Abcam Remuneration Vote Only Narrowly Won

There was a vote by Abcam (ABC) shareholders last week on a new Remuneration Policy including a new “Profitable Growth Incentive Plan (PGIP)”. I voted against them because the proposals seemed very generous to me particularly bearing in mind that they are in addition to existing bonus and LTIP schemes and could involve up to 2.8% of shares being awarded to participants in the scheme (including 1.36 million shares to the CEO, currently valued at £14.25 per share).

The outcome of the vote was that 46% of shareholders voted against the revised Remuneration Policy and 44% against the PGIP. The company says that those who use proxy advisors did not support the resolutions but that “Abcam’s Remuneration Committee received positive indications of support for the final proposals following an extensive consultation process” prior to the meeting.

It seems the company plans to do nothing about this substantial opposition to the remuneration proposals which I consider most unfortunate. All they say is “The Board remains firmly committed to maintaining an open dialogue with its shareholders to ensure it fully understands their views and it will continue to constructively engage with those shareholders who were unable to support the proposals”. This is simply not good enough. I will also be voting against the current Chairman in future as I have done in the past after he failed to answer some simple questions I posed at a previous AGM.

This company’s financial performance has been declining in recent years. Perhaps the PGIP was designed to incentivise improvements in that regard but I think the directors and managers have incentives enough.

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

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Selling Technology, Intercede at Mello, and Sir Frank Whittle

I have just listened to a recording of the Mello event which took place on Monday evening. In the “Bash” section one of the companies presented was Intercede Group (IGP). This company sells security software and is based in Lutterworth, which is in Leicestershire in case you have never been there. Bearing in mind the company’s client list of banks, US Government bodies and companies such as Boeing and Wells Fargo you might think the location a bit odd.

I first purchased the shares in 2010 and I still hold them. But it became clear to me very quickly that this was a typical example of a company with great technology but unable to convert it to profits. The company was founded by Richard Parris who remained Executive Chairman for a very long time – until 2018 in fact when a new CEO took over. Losses have been turned into profits although revenue is still not great (£10 million last year).

I did visit the company’s AGM in Lutterworth a few times and at one meeting I discovered that the company’s operations director was actually Richard’s wife under a different surname. It’s always interesting what you can learn from attending AGMs! The problem was the dominance of the company by someone with a technology background rather than a sales or marketing background. At least that was what I perceived. The culture was I suspect a negative.

Oddly enough there was another company based in Lutterworth which I only recently learned about which had an analogous history. Great technology which became a world beater but where the owners never made much money out of it. This company was Power Jets Ltd which was the baby of Sir Frank Whittle – the inventor of the jet engine.

A recent biography of Whittle is called Jet Man. Its author is Duncan Campbell-Smith and it’s well worth reading. Whittle lost control of the invention and associated patents (being a serving RAF officer did not help) and his company was eventually nationalised. Rolls-Royce acquired some of the technology and it was also given to the USA for nothing. What should have been a great money-spinner for the UK and for Whittle after the war years was lost due to commercial incompetence.

There is apparently a memorial to Frank Whittle and a small museum in Lutterworth if you ever visit Intercede.

Will Intercede ever make real money? It’s a bit early to tell I think but I am certainly more confident in the new management than the old. A slight downside is the recent announcement that they are rewriting the LTIP to reduce the share price targets. I never like to see options rewritten but there may be some justification in this case and certainly the CEO, Klaas van der Leest, has achieved a remarkable turnaround. I’m even finally showing a decent return on my investment in the company.

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

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Victoria and Downing One VCT Annual Reports, and Rio Tinto Mea Culpa

With it being all quiet on the financial front, with a lot of people on holiday, I had the time to read a couple of Annual Reports over the weekend. First came Victoria (VCP), a producer of flooring products (carpets and tiles) in which I have a relatively small holding. Chairman Geoff Wilding always has some interesting things to say and their Annual Report is an exemplary model of shareholder enlightenment.

He commences with this statement: “There is an old Yiddish adage which, loosely translated, says “If you want to make God laugh, tell him your plans”. It is safe to say that when Victoria developed its business plan for 2020/21 at the start of this year, we did not factor in the complete economic shutdown in most of the various countries in which we operate”. He does briefly cover the latest business position but the Annual Report covers the year to the end of March so it is mainly historic data.

It was interesting to read this section: “A core element of our UK growth strategy, made possible due to the scale of our business, is our logistics operation, Alliance Flooring Distribution. 18 months ago, we made the decision to invest heavily in logistics, accepting the consequential temporary loss of some margin, in the belief that our customers – flooring retailers – would highly value reliable on-time delivery of carpet, cut precisely to size for a specific consumer order. This has meant that they can hold less inventory, freeing up cash from their working capital, and devote more space in their stores to point of sale rather than using it to warehouse product, and reduce waste, improving their margins. (Carpet is produced in rolls 25m long. However, houses rarely need exactly a full roll and retailers would invariably be left with a typical leftover 2-3m “short end”, which would be thrown away. In contrast, given our high volume of orders and sophisticated cutting planning software, our wastage is much lower). And this is exactly how it has turned out”.

Going back into history, in 1980 I developed a similar system for Harris Carpets to establish a computer system to optimise their central carpet cutting operations and minimise “remnants” or “short-ends”. This proved to be one of their key competitive advantages. Similar systems have been used by other big carpet retailers and distributors since, but the carpet market is still dominated by smallish local operations so you can see the advantages that Victoria might gain.

The second annual report I read was that of Downing One VCT (DDV1). Apart from a very poor financial performance for the second year running, the report fails to cover several important items.

Firstly there is no information on the length of service of the directors, nor their ages. It is now convention not to report the ages of directors which I consider unfortunate but they should at least state when they joined the board so we can see their length of service. Ages can of course be easily looked up at Companies House – they are 60, 71 and 75 years for the three directors.  Are ages and length of service important? I think they are simply from my experience of boards and their performance.

But the really big omission is that the substantial loss reported of £23.8 million partly included a “Provision for doubtful income” under Other Expenses of £2.1 million in Note 5 to the Accounts. What is that? I cannot spot any explanation in the report. I have sent a request for more information to the company.

Rio Tinto (RIO) published an abject apology this morning for their destruction of a cultural heritage site in Juukan Gorge in Australia. They say “The board review concluded that while Rio Tinto had obtained legal authority to impact the Juukan rockshelters, it fell short of the Standards and internal guidance that Rio Tinto sets for itself, over and above its legal obligations. The review found no single root cause or error that directly resulted in the destruction of the rockshelters. It was the result of a series of decisions, actions and omissions over an extended period of time, underpinned by flaws in systems, data sharing, engagement within the company and with the PKKP, and poor decision-making”. They propose a number of improvements to avoid the problems in future. In the meantime they are knocking off £2.7 million from the possible bonuses under the STIP and LTIP schemes available to CEO J-S Jacques and large amounts from two other senior executives. That should hurt enough I think. 

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

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Ocado Trading Update, Coronavius Apps, EMIS AGM, IDOX Pay, Segro Dividends

Ocado (OCDO) issued a trading update today, and it shows their joint retail venture with M&S is benefiting from the coronavirus epidemic. In the second quarter revenue was up 40% on the prior year. They have had to ramp up capacity significantly to meet this demand, and they have suspended delivery of mineral water so as to cope with the needs of additional households. The announcement gives the distinct impression that they need more warehouses (or CFCs as they call them).

On a personal note, my family has been using Sainsburys’ on-line delivery system and as a “vulnerable” person we get priority. The result has meant neighbours asking us to shop for them. But at least I don’t need to accept the offer of food parcels sent to me yesterday by the local council!

There has been good coverage of coronavirus apps in the national media in the last couple of days. This UK Government has chosen one that relies on a centralised system and it looks distinctly insecure and not good enough to protect privacy. Robert Peston pointed out another flaw in it that someone could maliciously chose to report themselves as suffering from symptom thus causing everyone they might have come into contact with in the last two weeks to self-isolate. I am not at all clear why the Government has chosen this approach, which may deter take-up anyway, when Google and Apple are implementing a different system with fewer privacy concerns. That has been adopted by other countries so there will be problems with international travel.

EMIS (EMIS) held their AGM today. Nobody allowed to attend and no on-line session which is not good enough for an IT company. EMIS operates in the healthcare sector. Recurring revenues have held up but new business sales have been lower. They still expect to meet full year expectations.

However, they did get 15% of votes AGAINST the remuneration report. That included my votes as a holder as it looked a typical complex scheme with total pay too high in relation to the size of the business.

Another example of a poor pay scheme is that of IDOX (IDOX), an AIM listed company that operates mainly in the provision of software to local authorities. Reviewing the Annual Report, the Chairman acquired 585,000 share options last year (current price about 40p, exercise price 1p) based on a share matching scheme. The CEO acquired 3,512,400 share options under an LTIP with an exercise price of 0p (nil). The CFO also acquired 1,000,000 share options, again with an exercise price of 0p, but with a performance condition of the share price being greater than 45p. In summary I think this is way too generous so I have voted against the remuneration report. The AGM is on 28th May, so other shareholders have plenty of time to submit their votes.

Another item of annoying news I received recently was from Segro (SGRO) the property company. They will no longer be sending out dividend cheques from next year. I still prefer dividend cheques for my direct holdings because it is easy to check that the dividends are received and you know exactly when the money is in the bank because you pay them in yourself.

However looking at a report published by the Daily Telegraph last year, it quotes registrar Equiniti as saying that up to 30% of dividend cheques do not get presented which is a rather surprising statistic and must create a lot of extra work. Kingfisher, Marks & Spencer and Vodafone have already stopped dividend cheque issuance, forcing you to give the registrar your bank details. I may have to accept this as a reasonable change even if I don’t like it.

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

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Exemplary Remuneration at Judges Scientific

I recently commented negatively on the remuneration section of the Annual Reports of Greggs and Avast. Today I read another Annual Report from Judges Scientific (JDG) and it’s a completely different story.

I have held shares in this company which is a scientific instrument maker since 2010. The share price then was 327p. It’s now 4940p. Led by CEO David Cicurel in that period, as the Annual Report says the “Management is focused on shareholder value – profitability, cash generation, debt reduction, dividend growth and return on capital”. Return on Total Invested Capital last year was 31.4% and according to ShareScope my compound annual return from holding the shares has been 25.6% per annum.

What more could shareholders want? Perhaps a directors’ remuneration scheme that is simple and reasonable! Judges certainly meets that requirement.

The Remuneration Report is only 3 pages which is all we could wish for. For executive directors there is a reasonable base salary plus an annual bonus of 25% of salary if earnings per share targets are met and are higher than a previous high watermark. They also receive share options issued at market value (not at zero cost note), and there is also a performance condition attached to those.

In total the remuneration of all directors, including the non-executives, was £816,000 when post-tax profits were about £11 million. The CEO received £243,000. Another good point is that there is a vote on remuneration at the AGM which many AIM companies choose to omit. I don’t think there will be many Judges shareholders voting against that resolution.

Why cannot all public companies have such simple remuneration schemes? And with a level of remuneration that is not excessive?

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

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Unjustified Remuneration at Greggs and Avast

The markets seem to be settling down from the Covid-19 panic even if the impact on company results is far from clear. But it has given me time to read the Remuneration section of a couple of Annual Reports.

Firstly Greggs (GRG). Their Annual Report is a masterpiece of explaining why the company has been so successful of late – to quote from it: “Cheers to a record-breaking year. Since 1939 we have been on a roll….”. But it was clearly written before all their stores were closed.

Their Remuneration Report consists of 28 pages which is way too many. CEO total pay last year was £2.5 million – up by 46%. They did have a very good year but EPS was only up 32%. But the board appears to consider pay is inadequate so this is what the Chairman of the Remuneration Committee (Sandra Turner – why are they often women?) has to say:

Annual Bonus: The current policy allows for a maximum individual policy limit of 125 per cent of salary for the Chief Executive and 90 per cent of salary for other Executive Directors. It is proposed that the individual policy limit will be increased to 150 per cent of salary for the Chief Executive and 125 per cent of salary for the other Executive Directors. PSP: The current policy allows for PSP awards of 115 per cent of salary for the Chief Executive and 95 per cent of salary for other Executive Directors (150 per cent in exceptional circumstances). It is proposed that the new policy will provide for awards of 150 per cent of salary for the Chief Executive and 125 per cent of salary for other Executive Directors (with awards up to 150 per cent possible in exceptional circumstances)……

The Remuneration Committee is aware that the changes outlined above incorporate increases to reward opportunities under both the annual bonus scheme and the PSP, and that there are understandable sensitivities around increasing executive pay levels in the current political, economic and regulatory climate. However, the Committee wishes to ensure that the Executive Directors are appropriately rewarded for their contributions to the next stage of the Company’s growth, and we have been concerned that the pay opportunities under the existing policy no longer reflect what is appropriate or competitive for the leaders of a successful FTSE 250 company. We believe that the revised award levels are required to ensure that the policy is fit-for-purpose for the next policy cycle and will ensure that Executive Directors are appropriately incentivised to deliver and drive the business forward and are rewarded for success. As noted above, for 2020 we are not increasing all elements of pay for the Chief Executive and the Finance Director to the maximum levels permitted under the new policy, but we wish to retain a suitable level of headroom.

It is also important that we have the right structure in place as part of our succession planning processes. Should we need to recruit externally at senior levels during the policy period, we would like to have headroom in relation to the annual bonus and PSP opportunities in order to be sufficiently competitive in the market. Even taking into account the proposed increases, we believe that when compared against the market more broadly, the pay for the Executive Directors remains at below mid-market levels and total remuneration is positioned appropriately, thus demonstrating an ongoing focus on restraint”.

You can see how the pay is being ratcheted up and telling us it is below mid-market levels is no justification. No everyone can be above the average. Greggs undoubtedly employs many low-paid workers. Their figure for “All Colleague Costs” only went up by 11.4% last year. Clearly another example of the better paid getting richer, while the poorer are not equally benefiting from the success of the company.

Am I suggesting the lower paid in the company should be paid more? Not necessarily. But the increases at the top are not justified, however good a job they are doing. I suggest shareholders should vote against the new Remuneration Policy and Performance Share Plan (PSP) resolutions even if they consider last years Remuneration Report is acceptable.

The Remuneration Report of Avast (AVST) is only 16 pages. The total pay of the CEO, Andrej Vicek, in 2019 is given as $6,933,411 but he was only made CEO through part of the year. The vast majority of the total pay comes from the value of an LTIP. The former CEO received even more.

Some 95% of shareholders voted to support the Remuneration Policy in May 2019. The company’s excuse for the high level of pay is this: “Our Directors’ Remuneration Policy has been designed to incorporate the best practice features of the typical UK pay model while setting reward levels, particularly long-term incentive opportunities, at a level that recognises that we source talent in a global market and in particular from the US where pay models are different to the UK”. But this is a UK listed company and many of its operations are not in the USA.

But the CEO has made a token gesture by indefinitely waiving his annual salary and bonus (not including the portion related to his Board fee) for a nominal annual salary of $1. He has also notified the Board of his decision to donate 100% of his Board Directors’ fee ($100,000 per annum) to charity. He will continue to receive an annual LTIP award, calculated as a multiple of his (waived) base salary.

Avast was originally founded as a co-operative in Czechoslovakia but listed in the UK in 2018 after taking over AVG. How times change!

I will be voting against the Remuneration Report at this company and I suggest other shareholders should do the same.

 

 

 

 

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

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Recent Annual Reports and Trust Discounts

After the news over the weekend, it’s clearly going to be another very bad day on stock markets. One rare riser initially was Ten Entertainment Group (TEG) despite the fact that they announced this morning that all their bowling venues had been closed but they made some positive comments about their cash balances and Government support which might have helped.

As per guidance issued by the Financial Conduct Authority (FCA) it has delayed publication of its Preliminary Financial Results for two weeks as many other companies will be doing. This seems unfortunate to me as a company could just give only a limited outlook statement in there and issue separate trading statements as the crisis developments. But there is no reason to delay the historic figures for the last year.

The AIM Regulator (the LSE) has also announced that in response to the epidemic it is making the rules around suspension of listings more flexible. It is also permitting Nomads not to do site visits to new clients. See https://www.londonstockexchange.com/companies-and-advisors/aim/advisers/inside-aim-newsletter/inside-aim-coronavirus.pdf for details.

Clearly all companies affected by the closure of all public entertainment venues such as pubs, bowling alleys and cinemas are going to suffer greatly. Although they might get some financial relief from the Government, a close examination of their balance sheets and debt will be essential. Some might request suspension of their shares until their financial position becomes clearer. Property companies seem to have been badly hit simply because independent valuers are having difficulty valuing commercial properties as the market is frozen. Retailers with physical stores are also closing them, apart from supermarkets who are doing well due to panic buying and the shift from eating out to eating in as restaurants close. But they seem to be having difficulties adapting their supply chains and coping with the new demands for on-line ordering.

With preliminary announcements being delayed, the AGM season might be delayed also. Companies might have difficulty holding physical meetings and venues might become unavailable, particularly in London. We might see companies holding small meetings in their own offices instead as they won’t expect many people to turn up – I certainly won’t be attending as I am one of those people being told to stay at home for 12 weeks. Some larger companies may try and provide a live on-line stream of the meeting such as Alliance Trust (ATST) who just issued their Annual Report which I would certainly encourage them to do, preferably with some way to submit questions.

It is interesting to look at the discounts to NAV of the share price of that trust and other similar large trusts. According to the AIC, their discount was 17.5% at the weekend, and others were Brunner on 17.5%, F&C on 19.3%, Monks on 12.6% and Witan on 15.6%. These are much higher discounts than such trusts have traded on of late. When private investors have lost faith in the stock market, the discounts tend to rise, although some of the discount can be accounted for by the delay in reporting.  There may be some bargains in investment trusts in due course as private investor sentiment tends to lag financial news.

One company that just distributed their Annual Report and which I hold is property company Segro (SGRO). They had a good year last year although the share price is down 28% from its peak in February due to the general malaise in the property sector as open-end funds close to redemptions and run out of cash. I won’t  be attending their AGM but I will certainly be submitting a proxy vote which all shareholders should do anyway. I will be voting against their remuneration report simply because the total pay of executive directors is too high. The remuneration report consists of 27 pages of justification and explanation, which is way too long and is a good example of how both pay and pay reporting has got out of hand of late.

With bonuses, LTIPs and pension benefits, the total pay of the 4 executive directors (“single figure” report) was £20.4 million. They also wish to change the Articles of the company to raise the limit on the total pay of non-executive directors to £1 million so I will be voting against that also. I would encourage shareholders to do the same.

Lastly for a bit of light relief as it looks like we might have a major recession this year, I mentioned the book “Caught Short!” by comedian Eddie Cantor on the 1929 Wall Street crash in a previous blog post. Now Private Eye have repeated one of his comments in October 1929 after John D. Rockefeller (probably the richest person in the world at the time) said “during the past week, my son and I have for some days been purchasing sound common stocks”. This was seen as an attempt to calm the market in a world where a few very wealthy investors could influence financial markets. Eddie Cantor’s response was “Sure, who else has any money left”. I hope readers do not feel the same.

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

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Avoiding Another NMC Debacle

Yesterday the shares in NMC Health (NMC) were suspended and a formal investigation by the FCA was announced. The suspension announcement said that the company has requested the suspension of its shares and that the company is focused on providing additional clarity to the market as to its financial position.

The events at NMC are hardly the kind of thing one expects from a FTSE-100 company with reported revenue of $2.5 billion and profits of $320 million. The company operates hospitals and other healthcare facilities in the Middle East – hardly a sector that should be particularly volatile. The company has of course been the subject of an attack by Muddy Waters and the share price was already down by 80% from their peak in 2018, before they were suspended.

There now seems to be considerable doubts about the accounts (the finance director is on long-term sick leave which is never a good sign), there are doubts about who holds the shares, and questions about related party transactions and debt. The founder and CEO have departed from the board leaving the COO as interim CEO.

I recall NMC being tipped in numerous publications before all this bad news came out and it certainly looked a good proposition at a glance. Both revenue and profits were rising at 30% per year driven by rising wealth in the Arab states. So why did I avoid it?

The key point I would make is that “financial numbers are not important when picking shares” which is the subtitle of my book “Business Perspective Investing”. The numbers alone cannot be trusted even if they have been audited by a big firm such as Ernst & Young.

The company is registered in London and listed in the UK but the company had a peculiar governance structure with two joint Chairman and an Executive Vice-Chairman. They had a large number of directors otherwise and at the last AGM actually approved a resolution to increase the maximum number to 14. That is way too large for any company and results in board meetings being dysfunctional. The Muddy Waters financial analysis clearly raised some concerns and it is well worth reading. It also raised issues about the level of remuneration of the board and share sales. These might be considered warning signs and there is the key issue that it might be very difficult for UK based investors to monitor the operations of the company.

These are the kind of issues that I suggested investors need to look at in my book.

What do investors do if they find they have been suckered into a company with dubious accounts and when other negative facts have come to light? The simple answer is to study the evidence carefully and if in doubt sell the shares. It is never too late to sell is a phrase to remember. You only have to look at the share price graph of NMC to see that investors with a trailing stop-loss of 20% would have exited long ago and hence avoided the worse outcome.

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

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Objections to Pay at Diploma and the Cost of Zero Carbon

My previous blog post covered the subject of criticism by Slater Investments of many current pay schemes. That at Diploma (DPLM) is a typical example. But at their Annual General Meeting yesterday, which I unfortunately was unable to attend in person as a shareholder, there was a revolt.

The votes cast as disclosed in an RNS statement today were 20% against their new Remuneration Policy and 44% against their Remuneration Report. I voted against both of them of course personally. The board has acknowledged the concerns of shareholders and they will consult further with shareholders plus provide an update within six months.

What is wrong with their remuneration scheme? First pay is simply too high. Over £1 million last year for the CEO when profits were only £62 million and that does not include any LTIP benefits as he is recent joiner. But the CFO got £1.6 million in total. The CEOs pay scheme includes base salary, pension, short term bonus of up to 125% of base (90% achieved) and an LTIP that awards up to 250% of base salary. The Remuneration Report consists of 14 pages when Slater suggests a maximum of two would be sensible. I could go on at length of this subject but in essence the remuneration scheme at Diploma is simply unreasonable and too generous. It displays all the faults that Slater complained about.

I have previously criticised the Government’s commitment to achieving net zero carbon emissions on the grounds of cost. Well known author Bjorn Lomborg has published a good article on this subject in the New York Post. Almost no Governments making similar promises are willing to publish any real cost-benefit analysis. The only nation to have done this to date is New Zealand: the economics institute that the government asked to conduct the analysis found that going carbon neutral by 2050 will cost the country 16% of GDP. If the small nation follows through with the promise, it will cost at least US$5 trillion with negligible impact on temperatures. Just imagine what the cost will be in the UK, for a much bigger economy! See this article for more information:  https://nypost.com/2019/12/08/reality-check-drive-for-rapid-net-zero-emissions-a-guaranteed-loser/

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

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Slater Investments Warns on Pay, and Flybe Bail-Out

Slater Investments has issued a warning to companies of their “dissatisfaction with the framework of directors’ remuneration in most public companies”. Slater Investments run a number of funds managed by Mark Slater and others with a focus on growth companies.

The letter complains about a “relentless ratcheting of terms and conditions which have meant the interests of directors and investors have grown steadily further apart”. Specifically it complains about the award of nil-cost options which they see as a one-way bet and they also don’t like the hurdles that are set which are often simply e.p.s. rather than total return.

They also don’t like the quantum of pay awards and say: “It has become customary for executive directors to receive a handsome salary, plus the same again in cash bonus and a similar amount in nil cost options – year in, year out. Is a good salary not enough to get directors out of bed in the morning and to diligently work their allotted hours? A bonus should be determined by the return received by investors”. This is a similar complaint to my own made a week ago.

They plan to vote against remuneration reports which are longer than two pages [Comment: that means most of them at present], and vote against any schemes with nil cost options and against unresponsive members of the remuneration committee. Mark Slater and his firm are to be congratulated on taking a stand on this matter. I hope other fund managers will follow his example.

To read the letter sent to companies, go here: https://tinyurl.com/wu9jh9q

The UK Government is bailing out airline Flybe. It was obviously running out of cash and was saved from administration by the Government deferring passenger duty tax payable, a possible Government loan and more cash from the owners. Is this a good thing?

Flybe operates a number of short-haul flights in the UK and the rest of Europe. Some UK airports are apparently dependent on its operations. Is it really essential to maintain these operations when roads and rail links provide alternative transport options in most cases, albeit somewhat slower perhaps? State aid to failing companies has a very poor record in the UK – the motor industry was a good example of that. One of the few good things about the EU is its tough rules on state aid. I hope that the UK will not diverge from its principles now we are departing from the EU.

Why is bailing out failing companies a bad idea?  For several reasons. First because it effectively subsidizes poor companies which then compete with profitable companies to their disadvantage. Second, it rarely works because a bad business usually remains a bad business. For example, Flybe has been perennially unprofitable and had to be rescued via a takeover in March 2019 when it was delisted. You can see the financial track record of the company on this Wikipedia page: https://en.wikipedia.org/wiki/Flybe

Airlines are one of those businesses that I avoid. They suffer from the business model problem that they are always trying to maximise passenger loading as the economics of airlines means they need to fly the planes full to make money. This means they cut prices to fill volume when business is bad, but their competitors do the same (and their competitors can be other transport modes on short-haul flights such as buses or trains).

It has been suggested that the worlds’ airlines have never overall made money since the airplane was invented. I can quite believe it.

I see no good economic reason why the Government should bail out Flybe in the way proposed. If it owns some profitable routes, other airlines will take them on. There might be merit in reviewing air passenger duty in general which is a tax on travel that does not apply to other transport modes, or perhaps in providing some specific funding to unprofitable routes as suggested in the FT if there are good arguments for doing so and with onerous conditions attached. But the principle should be “no money unless the business is restructured forthwith with some certainty that it can be made profitable”.

Otherwise the danger is “moral hazard” as Lord King mentioned when refusing to bail out Northern Rock, not that I think he was particularly wise in that case. It is suggested that it just encourages the directors of companies to believe they will be rescued regardless of their incompetence. The threat of no more assistance ensures directors take more care it is argued and provides an example to others. Banks may be rescued with cash that the Government prints to shore up their balance sheet, but putting cash into airlines is typically just used to fund operating losses.

Businesses that are subject to Government regulation are always tricky to invest in. If they are not subsidising the competitors, they are restricting competition by regulation. Which one of my US contacts was explaining to me a couple of weeks ago as one reason for the demise of PanAm.

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

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