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

Alliance Trust Vote – A Victory for Private Investors and ShareSoc

Today Alliance Trust shareholders voted to support the Board’s proposals to change the investment management arrangements and to buy out Elliot. This is surely a major win for private investors and for the stance taken by ShareSoc and the Alliance Trust Shareholder Action Group (ATSAG) which ShareSoc has supported over the last 3 years. ShareSoc wholeheartedly backed the Board’s proposals. Alliance Trust can now move forward.

But it was a close run thing as proxy advisory services who advise institutions were not happy with the buy-back. As a result only some 77% and 83% of votes were cast for the relevant resolutions and the second one required a 75% vote as it was a special resolution.

See the ShareSoc Alliance Trust campaign page for more information and a report on the Meeting: http://www.sharesoc.org/alliance.html

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

Alliance Trust Press Release

ShareSoc has issued the following press release:

Alliance Trust have convened a General Meeting on the 28th February. It includes 4 resolutions covering the change in investment approach and the proposed share buy back of shares held by Elliott.

Our recommendation is that shareholders vote “FOR” all the resolutions.

ShareSoc is issuing this press release because we understand that some institutional investor advisory services have expressed some concerns about the proposals.

The Alliance Trust Shareholder Action Group which has been supported by ShareSoc is satisfied that the new Board of Directors has made good progress in revitalising the Trust since it was appointed. The steps taken have substantially closed the share price discount to net asset value (a long standing concern of many investors), the disposal of the non-core Alliance Trust Investments (ATI) subsidiary has been agreed and steps taken to make Alliance Trust Savings (ATS) both profitable and able to stand on its own feet. The board structure and corporate governance of the company have been changed and are now in a more conventional form for investment trusts.

The repurchase of the Elliot shares will avoid future pressure from them and the purchase appears to be at a fair price and does not favour them over other investors who can currently sell shares in the market at a similar price and will continue to be able to do so.

For those reasons we support the recommendation of the Directors to vote in favour of the resolutions. We encourage all shareholders to ensure that they vote on these important resolutions.

If the resolutions at the General Meeting were defeated then it would put the company back at square one and potentially create major problems. Investors need to consider the proposals bearing in mind the history of the company and the other options available. In other words, a holistic consideration of the proposals needs to be taken rather than taking issue with minor technical points.

More Information

See http://www.sharesoc.org/alliance.html for more background information on the Alliance Trust campaign.

Roger Lawson

VCT News – Baronsmead, Northern VCTs and Foresight 4

I attended the Annual General Meeting of Baronsmead Venture Trust this week (on 14/2/2017). It was not particularly well attended perhaps because of the early start time of 10.00 am. The Chairman, Peter Lawrence rebuffed the criticism of one shareholder and after I suggested a straw poll of investors present to see if they would prefer a later time, which showed many would, suggested they move it to 10.15 pm. That did not impress many present. The poll of course did not even include those who decided not to attend the meeting as it was too early.

ShareSoc has published a document on “How to Run a General Meeting” which is on our web site, and this is what it says on page 5: “Likewise timing should be set for 11.00 onwards because travelling in the rush hours of London or other locations is not ideal and as many private shareholders are retired it can ensure they can use cheap train fares. This is particularly important for shareholders who will have some distance to travel. If companies do not wish the expense of providing lunch, then set the time for 2.00 pm.” 

The Chairman and speakers also read from a script which he apologised for and said it was because of regulatory concerns. He certainly made some off the cuff remarks in the past but the new approach made his presentation very boring. Let us hope this does not become the norm unless he gets a better speech writer and rehearses it in advance. 

I will do a fuller write up of the meeting for the ShareSoc Members Network as soon as possible but there were some interesting points that arose of particular note. One was the lack of new investments in unquoted companies, so the VCT now has more investments in AIM companies than private equity. As one shareholder said, bearing in mind that in the past more returns were obtained from the latter than the former, this might be of concern. But it seems that AIM investments are becoming less risky and giving better returns of late. 

The new VCT rules and the risks of breaking those rules were discussed at length. A breach of the rules now means one can lose VCT status which would be disastrous for investors, i.e. one mistake in one investment could trigger it. As a result VCT managers are now asking for “advance assurance” on new investments which they can get from HMRC. But this takes a long time as HMRC do not have enough resources and it will be easy to let deals slip away as a result (indeed it seems Baronsmead lost two because the investees changed their minds recently). This could be a serious handicap for VCTs in future and is one of the reasons, apart from trying to understand the new rules, for the lack of new investments. It is surely an example of HMRC losing the plot and making such investments more difficult than they need be for no good reason.

Northern VCTs

A lot of investors in the three VCTs managed by NVM Private Equity will have been disappointed (including this writer) by the opening and closing of the recent fund raising for a “top-up” offer on the same day. This was an offer for only £4.3 million because of the need to avoid a prospectus, but even so investors who responded immediately the offer was open and sent off their cheques only to find that they had missed the boat because of the “first come, first served” process followed will not be happy. This possibly meant that those who physically delivered their applications the same day (to Newcastle), or whose forms simply got emptied out of the post-bag first, got their applications met in full, when everyone else missed out.  

There are surely better ways to do this  – for example by taking a ballot, or reducing applications pro-rata, as other VCTs have done in these circumstances. 

It would seem that there is some enthusiasm for the shares in the better performing VCTs such as Northern and Baronsmead because of the high tax-free dividends they have been paying of late. Whether these are sustainable under the new rules which require more investments in early stage companies is not clear, although their existing portfolios will be the drivers of fund performance and dividends in the short term.  

Anyway if you wish to learn more about the Northern VCTs or ask questions about the above, Tim Levett of NVM is presenting at the ShareSoc event in Altrincham on the 21st February – see http://www.sharesoc.org/altrinchamseminar.html

Foresight 4 VCT

Following their AGM in September where the directors only narrowly managed to get re-elected, a commitment was made to recruit new directors. The company has now announced the appointment of Michael Gray. Shareholders would have preferred any new director to be knowledgeable about VCTs (which are not conventional companies and are subject to complex regulations), experienced in investment in early stage companies which is what VCTs do, and be clearly independent, i.e. independent of the manager of the fund. 

Mr Gray does not obviously have the relevant knowledge or experience according to his background supplied by Foresight and he also seems to have business links to Foresight – for example he is a non-executive director of Triton Investment Management and Foresight has invested in Triton Solar 13 Fund. When there were other candidates interviewed for the position who had more relevant experience, this is surely disappointing. 

As there are some critical strategic decisions coming up at this company (e.g. the prospective merger), it is not a positive move and might well be challenged by shareholders at future general meetings.

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: http://www.sharesoc.org/rbs.html

Roger Lawson

Alliance Trust Voting Recommendations

ShareSoc has issued the following note to supporters of the Alliance Trust Shareholder Action Group:

Shareholders in Alliance Trust should have received a Notice of a General Meeting on the 28th February. It includes 4 resolutions covering the change in investment approach and the proposed share buy back of shares held by Elliott.

Our recommendation is that shareholders vote “FOR” all the resolutions.

The Alliance Trust Shareholder Action Group is satisfied that the new Board of Directors has made good progress in revitalising the Trust since it was appointed. The steps taken have substantially closed the share price discount to net asset value (a long standing concern of many investors), the disposal of the non-core Alliance Trust Investments (ATI) subsidiary has been agreed and steps taken to make Alliance Trust Savings (ATS) both profitable and able to stand on its own feet. The board structure and corporate governance of the company have been changed and are now in a more conventional form for investment trusts. The repurchase of the Elliot shares will avoid future pressure from them and the purchase appears to be at a fair price.

For those reasons we support the recommendation of the Directors to vote in favour of the resolutions. Please ensure you vote!

Note that many long-standing shareholders in Alliance Trust may have been disturbed by the aggressive stance taken by Elliott in May 2015 to reform the affairs of the Trust, which ShareSoc chose to support, after a long period of relative under-performance by the company. The outcome has demonstrated that shareholder activism can be positive if it is done in a way that is for the benefit of all shareholders and when the Directors respond in a positive way.

Please also recognise the considerable effort put in by ShareSoc and the Members of the Alliance Trust Shareholder Action Group to communicate the issues to shareholders and try to achieve a positive outcome.

If you wish to support ShareSoc (the affairs of Alliance Trust is just one of the issues we have dealt with of late) then please consider Membership (see http://www.sharesoc.org/membership_options.html ) or consider a donation to help cover our costs (see http://www.sharesoc.org/donations.html )

See http://www.sharesoc.org/alliance.html for more background information on the Alliance Trust campaign.

Roger Lawson