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Power leads us astray: fairness lessons from Grenfell

Power does strange things to the mind. It increases confidence that you are right. It also makes you less likely to be. It generates a sense of entitlement, which may mean you pay less attention to those with less power. This leads to failures of fairness.

This seems to be some part of what went wrong in recent scandals in the UK: Infected Blood, the Post Office, and at Grenfell Tower. I’ve written in depth about the first two. With yesterday’s publication of the report of the Inquiry into Grenfell, I’m reflecting on that and the wider lessons that those with power should learn, for fairness’s sake.

The horror of the fire at Grenfell Tower, where 72 people died after a series of failures and abuses, was bad enough in itself. But it sits within a much broader context. Ed Daffarn, one of the Grenfell Tower residents to survive the fire, has talked about it being the second act in a three act tragedy. I’d suggest that the other two acts (the ignoring of the views and concerns of residents prior the the fire, and their shocking treatment afterwards) were all about the effect of power, even limited power, and how it leads to errors.

The authorities’ response to Daffarn himself shows this in practice: as an articulate resident willing to express his views, prior to the fire and as the Tower was being refurbished, he was often the one who expressed concerns others were feeling. Rather than being seen as providing a channel for broader insights, the Tenant Management Organisation that ran the Tower on behalf of landlord, the London Borough of Kensington & Chelsea, clearly tended to regard him as a troublemaker. Remarkably, on his Grenfell Action Group blog, Daffarn specifically highlighted the risk of fire in the Tower six months before it occurred, in KCTMO – Playing with fire! (since withdrawn), and others. Daffarn would dearly love to have been proved wrong.

The final Inquiry Report is clear in its criticisms of the Tenant Management Organisation (TMO). These two quotations, the first on an insubstantial and insufficient review initiated to respond to a tenant petition setting out concerns about the refurbishment of the Tower, and the second part of the overall conclusions, will need to stand for the breadth of the damning findings:

“Given the history of the matter and the lack of trust between the residents of Grenfell Tower and the TMO, the board should have realised that only an independent review of the management of the project with particular reference to the residents’ complaints could fairly satisfy the requirements of the moment. As it was, the review was superficial and the group conducting it failed to carry out its investigation in a sufficiently thorough and robust manner. The report lacked balance.” (Para 33.63)

“The TMO lost sight of the fact that the residents were people who depended on it for a safe and decent home and the privacy and dignity that a home should provide. That dependence created an unequal relationship and a corresponding need for the TMO to ensure that, whatever the difficulties, the residents were treated with understanding and respect. We regret to say the TMO failed to recognise that need and therefore failed to take the steps necessary to ensure that it was met.” (Para 33.68)

Image from KCTMO – Feeling the Heat!, Grenfell Action Group blog, March 14 2017

This response by the Tenant Management Organisation and the Council – and the response by all of those with power in relation to the scandals mentioned – reflects long-standing literature about the poor decision-making and failures of judgement that come from power. In some senses, we shouldn’t be surprised when people in positions of power do act in ways that harm the interests of others, fail to listen to the less powerful, have a tendency to close ranks and deny prior errors. Those failures of fairness are built into power structures. Studies have for years told us that to be powerful is to be prone to overconfidence and error, particularly in interactions with others, and especially in interactions with the less powerful.

Power leads both to over-confidence and to errors. That is, psychological studies show that powerful people – even just those primed to feel powerful by artificial prompts – are more likely to be sure that they are right, and at the same time they are less likely to be correct. Many of those errors are around misreading social situations because powerful individuals have a tendency to imagine everyone should see things the same way as them, and don’t pay enough attention to others to learn that they are wrong.

Power leads us astray.

Power also reduces our inhibitions, so the powerful are more likely to take risks and transgress. The cold power that comes from money affects judgement too, in particular it seems to generate a sense of entitlement. Among the striking outcomes of a series of studies for a paper entitled, strikingly, Higher social class predicts increased unethical behaviour – it’s only slightly less striking when you realise that by social class the researchers intend socioeconomic standing rather than class, at least as that term is understood in the UK – are the tendencies of the wealthier to misbehave in terms of their driving styles. The drivers of more expensive cars are more likely to fail to stop for pedestrians crossing the road, and to cut off other vehicles, in both cases in breach of local traffic law. Those with higher socio-economic status are also more likely to nick sweets from children and to lie about the results of dice throws to their own small financial benefit, the study found.

Perhaps it is not surprising in the face of these sundry negative impacts of power, even of a limited form of power, that authorities in the scandals failed to respond to warning signs from those impacted, and tended to deny that anything had gone wrong or that they had a responsibility to try to put right what could be put right.

As Daffarn suggests, the response of the authorities after the fire was as poor as what came before, in many cases exacerbating the suffering of the survivors. One small example stands for the casual carelessness of those with power, and their failures of fairness:

“When official communications were eventually released, they were in English. That included communications sent to those who had been placed in hotels. People described feeling at a disadvantage because they could not read English well and had significant difficulty in gaining access to services, which they felt created unfairness…In some cases interpreters were provided, but not always in the right language.” (Para 100.60)

The council simply didn’t prepare well enough to carry out some of its key duties, the Report concludes:

“the wider evidence reveals a culture of neglect at RBKC over a number of years towards planning for humanitarian assistance. The existence of an effective plan for providing such assistance would probably have made a material difference to its response to the Grenfell Tower fire” (Para 101.73)

As Keltner, Gruenfeld and Anderson point out, there are many countervailing influences to the negative impacts of power: “many social values and practices, from conceptions of virtuous leaders to institutionalized checks and balances, have as their very purpose the placing of constraints on those with power”. For fairness to succeed, other players with power need to exert it in more positive ways, driving accountability and delivering those checks and balances.

As the evidence emerged in the Inquiry about the shocking misbehaviour of the insulation manufacturers Kingspan and Celotex, part of France’s Saint Gobain (whose illustrious history began with creating one of the greatest symbols of inequality, the mirrors for the Galerie des Glaces in the Palace of Versailles) in gaming fire safety regulations, I worked to encourage investors to seek to hold these businesses to account. Some did make some efforts, but the work had limited bite and ebbed quickly. There were a smattering of votes against individuals one year but these dissipated by the following year, even though the scandalous failures had not changed or been atoned for. That too was a failure of accountability and of fairness. US company Arconic, which supplied the cladding itself (material that sandwiched highly combustible hydrocarbons between thin sheets of aluminium), has escaped with even less holding to account by its shareholders.

The Report’s conclusions regarding each of these companies are as clear as they are damning. The fact that these blunt findings are highlighted in the executive summary itself shows how central the abuses of power by these businesses were to what went wrong:

“One very significant reason why Grenfell Tower came to be clad in combustible materials was systematic dishonesty on the part of those who made and sold the rainscreen cladding panels and insulation products.” (Para 2.19)

“From 2005 until after this Inquiry had begun, Kingspan knowingly created a false market in insulation for use on buildings over 18 metres in height by claiming that K15 had been part of a system successfully tested under BS 8414 and could therefore be used in the external wall of any building over 18 metres in height regardless of its design or other components. That was a false claim, as it well knew” (Para 2.32)

“In an attempt to break into the market for insulation suitable for use on high-rise buildings, created and then dominated by Kingspan K15, Celotex embarked on a dishonest scheme to mislead its customers and the wider market.” (Para 2.28)

“By late 2007 Arconic had become aware that there was serious concern in the construction industry about the safety of ACM panels and had itself recognised the danger they posed. By the summer of 2011 it was well aware that Reynobond 55 PE in cassette form performed much worse in a fire and was considerably more dangerous than in riveted form. Nonetheless, it was determined to exploit what it saw as weak regulatory regimes in certain countries (including the UK) to sell Reynobond 55 PE in cassette form, including for use on residential buildings.” (Para 2.23)

The lawyers representing victims at the Inquiry alleged that these appalling actions by the companies amounted to a fraud on the market, corruption with the most terrible consequences. The Grenfell United survivor campaign group is now calling for criminal charges. I’m not sure that power generally always corrupts, at least the power of those some far distances below the level of absolute power. But power, even of a limited sort, certainly does lead us astray, it does lead to misunderstandings and misreadings of situations. By its nature, it leads to a heedlessness of those with less power. Fairness requires those with power, even if they regard it as only a small degree of power, to lean hard against these natural tendencies. Fairness requires the powerful to temper their power and to listen harder to those who see themselves as without power. Fairness also requires others with different sources of power to exert it and hold them effectively to account. It requires all of us to consider the power that we have, and to keep asking how wisely we are using it.

The Report’s recommendations provide precise specifications of how these checks and balances and added protections should be put in place, but the lessons we need to learn are broader. Let us hope that these fairness lessons of Grenfell (and of the Post Office and Infected Blood scandals and, sadly, others) are learned.

See also: Fairness in the blood
The scandalous Post Office
Unfair trials: justice in the dock

Final – Phase 2 – Report of the Grenfell Tower Inquiry

Grenfell: Building a Disaster, BBC podcast, August 2024
The three-act tragedy quote from Ed Daffarn referenced here occurs at the start of the 10th episode, The Final Act, though the whole podcast series is highly recommended

Grenfell Action Group blog

Grenfell United

Grenfell Tower Enquiry Podcast, BBC podcast, May 2018-November 2022

Grenfell: In the Words of Survivors, National Theatre production, July 2023
A stunning play using survivors’ words verbatim, highly recommended: recording available on National Theatre at Home

Power and overconfident decision-making, Nathanael Fast, Niro Sivanathan, Nicole Mayer, Adam Galinsky, Organizational Behavior and Human Decision Processes, Vol 117, Issue 2, March 2012

Power, Approach and Inhibition, Dacher Keltner, Deborah Gruenfeld, Cameron Anderson, Psychological Review 2003, Vol 110 No 2

Higher social class predicts increased unethical behaviour, Paul Piff, Daniel Stancato, Stephane Cote, Rodolfo Mendoza-Duggan, Dacher Keltner, PNAS vol 109 no 11, March 2012
Note that while the title (and the article overall) references social class, this is actually a discussion of socio-economic standing

I am happy to confirm as ever that the Sense of Fairness blog remains a wholly personal endeavour.

Amazon resurrects worst of the industrial revolution

In a small (a very small) way, I collect 18th and 19th century company tokens. These symbolise for me the worst of the financial exploitation of the industrial revolution. It was not enough for the industrialists to ruthlessly exploit the excess availability of labour and pay badly the new industrial workforces of their dark satanic mills*. In many cases they also paid not in money that could be spent anywhere, but in scrip – tokens that could only be spent at the company’s own store. Prices there reflected the guaranteed market, so workers were exploited over again. These practices were progressively abolished in England from 1831 onwards by the oddly-named (at least to modern ears) Truck Acts. There is similar legislation to bar such abuses elsewhere in the world – though not everywhere.

As we know, this financial exploitation sat alongside brutal working conditions where injuries and even death were common, accepted outcomes of the industrial process. That was a lack of health and safety gone mad.

We’ve known for a while that the AI revolution depends on a similar exploitation of the health and safety of workers. The stories of the employees of Sama in Kenya, who helped train ChatGPT, are disturbing. The human training of these supposedly ‘artificial’ intelligence systems (ChatGPT is no worse in this regard than its rivals) involves individual people being exposed to the worst things that the draft forms of AI machines produce. As the machines’ training materials are the entire internet, this replicates the biases of the present and prejudices of the past, and includes all the filth that humankind has produced in recent years. The human job is to tell the AI not to produce further paedophilia, repeat racist incitement, and so on – but in order to do that, people need to read and look at truly horrific material.

Sadly, the people who did this work are not treated well. Their mental health disorders are the equivalents of the fingers on the floors of cotton mills. These seem not to trouble those who are making epoch-making amounts of money, and little enters the public discourse so that it has minimal impacts on consumer use of these products.

But it turns out that such physical exploitation of people’s health isn’t all that’s going on in the current technological revolution. Amazon has revived the company scrip model. It pays some of its MTurk workforce in Amazon gift cards, and severely constrains how those gift cards can be spent so that the workers are unable to get full value from them. MTurk – mechanical Turk in full – is the name for the distributed self-employed workers who perform tasks that help test and train much modern IT and so ensure its smooth working. The name aptly reflects the 18th century supposedly mechanical chess board, called the Turk, that toured Europe playing matches. Instead of being an automaton, the Turk actually only worked because in place of a machine there was a skilled human chess player crammed uncomfortably into the space under the board.

In the same way, the human work that is necessary to help train current supposedly ‘artificial’ intelligence technologies suggests there is some artifice in calling them artificial.

The DAIR Institute (Distributed AI Research Institute in full) – the grouping formed by the authors of the Stochastic Parrots paper – have launched a Data Workers’ Inquiry trying to bring forward the stories of the people who are directly involved in facilitating the current technology revolution, and who all too often are its unhappy victims. Consistent with the DAIR philosophy, this includes putting the voices of the individual workers themselves at the heart of the work, and facilitating them in telling their stories in the forms they find most comfortable and appropriate.

One of the stories discussed on the launch webinar, and on which the Inquiry has published a short paper, highlights this issue. Though its author, Alexis Chávez, is from Venezuela, the use of gift cards as payment isn’t restricted to countries where currency or sanctions issues might limit payments in real money: Chávez shows that the practice applies in (at least) Brazil, Colombia, India, Kenya, Mexico, Pakistan, and the Philippines. The paper details the convoluted processes needed for these individuals to gain value from their gift card payments, which mean that they are in effect forced to take discounts of 20-30% in order to extract value. It’s like the mark-up in the company store.

And it’s hard to argue with Chávez: “Even though Amazon does not see them as employees but as independent contractors, it’s our right to be paid fairly and in a useful manner.” We fondly thought the worst of the financial practices of the industrial revolution were far behind us – they should be – but unfairness clearly persists in the very human side of the supposedly ‘artificial’ intelligence business.

The second event in the Data Workers Inquiry happens this week, and Chávez himself is due to speak on August 26th.

* This phrase is from William Blake’s preface to his lengthy 1804 poem in praise of John Milton, words that are now known to us as Jerusalem. Please consider supporting the campaign to save Blake’s cottage in the West Sussex village of Felpham.

I am happy to confirm as ever that the Sense of Fairness blog remains a wholly personal endeavour.

See also: Learning from the Stochastic Parrots

Mental Health and Drug Dependency in Content Moderation, Fasica Berhane Gebrekidan, the Data Workers Inquiry, June 2024

Click Captives: The Unseen Struggle of Data Workers, Wilington Shitawa, the Data Workers Inquiry, June 2024

The African Women of Content Moderation, Botlhokwa Ranta, the Data Workers Inquiry, June 2024

OpenAI Used Kenyan Workers on Less Than $2 Per Hour to Make ChatGPT Less Toxic, Billy Perrigo, Time, 18 January 2023

Data Workers Inquiry

The Distributed AI Research Institute (DAIR Institute)

The Impact of Gift Card Payments on MTurk Workers, Alexis Chávez, the Data Workers Inquiry, June 2024

Is lobbying fair?

All participants in society have a right to make their views known, and to seek to influence politicians and other decision-makers. In fact, in many ways it is hard to see how politicians and regulators can fairly balance the interests of affected parties without hearing their perspectives. But that need for fair balance is crucial: those reaching key decisions need to hear all perspectives, and they need to be active in thinking whether they are actually doing so, or whether in practice they are hearing only from those with the loudest voices (often a function of having the greatest financial resources) or the most vested of interests – who will always be the ones with the greatest incentive to use all available powers of persuasion.

And decision-makers need to listen thoughtfully and actively to all perspectives in the full knowledge that there is a human tendency to give greater weight to the views expressed by the already powerful and successful. The wealthy have excess influence, through the greater resourcing they put behind expressing their views, but also because their apparent success (let’s remember, it may only be apparent success) lends them greater standing. The voices of ordinary citizens, who may be more fundamentally affected by political or regulatory decisions, are always relatively downgraded. And that’s even before we consider the recent phenomenon of fake grass-roots organisations that purport to represent ordinary folk but instead again promote the interests of the wealthy who fund them – so-called astroturf initiatives.

Even before an assassination attempt, it was clear that we faced oddly febrile times politically, with polarisation and starkly angry social media noise. That surely raises the stakes for all political lobbying, and should require caution by the powerful. It doesn’t seem to have done so far.

These are the reflections inspired by applying fairness considerations to some remarkable analysis of corporate lobbying by the good people at ACCR (the Australasian Centre for Corporate Responsibility). ACCR specifically invited me to think about their analysis of Shell’s lobbying activities – and the apparent gaps in that company’s transparency about it – which came out in March. Forgive me that it’s taken a while to think this one through.

Recent elections may have been fair, perhaps sometimes in spite of their electoral systems. But not all democracy is as well-established or transparent – and even long-standing democracies are not clean of allegations of impropriety (think of the UK’s pandemic era PPE-purchasing scandal, party funding from Kremlin-adjacent oligarchs or the grubbiness of minister Robert Jenrick signing off a housing development shortly after sitting next to its promoter at a Conservative fundraising dinner – in doing so overruling the planning process and the day before a new regime came into force that would have required the developers to pay the local authority £30-50 million to help fund local schools, community centres and other amenities).

Particularly where democracy and transparency are weaker, the powerful have additional influence, and perhaps excess influence. Fairness ought to dictate that they should wield that greater influence with greater circumspection. They should also be more transparent in their activities. Where they do not and are not, they will inevitably create concerns about the propriety and fairness of their actions. Any limit on full transparency may also invite concerns about whether their lobbying efforts are in fact in line with their stated policies.

That’s why ACCR’s findings on Shell are so troubling to an investor, and citizen: the research and shareholder advocacy NGO identifies multiple developing economies where the oil major has been active in lobbying organisations without being fully transparent about it – the title of the research says it all, really: In the dark: gaps in Shell’s climate lobbying disclosures. Given that such a high proportion of the oil company’s future activity will be in these developing economies, this failure to be fairly transparent represents a particular gap.

Source: ACCR, In the dark: gaps in Shell’s climate lobbying disclosures

As the chart shows, the research identifies at least 80 associations of which Shell is a member which conduct climate or energy lobbying which the company does not itself disclose. 45 of these are in emerging economies, and in many of them Shell takes a leading role. The 80 undisclosed memberships are in addition to 98 on which the company does make some disclosure.

The ACCR research identifies ways in which Shell’s emerging economy lobbying has influence both on the demand-side for fossil fuels and on the supply-side. This may be unsurprising given ACCR’s broader analysis of Shell’s strategy and capex indicates the scale of the company’s gamble on gas as a transition fuel. The lobbying includes support for increases in long-term LNG demand in southeast Asia; opposing transition from fossil fuels in China, Mexico and South Africa; expanding production across emerging economies including Brazil, Kazakhstan, Malaysia, Nigeria and Tanzania; and arguing for new exploration as a driver of economic development in Columbia and Namibia. As the study shows, the money spent on this is not visible to shareholders and other stakeholders:

Source: ACCR, In the dark: gaps in Shell’s climate lobbying disclosures

This invisibility bars shareholders from holding the company to account for this expenditure of money and raising questions about its consistency with stated policies. The invisibility also bars citizens from questioning the influence that corporations generally may be having on political and regulatory decision-making.

This company-specific analysis sits within a broader context regarding corporate lobbying and political influence – and I am not in any way intending to imply that Shell is worse than other companies. Investors want more transparency: it’s been notable this year how many shareholder proposals there have been at companies, from the US and elsewhere, seeking further visibility of corporate lobbying activities (some specifically regarding climate change, some lobbying more generally). For example, 41% of the non-founders of Alphabet supported such a proposal, as did 28% of Nippon Steel’s shareholders, 40% of those at Goldman Sachs and 45% of those at Morgan Stanley (once the holdings of Japan’s MUFG are set to one side). Again, I am not intending to imply that Alphabet, Goldman, Morgan Stanley or Nippon Steel are in any way particularly extreme offenders in this regard.

The issue of lobbying and political influence is most notably an issue in the US. Corporate governance guru Bob Monks has long railed at the negative influence of large companies on that country’s politics, and the commensurate limited constraints on corporate power exerted by politicians. He did so in his 2007 book Corpocracy, spectacularly subtitled How CEOs and the Business Roundtable Hijacked the World’s Greatest Wealth Machine – and How to Get It Back. This focuses ire on a US Supreme Court decision, First National Bank of Boston v Belotti, that enabled companies to engage in campaigns on state legislative ballot initiatives – the first step opening the door to full involvement in the political process by businesses. He writes: “today even the political process is largely in the control of corporate masters who fund campaigns, back “debates,” and stymie in every way conceivable their own regulation.”

In the book, Bob further said: “the Belotti decision appears on its face sufficiently absurd as to suggest that reversal is just a matter of time.” For once, Bob’s general prescience failed him, as Belotti was not only not reversed, it was in fact moved further onwards, this time in a federal law context, in the Supreme Court’s later decision in Citizens United v Federal Election Commission. And that case predates the latest successful corporate attack on regulation, facilitated by the Supreme Court: last month’s decision to overturn the 1984 precedent of Chevron v Natural Resources Defense Council, in effect removing the right of regulators to regulate without express Congressional authority.

Bob railed more strongly in 2022’s The Emperor’s Nightmare, a book that is subtitled Saving American Democracy in the Age of Citizens United. Citizens United was the 2010 Supreme Court decision that fully extended the right to free speech assured by the First Amendment to the US Constitution to corporate entities, in effect removing all limits on corporate spending on lobbying and political campaigns. It’s a fundamental human right, but corporations are not humans, only enjoying the benefit of legal personality, so it seems an odd decision to extend the First Amendment right to companies. As the dissenting opinion in the case, written by Justice John Paul Stevens, states: “A democracy cannot function effectively when its constituent members believe laws are being bought and sold.”

Bob spoke even more bluntly in his speech this week to the International Corporate Governance Network (read on his behalf in his absence by CEO of ValueEdge Advisors, Rick Bennett) accepting his Lifetime Achievement Award from that organisation. Entitled ‘American oligarchs prevail’, the speech began “American exceptionalism has been lost…” and identified the decisions in Belotti and Citizens United as the moments at which that loss started and accelerated.

Politics is about finding a fair balance between different interests. The powerful will always want influence – and power and wealth are automatically accorded respect and given extra weight in the way the balance is struck. But fairness requires that the balance is not struck in a way that is biased towards those corporate interests. Fairness further requires visibility and honesty from corporate actors about their activities – and their shareholders are asking for it. Bob Monks argues that bias is now firmly established in the US, and he calls to action investors to lean against this; perhaps that bias, and its pernicious effects, are less well established elsewhere, but without transparency it’s hard to tell.

At the very least, we need visibility on lobbying and the ability to hold it to account, and so limit its influence – probably both as investors and as citizens. Sadly, ACCR’s analysis suggests that such transparency is far from universal. That’s far from fair, and it risks propagating further fundamental unfairness in policy-making.

See also: Was the election fair?

Meritocracy’s unfair

I am happy to confirm as ever that the Sense of Fairness blog remains a wholly personal endeavour.

In the dark: gaps in Shell’s climate lobbying disclosures, Australian Centre for Corporate Responsibility, March 2024

Corpocracy: How CEOs and the Business Roundtable Hijacked the World’s Greatest Wealth Machine – and How to Get It Back, Bob Monks, Wiley, 2007

First National Bank of Boston v Bellotti, US Supreme Court, 435 US 765 (1978)

Citizens United v Federal Election Commission, US Supreme Court, No. 07-2240, 2008

Chevron USA Inc v Natural Resources Defense Council, US Supreme Court, 467 U.S. 837 (1984)

Overruled by: Loper Bright Enterprises v Raimondo and Relentless Inc v Department of Commerce, US Supreme Court, No. 22–451, 28 June 2024

The Emperor’s Nightmare: Saving American Democracy in the Age of Citizens United, Bob Monks, De Gruyter, 2022

Was the election fair?

A member of my family has just discovered that the UK’s first-past-the-post election system brings anomalous results for small parties – at least it does if you compare votes cast nationally with the number of seats won. It may be no coincidence that this individual has gone from supporting one of the main parties – which benefit from first-past-the-post – to backing a much smaller party, which lose out from it. Notwithstanding that, the question they raise is, was this election result fair?

Certainly, the raw comparison between the seat share and vote share percentages suggest that the outcome isn’t fair (note that I have included here only the non-Northern Ireland seats as the unusual politics of that place would add confusion, not least because the listed parties mostly do not campaign there; the Speaker of the House of Commons, whose seat is traditionally not contested by other parties – though no one seems to have told the Greens – is included here as an Independent):

         SeatsSeat share  VotesVote share      Votes per seat 
Labour41165.0% 9,704,65534.5% 23,612
Conservative12119.1%6,826,758 24.3% 56,419
LibDems7211.4% 3,519,199 12.5% 48,878
SNP91.4%724,7582.6% 80,529
Reform UK50.8%4,117,221 14.6%823,444
Green40.6% 1,943,265 6.9%485,816
Plaid Cymru 40.6% 194,8110.7% 48,703
Independent60.9%564,2432.0% 94,041

The votes per seat numbers are perhaps the most striking statistic, what might be called ‘vote efficiency’. Labour clearly benefited disproportionately on this measure, and Reform and the Greens (whose manifesto was happily leavened generously with the language of fairness) were the parties that most lost out. There’s no doubt though that both of those parties were delighted by their tally of MPs and will certainly rate that level of parliamentary representation a major success.

But considering votes on a national basis mistakes what’s going on in a first-past-the-post constituency system – and it’s worth remembering that the form of British elections long predates the invention of national political parties, let alone their regimented form of more recent years. First-past-the-post is all about delivering the single MP chosen by the constituency, and that means localised voting strength is rewarded and national performance isn’t.

That’s why it’s worth considering the Scottish National Party (SNP) and Plaid Cymru performance, whose results strongly outperform those of the other small parties – true even though it was a very poor election result for the SNP. Each of these parties benefit from fighting elections not on a UK-nationwide basis but within their own nations – Scotland and Wales respectively. Plaid’s votes were shared across only the 32 Welsh constituencies, the SNP’s across the 57 Scottish ones. The parties with the lowest ‘vote efficiency’ – votes per seat gained – are the two parties that stood candidates nationally but really had only a very limited number of constituencies where they were realistically competing to win.

Local concentration is why, for once, first-past-the-post seems to have suited the Liberal Democrats – traditionally a smaller party that has fared badly under it, and has argued strongly for proportional representation (arguing that it was needed for fairness reasons, not for their own political advantage). Again, the LibDems happily headlined their manifesto For a Fair Deal – though the fairness language is slightly less universal across their document than it is in the Greens’. The LibDems had a vote efficiency remarkably similar to Plaid Cymru’s, because its votes too were largely concentrated in constituencies where they were competing to win (particularly in the Southwest of England). A large part of that effect was because of tactical voting, with both Labour and LibDem supporters lending the other party their votes in constituencies where the other had the best chance of beating the Conservatives. Labour too was therefore a beneficiary of votes cast tactically in reflection of the apparently widespread desire to oust the Conservatives.

And that’s really the story of this election: it was more about voting against rather than voting for. Just as with the French election a few days later, the clearest message from the electorate was what they did not want rather than what they did. In France, opinion pollsters were shocked when the National Rally (the rebadged, and perhaps reformed, National Front) was beaten into third place – having placed first in the first round a week before, and in the prior European election. Some in the country will no doubt complain at unfairness through manipulation of the candidates left standing following the first round (more three-party contests than usual survived that first round as high turnout made it more likely that third placed individuals met the required threshold of 12.5% electoral support; there were then 48 hours in which candidates could choose to stay and compete in the second round, and many were withdrawn), so that there was a decision simply between the National Rally and a not-the-National-Rally candidate. Yet in many ways, this seems simply to have been an adjustment making the tactical voting decision more clear. The turnout, 66%, and the strength of the support for the not-the-National-Rally candidates, is suggestive that actually the electorate welcomed this clarity and were very willing to vote tactically and oppose the National Rally, voting against something rather than voting for.

Voting against, as well as helping Labour in its contest with the Conservatives – both directly and in the way Reform votes were mainly taken direct from Conservative candidates – also harmed them. In a number of constituencies there was clearly a strong protest vote in relation to the Labour leadership’s stance on the conflict in Gaza. Setting aside the unusual situation of former party leader Jeremy Corbyn retaining his seat against the official Labour candidate, there were four seats won from Labour by Independents, apparently all related to concerns about the approach to the issue of Palestine. In still further seats, independents took votes from Labour, in some cases clearly allowing incumbent Conservatives to survive (not that Sir Iain Duncan Smith, for example, seemed willing to acknowledge that on the night).

It would be welcome of course to have a politics where people are inspired to vote for something rather than simply to vote against. But it does seem that voters understand their electoral systems pretty well and know how to deploy them to get the results they want – even if those results are more about what they don’t want.

That seems fair.

But perhaps it is fair in spite of the electoral system, not because of it. The election results, particularly the vote efficiency statistics, suggest that something isn’t right, and that something will need to be addressed over time. Proponents of proportional representation will need to find a response to the importance placed on genuine constituency representation by the many who continue to favour first-past-the-post, the personal connection between MPs and their locality, and their individual constituents. That’s why something like the modified d’Honte system seems most likely to gain traction (there was an odd moment sometime in the night’s coverage when a Reform representative referenced modified d’Honte and was told by the presenter it wasn’t a good time of night to start discussing such things). It’s already used in the UK – for the Scottish parliament, the Welsh Senedd and the London Assembly – and seems to lead to reasonably fair outcomes, with constituencies electing candidates on a first-past-the-post basis and then other seats filled in a way that ensures the whole elected body is more fully and fairly representative of the weight of votes overall.

For fairness’s sake, something needs to change – and change is also needed because the mindset and approach of the electorate has changed. It seems that mindset can no longer be crammed into the tight election box of first-past-the-post.

Historically one benefit of the UK’s first-past-the-post system has been seen to be the clarity of the results it gives. It’s hard to say that isn’t true of this result, given Labour’s huge majority. But historically that clarity tends to have arisen because of the small number of realistic options between which the electorate could choose. It wasn’t quite a binary choice, but it did sometimes seem that way. The real lesson of this election has to be that the electorate is now much more open-minded about its choices and that five parties that campaign nationally have a genuine chance of winning seats, and a further two are competitive in the 10% and 5% of seats in which they respectively fight. If even independents can win seats, and upset the results in other seats, it’s clear that the electorate’s perceptions of the election process have changed. The electorate’s desires have fragmented, and even with first-past-the-post strongly favouring the larger parties, the electorate has rallied effectively behind other options in many cases.

That fragmentation of desires will need at some point to be reflected in some change to the electoral system. The current system will find itself less able over time to respond to the actual wishes of the electorate, which are clearly very different from the more binary world of the past. While this does seem a result that fairly reflects the wishes of the electorate – for removal of the incumbents, a vote against rather than a whole-hearted vote for – it does seem that soon only some proportional system will be able to capture fairly the wishes of the British people.

I am happy to confirm as ever that the Sense of Fairness blog is a wholly personal endeavour.

Real Hope, Real Change, Manifesto for a Fairer, Greener Country, Green Party

For a Fair Deal, Manifesto 2024, Liberal Democrats

Fairness in the blood

“When citizens have concerns that something has gone seriously wrong, fairness should mean that they get answers.”

The report (all 7 volumes and 2500 pages of it) have the words unethical, unconscionable and wrong echoing throughout – sometimes in the same sentence. This is the devastating report of the Infected Blood Inquiry, released last week, and it is a tough read from which few in authority emerge well. Particularly tough is Volume 2, which relentlessly relays individuals’ stories, mostly in their own words. Unethical, unconscionable, and wrong; in many cases, actions were simply inhumane, indeed cruel.

I had the privilege of being at the launch of the report. Though I am not a core participant in the scandal, being neither infected nor affected in the way the Inquiry’s terms have been drawn, I have followed it closely and witnessed both its start in 2018 and this closure. A good friend at university was one of the 380 haemophiliac children infected with HIV along with their Factor VIII treatment. Thanks to the miracle of antiretrovirals, he survived to 30 but the threat of death – and the stigma attaching to HIV and Aids through crucial years of his life – blighted Dave’s time with us.

The launch a week ago today certainly did provide some closure. As I said to the Inquiry staff, it was clear from the mood in Westminster Central Hall that afternoon that people felt they have been heard and that the truth has now been fully revealed – though, sadly, in both cases this was for the first time.

The quote that heads this blog is from Sir Brian Langstaff’s masterly speech at the launch. The relevant segment is worth reproducing in full:

“The failure of clinicians to tell people of the risks of infection from blood or blood products; the failure to tell people of the availability of alternative treatments; the failure to tell them that they were being tested for HIV or Hepatitis C; and sometimes, the failure even to tell them, or to tell them promptly, that they had been infected with HIV or Hepatitis by their treatment; the failure to explain these devastating diagnoses privately, in person and with sensitivity; these failures were widespread, they were wrong, they were unethical.

“The failures in decision-making that led to the original infections were then compounded by institutional defensiveness, and that’s a pattern of institutional defensiveness that must stop.

“When citizens have concerns that something has gone seriously wrong, fairness should mean that they get answers. People infected with blood and blood products did not. Instead, their trauma has been compounded by the lack of recognition of what happened to them and by a lack of accountability.”

Sadly, too often we have found in recent times that ordinary citizens have had serious wrong done to them and that rather than getting the answers that fairness demands, they have faced assertions that nothing was wrong and a closing of ranks by those with power. I have previously discussed the Post Office/Horizon IT scandal; similar failures of candour have become apparent in other cases. There is a natural human tendency to support and protect your own, both people and organisation. There is a natural human tendency to believe that your organisation has done the right things and not the wrong – perhaps particularly so when the consequences of those wrongs are so devastating. It is these human tendencies that lead to the institutional defensiveness that Sir Brian refers to. For organisations with such power over the lives of ordinary people, such institutional defensiveness must be wrong. Fairness requires that we have systems and leadership that leans against these human tendencies.

I don’t underplay the recommendations that Sir Brian makes with regard to future monitoring and treatment of those still suffering from their infections, for memorials to those who have suffered and in particular on reinforcing the safety culture in health services, notably through the duty of candour and by giving patients greater voice. But the apparent general problem means that his recommendations regarding the defensive culture in the Civil Service and government are perhaps of broad urgency and could have the widest impacts. In essence, though put in careful and lawyerly language, Sir Brian is pressing for statutory duties on both Civil Servants and politicians in government, specifically a statutory duty of candour. His relevant recommendations in full are:

  • The Government should reconsider whether, in the light of the facts revealed by this Inquiry, it is sufficient to continue to rely on the current non-statutory duties in the Civil Service and Ministerial Codes, coupled with those legal duties which occur on the occasions when civil servants and ministers interact with courts, inquests and inquiries, as securing candour.
  • If, on review, the Government considers that it is sufficient to rely on the current non-statutory duties in the Civil Service Code, it should nonetheless introduce a statutory duty of accountability on senior civil servants for the candour and completeness of advice given to Permanent Secretaries and Ministers, and the candour and completeness of their response to concerns raised by members of the public and staff.
  • The Government should consider the extent to which Ministers should be subject to a duty beyond their current duty to Parliament under the Ministerial Code.

I do not think it an accident that the chapter of the report that discusses the government response over decades to the concerns of those infected is called ‘Lines to Take’. The words ‘lines’ is remarkably close to the word ‘lies’, which is what the three key lines proved to be (that the infected had received the best treatment available, that infections were inadvertent, and that screening was introduced as soon as possible). When Sir Brian said at the launch that “all of those claims were untrue” (just following the segment quoted at length above) he received one of the longer of many periods of applause. These lines – lies – were pursued for years even after they had been proven wrong, and the long delay in setting up the public inquiry re-emphasised the institutional defensiveness (Sir Brian makes helpful recommendations on that too).

The memorial sculpture as created at the opening of the Inquiry; by the report launch, it had doubled in size as more individuals had added vials containing their own messages over the years of the Inquiry process.

He doesn’t quite say it explicitly in his recommendations, but it is clear that Sir Brian himself believes that there should be a statutory duty of candour on all civil servants and ministers, that they should not simply be expected to tell the truth but the whole truth, and to flag up the chain where they believe this hasn’t been done. Leadership must welcome such challenge, and not blame those who raise concerns (even if wrong) but rather blame those who know of a matter of concern and do not raise it. He accepts that in some circumstances telling the whole truth may have to be constrained by the public interest, but he expects this to be limited and he believes all those involved need to help “ensure that Government as a whole is candid”.

It’s terribly sad that this needs to be said – that a Civil Service and Government need to face calls and requirements to be candid in their dealings with ordinary citizens. But it is very clear, from this scandal and others, that it does indeed need to be said. And, as Sir Brian says, it is clear that fairness requires nothing less.

See also: Money is not the answer

Unfair trials: justice in the dock

The scandalous Post Office

I am happy to confirm as ever that the Sense of Fairness blog is a wholly personal endeavour.

Infected Blood Inquiry Report, May 2024

Sir Brian Langstaff’s speech, 20 May 2024
I am told that there is no plan to publish a written form of Sir Brian’s remarks, but this is the YouTube recording; the section I quote in detail appears from around minute 51.

The fairer CFO

The excellent people at the Board Intelligence Think Tank – a small unit, led by the wonderfully energetic Scarlett Brown, attached to a provider of technology to assist board information and so decision-making – have produced a great paper setting out the changing role of the Chief Financial Officer in business. It’s the latest in an ongoing project exploring the CFO’s role in relation to sustainability. In particular, the paper highlights the ways in which those in these crucial business roles need to consider fairness. Most vitally, it includes a 5-point ‘fairer future toolkit’.

At its heart, this fairer future toolkit calls on CFOs to think about value in their business beyond the short-term financial. Instead, it urges them to think about broader relationships that will foster value for their company over the longer-term. After all, their role, just as every other director of a business, is to promote the success of the company – not simply drive short-term financial returns, let alone inflate the share price. Slightly abbreviated versions of the five points of the toolkit are:

  1. Measure & report on social value
  2. Make non-financial metrics matter
  3. Flex your spending muscles
  4. Take a long, hard look at your tax strategy and conduct
  5. Use your voice to tell a different story

The paper is powered by interviews and roundtables with more than 150 CFOs from across the full range of businesses, and its driver is a recognition that the role of the CFO has changed and is changing. No longer a pure numbers role, especially not simply in relation to just the financial numbers, the CFO has for some time needed to be thinking about risks and strategic planning – and the need to recognise the importance of stakeholder relationships in both. With the advent of more systematic requirements for reporting of sustainability factors, this need to think more broadly is only growing.

There are close parallels here with a recent blog from recruiters Odgers Berndtson on the private equity industry. Not least given the big rise in the cost of debt, the authors argue that private equity needs to move on from its focus on financial engineering and short-term returns to the opportunities for value creation through operational performance, particularly through investing in people. “PE leaders should shift the focus from pure cost-cutting to operational efficiency, allowing for long-term profitability without sacrificing jobs,” they say. Later they add: “As scrutiny on PE practices grows, we expect more demand for leaders with proven experience of balancing financial returns and responsibility.”

There are quotes throughout the Board Intelligence paper from the CFOs of an impressive array of businesses, and there are fuller versions of many of the interviews from which these come at the home page of the think tank’s broader project on CFOs’ role in building a fairer future.

There is clearly most agreement on the first two of the five points. On 1, which in full is “Measure & report on social value (even though it’s hard)”, Andy Agg, Group CFO of National Grid, says: “It makes complete sense to apply the finance function’s skillset to non-financial data. It provides reassurance that it has been subject to the same series of robust controls and standards that we apply to financial data.” And on 2, “Make non-financial metrics matter – for everyone”, Jeff Davies, Group CFO of Legal & General, says: “CFOs are recognising that it’s their responsibility not only to report against things like sustainability or diversity and make sure the numbers are accurate, or help decide what the target should be, but also to help the company achieve those targets.”

If this sounds to some like a power grab, actually I’ve heard the same from corporate heads of sustainability – many of them welcome having passed over responsibility for reporting to finance and agree it’s the better place to carry that burden. However, it may still be early to be talking about the ‘same series of robust controls and standards’ as applicable to emergent metrics as to the financials. Having worked closely with a client on attempted assurance of its Task Force on Climate-Related Financial Disclosures (TCFD) report, neither the measures nor the assurance of them are yet mature.

It appears that the second two points of the toolkit are more contentious – or at least that fewer CFOs of purely commercial organisations are prepared to go on the record about them. Key to 3, “Flex your spending muscles (for good)”, is responsible and long-term relationships with the supply chain (I’ve written previously about the economic madness of late payment by large business). “Supply chain fragility is an issue post-Covid. But the strong relationships we built with suppliers through the pandemic — by making sure we were communicating with them and paying promptly or earlier — have really helped us now,” says Brad Greve, CFO of BAE Systems.

It’s a shame more CFOs don’t seem willing to talk about responsible tax (another topic on which I’ve written previously). It shouldn’t be controversial to discuss and deliver on 4, “Take a long, hard look at your tax strategy and conduct”. Sadly, it still seems an area on which corporate executives acknowledge the need to change, but rarely go on the record about. But as Joel Ripley, CFO of Schroders Personal Wealth says: “If you don’t pay your fair share of tax, what’s the point of being environmentally responsible? It’s in the CFO’s gift to make sure our company’s tax conduct is responsible and ethical.” Happily, at least off the record, other CFOs do seem to recognise their role in this area.  “They see their role as setting the right tone for the company’s tax conduct — deciding if it is responsible and ethical, and taking action when it falls short,” the report states.

The fifth and final point of the toolkit, “Use your voice to tell a different story” is perhaps the most interesting because it is less immediately tangible than the others – but may be all the more powerful because of that. The influence of the CFO is vast in most organisations and can be used to help the business focus on what matters, especially if the CFO chooses to focus on areas that are not traditionally the purview of finance. “The CFO can raise the profile of sustainability and responsible business simply by being a visible part of the debate. I’m on the steering committee for our ‘Do What Matters’ plan. As CFO I have to be able to clearly articulate the business case for pursuing these objectives, while also demonstrating commitment to these aims in investment allocation,” says Declan Hourican, CFO of TSB Bank.

The Board Intelligence paper is clear evidence of a great deal of fresh thinking, and it is certainly thought-provoking. Hopefully CFOs broadly rise to its challenge to address their opportunity to help deliver a fairer future.

See also: What’s the purpose of purpose?

Demanding supply

Talking with the taxman about fairness

People matter – but not like that

I am as ever happy to confirm that the Sense of Fairness blog is a purely personal endeavour.

What does the CFO’s changing role mean for you?, Board Intelligence Think Tank, 17 April 2024

What is the role of the CFO in creating a fairer future?, Board Intelligence Think Tank

How to balance returns and responsibility in private equity, David Bell, Pieter Ebeling, Annemarie Depue, Odgers Berndtson, 30 April 2024

The fairness, the entire fairness, and nothing but?

So, we know that the pay award to Elon Musk by Tesla’s board, to a value that turned out to be over $50 billion, was not entirely fair. The Delaware court has told us this, applying the wonderfully named ‘entire fairness doctrine’. But in proposing that shareholders again approve the award, the Tesla board says that its reinstatement is a necessary step to be fair to Musk.

This is set up as a battle of fairnesses. Is it? I’ll try to break the answer to that question down.

Proxy Statement arguments

When reading the Tesla Proxy Statement, it appears that the board doesn’t believe it has a case to answer, even though it has lost one. Robyn Denholm, in her chair’s letter that opens the Proxy Statement, says that restoring Musk’s pay award “is a matter of fundamental fairness and respect to our CEO”. Further, the voiding of the scheme was “fundamentally unfair, and inconsistent with the will of the stockholders who voted for it”.

None of the damning Delaware court findings (essentially that there was no negotiation process with Musk on the pay scheme, those board members charged with the process of developing the pay plan were not fully independent of him, that some of the performance metrics were not in fact stretching, and that shareholders were misled in the company’s communications, so that their approval of the deal was void) are in any way addressed by the Tesla board in their formal communication. The Proxy Statement explicitly confirms that there has been no attempt at a renegotiation of the pay scheme with Musk. The sole nod to the court’s findings is the creation of the new so-called ‘independent Special Committee’.

This new ‘independent Special Committee’ is not worthy of at least one of those words given that the ‘committee’ was personned by just a single director, Kathleen Wilson-Thompson. Director Joe Gebbia withdrew from the committee when its remit was expanded from the question of whether Tesla should redomicile to Texas (discussed further below) to also include Musk’s pay. “Mr Gebbia explained that he was stepping down from the Special Committee out of an abundance of caution because of the potential for unfair attacks based on perceived conflicts of interest. He stepped down entirely of his own accord,” the Proxy Statement reads.

The Proxy Statement does note that the Delaware court found failures in its processes and invites shareholders to read relevant parts of the Tornetta decision (and publishes that decision in full as an appendix). But it does not directly respond to those findings, which are damning about the board’s behaviour and processes. In failing to deliver ‘entire fairness’, the court found that the board failed to deliver both a fair process and a fair outcome. The Proxy Statement doesn’t seek to demonstrate the fairness of either, only that the proposed remuneration scheme was unusual and unusually stretching in the US (such as including features which are unusual in the US but pretty normal in non-US markets such as a five-year time horizon and extended shareholding periods). The court strongly doubted the need for such a scale of award in order to retain Musk’s services for Tesla – which had seemed a strongly motivating factor in the board’s decision-making. After all, Musk owns more than 20% of the company and this shareholding represents well over half of his net worth.

On that issue of Musk’s major shareholding, the Proxy Statement’s main argument that the pay scheme needs to be resurrected is that Musk has received no reward for the extraordinary market capitalisation increase of Tesla over the period since 2018. This absence of any recompense is the source of its argument that fairness requires the scheme to be revived. It does ignore the fact that as 20% shareholder, Musk’s overall wealth increased by more than $100 billion as the value of the business grew from around $55 billion to $650 billion (even for a brief while over $1 trillion) over the life of the scheme. For the board, this share value appreciation is apparently not sufficient to satisfy fairness – though the court explicitly noted it as a reason why setting aside the pay scheme was an equitable remedy.

The Proxy Statement summarises the Tornetta findings but does not directly respond to them. In effect, while the board says it intends to appeal the findings, the proposal to the shareholders is simply to confirm the pay scheme without addressing any of the fairness questions raised by the court. So in order to unpick things more fully we need to consider the Delaware court’s judgement and the evidence that it considered.

The entire fairness doctrine is brought to bear because Musk was found to be a controller of Tesla, and the pay scheme amounted to a conflicted-controller transaction. Such transactions can only be pursued if that is done in an entirely fair way – both the process and the outcome need to be fair. Let’s look at each.

Was the process fair?

While it summarises much of the Tornetta decision, the Proxy Statement provides none of the detail of the questions raised about the independence of the individuals charged with leading the ‘negotiations’ on the scheme.

It’s important to note that while the Delaware court reflects evidence about the question of directors’ independence, it reached no absolute conclusion on this point directly because it found that the entire fairness doctrine applied because of its finding that Musk is a controller of Tesla. It did, however, make findings about whether the directors were beholden to Musk. Investors are likely to draw conclusions regarding independence from the court’s finding that directors were either “beholden” to Musk or “acted beholden” to him with regard to the pay scheme.

The court sums up its finding about the effective independence of the board in the pay scheme process: “Put simply, neither the Compensation Committee nor the Board acted in the best interests of the Company when negotiating Musk’s compensation plan. In fact, there is barely any evidence of negotiations at all.” The form and shape of the pay scheme were largely what Musk had suggested to the chair of the compensation committee at the start of the process, with only minor amendments over the time between that and its approval.

These directors’ main go-between to Musk, who also drafted most of the documents the company leant on to argue that its decision-making was fair, was Tesla’s general counsel. This individual, Todd Maron, was Musk’s former divorce lawyer who held back tears both during his deposition and at trial, in discussing the pain of his 2019 departure from Tesla, and the depth of his positive feelings about the company and its executives.

The Delaware court makes clear that the process of developing the pay plan, including a precipitant timetable, and then a slightly slower but still aggressive timetable, were driven by Musk, not by the committee. The court raises significant doubts as to the independence of the process by which the proposals were tested on institutional investors as they were progressed (for example, it states: “the script reads like a loaded questionnaire intended to solicit positive stockholder feedback and not a method for gaining objective stockholder perspectives on a potential new plan”).

The court also found key gaps in the proxy statement disclosures on which shareholders based their decision to approve the 2018 plan. These included failures to disclose questions about independence of directors from Musk, the nature of the discussions of the plan (particularly their origin as a proposal from Musk himself), and the ease with which Tesla believed it could achieve the operational targets (they were instead stated to be “very difficult to achieve”). Investors were not fully and fairly informed by the 2018 proxy statement, so their approval of the pay scheme isn’t sufficient to overturn the findings of unfairness.

The process was not fair, in multiple ways.

Was the outcome fair – essentially, was the quantum fair?

Musk set the scale of the pay scheme award, initially calling for 15% of the company in 1% increments and then later seeking 10% on a fully diluted basis. The board chose 12% because it preferred to calculate based on issued shares rather than the more complicated diluted basis. No one throughout the process seemed to question this order of magnitude of award. Again, this was not a fair and independent process, but is the outcome, the quantum, fair?

Looking at the current circumstances provides helpful context on this. Musk seems again to be directing matters, including directing the scale of any future awards. In the Proxy Statement, Tesla states that Musk has indicated he would expect any replacement incentive, should the current proposals fail, to be of a “similar magnitude to the 2018 CEO Performance Award”. Oddly, it is clear from the rest of the discussion of the potential costs of such a possible award, that this doesn’t mean a similar order of value in dollars, but an award of the same number of shares: 303 million (at least, this is the equivalent number of shares following repeated share splits). This would have a value at award date of around $25 billion rather than the value at award date of the 2018 award of a still extraordinary $2.3 billion (according to the Proxy Statement, $2.6 billion according to the Delaware court).

As a brief aside on that slight discrepancy in the reported fair value at grant of the awards ($2.3 billion or $2.6 billion – though what’s $300 million between friends?), one of the key interventions by compensation committee chair Ira Ehrenpreis, who was leading the board’s supposedly independent working group on the pay scheme, seems telling. The court reports “a request from Ehrenpreis for “creative options” they could employ to “solve for getting a bigger discount” on the publicly reported grant date fair value”. This appears to be one of the drivers for the unusual (at least in the US context) five year holding period for the shares. The sense that the numbers presented to shareholders were subject to manipulation to put the proposals in the best light, rather than presented fairly and straightforwardly, seems strong.

The Delaware court states (my emphasis added): “With a $55.8 billion maximum value and $2.6 billion grant date fair value, the plan is the largest potential compensation opportunity ever observed in public markets by multiple orders of magnitude—250 times larger than the contemporaneous median peer compensation plan and over 33 times larger than the plan’s closest comparison, which was Musk’s prior compensation plan.” The mooted replacement award would be 10 times larger than this, i.e. more than 2000 times the now-increased median.

Oddly though, the Delaware decision reports that at trial, Musk stated “unequivocally that he would have remained at Tesla even if stockholders had rejected a new compensation plan”, because of his heavy investment in the company “both financially and emotionally”. And the Delaware court reports that there is no evidence that the compensation committee even considered the question of whether additional pay for Musk was needed, given his existing share ownership in the company; this question was put to them belatedly in the process by their compensation consultant, but apparently not discussed. “The most curious thing about this question is that there is no evidence that any director deliberated over it, and it did not appear in any other Board or committee materials,” the court states.

Even though the board’s stated intent was to keep Musk as a fully engaged CEO, the terms of the pay scheme in fact permitted him to stand down to the role of chief product officer.

So this extraordinary quantum of award was not necessary to retain and motivate its recipient, and it was not in practice designed to do so. There was no negotiation over quantum, nor even any real discussion of it. In these absences, the quantum cannot be said to be fair.

Broader applications of fairness

Investors shouldn’t place too many expectations on this case for setting broader precedents on the willingness of the US courts to intervene on matters of executive pay. The judge states that “A board of director’s decision on how much to pay a company’s chief executive officer is the quintessential business determination subject to great judicial deference.” The entire fairness doctrine was triggered in this case by Musk’s dominance of the board’s decision-making. Even in a market where corporate culture facilitates unusual dominance by corporate leaders, Musk’s position at Tesla is unusual.

Instead, at most US companies, the burden of determining what is and isn’t fair will remain with the board, and with investors. The Delaware decision may lead to a little more circumspection among US corporate boards, but it won’t lead to a transformation.

Instead, we will need to continue to rely on investors to try to hold the line on what level of executive pay is fair. As I’ve discussed previously, many don’t have a great record on that. And it’s notable that the Tesla case itself was not sparked by any institutional investor; rather it was brought in the name of an individual, Richard Tornetta. Institutions should be grateful to Tornetta, to the collective tune of over $50 billion, for raising questions about the pay deal. The case was legally a derivative action, so that while it was brought in the name of a single shareholder it was actually carried forward in the name of the company itself, on behalf of all shareholders, and the value of the decision accrues wholly to Tesla.

What might the investor approach be to the forthcoming AGM?

Investors will be faced with a number of key resolutions at the AGM, now set for June 13.

Investors will have to decide whether they can support the re-elections of the board. This may be particularly challenging given the court’s finding that directors are either “beholden” or “acted beholden” to Musk in relation to the pay scheme. The two directors up for election (Tesla being one of the unusual companies in the US with a so-called classified board, meaning not all directors stand for election each year) are James Murdoch, whom the court found to be “beholden” to Musk given their close personal relationship, and Kimbal Musk, Elon’s brother.

The second key decision at the AGM is the plan to shift the domicile of Tesla from Delaware to Texas. The so-called ‘independent Special Committee’ also worked on this resolution. We are told this proposal is not as a fit of pique because of the Delaware court decision, though Musk polled his X (ex-Twitter) followers on the domicile question almost immediately after that court decision. The board takes up 40 pages of the Proxy Statement to explain the detail of its entirely independent thought processes which have ended up in making the same proposal to shareholders as Musk had asserted the company would following the 87% support of his poll of followers.

Given how effective the Delaware court has just proven to be in protecting shareholder interests, it would be surprising if institutional investors welcomed a move to the unproven corporate law jurisdiction in Texas (as the Proxy states, “Texas’s business courts were just created and will not start hearing cases until September 2024”). Further, those shareholders who care about the existence of multiple share classes and the differential voting rights often associated with them may be interested to note that the draft articles of the intended Texas reincorporation include the creation of a separate class of preference shares, with the board having explicit powers to determine all characteristics of these shares as and when issued, including voting rights (Tesla currently only has one share class). Investors will need to consider if they trust this board to exercise that broad discretion fairly and well.

There are a number of shareholder resolutions, perhaps most notably one considering the Tesla policy on freedom of association and collective bargaining, and one regarding anti-harassment and discrimination efforts.

But inevitably, the main focus of attention will be on resolution 4, which seeks to reinstate the Musk pay scheme. While the Proxy Statement sets this up as a battle of fairnesses, in perhaps a first for this blog, I suggest that shareholders – at least institutional investors – do not in fact need to think about fairness when considering this proposal. They just need to think about their fiduciary duties.

It seems to me impossible to understand how any investor motivated by fiduciary duties can vote in favour of the proposed resurrection of the pay scheme. Whether it was right in the first place – and the court’s holding that it was not entirely fair is robust, and oddly unchallenged in its details by the Tesla board – the proposal now is to make an award to an individual for value that has already been created (and some of which has since dissipated given more recent share price falls). The proposal will create no new value for shareholders, rather it is simply to give money away for no benefit. That is not a fiduciary-led decision. While it is still called a 100%-performance linked award, there is no performance still to be delivered.

The clients to whom those fiduciary duties are owed may well seek particularly robust justifications from any fund manager that decides to vote in favour of making a gift – especially such a sizeable gift.

One further unfairness?

As a final brief comment, at some time this summer (most likely), the Delaware courts will assess the fees due to Bernstein Litowitz Berger & Grossmann LLP for their work on the Tornetta case. The law firm has claimed around $5.5 billion for protecting shareholders from the cost of more than $50 billion through the pay scheme; that is calculated by looking at percentages of awards previously allowed as costs for lawyers, but is clearly an extraordinary sum (it amounts to some $275,000 for each of the near 20,000 hours apparently worked on the case). Whether the courts – and shareholders – regard this as fair, let alone entirely fair, remains to be seen. The Proxy Statement notes one benefit of the reinstatement of the pay scheme as being that this legal cost would not be faced; whether that’s true, and whether it is sufficient justification for the board’s proposal, seems highly debatable.

See also: The madness, let alone unfairness, of US executive pay

The Gini in the executive pay bottle

The unfairness of dual class shares

I remain happy to confirm that the Sense of Fairness blog is an entirely personal endeavour.

Tornetta v Musk, C.A. No. 2018-0408-KSJM, 2024 WL 343699, Delaware Chancery Court, January 30 2024

Tesla proxy statement (DEF 14A), Securities and Exchange Commission, April 17 2024

Bernstein Litowitz Berger & Grossmann LLP on Tornetta v Musk

Tornetta v Musk is the Rule of Law at Work, Holger Spamann, Harvard Law School Forum on Corporate Governance, February 27 2024

The Bill comes Due, Ann Lipton, Oxford Business Law Blog, February 2 2024

Deaton’s economics: fair criticism?

It is remarkable that the International Monetary Fund, one of the bastions of our modern economic construct, should be so willing to test and challenge current economic thinking. But that is what it does in publishing a striking short blog by respected economist Angus Deaton. Deaton is best known for his remarkable work on the US epidemic of what he has dubbed deaths of despair and he also led a recently-completed eponymous review of inequality for the Institute of Fiscal Studies. Deaton offers what amounts to an apologia for modern economics, and suggests some routes that may be more productive for the future. Not only might they be more productive, I would suggest that they are also likely to be fairer.

In the blog, Deaton questions mainstream economics. He does so from a remarkably mainstream position. He won the Nobel Prize in 2015, and is a professor at Princeton. His criticism of the failings of current economics, and not least of current economic education, should therefore hit home.

The core of Deaton’s points are made in crisp discussions under a handful of bullet-point headings. These are: power, philosophy and ethics, efficiency, empirical methods and humility (doesn’t our entire world need a whole lot more of that last?). He comes most crisply to his point in the first of these: “Without an analysis of power, it is hard to understand inequality or much else in modern capitalism.” But the bullet points reflect a continuity of thought, not separate ideas. He complains at the loss of ethical thought from economics and its replacement by an emphasis on efficiency and a simplifying focus on the financial: “We often equate well-being with money or consumption, missing much of what matters to people.”

Under efficiency, he states:

“Many subscribe to Lionel Robbins’ definition of economics as the allocation of scarce resources among competing ends or to the stronger version that says that economists should focus on efficiency and leave equity to others, to politicians or administrators. But the others regularly fail to materialize, so that when efficiency comes with upward redistribution—frequently though not inevitably—our recommendations become little more than a license for plunder.”

I think that quote bears rereading.

Applying these five approaches as a new lens for approaching questions, Deaton reaches a range of fresh conclusions – or rather a reduced level of certainty – about a number of different issues. These include: unions, free trade, global poverty and immigration.

But though it is not among these bullet-points, or the issues about which Deaton now has less certainty, to my mind one of the most notable single words in the piece is ‘efficacy’. Deaton says: “today we [economists] are in some disarray. We did not collectively predict the financial crisis and, worse still, we may have contributed to it through an overenthusiastic belief in the efficacy of markets, especially financial markets whose structure and implications we understood less well than we thought.” Normally economists and investors talk about market efficiency, and certainly the financial crisis was in part due to overconfidence that markets are efficient, that they will find the right prices for things. The efficient market hypothesis – which many investors take as a certainty, even though it is merely an hypothesis, and even though there would be no ability of active investors to outperform if it were true (admittedly many are more lucky than genuinely generate outperformance, but nonetheless it is still possible to outperform a market). The crisis showed that market pricing can often be very wrong and the use of market prices as a foundation for valuations can be risky.

Deaton is clearly referencing the Efficient Market Hypothesis (and the use of ‘efficiency’ as one of his bullet-point headings makes more notable his decision not to use the term in his comment about the disarray of modern economics), but he is actually making a very different point. He is asking whether markets are always efficacious, whether they work and always add value to human society. And his clear view is that they are not always, and do not always. We should listen, particularly those of us who work in financial markets.

Deaton has never minced his words, but here he is remarkably cruel about his profession. He says he does not want to get into the question of corruption among his peers, though he notes that allegations “have become common in some debates”. But he does state, bluntly: “economists, who have prospered mightily over the past half century, might fairly be accused of having a vested interest in capitalism as it currently operates”. In a blog that clearly has real concerns about the operation of modern capitalism, that fair comment is one that should hang over the profession, challenging all to rethink with the confidence and honesty that Deaton has.

See also: Meritocracy’s unfair

I’m happy to continue to confirm that the Sense of Fairness blog is a purely personal endeavour.

Rethinking my economics, Angus Deaton, International Monetary Fund blog, March 2024

Rising morbidity and mortality in midlife among white non-Hispanic Americans in the 21st century, Anne Case, Angus Deaton, Proceedings of the National Academy of Sciences, Vol 112 No 49, December 2015

Deaths of Despair and the Future of Capitalism, Anne Case, Angus Deaton, Princeton University Press, 2020

Deaton Review of Inequality, Institute of Fiscal Studies

Is enough enough? Addressing the problem of the super-rich

“To make the poor richer, you have to make the rich poorer.”

It’s one of the bolder early assertions made in a new book, Enough: Why it’s time to Abolish the Super-Rich, from my friend Luke Hildyard, who leads the High Pay Centre, the think tank dedicated to considerations of pay and employment rights. Given the hours he put into it, he’ll hate that I note it’s a short book, but that means it is a quick read – which its brisk and energetic style greatly assists. It includes extensive references to the evidence of academic and other studies, but Hildyard doesn’t let them weigh down his central messages and arguments.

Much of the book is dedicated to demonstrating the truth of this early assertion. Beyond that, Enough also aims to show that there would be benefits from a more equal income and wealth distribution and that much current income and wealth is unearned and undeserved. It argues that it is possible to address the issue of the super-rich, both politically and practically – but that at present the political will isn’t there and the social pressure for change isn’t yet great enough. “The super-rich are tragically unloathed,” says Hildyard in one of his typically crisp and blunt phrases.

As is perhaps obvious, this is a polemic, using vigorous and direct language to make its points – and it is none the worse for it. It’s also funny. I didn’t expect to laugh out loud at the book, but its dogged pursuit of a thought experiment of carpeting the nation in £5 notes is only one among its amusing moments.

Hildyard also charts a path for addressing the issue of the super-rich, one part of which would be wealth taxes. That particular path became potentially much easier just yesterday when a UN committee of tax experts agreed to develop a clear map for it: the Committee of Experts on International Cooperation in Tax Matters approved guidance for the creation of wealth taxes. This will not be called a ‘model law’ but rather an ‘example law’, but the intent is clear, and the idea of international cooperation in this area is aimed to reduce incentives for individuals to move to avoid such tax burdens. We’ll see how far these proposals progress in practice.

There is clearly some political will, and indeed some general willingness to engage in these issues. If the interest shown by those seeing me reading Enough on public transport are anything to go by, this is a book whose time has come. I would certainly heartily commend it. It was formally published this last week.

In many ways, vigorous and blunt as it is, Hildyard’s language is less hardline than others’. For example, the authors of the wonderful Spirit Level, Kate Pickett and Richard Wilkinson, both professors of epidemiology at York University, recently wrote a comment piece published in venerable journal Nature entitled Why the world cannot afford the rich.

As well as noting the disproportionate greenhouse gas emission impacts of the lifestyles of the wealthy (as previously noted in this blog), Wilkinson and Pickett state: “large differences in income are a powerful social stressor that is increasingly rendering societies dysfunctional”.

They continue:

“bigger gaps between rich and poor are accompanied by higher rates of homicide and imprisonment. They also correspond to more infant mortality, obesity, drug abuse and COVID-19 deaths, as well as higher rates of teenage pregnancy and lower levels of child well-being, social mobility and public trust.”

Most strikingly, the epidemiologists argue that “Even affluent people would enjoy a better quality of life if they lived in a country with a more equal distribution of wealth”. They complain about the wastefulness of unfair distributions: “Inequality also increases consumerism…Studies show that people who live in more-unequal societies spend more on status goods.” It’s certainly clear that this is happening. For example, ultra-luxury carmaker Bentley recently revealed its financial results, making revenues of €2.9 billion on sales of just 13,560 cars (or over €200,000 per vehicle), with margins improved by a record of nearly 10,000 of those vehicles including personalised features costing upwards of €40,000. For these buyers, it appears, it’s not enough to be able to buy a car that costs more than many houses. They also want the additional status of a still more expensive and truly unique vehicle.

The wealthy also buy other trappings of status – like the arts building branding that was part of the focus of the Sackler family in deploying their immoral earnings from Purdue Pharma’s role in the opioid crisis, or political donations. Evidence shows that rarely are such gifts really generosity – something is expected in return (as the reliably brilliant Tom Burgis amply shows in his excoriating new book Cuckooland). Sadly, rarely do the super-rich now feel the need to be genuinely generous in sharing their wealth in the ways their predecessors in earlier generations did. Alms houses are among our most beautiful old buildings, mostly built by our wealthy Tudor or Victorian forbears, but there seems to be no modern equivalent being created now.

This urge towards status skews our whole business sector. When you now look at the market capitalisations of major businesses, it is notable how much more valuable are the luxury goods companies that cater to the demands of a tiny minority than those that provide much larger markets with less luxurious versions of the same products. Germany’s Porsche is valued at more than $90 billion and Italy’s Ferrari (actually listed in the Netherlands to benefit from rules allowing unequal voting rights) is touching a valuation of nearly $80 billion; Ford and General Motors hover around the $50 billion mark, while producing orders of magnitude more vehicles. In a similar way, the valuation of Hermes (around $270 billion) is nearly double that of Inditex, whose major brand is Zara (valued at some $150 billion). The mass market isn’t where the money is made any more: even collectively, the centre doesn’t hold as much spending power.

Pickett and Wilkinson capture their findings in a striking chart that sets the Gini coefficient measure of inequality against an index the authors created of environmental, health and social issues (including measures such as air pollution and recycling; infant mortality, life expectancy, and obesity; and educational attainment, teenage births, social mobility and trust). As they say, “There’s a clear trend, with more-unequal societies having worse scores”:

As an earlier editorial in Nature raged, Reducing inequality benefits everyone — so why isn’t it happening? Essentially, that’s the challenge that Hildyard is attempting to rise to, and he provides some useful answers, and relevant solutions, as well as amusing challenge to the status quo. Do we need to make the rich poorer in order to make the poor richer? Probably, yes. The greatest political challenge on this issue though is likely to be defining what amounts to ‘rich’ or ‘super-rich’ for these purposes. One hindrance to action may be that definitions of what is too much are hard to draw. It’s hard to build a coalition of the willing among those who fear they may be next to face reductions (even if intellectually they might accept the idea that they would benefit from less inequality), and that – for the present at least – seems to limit the political pressure for change.

Hildyard himself blurs these lines, at times railing only and specifically at the truly (absurdly) super-rich, the billionaires, and at other times focusing on broader wealthy groups, including all public company bosses, top lawyers and bankers, and anyone earning in the top 1%, or having wealth among the top 1%. He quotes income of £183,000 and wealth of £3.7 million for the UK, and $400,000 and $11 million respectively for the US, as placing people into the respective 1% groups. These are huge numbers, clearly, but not close to being in the same league as the billionaires. A focus on a loosely defined super-rich elides this challenge – and while Hildyard demonstrates just how much might be available from the individuals at the very top of the income and wealth distributions, were they taxed more effectively (a simple function of their extreme wealth), he leaves open the question of seeing changes lower down the income levels too. This doesn’t undermine his arguments, but clarity is likely to be helpful in garnering political support and leveraging real change.

Hildyard ends the book saying:

“Indeed, it will be impossible to achieve our full potential to build a fairer, happier, more prosperous society without a major rebalancing of incomes and wealth. This ought not to be a question of partisan ideology – the logic, feasibility and urgent importance of the issue are clear. It is time to abolish the super-rich.”

I’d argue that all of this but the final sentence is unarguably true – that last sentence probably remains open to some debate, not least as to where the threshold for super-richness lies.

As the phrase goes, the poor are always with us. It is less clear that the super-rich need to be.

See also: Unfairness in carbon emissions

The centre cannot hold

As ever, I am pleased to confirm that the Sense of Fairness blog is a purely personal endeavour.

Enough: Why it’s time to Abolish the Super-Rich, Luke Hildyard, Pluto Press, 2024

Subcommittee on Wealth and Solidarity Taxes Guidance as of 1 March 2024, UN Committee of Experts on International Cooperation in Tax Matters

Why the world cannot afford the rich, Richard Wilkinson, Kate Pickett, Nature 627, 268-270, 12 March 2024

The Spirit Level: Why Equality is Better for Everyone, Kate Pickett, Richard Wilkinson, Penguin, 2010

Highest Levels of Personalisation Drive Second Best Financial Performance on Record for Bentley Motors, Bentley, 19 March 2024

Cuckooland: Where the Rich own the Truth, Tom Burgis, HarperCollins, 2024

Reducing inequality benefits everyone — so why isn’t it happening?, Nature 620, 468, 16 August 2023

Unfairness fuels conflict: fraying threads

Perceived unfair treatment is a driver not just of resentment but of outright conflict. Unfairness destabilises our world.

That’s the clear conclusion of some recent research by an IMF economist and a professor at Rice University in Houston in the US. Their focus is sub-Saharan Africa, a region with disproportionate levels of conflict and human suffering, whose violence fuels emigration and so more instability elsewhere. But it seems sure that while there unfairness fuels outright military conflict, the logic must be that in other parts of the world unfairness will drive unrest and discontent in different forms. The researchers refer to “conflict-inducing alienation”. That alienation can be seen in many countries of the world, not just sub-Saharan Africa.

But sticking first with their area of focus, the blog that accompanies the launch of the paper summarises the researchers’ findings:

“While various factors can fuel conflict, our research shows that discontent with state institutions among marginalized groups is a key driver of unrest in the region. Such distrust reflects perceptions that governments fail to address equity issues and inclusive growth—including the fair allocation of natural resources and human capital development… Poverty and underdevelopment alone may not fuel conflict. But those underlying factors are exacerbated by the experience or perception of social and economic exclusion, thus providing a fertile breeding ground for armed groups, necessitating urgent intervention.”

These countries in sub-Saharan Africa are of course among the first to experience the most brutal impacts of climate change, and this exacerbates the experiences of those at the edges of society. “Climatic fluctuations and food insecurity have been particularly acute in this subregion,” the paper reads. “Forecasts for 2023 indicate that nearly 142 million individuals in the region will confront acute food insecurity.” It should not be a surprise that “Food insecurity contributes negatively to trust in government.” Also unsurprisingly, the desperation that arises from this hunger drives individual actions, especially among those who have lost trust in governments. It must of course be noted that much of the poverty in the region is a legacy of colonialism.

The consequences of this are stark. Essentially, there is a close correlation between the sense of exclusion and unfairness and the fragility of nation states and their susceptibility to conflicts of various forms. This chart from the paper illustrates the finding well:

The researchers conclude:

“Our findings show that the crisis of confidence experienced by marginalized groups towards state institutions is the primary driver of conflict. This crisis of confidence originates from the perceived failure of state institutions to safeguard interests, ensure justice, promote human capital development equitably, oversee fair allocation of natural resources, and encourage inclusive economic growth. Such institutional failures, contributing to perceptions of social and economic exclusion, invite conflict as they undermine the principles of fairness and inclusivity vital for sustainable development.”

These findings emphasise the importance of the Rule of Law in fostering trust in government and so in building the foundations for economic growth and investment. And there is a clear need to foster the basic expectations of a cohesive society in order to lean against these perceived unfairnesses: “These results suggest strongly that governments in the Sahel G5 as well as sub-Saharan Africa more broadly should focus their efforts on improving the quality of their institutions (reduce corruption and improve law and order) and provision of public goods (healthcare, education, air and water quality, food and shelter sufficiency) rather than focus primarily on macroeconomic variables such as the levels of economic growth and unemployment.”

The sense of being forgotten and left behind by government and wider society is greater for those at the geographic edges: “conflict is often concentrated near national borders where there tend to be more limited or insufficient public services, fostering feelings of exclusion”. Many of those national borders were drawn with the arbitrary straight lines of empire.

That sense of living at the periphery, having been forgotten by government and wider society, is of course not unique to people in the countries of sub-Saharan Africa. Many in all the countries of the world now feel left behind and peripheral. In sub-Saharan Africa these frustrations appear to be reflected in outright conflict but in other parts of the world the same sense of abandonment has inevitable, if different, consequences. The consequential violence can fuel crime, it can drive social division and anger in and with politics, but these are just other forms of the violence and dislocation that comes from people feeling that society no longer operates fairly to protect their interests.

Perceptions of fairness seem to be vital to hold states and their people together in peaceful coexistence.

See also: The Rule of Law is fairness

Lessons from Argentina, and Copperfield

The centre cannot hold

Fraying Threads: Exclusion and Conflict in Sub-Saharan Africa, Hany Abdel-Latif, Mahmoud El-Gamal, IMF WP/24/4, January 2024

How Distrust of Government by Marginalized People Fuels Conflict in Africa, Hany Abdel Latif, Mahmoud El Gamal, IMF Blog, January 25 2024

The Rule of Law and investor approaches to ESG: Discussion paper, Paul Lee, Bingham Centre for the Rule of Law, September 2022

Note: in case it is not already sufficiently clear (looking at you, anonymous US company), I am happy to confirm that the Sense of Fairness blog reflects solely my personal views