LSE General Meeting and Blancco AGM

Yesterday I attended two company general meetings (I hold a trivial number of shares in each). Here’s a brief report on events, with the later one being more interesting than the first one.

London Stock Exchange (LSE) General Meeting.

As readers may be aware, a General Meeting was called at the LSE by The Children’s Master Investor Fund (TCF), which is led by Sir Christopher Hohn, in an attempt to remove the Chairman Donald Brydon. That was the only item on the agenda. This arose from a dispute over the removal of CEO Xavier Rolet after the board decided to do some “succession planning”. Mr Rolet has been a very successful leader of the LSE for eight years (the share price has gone up more than 6 times since he was appointed to the board in 2009).

Mr Rolet was going to depart after the Deutsche Borse merger but when that fell through the board apparently decided that he should be replaced. Sir Christopher Hohn objected to him being eased out. There then appeared a number of press reports (e.g. in the FT) suggesting that Mr Rolet was a difficult person to work with – rude to colleagues, tended to not pay attention in meetings, and other defamatory remarks. The company’s defence document for the meeting referred to Mr Rolet’s “operating style” as an important factor in seeking a replacement.

The meeting was attended by mainly “suits”, with very few private shareholders as is more common at these kinds of events – only the latter asked any questions. Neither Mr Rolet or Mr Hohn attended but the latter certainly had representatives present.

The meeting was chaired by the Senior Independent Director, Paul Heiden, and the acting CEO Donald Warran also spoke. Mr Brydon said little. Mr Warren emphasised the need for a “team” to deliver business success and made positive comments about the prospects for the company.

One shareholder commented that it was a “sorry affair” that had generated considerable opprobrium against the company.

The vote was taken on a poll, with results announced some time later. The votes were 79% opposed to the resolution to remove the Chairman (i.e. 21% supportive although there were also 9 million votes Withheld). Sir Christopher Hohn suggested afterwards that this shows considerable support for a change of Chairman and that the board should look to do that sooner rather than later.

Comment: I agree with the views expressed by one shareholder in the meeting. This seems to have been handled badly. Succession planning for non-executive directors who have reached ten years’ service are routine. But when you decide to remove an executive director you have to tread a lot more carefully. This resulted in a public battle, and then having to pay off Mr Rolet with a very generous compensation package.

The allegations about Mr Rolet’s management style may or may not be true. But forceful personalities are very common in high achieving leaders (Steve Jobs and Bill Gates are two very good examples). Organisations are wisest to put up with such personalities in my experience. Having heard what was said at the meeting, I voted in favour of removing Mr Brydon as Chairman. 

Blancco (BLTG) Annual General Meeting

Blannco is an AIM listed software company that specialises in data erasure and mobile phone diagnostics. It transmogrified from a business named Regenersis which was into hardware repair and there were changes of management and restructuring when that happened.

The meeting was chaired by Rob Woodward with about a dozen, mainly disgruntled, private shareholders present.

The reason for their unhappiness is no doubt the substantial losses reported in the last three years (£4.3 million in the year ending June 2017) compounded by the need to restate the 2016 accounts following the discovery by a new interim CFO that sales worth £3.5 million booked in June and December 2016 were uncollectable. The company had to raise additional funds as a result at that time. The former CEO, Patrick Clawson, departed and the interim CFO is now interim CEO. They are looking for a new permanent CEO.

Mr Woodward opened the meeting by introducing the board and said “last year was a year of substantial challenge”. He summarised the events mentioned above and said “several members of the senior management team had departed”. He suggested the company needed to rebuild trust with all stakeholders, but the market opportunity remains strong. He said he was unable to comment on some of the investigations undertaken into past events for legal reasons.

Shareholders asked questions about current revenue recognition policies. Then the question of who might be accountable arose, e.g. the auditors for failing to spot the abuse or the former CEO. But Mr Woodward said the board did not believe it was in anyone’s interests to take action against individuals.

Note: the auditor at the time was KPMG but they were replaced by PWC at this meeting. Past events were not given as a reason but open tenders following length of service and other platitudes. Mr Woodward stated the auditors correctly prepared the accounts based on management information provided and that the management overrode controls. The company had taken legal advice but were unwilling to disclose it.

I asked whether there had been any report to the FRC asking them to investigate the audit. Apparently not.

A vote on the resolutions was taken on a show of hands. All resolutions passed with 100% voting For in several cases. But there were over 11 million votes Withheld on some of the resolutions. I asked who that might be as clearly some institution was unhappy. Although the Chairman declined to say, a shareholder pointed out that the number matched the holding of M&G/Prudential (see page 29 of the Annual Report).

Simon Herrick, acting CEO, gave us some information on his background (he had recently helped to float Ramsdens, a financial services company). He said Blancco had a great position in the market. Data erasure will be a big market but it is really only just beginning to kick off. The company seemed to have been rationalising its operations by introducing Salesforce everywhere and a new accounting system (NetSuite). He said the company did not need more cash in the short term but they are not generating large amounts either. He suggested shareholders study the last results presentation on their web site where cash flow is analysed (page 14).

Apparently the company is well down the process of finding a new CEO with a software background, strong leadership capabilities and who can grow the business. They are focusing on a US background which is their major market at present and where such people are easier to find. (Comment: but they are also expensive).

Note it is remarkable that this company only has one person on the board with any software industry experience. To my mind this is a major defect.

Concluding Comments: This problem of revenue recognition at software and other IT companies persists, with auditors apparently incapable of identifying the signs. The rules in the accounting standards have been tightened up, but the activities of over enthusiastic management keen to achieve their bonuses or even ramp up the share price persists. This is in reality a fraud on the company and on their investors.

Why auditors are still proving incapable of spotting such frauds is probably because they are not sceptical enough about the information they are given. But they are not that difficult to identify. Large deals done near financial year ends, where the cash is not yet collected or the agreed payment terms are very extended should be examined very closely.

Not that these are foolproof. As we are coming up to the year end, I recall the case of Software International some years ago who got their sales staff to book sales to customers near the year end which were then invoiced. The customers were told they should simply cancel them in the new year. They employed very persuasive female sales staff who begged the customers to help with their bonus entitlements. The company collapsed when this process was discovered.

But there are way too many of these problems still arising, e.g. HP/Autonomy, Globo (both audits still under investigation), and more recently IDOX. Readers can probably suggest others.

As regards the prospects for Blancco, there is certainly a market opportunity but whether it can be exploited profitably remains to be seen. They really do need a good new CEO but they are not easy to hire. In the meantime, the events in the last couple of years must have been somewhat demoralising for the company staff. If I worked for this business, I am not sure that I would have great confidence in the current board. These kinds of businesses need visionary leaders who can promote the merits of the new technology enthusiastically and who have a very strong technology background.

With profits somewhat uncertain, but on a revenue multiple of 1.5 times, the uncertainty is probably reflected in the current share price.

Postscript: Feel sorry for KPMG losing the audit of Blancco? You don’t need to. The average pay of partners in the UK at the firm last year was £519,000 and according to the last annual report there were 623 UK partners. But those at PWC, EY and Deloittes did even better (the latter on £865,000).

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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