Alliance Trust, Katherine Garrett-Cox and Perverse LTIPs

I have previously commented positively on the outcome of the “revolution” that took place at Alliance Trust (ATST) as reflected in their latest accounts which were recently published. That revolution resulted in the departure of former CEO Katherine Garrett-Cox who resigned in February 2016.

The latest Annual Report shows that she is still being paid large amounts though. For example, total “single figure” remuneration for the 2016 calendar year is given as £1,305,000 and was £832,000 for 2017.

She is likely to be paid still more in future as she is still entitled to LTIP and performance share awards that will vest in 2020. The pay-outs will depend on the positive performance of the company which has been achieved since her departure, which she obviously will have had little influence over. Certainly not by 2020.

Now she may be contractually entitled to these payments under her contract or as might have been agreed to ensure her timely departure, but is it fair and reasonable for her to claim such amounts? Some shareholders think not and are writing to her to suggest that she might like to consider waiving her entitlement or donating the value to charity.

This is of course yet another example of how LTIPs and other performance schemes in public companies lead to perverse outcomes.

P.S. Would anyone like a proxy appointment to enable them to go to the Persimmon AGM on the 25th April in York – and harass them about the wonders of their LTIPs? I can supply if you telephone 020-8295-0378.

Roger Lawson (Twitter: )

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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: . 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: )

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The Dangers of Share Tipping, Alliance Trust and AIM Regulation

Share tipping is a mug’s game. Both for the tipsters and their readers. More evidence of this was provided yesterday.

Investors Chronicle issued their “Tips of the Week” via email during the day. It included a “BUY” recommendation on Conviviality (CVR). Unfortunately soon after the company issued a trading statement which said the forecast EBITDA for the current year (ending 30th April) will be 20% below market expectations. Conviviality is a wholesaler, distributor and retailer of alcohol and it seems there was a “material error in the financial forecasts” in one part of the business and that margins have “softened”.

The share price dropped by almost 60% during the day and fell another 10% today at the time of writing. This puts the business based on the new forecasts on a prospective p/e of less than 6 and a dividend yield of over 10% (assuming it is held which may be doubtful). Is this a bargain?

Having had a quick look at the financial profile I am not sure it is. Although net debt of £150 million may not be too high in relation to current revenues or profits, their net profit margin is very small and their current ratio is less than 1, although this is not unusual in retailers who tend to pay for goods after they have sold them.

(Postscript: Paul Scott of Stockopedia made some interesting comments on Conviviality including the suggestion that they might be at risk of breaching their banking covenants and hence might have to do another placing. Certainly worth reading his analysis before plunging into the stock. He also commented negatively on the mid-day timings of the announcements from Conviviality and Fulham Share which I agree with, unless there was some compulsive reason to do them – perhaps they were aware of the Investors Chronicle commentary being issued).

Another tip Investors Chronicle gave yesterday was on Fulham Shore (FUL) which they rated a SELL on the grounds that “growth looks unsustainable”. They got that one right. The company issued a trading statement on the day which also said EBITDA would be below market expectations. Their London restaurants are simply serving fewer customers. The share price dropped 17% on the day. This looks to be symptomatic of the problems of restaurant chains – Prezzo are closing a number of outlets which I was not surprised at because from my visits it seemed rather pedestrian food at high prices. Restaurant Group also reported continuing negative like-for-like figures recently, perhaps partly because of price cutting to attract customers back. Restaurants are being hit by higher costs and disappearing customers. Boring food from tired formulas is no longer good enough to make money.

Another announcement yesterday was results from Alliance Trust (AT.). This is a company that I, ShareSoc, some investors in the trust and hedge fund Elliott Advisors spent a lot of effort on to cause a revolution a couple of years ago so it’s good to see the outcome has been beneficial. Total shareholder return was 19.1% which was well ahead of their benchmark. There was a lot of doubt expressed by many commentators on the new multi-manager investment strategy adopted by the board of directors and the involvement of Elliott, who were subsequently bought out, but it has turned out very well.

The only outstanding issue is the continuing problems at Alliance Trust Savings. They report the integration of the Stocktrade business they acquired from Brewin Dolphin has proved “challenging”. Staff have been moved from Edinburgh to Dundee and the CEO has departed. Customer complaints rose and they no doubt lost a lot of former Stocktrade customers such as me when they decided to stop offering personal crest accounts. So Alliance have written down the value of Alliance Trust Savings by another £13 million as an exceptional charge. No stockbrokers are making much money at present due to very low interest rates of cash held. It has never been clear why Alliance Trust Savings is strategic to the business and it’s very unusual for an investment trust to run its own savings/investment platform. Tough decisions still need to be taken on this matter.

AIM Regulation. The London Stock Exchange has published a revised set of rules for AIM market companies – see here: .

It now includes a requirement for AIM companies to declare adherence to a Corporate Governance Code. At present there is no such obligation, although some companies adhere to the QCA Code, or some foreign code, or simply pick and choose from the main market code. I and ShareSoc did push for such a rule, and you can see our comments on the review of the AIM rules and original proposals here: and here is a summary of the changes published by the LSE: (there is also a marked up version of the rule book that gives details of the other changes which I have to admit I have not had the time to peruse as yet).

In summary these are positive moves and the AIM market is improving in some regards although it still has a long way to go to weed out all the dubious operators and company directors in this market.

Roger Lawson (Twitter: )

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Persimmon Pay and Rightmove Results

This morning the directors of Persimmon (PSN) gave in to demands to revise the benefits they would get from their LTIP scheme. This has drawn lots of criticism from investors, even institutional ones who voted for the scheme a few years back. They clearly either did not understand the workings of the scheme or did not understand the possible implications. I voted against it at the time as a holder of shares in this company, but then I do against most LTIPs. The LTIP concerned potentially entitles three directors and other staff to hundreds of millions of pounds in shares.

Three of the directors have agreed to cut their entitlement to shares on the “second vesting” by 50%. They have also agreed to extend the required holding period and put a cap on the value of any future exercise.

However, they have not conceded anything on the first tranche of vesting which vested on the 31st December 2017. Director Jeff Fairburn, has said he will devote a substantial proportion of his award to charity, but surely that is simply a way to minimise his tax bill.

One particularly annoying aspect of the announcement this morning is this statement therein: “The Board believes that the LTIP put in place in 2012 has been a significant factor in the Company’s outstanding performance.  In particular, it has contributed to industry-leading levels of margin, return on assets and cash generation”. This is plain hogwash. The main factors were a buoyant housing market, supported by the Government’s “Help to Buy” scheme. House prices rose sharply driven by a shortage of housing while record low interest rates encouraged buy-to-let investors. It was the most benign housing market for decades.

So although the three directors have made some concessions, and the company Chairman has resigned, I suggest this has not really been as satisfactory an outcome as many folks would have liked to see.

Rightmove Results

Another company I hold who also operate in the property sector is Rightmove (RMV). This business mainly provides an advertising platform for estate agents. Results were much as forecast with revenue up 11% and adjusted earnings per share up 14%. These are good figures bearing in mind that there were some concerns about increased competition from two other listed companies, Zoopla and OnTheMarket, plus concerns that the business was maturing. In addition the number of house moves has been falling, thus impacting one would have assumed on estate agent transactions, but they seem to be spending more to obtain what business is available to them.

There are very few estate agents, traditional or on-line ones, that are not signed up with Rightmove plus one or other of the competitors. Although growth in revenue to Rightmove has been slowing, it’s still improving mainly because of price increases and new options available to advertisers. It is clear that Rightmove has considerable “pricing power” over its customers.

The really interesting aspect of this business is their return on capital that they achieve. On my calculations the return on equity (ROE) based on the latest numbers is 1,034% (that’s not a typo, it is over one thousand per cent).

This is the kind of business I like. A dominant market position due to the “network” effect of being the largest property portal, plus superb return on capital.

But their remuneration scheme is not much better than Persimmon’s. Retiring CEO Nick McKittrick received £159,200 in base salary last year, but the benefit from LTIPs is given as £1,063,657, i.e. seven times as much. Other senior directors had similar ratios if other bonuses are included (cash bonuses and deferred share bonuses). Such aggressive bonus arrangements distort behaviour. In the case of Rightmove I believe it might have resulted in an excessive emphasis on short-term profits which has enabled their two listed competitors to grab significant market shares.

Roger Lawson (Twitter: )

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RBS, GRG and Borrowing From Banks

I just had a read of the Financial Conduct Authority’s report on the Global Restructuring Group of the Royal Bank of Scotland (RBS). This was published by the Treasury Select Committee despite the fact that the FCA wished to delay it further. At 361 pages in length, it’s not exactly a quick read.

The operations of GRG have been the subject of many complaints – hundreds in fact from mainly smaller businesses. This was a part of GRG where borrowers in default were placed so as to “help” them. In reality their fees were raised and many of the financially distressed companies that went through the process ended up being put into administration.

The FCA report certainly supports many of the complaints. It says one in six of the cases it examined RBS had caused “material financial distress”. They suggest there were major failings in GRG’s “governance and oversight arrangements” where narrow commercial objectives were paramount. The interests of their customers were ignored and the stated objectives of GRG to support the turnaround of potentially viable customers was not pursued. In summary they conclude there was “widespread inappropriate treatment of customers”.

In other words, the interests of RBS took precedence. Bearing in mind that this was the culture in RBS under the leadership of Fred Goodwin, it’s not that surprising. I saw this myself where RBS was involved with public companies in some difficulties. The other stakeholders seemed to be ignored by RBS who pursued their own interests regardless. But should borrowers have ever expected a bank like RBS to take account of their interests?

Regrettably small businesses often rely on bank lending to fund their working capital. This is a very dangerous practice when working capital can swing violently in response to market circumstances. Even larger companies often go bust when they take on too much debt unwisely and simply run out of cash – the latest example being Carillion of course.

Since the financial crisis of 2008, people have lowered their trust in bankers. They are now rated alongside estate agents and used car salesmen. But past trusts in bankers was always misplaced. Bankers are there to make money from you or your company. When you have lots of assets and cash, they are happy to lend on good terms. When you really need the funds, they will be reluctant to lend and if they do charge high fees and impose onerous terms. The moral is: businesses should be financed by risk capital, i.e. equity or preference shares.

Companies that gear up their balance sheets with debt rather than equity (and RBS itself was a great example of the problem of little equity to support its business back in 2008), might apparently be improving the “efficiency” of their financial structure and enable higher profits but in reality they are also increasing the riskiness of the business. Investors should be very wary of companies with high or increasing debts. It might look easy to repay the interest due out of cash flow now, but tomorrow it might look very different.

You can read the full FCA report on GRG here:

Roger Lawson (Twitter: )

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Unicorn AIM VCT Annual General Meeting and APC Technology

Yesterday I attended the AGM of Unicorn AIM VCT (UAV) which is of course a Venture Capital Trust. I am generally not wildly keen on AIM VCTs from past experience – they tend to buy shares in companies from IPOs and Placings when the prospects for the company are being puffed up by promoters, and then they have no ability to intervene when problems arise as do VCTs who invest in unlisted shares and with onerous shareholder agreements. Neither can they get out easily because selling large blocks of shares in the market of such companies is not easy. You can see this from the portfolio of shares they hold – 75 “qualifying” shares including what I consider to be such dogs as Crawshaw and Grafenia. Lots of “zombies” in there – walking dead companies going nowhere fast.

From the presentation it transpired that UAV cannot even now fund such companies further if they get into difficulties because of the new VCT rules which emphasize investment in younger, growing companies. Indeed a presentation from one of the investee companies later in the meeting (from APC Technology) was a great example of the risks and problems of investing in early stage businesses (original cost £3.1 million, now valued at £226,000!)

However AIM VCTs have been doing better of later as the AIM market total return was 24.4% last year (some of the really hot stocks would not be VCT qualifying though). In comparison UAV achieved a total return of 7.4% last year which is not brilliant, and was much less than that from another AIM VCT I hold.

The meeting commenced with the formal business. One director absent with flu. All resolutions passed by large majority of votes and little opposition on the “show of hands”.

I did raise the question of the two directors on the board who have served for more than 9 years (Chairman Peter Dicks, aged 75, who is not the most loved of VCT directors from the events at Foresight VCTs) and Jocelin Harris, and the impact of the proposed new UK Corporate Governance Code which is tougher in this area. The answer I got was they were looking at board succession, but the Company Secretary claimed they can ignore the UK Corporate Governance Code because they follow the AIC Code. I disputed that they could do this and I spoke at length with him on the subject later. VCTs are fully listed companies and hence in my view need to adhere to the UK Corporate Governance Code. Their claim to be able to refer solely to the AIC Code, based on an ambiguous letter from the FRC Chairman who probably did not have the power to amend the rules for investment companies, is dubious in the extreme. I did say to him that in my view all directors of VCTs should be “independent” and although I have no reason to question any impropriety in this company, retirement after 9 years is a good principle.

Note that apparently only 6.8% of shareholders submitted proxy votes (there were over 50 in the meeting). I am not surprised the turnout is so low when I had great difficulty in voting myself. No paper notice of AGM, proxy voting form or Annual Report sent even though I am on the register, just a simple letter sent via email saying I could vote on-line. Bearing in mind I have never authorised them to use my email address for that purpose, I complained to Link (formerly known as Capita) about this. They are amending their records. Could I have voted on-line? Perhaps but having had numerous past difficulties with the Capita system for that I did not even attempt to try.

After the formal business, we had a presentation from APC Technology by CEO Richard Hodgson. He covered the history of the company. It ran into difficulties before he took over when it had a problem with high debt and aggressive actions by their bankers HSBC. The business used to be in fire and pest control but is now focused on distribution of electronic components. They tried a failed diversification but then decided to “stop doing the stupid stuff” and are now profitable. He mentioned they are into “smart buildings” which I have an interest in, but they are not sure who is going to pay for it – tenant or landlord. They also seem to like to make acquisitions of niche businesses where the owners wish to retire (a bit like the Judges Scientific model but smaller).

The last financial figures for APC are revenue £15.6m, profit before tax £0.2m (to August 2017). Is this an exciting business going somewhere? I doubt it on the cursory information provided and it’s in a sector which I have found tricky in the past and hence one I generally avoid.

We then had a presentation from fund manager Chris Hutchinson. He admitted total return was not the greatest this year and other VCTs had done better. But they did raise £48 million in new capital of which £12m had already been invested in 6 new investments. (Note: it is wrong to judge any investment company by its performance over one year – you need to look at the long term track record). As other VCTs have warned, under the new rules new investments are likely to be in earlier stage companies and returns might therefore be more volatile and lumpy.

I won’t cover his talk in depth nor the questions that arose, apart from the fact that one shareholder raised the issue of IDOX – one of the VCTs larger holdings (and one I hold directly). Chris said his view was that it was not “holed below the water” but there may be more negative adjustments to come. Sounds like they will be holding for a recovery, but then one gets the impression that they hold onto companies through thick and thin. I would prefer that they got rid of some of the dogs and had a more focused portfolio – 75 qualifying companies plus some non-qualifying is a large portfolio when small companies need a lot of monitoring.

In summary a useful meeting if unexciting.

Roger Lawson (Twitter: )

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New Corporate Governance Code – It Could Be Improved

I commented briefly earlier on the public consultation on a new UK Corporate Governance Code (see here: ). I have now submitted a detailed response to the public consultation which you can read here:

The main points I made therein are:

  1. I supported the inclusion of Chairmen in the 9-year rule after which they are no longer considered independent. But I think that period should also apply to tenure to avoid directors sticking around for too long.
  2. I am concerned about the wording that promotes diversity of gender, social and economic backgrounds in new board appointments. It appears to conflict with the requirement in law not to show any bias in selection (and quite rightly). Positive discrimination is as just as illegal as negative discrimination.
  3. I doubt that appointing a non-executive director to engage with the workface would be nearly as effective as the other two suggested methods of improving engagement.
  4. I question the approach to executive remuneration. It still does not discourage aggressive bonus schemes such as LTIPs and the ability of boards to retrospectively review awards (e.g. when the pay-outs turn out to be excessive) I consider to be quite unlikely to be effective in practice. The changes in this area are unlikely to stop the ramping up of pay levels to excessive levels.
  5. It perpetuates the myth that when companies need to engage with shareholders they can simply contact a “few major shareholders” to get their views. This does not work in most public companies nowadays because of the very diverse shareholder base, and also ignores all the private shareholders who could be the largest bloc. It should have proposed a more formal process such as a Shareholder Committee and disclosure on who has been consulted.
  6. It does not introduce restrictions on the appointment of directors with no knowledge of the sector in which the company operates. It perpetuates the English preference for “amateurs” versus “professionals”, i.e. assumes those who know less might be wiser.
  7. Likewise, it does not impose restrictions on the number of roles that directors should have.

In summary there are some improvements in the new Code, but more could have been done to improve the Governance of companies and toughen up the Code. Although I do not object to the principle of “comply or explain”, as there are always exceptions that justify some anomalies, I suggest there should be a requirement to provide more specific justifications for such exceptions. The excuses we get at present are often way too weak.

Readers are welcome to submit their own responses to the consultation. The more they receive from individual shareholders, the better. Feel free to “copy and paste” from my own submission.

Roger Lawson (Twitter: )

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