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

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

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

AIC Response to Green Paper

The Association of Investment Companies (AIC) have published their response to the Government’s Green Paper on Corporate Governance. One recommendation contained therein is that “The AIC also recommends that a detailed study to assess retail investors’ access to voting services on platforms and other nominee account services is undertaken to identify any necessary reforms”. This is of course a very positive endorsement of an issue that ShareSoc has been campaigning upon for some time – see our campaign page here:

In addition if you read the detail submission, they say “Additionally, the study should assess any barriers to switching providers that may be preventing shareholders, that do want to vote but are unable to, from moving to a provider that does offer this service”. This is indeed a very important issue also as currently it takes way too long to switch between brokers or platforms. For example, my latest broker switch has now been running since last October. And that’s not the first time I have experienced such delays. Anyone who experiences this problem should complain to the FCA as I have already done in the past – but they clearly do not get enough complaints about it because no action has been taken and the response did not likely indicate any will be.

Otherwise the AIC’s response to the Green Paper can be read here:

Roger Lawson

FRC to Investigate Redcentric Audit

Further to ShareSoc’s campaign regarding accounting irregularities and related matters at Redcentric (AIM:RCN), I am delighted to see that the FRC has launched an investigation into the audit of Redcentric’s accounts by PWC:

The FT also reports on this investigation today, coming hot on the heels of PWC’s embarrassment at the Oscars ceremony:

This article highlights that PWC is also under investigation in relation to audits of BHS; Barclays compliance; Connaught and RSM Tenon. It has already been sanctioned in respect of its audit of Cattles. Further, PWC has been replaced as Tesco’s auditor, following the accounting scandal there, and failed to detect irregularities at BT’s Italian subsidiary.

Shareholders may wish to question any firms currently employing PWC as auditors.

I am also pleased to report that two members of the campaign and I met with the Redcentric chairman and new CFO last Friday. The meeting was productive, and amongst other matters, included discussion of PWC’s performance and action being taken. I will be publishing a report on the meeting for campaign members shortly, and taking further action, as described in the report.

Mark Bentley

Press Release – Response to Green Paper on Corporate Governance

ShareSoc has today issued the following press release:

How to fix the ills of the UK Corporate Governance scene? ShareSoc and UKSA have given their solutions in a response to the Government Green Paper on Corporate Governance Reform. We have emphasised that the following are the key issues:

  1. Engagement between shareholders and companies is not working. Shareholders are not exercising effective stewardship and control, and boards are failing to fulfil their fiduciary obligations to members. As a result, public trust in business is low. This is bad for business and for long term investors. It needs to be addressed.
  2. The ownership structure of public corporations is a problem. It means that beneficial owners’ interests and views are not represented adequately. The bulk of public company shares are controlled by institutions whose interests are often not aligned with those of the beneficial owners.
  3. Shareholder Committees: We strongly support the concept of Shareholder Committees, provided that they represent the interests of all shareholders, including private investors and investors in employee share plans.
  4. Problems in the voting chain: This is not highlighted in the Green Paper. The proliferation of shareholders who are not directly interested in the companies in which they own shares– for example, intermediaries, ETFs, tracker funds and other index-related funds – corrupts the governance and stewardship process and the associated governance checks and balances. This is exacerbated by stock-lending. This prejudices the concept of corporate governance based on shareholder oversight, and places too much influence over our companies in the hands of traders – the ultimate cause of short-termism.
  5. Disenfranchisement of individual shareholders: The Green Paper recognises the problem that most private investors are now obliged to hold their shares in pooled nominee accounts wherein shares are legally owned by an intermediary. The ability and rights of informed individual investors to influence the affairs of companies in which they have invested is fundamental to good governance.
  6. Complexity of boardroom pay: Systems of remuneration for directors have become excessively complex, as a result of the structural governance weaknesses identified in the Green Paper. The mechanisms for triggering bonus payments have become opaque, the quantum of the payouts is often impossible to predict, the true motivational impact has become questionable while the reporting to shareholders has become cumbersome and often obscure to the point of incomprehension.
  7. Weaknesses of long-term incentives: Boards and their advisors have taken advantage of the lack of voting integrity to implement complex LTIPs as a major part of the overall remuneration package. It is widely accepted that the longer a reward is deferred the less motivational impact it has on the recipient. It is also accepted that for performance incentives to work, the achievement of outcomes must be within the control of the recipient. The current system of long-term incentives fails both these tests. It can encourage perverse behaviour which we do not want from those who run our companies.

Shareholder Committees are a core part of the solution to the problems of corporate governance. There are many other elements of governance and control that can be improved and we have commented in our response on those where we have specific knowledge. However, without Shareholder Committees, and concomitant reform to restore the rights of individual shareholders, other changes to corporate governance are unlikely to produce meaningful change.

More Information

Our responses to the specific questions set out in the Green Paper are given here:  (the submission was a joint one from ShareSoc and UKSA).

Roger Lawson

RBS and Shareholder Committees

As readers may be aware, ShareSoc have requisitioned a resolution for the Royal Bank of Scotland’s (RBS) Annual General Meeting requiring a Shareholder Committee be appointed. Do they need one? The directors of RBS clearly think not.

For those readers who do live or work in London, you may find an article published yesterday (15/2/2017) in the London Evening Standard giving an overview of the major UK banks revealing. The article was written by Simon English and was headlined “End of the great banking bust (apart from RBS)” which he picked out as the one of the four still in deep trouble. To quote: “Even after nine years of losses, we still don’t know if we have hit the bottom of the well”; and: “Chief Executive Ross McEwan has perhaps the worst job in banking. He has been doing it since October 2013, so might soon decide he has had enough”. The punch lines were “Strong points: it can’t get any worse; Bad points: everything”.

Anyone who understands the challenges faced by RBS is likely to agree with those comments and hence it can surely be argued that they need all the help they can get to ensure a sensible strategy supported by all stakeholders. That is one objective of a Shareholder Committee.

It seems though that some public company directors are under the impression that the concept of Shareholder Committees might undermine the unitary board structure used in the UK, or undermine the authority of directors. The ShareSoc proposals do nothing of the kind. This is what our proposed resolution for RBS says: “It is not for the proponents of this initiative to micromanage the Company, and therefore this Resolution is intentionally not prescriptive. It is for the Directors to decide the terms of reference and operational details of the Shareholder Committee in line with this Resolution and to produce proposals for approval by shareholders in due course.” 

We made some suggestions in our supporting statement about what influence a Shareholder Committee might have but they were only options for consideration and none were intended to override the ultimate authority of board directors to decide what is in the best interests of the company. 

More information on our proposals on Shareholder Committees and RBS are present on this web page:

Roger Lawson