Berkeley Group Interims, and Pay

House builder Berkeley Group issued their Interim Results this morning (2/12/2016). It was generally positive about the future so the share price has perked up somewhat today. But the interesting aspect is that Berkeley has been heavily criticised in the past by ShareSoc and others for the generosity of its pay scheme. We questioned whether the total pay figure of £21 million in 2015/16 for Executive Chairman Tony Pidgley was justifiable on any grounds at all and suggested shareholders vote against the Remuneration Report at the last AGM.

But the board has reconsidered the matter and said this in today’s announcement following a proposed revision of the return of cash to investors: “The Board believes that this change will ensure that Berkeley’s shareholders fully benefit from the value embedded in the business. These changes will require consequential amendments to the terms of the 2011 LTIP which the Remuneration Committee of Berkeley will propose to shareholders at a General Meeting in the New Year, following a period of consultation with major shareholders. These proposals will be set in the context of a new Remuneration Policy which will include annual caps for Executive Remuneration which will materially reduce the potential value vesting under the 2011 LTIP. Under these proposals, at the current share price, the reduction in the number of shares still to vest would be approximately 25%; the level of discount increasing as the share price increases. Taken together with the changes made earlier this year and reallocations since the inception of the plan, the maximum number of shares capable of vesting under the 2011 LTIP would be approximately 50% lower than originally anticipated when the plan was put in place.”

This is certainly positive and shows they are reacting to criticism. However, the sting in the tail is that instead of the return of cash being solely via dividends, it will now be partly via share buy-backs. The announcement says: “This recognises that, at certain price points, the Board is of the opinion that the Company is materially undervalued and share buy-backs will be in the best interests of all shareholders”. Perhaps, is my comment – I have seen too many instances in the past where the board thought their company’s shares were cheap only to be disillusioned later. It’s probably worth pointing out that share buy-backs might also be seen as supporting the share price which is a key factor in the worth of the LTIP pay-out so there may be other reasons for the change.

And how about this for a good example of management speak near the start of the announcement: “The current heightened macro uncertainty has led to significant market volatility and there is a dislocation between this and both underlying market conditions and the strength of Berkeley’s operating model”. What exactly does that mean in plain English?  But the outlook statement suggests they at least take a positive view on the short term.

Incidentally there was a lot of discussion on how to tackle the outrageous pay levels in some public companies at last nights Conference on “Mobilising Investors” that ShareSoc ran. Chris Philp MP did a great job of promoting the concept of Shareholder Committees to tackle this and other corporate governance issues. He looks like a new MP who could go far. We will be publishing a fuller report on this event as soon as possible.

Roger Lawson

Blancco Technology Group and Corporate Governance

I attended the AGM of Blancco Technology Group (BLTG) yesterday (29/11/2016). The Government announced a review of Corporate Governance yesterday but is it not surprising that companies cannot get even the basics right? This AGM was a typical example.

Blancco used to be called Regenersis and was in the electronic hardware repair business in essence. This was not the kind of business I like to invest in because there are few barriers to entry and neither was I impressed otherwise having seen them present to investors more than once. However in the last financial year, it was all change. They disposed of the repair business and have transmogrified via acquisitions into a software business focussed on “data erasure”, they changed their name, and the management was also changed. The disposal of the repair business meant they returned a large amount of cash to shareholders, and these changes mean interpreting the accounts from last year, or understanding their current financial position is not easy. Analysts forecasts suggest revenue of about £30m in the current year and profits of £5m giving a p/e of about 25, but they have yet to publish their half year results to the end of June.

Data erasure is needed because of the high turnover in PCs, phones, TVs, even cars and watches now, where when they are disposed of (sold or scrapped) it is necessary to remove all data from them for security reasons. Deleting files does not do that – even formatting a hard drive does not do it – the data is still recoverable. Personally I take a sledgehammer to the hard drive but it seems only 10% of folks actually use that method with most using insecure methods. Only 8% of companies actually use paid erasure which is what Blancco sells.

Blancco now seem to be the world market leader in this niche software segment. But there is a growing demand for it as paranoia about security grows and new standards are promoted or legislated for that requires it on disposal of equipment.

I arrived 15 minutes late for the meeting due to trains into Cannon Street being disrupted by “signal failures”. Last week it was leaves on the line. Such an unreliable transport system! So I voted on the last resolution (against share buy-backs as usual), and before the Chairman moved on to general questions asked about the proxy counts. Was he going to give them? Answer: No. I suggested it was both normal and best practice to do so (I attend a lot of AGMs and it is usually done apart from being recommended), but he still declined. So I asked him whether there were any votes of significance against any of the resolutions. He tried to avoid answering that also by saying all resolutions were approved, but eventually conceded there were a number of votes against two resolutions including against the Remuneration Report (Comment: not surprising as I voted against that also – total board remuneration last year was £3 million, and new share incentive plans for the new management look quite aggressive). I can’t say I appreciate a Chairman (Matthew Peacock) who is unwilling to answer simple questions, so it is perhaps a good thing that he is stepping down as announced in the AGM statement issued on the day. I will send him a copy of the ShareSoc note on “How to Run a General Meeting” for his future reference and the new Chairman, whoever that might be as we do not yet know. See which covers this point.

Apart from the initial hiccup, the other directors answered questions openly and well thereafter. There is a full report on the ShareSoc Members Network. The business seems to be growing and is profitable which for a software company is not always true. Future accounts will certainly be worth examination. It’s always worth attending AGMs, and I just wish more investors would do so.

Roger Lawson

ShareSoc Welcomes Corporate Governance Review

ShareSoc has issued the following Press Release:

ShareSoc (the UK Individual Shareholders Society) welcomes the Government’s announcement today of a review of Corporate Governance in both public and larger private companies. It is good to see that the Green Paper both discusses the problems of executive pay and the influence of stakeholders other than shareholders on businesses while setting out a number of options for further reform.

As regards director pay, the document makes clear that despite more obligations on companies on reporting and voting on pay introduced in 2013, not a lot has changed in reality. Although there is widespread public concern about pay levels, the paper notes that the average vote in favour of remuneration reports was 93% (see page 19) and only one binding vote has been lost. ShareSoc certainly supports further significant reform in this area and have recently published our own policy document on pay.

The paper also highlights the difficulty that individual retail shareholders have in voting that arise from the widespread use of the nominee system, and refers to ShareSoc’s campaign on this issue (see pages 26/27). This problem reduces shareholder engagement with companies and the Government is suggesting that there are a number of options that could be considered to tackle this problem. ShareSoc is running a free seminar on Thursday covering this problem and the solutions.

The paper also states that “The Government wants to explore options for strengthening shareholder powers….” (see page 26). ShareSoc considers one of the best ways to do this is via Shareholder Committees as recently advocated by Chris Philp M.P., and previously by ShareSoc et al. The paper mentions this as an option.

In addition ShareSoc supports better representation of the views of other stakeholders such as employees, customers and others and the paper gives a number of options that might assist without changing from the principle of a “unitary” board as operated in UK companies.

In summary, this is good starting point to a wide debate on these issues. ShareSoc will be issuing a response to the consultation in due course.

The Government Green Paper is present here:

Inconvenient AGM Times – Proactis

Yet another example of an inconvenient date/time for an AGM is Proactis Holdings (PHD) – see previous blog posts covering the same issue at Dunelm and DX Group. Proactis have called their Annual General Meeting for 9.30 am on the 19th December in Wetherby (Yorkshire). That is a Monday morning of the week before Christmas to begin with, and the time makes it very difficult for most investors to make it without staying overnight.

Wetherby may be an acceptable location, but a time of 9.30 am is not. I have written to the Chairman suggesting they move it to 2.00 pm. Any other investors should likewise complain. If DX Group can move theirs, then so can Proactis. Or at least offer an alternative informal meeting at another time for private shareholders as AGMs are one of the few opportunities they get to meet management and ask questions.

Roger Lawson

ShareSoc Highlights Investor Concerns to Select Committee

ShareSoc (the UK Individual Shareholders Society) was asked to give evidence to the Business, Energy, Innovation and Skills (BEIS) Select Committee Inquiry on Corporate Governance. Cliff Weight represented ShareSoc at the inquiry on the 23rd November.

You can watch the session in which he appears by clicking on this link (Cliff appears in the second half of the session):

Here is a summary of some of the points he and other witnesses made:

Cliff indicated that individual shareholders are under-represented: The views of individual shareholders tend to be under-represented in many policy discussions, which is surprising as often they have very sensible opinions based on quite detailed knowledge of how business and the markets work. Part of the problem is the way that individual shareholders are disenfranchised through the way nominee accounts operate. This needs to change.

Individual investors do not have effective power to curb directors’. Fund managers, who are merely intermediaries in the ownership chain, have usurped this power: but have patently failed to provide effective stewardship. They are responsible for creating many of the current problems, yet to date seem to have avoided blame. Why should we expect them to suddenly change their behaviour? It is time for a strong input from Government and regulators of the London Stock Exchange to change the framework in which we are currently operating. The goal should be to get more power back to the ultimate investors and hence make capitalism work for everyone.

The Committee wanted to question what is the extent of the problem about corporate governance and what is changed since the 2006 Companies Act and why?

Cliff responded: It is a big problem. The 2007/8 financial crisis highlighted many of the problems of corporate governance. It was caused by short termism, greed, irresponsibility and a complete failure by NEDS, fund managers and auditors to highlight the risks that were being created. It was not just the complex products like CDOs and CMO’s, but also PPI miss-selling and the LIBOR scandal.

The main issue is enforcement of the Companies Act. It needs to be enforced more vigorously. ShareSoc believe that the law is adequate, but it is not being properly enforced. SFA, DPP and BEIS are Under-resourced. There are very few prosecutions. Very few have gone to jail. Few directors struck off. Regulators like London Stock Exchange and FCA are failing to enforce their rules. You should ask the LSE here and ask them why they don’t enforce better behaviours.

There is a problem in relation to some AIM companies. The AIM market, which is run by the London Stock Exchange (LSE), has been frequently criticised for the quality of some companies listed on the market and for the way it operates. ShareSoc and its Members think that some reform is necessary.

Question: what are your views about shareholder engagement?

Cliff’s response was: It is not working. I don’t wish to criticise Aberdeen Asset Management who are a low turnover, buy and hold, fund manager who aims for consistency of returns and has over a dozen executives in its corporate governance department. However not all fund managers are like Aberdeen. Far too many are completely under resourced to cope with the volume of work that has to be done. Prof John Kay highlighted this in his excellent report and said that too many so-called active funds held far too many stocks and should hold much more concentrated portfolios.

Catherine Howarth the Chief Executive of ShareAction made several very good points, that fund managers are not doing their job very well. Beneficial owners of pension funds and investment products are disenfranchised too. We have what Paul Myners calls the ownerless corporation with fund managers failing to exercise control and companies and Boards not being held to account. She suggested AGMs for Pension Funds where pension trustees could be questioned by members.

Asset Managers were not doing a good job and overcharged. A common theme amongst those giving evidence was the poor job that asset/fund managers are doing. The FCA has just published a damning report of the asset management industry which overcharges its customers and has failed to produce returns even close to the benchmark in most cases. Many witnesses referenced this as well as the failure of these managers to solve corporate governance problems. Retail investors are being treated poorly and their interests are being ignored by asset managers and industry bodies.

Other witnesses appearing at the session were Professor Vanessa Knapp, independent consultant and lecturer in company law and corporate governance, Queen Mary University of London; Elizabeth Wall, City of London Law Society; Catherine Howarth, Chief Executive, ShareAction; Kerrie Waring, Executive Director, International Corporate Governance Network; Sarah Wilson, Chief Executive, Manifest and Paul Lee, Head of Corporate Governance, Aberdeen Asset Management.

Chancellors Autumn Statement – How Does It Affect Investors?

The Chancellors Autumn Statement yesterday was effectively a cold shower for those who might be positive about the economy. Government debt is going to be allowed to rise so as to ensure that growth is not too anaemic and some of that money will be spent on improving infrastructure such as roads and including the support of house building. Inflation is forecast to rise, while real incomes decline as wages will not keep up so that does not bode well for the retail economy. Needless to say, those factors caused the pound to fall. The Chancellor, and the Treasury no doubt, are taking a cautious view on the economy and the effect of Brexit. Whether that will turn out to be the case or not is surely anyone’s guess as betting on the forecasts of economists and politicians is a mugs game.

He is particularly concerned about productivity so there will be steps to tackle that (lack of real productivity growth ultimately inhibits wage growth). But it is not totally clear how or where any expenditure will make a big difference there. Labelling investment in roads, broadband, R&D and house building as productivity schemes under the label “National Productivity Investment Fund” may be seen as “spin” as there could be little direct connection. But £13 million is being provided to improve management skills. The additional money for house building did nothing to improve the share prices of house building companies.

Unhappy that you lost money on banks in the big financial crisis of 2008? Well the Government, using your money, is now facing a loss of £27 billion the Chancellor reported. Future Governments may hopefully be less keen to take stakes in banks in a forceful manner in future (diluting that of other investors massively) on the premise that that they would come out ahead in due course as previously happened in the Swedish banking crisis and bailout which the UK Government was keen to imitate.

There will be a ban on the charging of letting fees as soon as possible, which may further dampen the buy-to-let market but the biggest impact was on companies in the estate agency sector, such as those like Foxtons (down 14% on the day).

Planned cuts to Corporation Tax will go ahead though as will increases in personal tax allowances and maximum ISA contributions (£20,000 from next April).

The state pension “triple-lock” will remain in place, despite rumours it was being reconsidered. But the allowance (Money Purchase Annual Allowance) to stop money being recycled through a pension once benefits are being taken, and hence collecting tax relief twice, is being reduced to £4,000.

A new National Savings Bond offering an indicative rate of 2.2% will be available from April 2017. Hardly generous considering projected inflation, and there will be a limit of £3,000 you can put in, so this will only be attractive to the small savers who can’t think of anything better to do with their money than deposit it in a bank.

One interesting mention was that there will be a review of stamp duty on share transactions. That is surely long overdue as there are lots of anomalies in that tax and the Government has consistently opposed “transaction taxes” in EU circles which is what it is. Shares registered overseas, and ETFs do not pay it, and anyone trading in CFDs does not. Likewise not everyone pays it, such as market makers. It has already been dropped for AIM shares. It would certainly be a useful simplification of the tax system and improve liquidity in markets.

There are to be changes to the rules for Tax Advantaged Venture Capital Schemes (VCT, EIS). This includes a number of measures and I repeat what HMRC issued on it below:

  • A consultation will be carried out into options to streamline and prioritise the advance assurance service.
  • The Finance Bill will clarify the rules for share conversion rights for shares issued on or after 5 December.
  • The Finance Bill will provide for additional flexibility for follow-on investments made by Venture Capital Trusts (VCTs) in companies with certain group structures, to align with EIS provisions, for investments made on or after 6 April 2017.
  • The Finance Bill will introduce a  power to enable VCT regulations to be made in relation to certain share for share exchanges to provide greater certainty to VCTs, to take effect from Royal Assent.
  • But the government has also announced it will not take forward replacement capital (using EIS/VCT money to buy second-hand shares) for the time being, but will review the case over the longer term.

Funding of the British Business Bank Venture Capital will be substantial to help growing companies (rather than have them sell out at an early stage) and that is likely to be invested alongside venture capital firms. There will be a review set up to target “patient capital” improvement.

Fintech is being backed in a big way with the DIT providing £500,000 a year for FinTech specialists and the government has commissioned an annual ‘State of UK FinTech’ report on key metrics for investors.The National Living Wage will rise to £7.50 per hour from April 2017, but that might be less than expected. This will hit those companies who employ lots of low cost staff.

Tax rises were generally thankfully absent but Insurance Premium Tax will rise from 10% to 12%.

The National Living Wage will rise to £7.50 per hour from April 2017, but that might be less than expected. This will hit those companies who employ lots of low cost staff.

The government will go ahead with reforms to restrict the amount of profit that can be offset by historical losses or high interest charges. This might affect highly geared companies and private equity investment companies. This is what the Government said in detail as this is quite an important aspect for investors:

“Tax deductibility of corporate interest expense Following consultation, the government will introduce rules that limit the tax deductions that large groups can claim for their UK interest expenses from April 2017. These rules will limit deductions where a group has net interest expenses of more than £2 million, net interest expenses exceed 30% of UK taxable earnings and the group’s net interest to earnings ratio in the UK exceeds that of the worldwide group. The government will widen the provisions proposed to protect investment in public benefit infrastructure. Banking and insurance groups will be subject to the rules in the same way as groups in other industry sectors.In summary, this is a “steady as she goes” budget. But the market seemed generally unimpressed. Nobody likes a basically pessimistic Chancellor perhaps.

Reform of loss relief – Following consultation, the government will legislate for reforms announced at Budget 2016 that will restrict the amount of profit that can be offset by carried-forward losses to 50% from April 2017, while allowing greater flexibility over the types of profit that can be relieved by losses incurred after that date. The restriction will be subject to a £5 million allowance for each standalone company or group. In implementing the reforms the government will take steps to address unintended consequences and simplify the administration of the new rules. The amount of profit that banks can offset with losses incurred prior to April 2015 will continue to be restricted to 25% in recognition of the exceptional nature and scale of losses in the sector.”

In summary, this is a “steady as she goes” budget. But the market seemed generally unimpressed. Nobody likes a basically pessimistic Chancellor perhaps.

Roger Lawson



No More Dividend Cheques From Aviva

It has been brought to my attention that insurance company Aviva (AV.) are to stop paying dividends via cheque. Unless shareholders supply bank account information and accept direct payments into them, they will not get paid their dividends in future. This particularly affects those shareholders who hold their shares in certificated form or as personal crest members where payment by cheque is the default method.

Another company that introduced this rule a year or two back was Vodafone, despite the objections of many shareholders. As someone who regularly receives dividend cheques as I am a personal crest member, I do find this is preferable to receiving them directly into a bank account as it is clear when the payment is received and who it is from so I do not need to continually check an account statement. Unless all dividends are paid that way, which seems unlikely in the near future, it just adds extra complexity to have some paid by cheque and some paid directly. There is also the extra security risk of having your bank details known to lots of people (don’t think that is worry – ask Jeremy Clarkson who thought the same until he gave his bank details out on the television). Another retrograde step in essence so far as direct shareholding is concerned.

Affected shareholders might wish to complain to the Chairman of the company, Sir Adrian Montague. And let me know if you think this is of concern and ShareSoc may take up the issue.

Roger Lawson