Pay at Weir, Reckitt-Benckiser and WPP

Yesterday saw Weir Group Plc defeated on pay. Both the Remuneration Report and Remuneration Policy resolutions were lost with 73% and 70% of votes AGAINST them respectively. This is a very damning blow to this FTSE-250 company which makes pumps for the mining and oil markets.

The company subsequently issued a grovelling apologia for the proposals they had tried to implement which included a “stock awards” scheme that was based on share price performance rather than more direct performance criteria (such as profits, cash flow, etc). Needless to point out that Weir has been badly hit by the decline in its customers demands for its products with the result that the share price bottomed out in January of this year at 820p. It’s been recovering since so this would undoubtedly be a good time to rebase an incentive scheme focussed on share price would it not?

Even institutional investors apparently saw through that although they seem to have expressed their criticism in more technical terms such as not being compliant with best practice in the UK.

Now this writer holds a few shares in Weir and yes I voted against the remuneration resolutions. But I did so solely on the ground that the past and proposed pay structures were way too complex – indeed just like most FTSE companies. In addition this business had a quite dire year in terms of financial performance, after a long track record of good returns and growth. Sales substantially down, profits wiped out and downsizing of staff and operations taking place almost everywhere. But the CEO received a “total remuneration” figure of £1.06 million for the year. That is less than the £1.45 million in the prior year which might surely show that the previous LTIP scheme was not so daft after all. But if I had been running the business I would have given a moral lead by slashing my pay to a fraction of what it was in such tough market conditions.

Yes pay in public companies is broken and we really do need a revolution in how pay is set. It needs to be simplified, reduced in magnitude and set by people who are not beholden to their fellow directors. Indeed I would go so far as to say Remuneration Consultants should also be barred because they have contributed to both the complexity and racheting up of pay in recent years. These are my personal opinions of course, rather than ShareSoc’s but sometimes one has to stand up and be counted on matters of principle. And too much pay for the fat cats at the top of public companies is corrosive to the body politic.

On a similar theme, ShareSoc is advising investors in Reckitt Benckiser to vote against their remuneration resolutions at the forthcoming AGM. We have issued a press release to that effect which you can read here: http://www.sharesoc.org/pr77reckittbenckiser.html but the key points are:

  • The remuneration of the CEO Rakesh Kapoor is indefensibly high (£23 million in 2015, £56 million since his appointment).
  • This level of remuneration seems even more egregious when viewed against the background of Kapoor’s potential future equity incentives (his unexercised 1.8 million options have £34 million gains to date and his LTIPs would currently be worth £49 million if fully vested).
  • Share buybacks, which impact the EPS performance condition, raise further concerns.
  • The constitution of the Remuneration Committee, the majority of whom are themselves serving CEOs, is inappropriate and may favour generous awards.

Meanwhile I see Martin Sorrell of WPP has been publicly defending his pay – about £70 million and the highest in the FTSE-100. He said “We started this company 31 years ago with two people in one room” and “It is now 100,000 people in 112 countries and the largest advertising and marketing company in the world”. There is no disputing it has grown to be large, but is its financial performance so brilliant? Compound annual growth in sales in the last six years is only 5.6% according to Stockopedia and Return on Assets was only 4.2% last year. Earnings growth looks much more positive, but free cash flow per share has been stagnant at minus 0.2%. This surely indicates that this company may be good at massaging its financial numbers rather than generating money for investors. In other words it might be more a case of Mr Sorrell telling a good story about his empire building so as to justify his high pay than his real business acumen.

ShareSoc will be saying more on remuneration at WPP in due course, but you can guess what it is likely to be.

Roger Lawson

ShareSoc slams LSE over AIM failures

ShareSoc slams London Stock Exchange over AIM failures – that was the title of a press release which ShareSoc has issued after the LSE Group’s AGM which was held today – see http://www.sharesoc.org/pr76lseaim.html

ShareSoc Director Mark Bentley spoke at the AGM and suggested that “AIM is full of dubious businesses led by dubious people”. He asked them to do something about it. Perhaps the merger with the German Deutsche Boerse will mean the introduction of a more disciplined approach to some of the problems Mark highlighted. It would certainly be an opportune moment to do so.

A fuller report of the AGM will be produced for ShareSoc members in due course.

Roger Lawson

Atlantis Japan Growth Fund – Requisition to Restructure or Liquidate

Atlantis Japan Growth Fund (AJG) is a closed end investment company (i.e. like an investment trust) focussed on small Japanese companies. It has had disappointing performance in recent years, is trading on a significant discount to asset value, has low liquidity, and is now relatively small in size. Indeed the current market capitalisation is only £54 million which many people would consider unviable, as a result it has relatively high costs (2.47% On-Going Charge according to the AIC). The fund has underperformed the MSCI Japan SMC Index in the last 1,3 and 10 years in terms of share price total return so you can see this situation has persisted for some time.

One of their major investors, LIM Advisors, has requisitioned an EGM to consider a special resolution to force the board to produce proposals to either liquidate the company or do a restructuring of the company – more specifically to possibly convert it to an open-ended fund run by the same manager. Coincidentally the fund management company already runs a similar open ended fund called the Atlantis Japan Opportunities Fund which shows much better performance and is managed by a different person (Taeko Setaishi), although she has already been nominated by Atlantis to become the lead fund advisor to AJG.

Now ShareSoc has been involved in several cases of investment funds which have become stuck in similar situations. Unattractive performance tends to lead to high discounts, low liquidity and a shrinking in size as investors depart (AJG has run a “redemption” programme to buy back shares). Few new investors acquire the shares because it looks moribund – Alliance Trust and Rensburg AIM VCT were two recent cases in which we were involved. This problem can persist for a very long time unless vigorous action is taken. Why has not the board tackled this issue before?

Another concern in this company is the length of service of some of the directors. ShareSoc has consistently opposed investment trust companies who flout the UK corporate governance code that indicates that 9 years is the maximum non-executive directors should serve. After that point they can no longer be considered independent. The AIC (a trade body for investment companies), unfortunately has encouraged this ignorance. The problem with long serving directors of investment companies is they often end up becoming too sympathetic to the interests of the fund managers, as this writer has said several times in the past. The 9 year rule was considered sensible by those who devised the UK Corporate Governance code for the number of reasons, and ShareSoc believes it should be followed unless there are very good reasons not to do so, which there do not appear to be in this case. Two of the directors, Eric Boyle and Andrew Martin Smith have now served for 15 and 13 years respectively despite them receiving substantial votes against their re-election at the last AGM. A third Director, Takeshi Murakami reaches his 9 year limit this November and the Board only consists of 5 people.

In response to the requisition from LIM Advisors, the board have issued a circular recommending voting against the requisition resolution and reiterating its commitment to pursue its existing investment objective. They talk about the performance of the Atlantis Japan Opportunities Fund, but as they say “past performance is no guide to future results”. They do not appear to deal with the problems of the small size of the fund or the high costs that this implies.

Although there may be some advantages to being a closed-end versus open-ended fund, the board has not really made proposals that would ensure the long-term viability of this investment company. Therefore ShareSoc recommends that shareholders in the company give careful consideration to this matter and consider supporting the requisition unless the board makes alternative and substantial proposals to tackle the problems explained above before the EGM.

Roger Lawson

Financial Repression Destroys Savings

The following press release has been issued by Better Finance to its members (of which ShareSoc is one). Readers may wish to take up this matter with their Member of Parliament as the UK has certainly been following the same economic strategy as the rest of Europe as regards to interest rates and financial repression so was to relieve the Government of some of its debt.

PRESS RELEASE – FINANCIAL REPRESSION DESTROYS SAVINGS: EUROPEAN SAVERS BAILED IN BY ECB

22 April 2016 – At the end of 2013, at the occasion of the publication of its yearly report on the real return of pension savings, Better Finance warned of the risk of a disastrous eradication of European savings across the board. Nearly two and a half years later and the warning goes unheeded, with the European Central Bank intensifying the financial repression of European Savers by further lowering its main interest rate from 0.5 to 0.25 percent. Now this fear is spreading to all actors – savers and retirees, insurers, pension funds, even bankers – threatening the whole edifice of pensions and savings.

Axel Kleinlein, the head of Germany’s Association of Insured Persons (BdV) and member of Better Finance, stresses the fact that lowering interest rates even further effectively crushes all hopes of decent pensions in the future and has started a campaign against the role of the ECB, which was relayed by the media all over Europe.

What is at stake is the entire monetary policy of the European Central Bank. This is the climax of financial repression.

Financial Repression refers to a set of governmental or central bank policies that keep real interest rates artificially low or negative and regulate or manipulate a captive audience into investing in government debt. Central banks started to fund banks at very low interest rates, most often asking for government debt as eligible collateral. Then central banks engaged in quantitative easing campaigns buying up sovereign bonds directly on the market. To complete the picture central banks try to keep inflation alive through quantitative easing policies in an attempt to further reduce the weight of sovereign debt in the EU Member States, but in the process also obliterating the value of all savings.

Indeed, we know that inflation is the weapon of mass destruction of savings and savers. Today, thankfully, the desired inflation has so far failed to materialise. Policymakers believe that low interest rates will encourage consumption but fail to take into account basic human nature: a small saver faced with low or even negative returns, is more likely to brace for hard times, tighten the belt and stow money under the mattress for a rainy day.

As President Jean Berthon says: “It is more than time to oppose by all means this disastrous policy and we call on all Member Associations of Better Finance to actively campaign in their home country to force the central banks to drastically change their policy.”

Roger Lawson

Sprue Aegis (SPRP) Business Review

The directors of Sprue Aegis have agreed to answer ShareSoc Members questions on Wednesday the 27th April following the recent trading statement (profit warning) and after the results announcement on the previous day. This event will commence at 6.00 pm and last approximately one hour. It will be at the office of Tavistock Communications at: 131 Finsbury Pavement, London, EC2A 1NT. If you plan to attend please tell us by using the ShareSoc Contact page here: Contact – mention “Sprue Aegis Meeting” in the Comments box.

Roger Lawson

Anglo American and Pay

Following ShareSoc’s recommendation to vote against the Remuneration Report at Anglo American, yesterday the company received 42% of shareholders votes AGAINST it. Other advisory bodies also recommended opposition and this is a significant snub to the board which they will have to do something about. The ShareSoc press release we issued is here: http://www.sharesoc.org/pr74angloamercian.html

The Investment Association which represents institutional investors has published a report which suggests that pay in public companies is “not fit for purpose” and needs reform. This has led to loss of public confidence that remuneration is fair and reasonable. The report wants reform of long-term bonus schemes and more transparency.

The working group’s Chairman Nigel Wilson (Legal & General CEO), said: “The current approach to executive pay in UK listed companies is not fit for purpose, and has resulted in a poor of alignment of interests between executives, shareholders and the company. Greater transparency, clearer alignment of shareholder, company and executive interests, more accountability on the part of Remuneration Committees and greater engagement with and control by shareholders, working through company boards, are vital to restore confidence in a system widely seen as broken.”

One could have not said it better. The remuneration setting arrangements in public companies need very substantial reform and it is clear that Vince Cable’s reforms such as a “say on pay” for shareholders and better reporting may have helped, but they have not been the final solution.

Remuneration needs to be taken out of the hands of board directors and grossly simplified. All these complicated structures of multiple bonus schemes and LTIPs devised by remuneration consultants have compounded the problem and enabled directors earnings to rise irrespective of the performance of the companies they control. This is what really stuck in the craw of shareholders in companies like BP and Anglo-American – the only saving grace in the latter was that total reported pay last year was not exceptional for a FTSE-100 company where the general level of pay is now outrageously high – perhaps that is why the vote just passed. But the potential going forward is still enormous.

The Government should surely take the initiative in promoting some changes to tackle these issues because nobody else is going to take it on voluntarily.

Roger Lawson

Lakehouse, Stock Spirits and Sprue Aegis

I commented on the affairs of Lakehouse and Stock Spirits in the last ShareSoc newsletter. Both companies had been attacked by unhappy shareholders who had submitted requisitions to change certain directors, a process that seems to be becoming more common of late. Both situations have now to been resolved to a great extent.

At Lakehouse the Chairman Chris Geoghegan is departing forthwith, with the three new directors proposed by the requistioners being appointed to the board as non-executive directors including founder Steve Rawlings. This is clearly a victory for Steve Rawlings and Slater Investments and a climb down by the company. Let us hope that the latter did not waste too much money on fighting the proposals which did not seem unreasonable to this writer.

At Stock Spirits, investment company Western Gate wished to remove the CEO, Chris Heath, and appoint some new non-executive directors. On the 18th April it was announced that Mr Heath was retiring “with immediate effect”. Was that a defeat conceded? Not quite. It’s not yet concluded because the board is still fighting the other resolutions put forward by Western Gate.

Another company in the news is Sprue Aegis, a maker of fire/smoke alarms. On the 18th April the share price fell by 54% after the company announced that it has had to make large provisions for warranty claims as a result of faulty batteries in its alarms. In essence what should have been “lifetime” batteries have failed after a few years and started “chirping” that the battery needs replacing. They also reported challenging trading conditions in France and weaker sales in Germany so that results will be much below expectations.

These kinds of events really annoy investors and tend to undermine confidence in stock market investment. Was all this bad news a surprise to management? And did all this became known at the same time? Or perhaps more to the point, how does one avoid such disasters?

Now I have to admit to holding this stock in the past but I sold in January of this year. Did I know anything specifically that worried me? I was certainly not a party to any inside information if you were thinking that. There was a trading statement in January which was negative in parts, but it would not likely have prompted an immediate sale in most readers. But it did become apparent to me that this former market shooting star was falling to earth with future profits forecasts being reduced. There also seemed to be a lot of uncertainty about future sales as this is a company where there is little “repeat” business, i.e. there is only short term order visibility. This seems to be true generally of electronic device manufacturers and distributors which I am becoming very wary about. So although the company had shown a high return on capital in the past, I rather concluded that it might be a somewhat “unreliable ” business and hence not the kind of “quality” stock I prefer to hold.

But the key message for investors is that trust in the management of a company is very important, and the directors of Sprue Aegis have certainly managed to instil a great deal of distrust in their investors from these events. It may take a long time to recover from these problems. and when you lose confidence in the management it’s time to sell regardless of whether you have made or lost money on the investment.

Roger Lawson