Crest Nicholson Lose Pay Vote

Builder Crest Nicholson (CRST) lost the Remuneration Report vote at their AGM yesterday with 58% opposed (107 million votes against plus another 5 million withheld on a 74% turnout). This may be the first of a number in this year’s AGM season. However they won the Remuneration Policy vote.

The company expressed their disappointment on the advisory vote on the Remuneration Report and suggested it was profit before tax target for the 2017-19 LTIP. They reduced the target because they do not expect the recent rate of growth to continue.

Just looking quickly at the Remuneration Policy that has been adopted, it could be worse. For example the maximum bonus and LTIP ratios to base are similar to those at Persimmon – more on that company at a later date. At Crest, the maximum “annual bonus” is 125% of salary and the maximum LTIP payout is 150% of salary (or 300% in exceptional circumstances such as new recruitment). An LTIP is another form of bonus but companies like to call it something else.

So it might well be possible to achieve 275% of salary if not more. Now back when I started in business a “bonus” was a small amount added to salary for exceptional performance. Over 100% would have been considered really odd. So the Oxford Dictionary defines bonus as “something paid or given in addition to normal amount”. But if you look at the pay of directors of such companies as Crest you find that not only do they expect to get the bonus every year, in reality they do so.

So at Crest the CEO got a base salary of £539,000 in 2016 but also received an Annual Bonus of £552,000 which was almost identical to the previous year, and received £132,000 in pension benefits. That means total pay of £1.2 million not even counting the estimated value in LTIP awards (called “Performance Awards” at this company) of £899,000, i.e. total “single-figure” pay of £2.1 million.

Bonuses over 100% encourage risky behaviour as it encourages directors to try to win the jackpot rather than doing the boring work of simply managing the business competently in the interests of the owners (that’s you the shareholders).

We clearly need a new word for such “bonuses” because these are such enormous figures in comparison with base salaries, which are high in any case. So please get your Thesauri out and submit your suggestions – just add comments to this blog.

Lastly how many shareholders in Crest supported their new pay policy? The answer is 96% which just shows how difficult it is to get institutions to reset expectations over pay in any significant way. As I was saying to a member of the press only yesterday, to really fix remuneration one needs to tackle the way it is set before it gets to the AGM vote. A Shareholder Committee would be one way it might be done.

Roger Lawson

Upcoming ShareSoc Events

We have a number of events lined up for investors in the next few weeks. That includes:

In the North:

Leeds on the 28th March (that’s next Tuesday!)

Companies presenting at that event are:

AVATION (AVAP): Passenger aircraft leasing company; and

BERKELEY ENERGIA (BKY): Uranium mining in Spain.

In addition we have guest speaker David Scott of wealth management company Andrews Gwynne. David will discuss the implications of recent global macro economic developments and how this might be a time for caution in terms of the equity markets. He has recently shared this presentation with senior figures in the City and it is causing some pause for thought. Our Members will be some of the first people to see David’s analysis.

Go here for more information and registration:

Also please note that registration is now open for our next event in Altrincham on the 16th May. Go here for more information:

In the South:

Don’t miss the next ShareSoc event in London which is  Richmond on the 4th April. This is a “supper” event with Marshall Motor Holdings presenting – an automotive sales and leasing company. Go here for more information and registration:

Our next seminar in the City of London will be on the 11th April. Companies presenting will include:

– HAYDALE GRAPHENE INDUSTRIES (HAYD): Research, development and manufacture of graphene products.

– LIDCO (LID): Non-invasive hemodynamic monitoring equipment for hospitals.

– BIOVENTIX (BVXP): Biotechnology company involved in the development and supply of antibodies.

Go here for more information and registration:

These events are all great opportunities to learn about companies and chat to other investors, so if you have not been to one of our events before, why not come along? They are of course open to anyone.

Roger Lawson

Pay Revolts and Rolls-Royce Voting Recommendations

According to a number of press reports we seem to be heading into the AGM season with another year of pay revolts. There are also rumours that Mrs May is to proceed with introducing annual pay votes.

Chris Cummings, CEO of the Investment Association, writing for the Guardian said “Too many people still feel they are not sharing this country’s prosperity. Companies can either act responsibly now and shape a more responsible 21st-century corporate Britain or they can carry on as before and have it foisted upon them”. Well said Mr Cummings.

Rolls-Royce looks like it will be one of the early battles. My wife has a nominal holding so I will probably go to the AGM on the 4th May as I have in previous years. I seem to have been writing a lot on Rolls-Royce in the last few years simply because of the amount of news, mostly bad, coming out of the company – profit warnings, bribery, imprudent accounting, new CEO and more.

The latest controversy is that CEO Warren East was paid a bonus of £960,000 last year even though underlying profits fell very substantially. It’s the usual story at Rolls-Royce – orders up but profits down (underlying profits down from £1,432m to £813m. Mr East clearly has not yet managed to sort out the company, and certainly not as quickly as hoped for when he joined. Other financial numbers are also poor – free cash flow down, debt doubled, and dividends to shareholders substantially reduced.

Mr East still managed to achieve 55% of his maximum bonus by reaching some of the profit and cash targets, although trying to understand the 22 page Remuneration Report to see how this was achieved is not at all easy. But in summary Mr East achieved total pay of £2.1 million (“single figure of remuneration”) in 2016. That compares with £543,000 in 2015 but he only served for part of that year.

Two other executive directors (both named Smith) achieved £1.3 million and £1.2 million, both up substantially. At least the Chairman did not get any more but he still collected £425,000 in salary.

Oliver Parry of the Institute of Directors said in the Guardian that “The idea that the CEO is receiving a bonus after two profit warnings doesn’t sit very well with investors”.

Needless to point out that the share price of Rolls-Royce remains in the doldrums and has only risen somewhat from its low point in February 2016. So how is this pay scheme aligning directors interests with those of shareholders? It is not apparent.

This year shareholders get to vote on both the Remuneration Report and the Remuneration Policy. In addition there is a vote on the Long-Term Incentive Plan (LTIP). But it’s the same kind of remuneration scheme that pays out enormous amounts as we see in lots of large public companies. For example under the proposed policy, Mr East can achieve a maximum of £5.1 million and the CFO £3.4 million.

ShareSoc’s recommendation is to vote against the Remuneration Report, the Remuneration Policy, the LTIP, and against the reappointment of Ruth Cairnie (Chairman of the Remuneration Committee). We also suggest voting against Chairman Ian Davis who must surely take some of the responsibility for these arrangements.

Is this not a company that would benefit from a Shareholder Committee? Clearly they need more input from stakeholders when making decisions on remuneration before they get put to a vote at the AGM.

The AGM of Rolls-Royce will be held in Derby near one of their main operating bases. But employees will be able to attend a separate “annual general meeting” for employees so as to strengthen links with them. Or is this a way of avoiding them attending the same AGM as shareholders and hearing the concerns expressed about pay?

Roger Lawson

Fundsmith Annual Shareholders’ Meeting – An ODD investment strategy

The Annual Shareholder Meeting for holders of the Fundsmith Equity Fund was held last night (20/3/2017). Here’s a brief summary of manager Terry Smith’s presentation and the question/answer session (summarised or paraphrased for brevity). You should be able to watch the whole 2 hour proceedings on the Fundsmith web site soon.

He noted that there was not much happening since last year (Terry prides himself on investment inactivity). The Fund was up 28.2% last year which was similar to the MSCI World Index. It’s the first year they haven’t outperformed the market, but it’s a bullish market at present when the Fund’s holdings are quite defensive.

Terry spelled out his “ODD” investment strategy:

– Only invest in good companies.

– Don’t overpay.

– Do nothing.

He emphasised the good “metrics” of the holdings within the fund: ROCE, Gross Margin, Operating Margin, Cash Conversion, Leverage and Interest Cover, versus the market. For example, free cash flow of the holdings grew 11% when earnings of companies in the index grew zero last year. He discounted allegations that they were too focussed on consumer staples – those holdings have actually been a drag on the fund’s performance in the last few years.

Portfolio turnover was only 0.5% last year (it had actually been negative in previous years because of the way it is calculated).

We then moved to questions/answers (only written questions taken due to the number). I’ll highlight just a few of the more interesting ones:

Question: On actual fees charged to the fund (based on newspaper reports). Answer: the management charge is unchanged. Ongoing charge of 1.16%. The newish office in Mauritius was mentioned and Terry has moved there – he has had a home there since 2014. This is partly to manage the FEET portfolio. Terry emphasised he has not retired, and he does not play golf. Comment: appears to be another workaholic.

Question: Have the portfolio changes had a negative or positive impact? Answer: it’s difficult to do that analysis, but it’s probably made things better. Similar question was on Dominos Pizza – holding sold when it then outperformed. Answer: sold because free cash flow yield fell to 2.7% (was 11.6% when invested). Terry admitted he could not be right all the time.

Question: The Fund doubled in size last year. Will it be closed to new investment? Answer: In summary not at the moment . Could double size of fund without a problem in terms of liquidity in the holdings. For example Microsoft holding is one tenth of 1% of shares. Closing a fund is also not easy.

Question on FEET (Fundsmith’s Far East investment trust): Why has Terry only invested £5m in it (he has hundreds in the main fund)? Answer: the problem is that FEET is illiquid, and he already proportionally has a bigger holding in it. Terry also discussed the large flows into index tracking funds in Far East securities which now dominate the sector and were distorting the valuations of the large cap companies they hold. He said the “dream of an active fund manager is to be the last active fund manager in the world”.

Summary: as usual this was an entertaining and educational evening. You can learn a lot about the investment strategies he uses to achieve such great performance, which are probably just as applicable to smaller UK companies as they are the large global companies that make up the Fund’s portfolio on the whole. Anyone who did not achieve 28% return on their own portfolio last year should certainly study Terry Smith’s activities in detail.

There is a longer report on the meeting on the ShareSoc Members Network.

Roger Lawson


Double Taxation and Broken Promises

The most recent changes to dividend taxation in the Chancellors Spring Budget are a major attack on private investors. The simple change to reduce the Dividend Tax Allowance from £5,000 to £2,000 only a year after it was introduced will have a big impact on the tax paid by many investors. It’s also another example of a broken promise about “no increases in taxes” made in the Conservative manifesto.

The Chancellor, Philip Hammond, has already had to back-track on the increases to National Insurance over the broken promise. Perhaps he should reconsider the above changes also.

Let’s go back eighteen months when his predecessor George Osborne issued his last budget. That scrapped the dividend tax credit system and introduced the Dividend Tax Allowance. This is what I said at the time about that:

“Dividend tax change. Few people understand the dividend tax credit system so this might be seen as a worthwhile simplification, but it will increase the Government’s tax take, particularly from wealthy investors, very substantially. For example it is forecast to raise over a billion pounds per year in tax!

The original reason for dividend tax credits was to avoid double taxation on the same profits. When both corporation tax and personal tax rates were high, profits made by a company could effectively be taxed twice – once within the company by corporation tax and then when the profits were distributed in dividends. It could result in very high combined rates. But tax rates are now lower, particularly corporation tax.

The new £5,000 allowance will mean the vast majority of individuals who receive dividends will not be adversely affected. However, those with substantial dividend income will be. For example, someone who receives £50,000 a year in dividend income may be £3,800 per year worse off!”

The latest reduction in the Dividend Tax Allowance to £2,000 will mean some investors are now an additional £1,000 worse off than stated above.

What did the Conservatives say in the 2015 Manifesto (which you can read here: It says on page 27 that “A Conservative Government will not increase the rates of VAT, Income Tax or National Insurance in the next Parliament”. Most people will have read that to mean that they will not be paying more Income Tax or National Insurance. Hence the complaints from the self-employed concerning changes to the latter. But the impact of these changes to dividend taxes are even more damaging to those living on dividend income in retirement.

Obviously the way we are headed is for the Dividend Tax Allowance to be scrapped altogether and dividend income is clearly now a target for more tax raising from the Chancellor.

I would urge all private investors to complain to their Members of Parliament about this change. You can write to your M.P. by post or email. You can obtain their contact details from this web page:  (enter your post code at the bottom left). This will take you to a page giving their name, postal address and email address – an email will do fine.

Roger Lawson

Share issues – And An Interesting Rule

Spring is in the air, and companies are clearly in a mood to raise cash. A lot of these have been share placings but the reasons given have been varied. Placings rather than rights issues are always prejudicial to private shareholders as they are generally unable to participate, unless an “open offer” is included.

The share placing at IDOX (IDOX) was covered in the January issue of the ShareSoc Informer Newsletter and there is now a report on the AGM of that company on the Members Network where shareholders raised the issue again.

Cello Group (CLL) undertook a placing to fund the acquisition of Defined Healthcare – they raised £15 million to do so, but the placing share price was at a small premium to the previous market price. although the price moved up significantly after the placing was announced.

Learning Technology Group (LTG) did a placing to finance the acquisition of NetDimensions.

TrakM8 (TRAK) raised £1.66 million through a placing at 65p so as to reduce the company’s bank debt and strengthen its balance sheet. This was at a significant discount of 17% to the previous market price. The directors of the company took up a large number of the shares on offer.

One company that is doing a full rights issue is property business Segro (SGRO) although they had done a placing recently. The new transaction is to raise £573 million to finance the acquisition of the balance of an interest in Airport Property Partnership they did not already hold. However, the rights issue is being done at a discount of 28.9% to the previous closing price. Although investors can sell the “rights”, if they don’t and otherwise do not take them up then they will be diluted. Investors in Royal Bank of Scotland will not have happy memories of their heavily discounted rights issue in 2008.

One interesting recent announcement was from South African gold mining company Pan African Resources (PAF). They have apparently been “book building” to finance the development of a new gold mine at Elikhulu. But the Johannesburg Stock Exchange (JSE), where PAF is dual listed, has a rule that a company cannot issue shares at a price that is in excess of a 10% discount to the 30 day volume weighted average price. But as the current share price is lower, they have decided not to undertake an equity issue at this time and will finance development in other ways for the time being.

Now would that not be a good rule to adopt in the UK? It might make shareholders a lot happier because there are grumblings about all the above.

Roger Lawson

Employee Directors at Sports Direct

It seems that controversial company Sports Direct (SPD) are likely to become the first UK public company to have a worker on their board. They plan to appoint an elected “Worker’s Representative” who will attend and speak at board meetings although they would not formally be appointed as a director. A spokesman for Sports Direct said: “Having explored all options we believe this is the best way to ensure the Workers’ Representative is free to champion the interests of all staff. We see this as a major step forward in bringing about positive change.”

Comment: if that improves their employee relations, which has seemed far from ideal in the past, then so much the better. But is there not a risk that the person so appointed might be seen as a “shadow director”? For those not familiar with that concept, anyone who has significant influence on the operations of a company and its board could be seen as a shadow director and in that case the legal position is that they have the same duties and obligations as any other director (and the associated legal liability).

One objection to these kinds of arrangement is that employee directors might have power without the associated obligations and hence make cavalier decisions. But in this example, not being formal directors they presumably will not be able to vote on any board resolutions.

ShareSoc has not adopted any formal policy on employee directors although we do think that a Shareholder Committee is a better way to improve corporate governance and stakeholder engagement. The presence of a worker representative on a Shareholder Committee might be an alternative solution.

Roger Lawson