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

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

Interesting FT Articles on Fund Performance , Nick Train and Executive Pay

There have been some very interesting articles in the FT in the last few days. On the 25th February John Authers discussed market timing and passive versus active management. He quoted consumer research group Dalbar who have compared active and passive funds. Although passive funds have beaten active funds in the long term, because of their lower costs, investors in active funds have received higher returns in the last 15 years. How can that be? It’s because to quote: “Holders of passive funds are generally terrible timers, buying at the top and selling at the bottom”. So the message is “The easier it is for us to time the market, the more we take advantage of the opportunity to time it badly”. That’s a very important message for all private investors who invest in funds of all kinds.

On the 27th February there was a profile of fund manager Nick Train (manages top performing trust Lindsell Train and others). Interestingly he discounted the wisdom of meeting company management – he was quoted as saying “But the truth is that there is no correlation between access to company management and superior investment performance”. He apparently prefers to spend time reading – a part of his library is devoted to books on Warren Buffett for example. Like many master investors, he is clearly an avid reader. It’s an interesting article although I am not sure that I would altogether discount the wisdom of meeting management. From my experience, even a brief contact, e.g. at an AGM, can often tell you a lot about whether you wish to back the management or not although it’s certainly not a foolproof process. There are a lot of bullshitters in this world who get to be company directors – readers no doubt know a few.

On the same day there was also an article by Daniel Godfrey, one of the founders of “The People’s Trust” (we expect to publish an interview with him in the next ShareSoc Informer Newsletter). He tackled the issue of executive pay and made an interesting suggestion. This was to go for a “salary-only” model where part of the salary is paid in shares which have to be held for seven years. No need for any other performance incentive – if the company performs then the shares become worth more.

Well that seems eminently fair, workable and simple to me. Complexity of late in remuneration policies has become an absolute nightmare and has led to the ramping up of pay. What do readers think about this idea?

Roger Lawson

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: http://www.sharesoc.org/ShareSoc-UKSA-Green-Paper-Corporate-Governance-Response.pdf  (the submission was a joint one from ShareSoc and UKSA).

Roger Lawson

Link Between Pay and Performance Is Negligible

A study commissioned and just published by the CFA Society gives a very good analysis of how the pay of public company directors bears little relationship to fundamental measures of company performance. It also highlights how they can game the system by accepting LTIPs and bonus systems that rely on performance measures such as earnings per share when what really matters is whether they achieve a good return on capital invested. The authors suggest this has in reality been less than 1% per year over the last 11 years.

The study was undertaken by Weijia Li and Steven Young of Lancaster University Management School. Here’s an extract from their report which highlights the issues:

“Collectively, our findings suggest a material disconnect between pay and fundamental value generation for (and returns to) capital providers. The research suggests the need to redirect the spotlight on CEO pay away from a focus on pay levels and broad calls for more performance-related pay arrangements, towards a more refined discussion about the type of performance measures employed.

Two key themes emerging from the results are: (i) the critical nature of performance measure choice in the debate over CEO pay arrangements; and (ii) the need for future recommendations on pay to focus more attention on linking incentives and rewards more directly to performance metrics that reflect long term value creation for capital providers.

At one level, the widespread absence of value-based metrics in CEO pay contracts is surprising given their compelling conceptual basis coupled with considerable evidence from consultants and academics on the benefits of value-based management systems. Practically, however, value-based metrics tend to be more complex to compute (particularly where cost of capital is concerned) and more difficult to implement (especially at lower levels of the organisation hierarchy).”

As many experienced investors know, it’s return on capital that really differentiates good management from bad. But when you have performance related pay schemes that are focussed on earnings per shares, or share price performance, it’s easy to go empire building so as to increase your pay. For example, borrow money for an acquisition so as to increase earnings.

This report is yet more evidence of how performance related pay schemes have led to massive increases in pay without matching improvements in performance (they report that median FTSE-350 CEO during the sample period was £1.5 million measured at 2014 prices). Pay has gone up by 82% in real terms over the review period.

For more information see:


Roger Lawson