on it. If they are unwilling to cede control, founders do not need to sell – or they could retain a majority of the shares and not resort to a gerrymander of the votes.

Minority shareholder rights enable investors to protect their own interests and protect their investment; they represent the common law heritage of the rule of law and certainty of ownership. They have been built up over many years and provide a basis of certainty and security of ownership, enabling confidence that it is safe for investors to trust their money to the market. They are the very foundations of market confidence. There seems a risk that this is being forgotten in a rush of blood about a rush of money. 

Investors call shares equities precisely because they are supposed to give their owners equal rights – their fungibility is fundamental to liquid markets. And yet dual class share structures deliberately create unfair shares: these are inequitable equities. Indeed, it seems that investment bankers and others appear to be arguing for foisting inequities on the investing public.

Instead, we need the regulators and markets to protect investors. Caveat emptor is a fine expectation. But it doesn’t work in a world that requires employees to save for their pensions, facing individual risk, and with charge caps that (rightly) oblige providers to invest mainly through passive index funds. Forced buyers cannot beware. While such retail investors simply cannot, institutional investors ought to be able to protect themselves, yet the way that most institutions currently invest means that they too would find themselves buying whatever is included in the index.

Forced buying of these inequitable equities seems to be the point. The proponents of including dual class stocks in the indices are keen to ensure that there is a ready market for the shares from index investors, that there is an automatic demand. This mindset is built into the Hill Review. Indeed, the Review rather oddly suggests that investors need to have a discussion about what standards they wish to require for inclusion in the index, rather than automatically linking index inclusion to premium listing on the London market. This ignores the fact that this exact linkage between index inclusion and the premium listing standards has been hard fought by investors on a number of occasions over the last several years: it is deliberate, not an accident, something that institutions have sought so that they continue to enjoy the minority shareholder rights that they so value. The Hill Review also argues for dismantling the terms ‘premium’ and ‘standard’ so that standard listing does not seem a lesser expectation – again in apparent ignorance that this quality distinction was entirely deliberate.

The debate on dual class shares specifically was last had back in 2017, in the US in particular, when the IPO of Snap forced it onto the agenda. Snap listed non-voting shares, with essentially all voting rights left in the hands of its two founders. In fact, because the company said that investors should not expect dividend payments, the instruments it issued were not really shares at all but in effect warrants – simply a right to hoped-for capital appreciation.

At that time, I and other investors tried to persuade the index providers to limit the inclusion of stocks in indices according to their voting power at the company, avoiding the inclusion of non-voters altogether and cutting the weighting of lower voting shares also. Some will argue that index investors would thereby have missed out on great recent performance by various tech businesses – but who knows what the share price performance of these companies would have been but for their full inclusion in indices and the heavy fund flows in recent years into passive investment strategies? I know that a number of investors are exploring ways to tailor indices so that they are not forced buyers of unfair shares, should the rules be changed as proposed.

Deliveroo’s, and Snap’s, lack of any prospect of a dividend is not unusual among the soaring technology stocks, even those with more mature businesses and huge market shares. There is no dividend from Alphabet (Google), Amazon or Facebook, let alone Spotify or Twitter. These companies’ cashflows, when not reinvested, are used for share buybacks – much of which is needed to neutralise the impact from the dilutive effect of heavy share issuance to employees as part of their compensation. That dilution, of course, does not affect the class of shares enjoyed by the founders, only that to which outside investors are exposed.

Investors in these companies thus do not expect dividends, and are not buying shares on the expectation of cash returns from the businesses themselves. Rather, they are willing to buy these shares on the expectation that someone else will later pay them more on the market. This is usually called the greater fool theory. Though sometimes it seems hard to believe, the world does always eventually run out of fools.

Perhaps the greatest risk with the dual share class approach is that the leaders of these businesses are insulated from influence. They literally do not need to listen to anyone, at least as long as they can fend off regulation. That ability to remain cloth-eared to outside influence is seen by them as a strength – they can ignore the supposed short-termism of the markets – but it can easily be a weakness, as shown by how slow many of the tech giants have been to respond to concerns about their role in fostering hatred and anger and in damaging democracy. Some tech leaders show an unwillingness even to consider rational questioning from within their own organisations

The Deliveroo prospectus was blunt about this: 

“The Founder’s ability, while he and any Permitted Transferees hold sufficient Class B Shares, to block any resolution to remove him as a Director will mean that his position on the Board, and his influence over the decision-making of the Company through decisions made by the Board, will effectively be entrenched for so long as the Founder wishes to remain on the Board.”

One hopes that Mr Shu at least will learn to listen. The remarkable efforts of the wonderful Bureau of Investigative Journalism show that, as is true of so many gig economy workers, Deliveroo riders can earn well below the minimum wage. Concerns about this, and about the unfair dual class share structure, were enough for some institutional investors to avoid investing in the company. For the time-being, they can choose, because the company is only making a standard listing; if the Hill Review proposals are adopted, not all of them will be able to avoid making an investment. At that point, absent regulatory intervention, Mr Shu alone will have been able to choose the ongoing business model for the company, and its treatment of its riders. 

Let’s hope he chooses greater fairness in relation to the workforce than he has in relation to investors.

Deliveroo Prospectus, March 2021 [not available in some geographies]

UK Listing Review, Lord (Jonathan) Hill, March 2021

Deliveroo riders can earn as little as £2 an hour during shifts, as boss stands to make £500m, Bureau of Investigative Journalism, March 25 2021