RBS, Shareholder Committees, LTIPs and Weir

It is good news that the Royal Bank of Scotland (RBS) have accepted a requisition for a resolution on a Shareholder Committee at their forthcoming AGM. ShareSoc and UKSA, who jointly promoted this under the leadership of Cliff Weight have issued a press release confirming the resolution has finally been accepted after some legal evasions to try and avoid it.

Shareholder Committees are a way to improve corporate governance at companies and ensure that the views of shareholders (and potentially other stakeholders) are noticed by the directors. It might put a stop to such problems as wildly excessive pay in public companies which non-executive directors have been unable to do – mainly because they are part of the problem.

RBS has an appalling track record of mismanagement and dubious ethics in recent years, from the dominance of Fred Goodwin who pursued a disastrous acquisition and then a right issue (in 2008) that was promoted by a misleading prospectus, to the activities of its Global Restructuring Group (GRG) which is still the subject of regulatory action and law suits, through involvement in the sub-prime lending problems that caused the financial crash to PPI complaints.

A Shareholder Committee might have tackled some of these issues before it was too late. You can read more about the campaign to get one at RBS, and how shareholder committees operate here: https://www.sharesoc.org/blog/campaign-to-obtain-shareholder-committee-at-rbs/ . I wrote the original note on the subject published there by ShareSoc back in 2011 and I still consider that it would be a step forward in UK corporate governance to have one in all public companies. But there is still strong opposition from boards to the idea mainly apparently on the principle that it might interfere with their decisions. That may be so but only if they are unjustifiable and it would not undermine the “unitary” structure of UK boards.

Shareholders in RBS should make sure they vote for the resolution to appoint one at the AGM, but winning the vote will not be easy. RBS have made it a “Special Resolution” which requires 75% support.

Another aspect of RBS that has concerned investors is the delay in paying out the legal settlement that was agreed over the Rights Issue. This has received a lot of media coverage but the problems faced by the legal firm now handling the settlement, Signature Litigation, should not be underestimated. It appears that they face two problems: 1) confirming the eligible claimants and their shareholdings; and 2) confirming the contracts with “litigation funders” who helped to finance the legal action and their entitlements.

You might think that confirming the shareholders would be easy but it is not. A very substantial number of the claimants will have held shares in nominee accounts (i.e. the shares they subscribed for were not put on their names on the share register of the company). They are quite likely to have subsequently sold the shares due to the collapse in the share price. After 10 years the nominee operator may not be able to confirm their past holding, and if they ever received a contract note or other written confirmation of their holding they may not have printed it out or retained a copy in digital form. Many claimants may have died in the meantime or become senile, or moved house or changed their email address so that would create other problems.

There are two morals to this story: 1) Make sure you always keep accurate records of share transactions, including any contract notes or confirmation of subscriptions; 2) do push for reform of the share registration system so that everyone is on the share register and there is no doubt about who owns what and when the shares were acquired.

As regards the contracts with litigation funders, it is entirely appropriate that Signature Litigation seek to confirm the details of those contracts and that they were appropriate, i.e. that real services or funding was provided and the commission due was fair and reasonable. The fact that these arrangements seem to be difficult to confirm, or at least are taking time, certainly raises some doubts that the campaign and legal action was competently managed all through its duration.

However, as I recently said to a member of the fourth estate, the action group(s) and shareholders involved in this case should be complimented in continuing the fight for ten years against very difficult odds and a ridiculously expensive legal system. I know exactly how difficult these cases are – the Lloyds Bank one is similar and is still in court. To obtain a settlement at all in the RBS case was an achievement, when there was no certainty at all that it would be won.

As regards corporate governance, an interesting item of news today was that from Weir Group Plc (WEIR) who are changing their remuneration scheme to replace LTIPs. That was after losing a “binding” vote on pay two years ago. The new scheme means shares will be awarded (valued at up to 125% of base salary for the CEO per year) with no performance conditions attached, although the board may be able to withhold awards for underperformance. The base salary of the CEO was £650,000 in 2016 while Weir’s share price is still less than it was 5 years ago. The justification for scrapping the LTIPs was that they paid out “all or nothing”, often based on the prices of commodities that directly affect Weir’s profits and share price. They are also changing the annual bonus so that it focuses more on “strategic objectives” rather than “order intake and personal objectives”.

Comment: as readers may be aware, I regularly vote against LTIPs on the basis that I am not convinced they drive good performance and tend to pay out ludicrously large amounts. The new scheme might ensure that directors do hold significant numbers of shares, which is a good thing, but with minimal performance conditions this looks like a simple increase in base salary, in reality a more than doubling for the CEO. Looking at the history of remuneration at Weir this looks like a case of wishing to continue to pay out the same remuneration by changing the remuneration scheme when past targets were not achieved.

They really have not learned much from past mistakes have they? This would be another company where it would be good to have a Shareholder Committee to bring some reality into the minds of the directors.

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

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