Are AIM tech company directors underpaid?

Grant Thornton have published a report which says that AIM technology company directors do not pay themselves as much as in other AIM companies. Author Amanda Flint suggests the former might feel themselves undervalued and move elsewhere.

According to the report, the average total pay package for AIM technology company chief executives was £383,000 last year. That is less than half the average pay across all sectors. And only 36% of technology CEOs received share-based awards compared with 60% of main market tech CEOs, although it’s worth pointing out that many smaller company CEOs already have substantial share stakes as they are often company founders.

Ms Flint suggests that tech companies should expand performance related pay elements and “adopt more creative performance measures” (as reported in the FT), so as to keep up with their peers.

Comment: As an investor in such companies I think pay is not so bad as Ms Flint suggests. Many such companies have no profits and hence both management and investors are betting strongly on the future.

What happens in many other AIM companies (such as in property companies and in the natural resource sector) is that companies raise massive amounts of money by listing on AIM (and often also by subsequent placings) which they then use to pay inflated salaries and wildly generous bonus schemes to management. The profits of these companies often bear no relation to the level of pay of the directors.

What I certainly would not like to see is tech companies following this model. Indeed one of the ways to best judge the merits of a technology company is whether the management have faith in the “jam tomorrow” and hence accept lower pay today, or wish to have their rewards now rather than in the future.

I am sure that Grant Thornton’s clients will appreciate reading the report, and may find it useful evidence to try and justify their own pay rises. But investors should take it with a pinch of salt.

Roger Lawson

RBS, Hibu and the unacceptable face of banking

There have been extensive media comments lately on the activities of the Royal Bank of Scotland in lending to smaller businesses, and what they did when those businesses got into financial difficulties. The articles printed focussed on two reports on the activities of RBS – a report commissioned by the bank by Sir Andrew Large, and one by Lawrence Tomlinson* who acts as a consultant to the BIS Department. Both reports, but particularly the latter one, were quite damning about the activities of the Global Restructuring Group (GRG) in RBS. This is the department of the bank to which responsibility is transferred for loans that appear to be at risk.

The Lawrence Report suggests that the bank often engineered “defaults” on loans so that they could impose additional conditions and fees. Or they would ask for personal guarantees to be provided and bankrupt the individuals concerned by subsequently forcing the business into administration. The general behaviour of the bank seemed to be a policy of generating profits for the bank rather than helping the business through financial difficulties.

One of the concerns is that the bank effectively acts  as a “Shadow Director” and sometimes forces the company to stop paying suppliers or even HMRC, thus destroying the reputation of the company and its viability.

Now this kind of behaviour is not going to be any surprise to anyone who is familiar with the way RBS has operated in the area of pre-pack administrations. It was interesting to see Neil Mitchell on BBC TV news last night (he also got a mention on the front page of the FT). Mr Mitchell was the former Chief Executive of Torex Retail, a large AIM company,  which got into difficulties after false accounts were published (later the subject of fraud trials) in 2007. The bankers were RBS and effectively a revised board of directors was put in place that was sympathetic to the bank, no doubt at their behest – it’s easy for a bank to dictate whatever actions they like in such circumstances by simply threatening to call in their loans. What then happened was a deal was lined up to sell the business in an arrangement that protected the banks interests but wiped out the ordinary shareholders, i.e. the interests of other “stakeholders” were not taken into account. Even though other approaches were made to refinance the business so that it could continue without administration, these were ignored.  This in essence was a typical “pre-pack” administration which ShareSoc has repeatedly criticised in the past for the secrecy involved, the lack of open marketing of businesses and the abusive process that is involved.

One of the interesting aspects of Torex Retail was an attempt by shareholders who could see that the board was not acting in their interests to remove the directors and replace them. The EGM called to do that was pre-empted by the directors putting it into administration.

Now yesterday we coincidentally had the case of Hibu where again a move by shareholders to place more directors on the board and get some questions answered about past behaviour via an EGM requisition has been thwarted by the company being put through a pre-pack administration. The assets have been disposed of to a “new holding company structure to be controlled by the Group’s lenders” to quote from the announcement. Needless to point out that RBS are one of the bankers to the company although several other banks are also involved. Hibu ran up enormous debts and was in a much poorer overall financial state than Torex and it was always going to be difficult to see much value remaining for ordinary shareholders but they will now definitely get nothing.  But the major concern is that the directors will avoid being accountable to the shareholders for past actions as a result of this tactic.

RBS has been particularly active in supporting the existing pre-pack administration process, no doubt because it enables them to intervene in this way to ensure they protect their interests and even potentially make a profit from the “restructuring” of companies. In addition the administration typically avoids any examination of past events by those concerned because administrators have no duty to anyone but the creditors (shareholders are not creditors).  

In conclusion, the actions of RBS might be legal (although the SFO is considering investigating), but their general approach to dealing with businesses in difficulties, from the evidence of the many cases reported, suggests they are the unacceptable face of banking. Bankers surely have a moral duty of care to deal with their customers in a fair and honest manner. But RBS, and other banks, have repeatedly ignored this principle. The example of selling interest rate swaps to unsophisticated business customers who simply did not understand the implications of those contracts is another example.

As regards the treatment of businesses in financial difficulties, as ShareSoc has said before, it would be good to get a complete overhaul of the insolvency regime (including the administration process with pre-packs being banned). The existing UK legislation puts too much power into the hands of lenders and there is no independent supervision of their activities. Individuals and companies involved also find the legal complexities baffling and action too expensive to protect their interests. It’s surely time to develop a new approach with fairer and simpler rules.

* The Lawrence Tomlinson Report can be read in full here: http://www.tomlinsonreport.com/docs/tomlinsonReport.pdf

Roger Lawson

A nation of DIY investors?

Research firm Compeer have reported that funds held by stockbrokers in “execution-only” accounts have increased by 20% in the first nine months of this year.  And a survey they undertook of 1,000 investors showed that half of them would invest without taking financial advice (i.e. by using an IFA or taking advice from a stockbroker for example).

This growth in the DIY investor community might partly have been driven by the Retail distribution Review that took effect in January of this year where the costs of advice now have to be spelled out. But it is also surely the case that there is a growing awareness that high charges for advice and fund management erode the returns available to retail investors.

ShareSoc has long advocated that retail investors should take charge of their own investment portfolios. One reason for this is simply that professional fund managers do not demonstrate any expertise of significance so an “amateur” investor might perform just as well. If you are not convinced read the book “Monkey with a Pin” and there is lots of other evidence that most professional fund managers (with a very few exceptions) perform no better than chance.  Even a few simple investment rules or stock screening systems can turn new investors into reasonably capable portfolio managers in no time at all.

Disintermediation is the name of the game, i.e. taking out the middlemen who contribute little but add greatly to the costs, and the internet makes this more viable than it was in the past. But in the UK, the proportion of “advised” investment business is still about 80% when it is only 60% in the USA (source Numis Securities in the FT). It is unfortunately true that the financial community and the regulators have developed a mystique in the UK that stock market investment is such a complex and arcane art that you would be foolish not to rely on professional advice. This is of course nonsense and can be very expensive for your own future wealth.

Roger Lawson

Pan African Resources AGM Report – a minor victory for shareholders on buy-backs

Pan African Resources is a South African gold mining company, but they are registered in the UK and hence hold their AGMs in London. This year it was at 10.00 am on the 22nd November in the City of London despite shareholders complaining about the 10.00 am start time last year. A full report is on the ShareSoc Members Network, but here are some of the noteworthy points.

Only the Chairman Keith Spencer was present from the directors, and he said the main reason for absence was them trying to save expenses. Hester Hickey, one of the Non-Execs, was going to attend but became sick.

Share Allotment Resolution Defeated

On resolution 12, concerning pre-emption rights on share allotment, there were major objections to this from three institutional holders and hence a poll on that resolution was taken, even though it was only the usual  10% of issued equity.  The resolution was defeated as it has been before at this company and it is only a minor inconvenience. 

Share Buy-Back Voted Down on the “Show of Hands Vote”

Shareholder Gerald Roberts asked when the resolution on share buy-backs might be used and whether it had been used in the past. The answer was they have never used it and would only use it if cash flow justified it. Mr Roberts indicated his opposition to share buy-backs but another shareholders spoke in favour – he said it enables the directors to give signals to the market (presumably to tell them they think the company is cheap, but the problem with that argument is that directors are sometimes deluded about the merits of their company). On the vote, there were two hands opposed, including mine, versus one in favour , even though there were about ten shareholders present – yes it helps not to have more than one director present! So the Chairman called a poll on that resolution also. The result was 86.5% in favour and 13.4% opposed which was enough to carry it but is more opposition than one normally gets.  

It is a pity more shareholders do not vote against market share buy-backs, but perhaps this company will set a new example for others to follow.

Roger Lawson

Netcall AGM Report – it was not crowded!

There was no crowd at the Netcall Annual General Meeting today – indeed only me for the meeting, other than the directors and the corporate folks, which was over in about 15 minutes. There would have been a second person but it seems he was in reception and was not told the meeting had started.  A tip for attendees at AGMs – the meeting almost always start on time so if you have not been invited into the room by the appointed time you ought to ask what is happening.

Netcall is an AIM listed software company that provides “customer engagement solutions” to over 700 organisations. That means communication via multiple channels between these organisations and their clients/customers. I think that includes public sector bodies sending you those annoying text messages that remind you that you have an appointment tomorrow. But no doubt they do a lot more than that.

There is a full report of the meeting on the ShareSoc Members Network. It would have helped to have more shareholders present with experience of the company so that they could ask some more penetrating questions.

So if you are a shareholder in this company, please turn up next year! 

Roger Lawson

Directors’ Pay and Galliford Try – Apathy reigns

The pay of directors in FTSE100 companies continues to power ahead. Up 14% in the past year according to Income Data Services, based on median total remuneration.  This is six times more than the average earnings of all employees.

The large increase has been driven by rises in the value of LTIPs (typically share based pay-outs based on performance measures). These payments are often not at all obvious in Remuneration Reports at present.

A good example is Galliford Try, the building company, whose AGM I attended yesterday.   Total board remuneration was £3.05m according to their Remuneration Report, with the CEO receiving £1.39m and the non-exec Chairman £105k. You might think that is quite high enough for a middle sized FTSE-250 company with post-tax profits of £58m last year. But a small note in the Remuneration Report tells you that the CEO and another executive director also received shares with a market value of £1.46m and £953k respectively last year, mostly from LTIPs presumably although that is not spelt out.

In total therefore the board remuneration is more like £5.5million, i.e. almost 10% of the profits of the company.

Now what did the shareholders have to say about this at the AGM? Nothing in essence. Nobody spoke on the subject (they weren’t given the opportunity), and the votes on the Remuneration Resolution were 98.5% in favour. I voted against of course but as there was no “show of hands vote”, I had to personally tell the Chairman of that fact. There was a token 2.0% of votes “withheld” so obviously some institutions were not perfectly happy, but it is all rather symptomatic of the apathy that reigns in both institutional and private shareholders.

One shareholder even said the board inspired him and got the audience to applaud them.

Another oddity of this company is that it has two divisions – house building and construction. The former is the smaller part of the business and makes 80% of the profits according to the Chairman. Margins on construction are appallingly bad at 1.8%.  So I suggested they shrink the construction business and divert resources into house building. It did not get a positive response from the Chairman. In reality this business could probably be downsized to release large amounts of capital for shareholders. Will it happen? Probably not because you can see that the directors have a vested interest in maintaining the current size of the business. Shrinking its size would make their pay look even more outrageous.

What this company needs is some corporate raider to come in and split it up to realise the value. Or a Chairman who is more interested in realising value for shareholders.

In the meantime you can read a full report on the AGM on the ShareSoc Members Network. 

Roger Lawson

The level of speculation in AIM stocks

How much speculation is there in AIM stocks? Quite a lot based on some figures recently published in a FinnCap newsletter.

“Speculation” might be defined as a short term bet on a share price rising or falling. That’s the opposite of “investment” where someone takes a view on the medium to long term returns from investing in a company.

These are the figures published by Finncap for the ten most traded AIM stocks in September – based on the percentage of the overall market value of the stock that was traded during that month:

Company

%

Monitise

28

African Minerals

23

Blinkx

14

Gulf Keystone Petroleum

14

Optimal Payments

12

ASOS

11

Archipelago Resources

10

Quindell Portfolio

9

Ithaca Energy

9

Rockhopper Exploration

9

Let’s look at a few of these companies to see what might account for the high volumes. Monitise published some preliminary results in early September which might account for the high volume, and the share price improved substantially during the month. African Minerals issued some Interim results in September and announced a strategic investment in one of their projects on the 26th September which caused the share price to jump upwards. In Blinkx there were some director share sales during the month, but the share price actually rose slightly in that period.

So there is possibly some reason for share price increases, except in Blinkx which seemed to be contradictory. But you have to bear in mind that for every buyer there is a seller. So in Monitise for example, it means that 28% of shareholders presumably did not like the issued news, and hence sold, whereas 28% did and hence bought. In other words, although everyone was seeing the same news, they seemed to have taken a contrary view of it. Or perhaps the sellers were selling in the hope of buying back at a lower price later when the euphoria had subsided, as indeed it has of late. Or perhaps there were some folks “top-slicing”, i.e. realising a part of their profits as the share price had reached a level which they considered to be an opportune moment to sell.

But the point I am trying to make is that the fundamentals of these companies, except perhaps in the case of African Minerals, did not substantially change. And even if they did why would the good news, which increased the share price, cause 28% of holders to sell in Monitise?  Surely even more reason to hold on to the stock?

However you look at it there are apparently shareholders trading the stock not on fundamentals or actual news, but on other grounds. Which surely means there is a high level of “speculation” taking place in those companies. That is surely something that any investor, rather than speculator, in the shares of these companies should take into account.

Roger Lawson