A Divorce Invoked and a Marriage Cancelled

Spring may be in the air but love is definitely not. As expected, Mrs May has issued a letter to the EU invoking Article 50. So the Brexit process is now commenced and we may be out in a couple of years. The UK stock market has of course discounted this already although there is some uncertainty about what the future impact will be. It depends a lot on the trade deal that can be negotiated.

The other big item of news today is that the proposed merger of the London Stock Exchange (LSE) with Deutsche Börse is off. The European Commission has prohibited the merger on competition grounds, adding that the proposed solution to their concerns was not viable.

This is possibly disappointing in one way in that I hoped some Germanic discipline might have improved the operation and regulation of the AIM market, but it clearly is not to be. The good news for investors in the LSE is that it will remain a stand-alone business and the company is to return capital to shareholders via on-market buy-backs instead of the promised special dividend which was part of the merger deal. But why can’t it be paid as a dividend instead of market share buy-backs?

Are the shares really intrinsically undervalued at present? Perhaps the directors should read Warren Buffett’s and Terry Smith’s recent comments on that topic.

Roger Lawson

Tesco Investor Compensation and Booker Opposition

Tesco (TSCO) have agreed a Deferred Prosecution Agreement with the Serious Fraud Office (SFO) over the overstatement of profits which came to light in 2014. Tesco has also conceded to a finding of market abuse by the Financial Conduct Authority (FCA) in relation to a trading statement issued in August 2014. As a result the company has agreed to establish a compensation scheme for purchasers of Tesco’s ordinary shares or bonds between the 29th August 2014 and 19th September 2014 (inclusive). Compensation will be 24.5p per share plus interest. So any investors in Tesco should check whether they will be eligible.

Note that the overstatement of profits went back several years so this offer may not let Tesco off the hook completely as law suits may still be pursued by disgruntled investors.

The SFO is still pursuing criminal proceedings in relation to individual persons involved in the matter but so far as the company is concerned that seems to conclude the matter as regards regulatory legal action. Tesco will take an exceptional charge of £235m for the compensation and other associated costs (that’s more than the profits they declared last year but only a small fraction of what they used to report annually).

The Financial Times reported this morning that there is opposition from major shareholders Schroders and Artisan to the proposed takeover of Booker by Tesco. Together they hold more than 9% of the company’s shares and Schroders have written to the Chairman urging him to withdraw the bid. Apparently the high price being paid for Booker is the concern.

Comment: the prospective p/e of 25 for Booker certainly makes it look a high price for what is basically a low margin food wholesaler even if Booker has grown profits rapidly in the last few years. There are also clear synergies between the businesses that can be exploited by Tesco. So this is not a clear cut matter it seems. If any readers have any views on it, please add your comments.

Roger Lawson

Fat Cats on Diet?

There was a good article in the Daily Telegraph this morning in which I was quoted. It was headlined “Will the fat cats finally be put on a diet by shareholders?” and gave an overview of the attempts to rein in executive remuneration and the likely impact this year.

But I expressed scepticism to the reporter and this is what it printed: “Roger Lawson, deputy chairman of ShareSoc, which speaks on behalf of thousands of retail investors in the UK, argues that an AGM vote is too late in the day to alter pay policies. He would like to see companies install shareholder committees with direct input on the issue”. I was also quoted as saying “The best way to solve the problem is to change the remuneration committee and its members – to have outsiders on the committee or the board.”

That’s certainly a fair summary of my personal views and ShareSoc is certainly promoting the merits of Shareholder Committees to tackle the problem of executive pay and other corporate governance problems. Ultimately the existing remuneration committees will never solve the problem alone because the directors are beholden to other director for their jobs. One needs to understand the dynamics of company boards to see that little will change unless outsiders have more influence. In addition I pointed out that institutional investors are often reluctant to vote against the recommendation of boards because they may lose access and in any case swim in the same high pay pool. But other people quoted in the article suggested that attitudes were changing. We will see.

The full article is present here: http://www.telegraph.co.uk/business/2017/03/27/shareholder-spring-2017-year-investors-win-war-ceo-pay/

Roger Lawson

Persimmon AGM Voting Recommendations

ShareSoc has issued the following press release:

ShareSoc is opposed to the Remuneration Policy of Persimmon Plc. We therefore recommend VOTING AGAINST the Persimmon AGM resolutions as follows: Remuneration Policy (Resolution No. 2), Remuneration Report (No. 3), Remuneration Committee Chair Jonathan Davie (No. 8) and the 2017 Performance Share Plan (No. 14).

How can the Remuneration Report almost completely ignore the existing LTIP awards? There is no mention of the £100 million share scheme for Persimmon CEO Fairburn in the new remuneration policy, other than to say that the previous 2012 plan will most likely vest in full before 31 Dec 2017.

Persimmon have adopted a pathetically inadequate share ownership guideline of 200% of salary. This means the CEO is able to sell all but £2million of his shares whenever he likes. Where is the alignment with shareholders in this approach? How can shareholders be sure that he will be retained and motivated? These points are not discussed in the Remuneration Report, which lamentably fails to get to grips with the key issues of motivation, alignment and succession. The contrast with Berkeley Group is stark.

Persimmon should require executive directors to hold their shares until 2 years after they leave. Such time will enable any legacy issues to show through before the executives cash in their shares. That is the best way to create alignment with shareholders.

The new remuneration policy is a plain vanilla one, with a maximum bonus of 200% salary for the CEO and a performance share plan (LTIP) giving up to 200% of salary (or 300% in some circumstances). ShareSoc considers these ratios to be excessive. ShareSoc’s Remuneration Guidelines suggest these levels should be halved.

The special circumstances of this highly successful company surely require more creativity than this anodyne plan. If the previous plan, which was billed as a ten year plan was so successful, then why was not a similar plan considered again? Although we are opposed to the quantum of payout, there are a number of good points in the structure of the previous plan, which are not included in the new plan.

Last year ShareSoc criticised the increase in the pension allowance to 24% salary, which seemed totally unnecessary in view of the upcoming £100 million share plan bonanza. Sadly this year we see no reduction in the pension allowance for the current directors, although there is a sop: new directors will receive the same level of pension as other employees. It is a pity that the existing directors did not step up to the plate and volunteer to drop their enhanced pension. This is just unnecessary icing on the cake, excessive greed and deserves all the criticism that can be levied!

Roger Lawson

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: http://www.sharesoc.org/leeds-seminar.html

Also please note that registration is now open for our next event in Altrincham on the 16th May. Go here for more information: http://www.sharesoc.org/altrincham-may.html

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:

http://www.sharesoc.org/richmond-apr.html

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: http://www.sharesoc.org/london-apr.html

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