Departures – AA and Blur

Yesterday was the start of many people’s holidays. But two company chief executives are going to be taking longer holidays than they expected.

The Executive Chairman of the AA Plc (AA.) Bob Mackenzie has gone. The announcement from the company said he “has been removed by the board….for gross misconduct, with immediate effect”. According to press reports, this arose from a fracas in a bar, although there is also a suggestion that he may be suffering from a mental illness. Some newspapers just suggested it was a “Jeremy Clarkson moment”.

The share price of the AA dropped 14% on the day, which probably reflects the problems that can arise when you have an Executive Chairman dominating a business. It’s not recommended corporate governance practice and personally I tend to avoid companies who have them.

The AA is an interesting organisation which provides breakdown cover and other services for many motorists. Back in 1905, it was formed to warn drivers about speed traps. It later transmogrified into a commercial organisation when the members sold out. Now it is one of the largest operators of driver education programmes such as speed awareness courses. That has become a booming industry and more than a million drivers are now attending speed awareness courses each year. This has resulted in the funding not just of commercial organisations such as the AA but more than £40 million per year goes to the police and local authorities. For the first time in English law, it is now allegedly legal to pay the police to drop prosecutions – all you have to do is promise to attend such a course. There is no evidence that it has any benefit in road safety. More information on this dubious practice is present here: http://www.speed-awareness.org (a campaign run by the ABD against it).

The other departure yesterday was of founder and CEO of Blur Group (BLUR) Philip Letts. This was a company that listed on AIM more than 5 years ago and in 2014 traded at a price as high as 665p. It’s now 3p.

This was a company that was a typical “concept” stock. It was going to revolutionise the commissioning by SMEs of services which is still very much an informal market by introducing an internet market. Mr Letts must be a very persuasive person to keep the business alive this long by repeated fund raisings. But it’s a typical example of how unproven business models are very risky investments. Most companies would have changed the business focus and the CEO long ago, or simply wound up, but Mr Letts persisted.

Yesterday the temporary suspension on AIM was lifted as they finally published some accounts. The results were slightly improved in that losses were reduced, but it still looks an unviable business unless the new management can make substantial changes. Mr Letts was removed from the board effective on the same day.

Incidentally I do hold a few Blur shares – market value now £6 so I hope that has not prejudiced my comments. If you get enthused by the hype surrounding some early stage companies, and the persuasiveness of the management, there is one simple thing to do. That is to only invest a very small amount until the company proves its business model and actually shows that the business is likely to be profitable. Revenue alone is not enough, because anyone can generate revenue by spending lots of your money.

The other protection is when the company fails to achieve its stated business plan, to simply sell and move on. Ignore the tendency to “loss aversion” where you hold the dogs in case of recovery. Or if you fear missing out on a big recovery, simply reduce your holding to a nominal level as I did on Blur and saved myself even more money.

So I invested a very small amount initially and then reduced it later to a miniscule level.

Just one point to note is that the company actually spells its name “blur” rather than “Blur” as I have used above, thus ignoring the rules of English grammar. Such affectations in companies to be “different” are always a bad sign in my experience.

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

Disclaimer: Read the About page before relying on any information in this post.

Why Institutions Cannot Control Pay

An interesting article in the Financial Times FTfm supplement on Monday helped to explain why pay is so out of control in public companies. In an interview with Rakhi Kumar of State Street Global Advisors, she made it plain what the problem is.

State Street may not be a household name in the UK, but they are one of the world’s largest fund managers. Fourth in size behind only Blackrock, Vanguard and UBS according to Wikipedia. Last year State Street had more than 4,000 pay proposals to review globally. They used a filter to identify 1,000 proposals that were the most controversial (implying that they did not even look at the other 3,000 and automatically voted “for” the others rather than abstained). They only voted against 300 of them.

It’s actually even worse than the above comments indicate because only this year have they started to include “quantum” of pay in the screen. In other words, the amount of money paid to chief executives was not even considered in the screen. So outrageous levels of pay would not even have been looked at. One can see exactly why companies like State Street, Vanguard and Blackrock who dominate all major stock markets have been criticised for their role in letting pay get out of hand.

Now this writer has a large portfolio consisting of over 70 stocks. I receive all their Annual Reports and vote all my shares at the AGMs where practical to do so (regrettably not always easy in nominee holdings). I have the same problem as State Street in that I do not have time to read the detail of all the Remuneration Reports which now can stretch to more than 30 pages. So here are a few tips on how to handle the task to help folks like State Street:

State Street may not be a household name in the UK, but they are one of the world’s largest fund managers. Fourth in size behind only Blackrock, Vanguard and UBS according to Wikipedia. Last year State Street had more than 4,000 pay proposals to review globally. They used a filter to identify 1,000 proposals that were the most controversial (implying that they did not even look at the other 3,000 and automatically voted “for” the others rather than abstained). They only voted against 300 of them.

  • I speed read the comments of the Remuneration Committee Chairman to see if there is anything of note.
  • I review the quantum of pay for the two highest paid directors (which for UK companies is easy now there is a “single figure audited remuneration” table). Is it reasonable in relation to the size and profitability of the company? If not, I vote against the Remuneration Report (and Policy if that is on the agenda). Any figure over £1 million, regardless of the size of the company I am likely to consider unreasonable. Similarly, any company where pay has gone up while profits and/or dividends have gone down is viewed negatively. The pay of non-executives I would also glance at.
  • I look at the LTIPs (which I generally don’t like at all) and bonus schemes. Any of those that enable more than 100% of basic pay to be achieved I vote against.

So that’s it. A quick and effective approach to making decisions on pay which can take about 5 minutes. It may not be perfect, but it is better than abdicating one’s duty altogether.

ShareSoc has published some Guidelines on how to set pay which gives more details and may be more helpful for smaller companies if you want to consider things in more detail.

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

Disclaimer: Read the About page before relying on any information in this post.