Shell & BG Group Deal – Not Everyone’s Happy

(Pay packages and short termism at BG Group and Amec Foster Wheeler)

Shareholders in BG Group should surely be happy. The offer from Shell values their shares at about £13.50 per share which is a premium of 50% to that which they have recently been trading. Although investors will get most of the value in Shell shares which means they will still be holding shares in the depressed oil and gas sector. An indication that perhaps not all investors are happy is that BG Group shares have not immediately rocketed to near that valuation, or perhaps there is uncertainty about closure of the deal or the length of time it will take to conclude.

Even the CEO of BG Group Helge Lund seems unhappy even though he is due to collect about £28m for only a few weeks work at the company. He said “I came to build a company not to sell it“. There was enormous controversy about the pay package of Mr Lund when he joined the company from Statoil in February. ShareSoc issued a press release on that subject which can be read here: http://www.sharesoc.org/pr62bggrouppay.html . BG Group subsequently revised the offer to Mr Lund so that it was more compliant with their Remuneration Policy that had been approved by shareholders. But it was still a very generous deal.

These events are surely symptomatic of the problems of excessive pay in British boardrooms and how executives can achieve massive amounts of remuneration for doing very little.  All bonus, LTIP and share option schemes tend to become crystalised when a company is sold so it encourages the management to look for a deal rather than continue to develop the business. This is encouragement of short-termism in essence which needs to be tackled.

Amec Foster Wheeler

Another recent example of this was Amec Foster Wheeler. On the same day as the announcement of the Shell deal, the former CEO of Foster Wheeler sold most of his shares in Amec and collected almost £4 million as a result even though he is still a non-executive director of the merged company. But that is not all because if you read the prospectus for the merger of Amec and Foster Wheeler which took place in October 2014 the directors and executive officers of Foster Wheeler also collected a considerable amount in cash as a result of the merger (totalling $67 million).  As the document says on page 6 where it asks the question “Can the interest of the Foster Wheeler directors and executive officers differ from Foster Wheeler shareholders generally?” and then gives the answer which is “Yes”.

The Kay Review commissioned by the Government attempted to tackle the issue of short termism in the investment scene but did not tackle the problem explained above. All it said was that companies should structure directors’ remuneration to relate incentives to sustainable long-term business performance and that long-term performance incentives should be provided only in the form of company shares to be held at least until after the executive has retired from the business. But it shied away from regulation of remuneration packages.

Unfortunately selling a business is one way to turn long term incentives into short term ones. Likewise “golden hellos” of the kind given to Mr Lund also favour quick deals and should surely be discouraged.

This is definitely an area the Government should be looking at if it wishes to reduce short term incentives and provide a more socially acceptable environment in which senior executives of public companies operate.

Roger Lawson

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