Shareholder Democracy, RBS, Rightmove AGM and Stockopedia

There is a very good article by City Slicker in this weeks’ edition of Private Eye (No.1469) on the subject of “Apathy in the City”. The article comments on the “disengaged” share owners in Persimmon who failed to vote against the remuneration report, or simply abstained. See my previous blog post on that subject here: https://roliscon.blog/2018/04/25/persimmon-remuneration-institutions-duck-responsibility/

The article highlights the issue that the many private shareholders in the company probably also did not vote (they could have swung the result), because they have effectively been disenfranchised by the nominee system that is now dominant. The writer says “This democratic deficit has been richly rewarding for companies, share registrars and those representing retail investors”, and the result “has been a real diminution in shareholder democracy”. A few more articles of that ilk may sooner or later impress on politicians and the Government that substantial reform is necessary.

The article also points out how the EU Shareholder Rights Directive, one of the few good things to come out of the EU bureaucracy in my opinion, is being misinterpreted by the UK Government to suggest beneficial owners are not shareholders.

To get the message across I have written to my M.P. on the subject of Beaufort and the substantial financial losses that thousands of investors will suffer there as a result of the use of nominee accounts compounded by the current insolvency rules. If anyone would like a copy of my letter to crib and send to their own M.P., just let me know.

In the meantime the AGM at the Royal Bank of Scotland (RBS) is due on the 30th May. The RBS board has opposed the resolution put forward by ShareSoc and UKSA to establish a “shareholder committee”. That would be a step forward in corporate governance in my view and shareholders would be wise to vote in favour of that resolution (no.27). I do hold a few shares in the company but will be unable to attend the AGM in Edinburgh so if anyone would like a proxy appointment from me so that you can attend and voice your own views on the subject, please let me know. You would at least have the pleasure of seeing the buildings created in Gogarburn by empire builder Fred Goodwin for RBS.

The RBS Annual Report is a 420 page document which must make it one of the heaviest UK Plc Annual Reports. The motto on the cover is quite amusing. It reads “Simple, safe and customer focussed” – perhaps it means they intend to get back to that because RBS was none of these things during the financial crisis that almost bankrupted the business.

One aspect that City Slicker criticizes in the aforementioned article is the low “turn-out” of voters at AGMs, i.e. the low percentage of shareholder votes cast even including “votes withheld”. A third were not voted at Persimmon. That is not untypical at AGMs in my experience although institutional voting has improved in recent years. It’s often the private investors now who don’t vote due to the difficulty, or downright impossibility of voting shares held in nominee accounts.

But there was no such problem at Rightmove Plc on the 4th May. About 85% of votes were cast. As a holder I could not attend in person, but Alex Lawson has written a report which is on the ShareSoc Members Network. One surprising result though was that long-standing Chairman Scott Forbes got 39% of votes against his re-election and Remuneration Committee Chairman Peter Williams got 37% against. I voted against the latter, against the Remuneration Report and did not support the re-election of Scott Forbes either. With 12 plus years of service, it is surely time to look to board succession planning and a new Chairman. The board is to look into why they got so many votes against the two resolutions which is certainly unusual.

To conclude I see that blogger/journalist Tom Winnifrith is having yet another go at mild-mannered Ed Croft of Stockopedia after a spat at the UK Investor Show over a trivial matter. Since then Tom has been attacking Ed over “recommendations” given by Stockopedia in his usual rottweiler manner. As a user of Stockopedia and other stock screening services, I don’t expect absolutely all the positively rated stocks to be great investments. I know that some will be dogs because either the accounts are fraudulent, the management incompetent or unexpected and damaging events will appear out of the blue. So for example, Globo’s accounts fooled many people including me until late in the day so any system that relied just on analysis of the financial numbers would be likely to mislead. But stock screens rely on the laws of averages. The fact that there will be one or two rotten apples in the barrel does not mean that stock screens cannot be a useful tool to quickly scan and dispose of a lot of “also-rans” in the investment world. They can quickly highlight the stocks that are worthy of more analysis, or prompt dismissal.

Winnifrith seems unable to differentiate between meritorious causes that deserve the full power of his literary talents and those where his imitation of a sufferer from Tourette’s syndrome where he heaps abuse on innocent victims goes beyond the bounds of reason. Stockopedia provides a useful service to investors. Let us hope that the saying there is “no such thing as bad publicity” applies in this case.

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

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They Do Things Differently in the USA

Former Autonomy CFO Sushovan Hussain has been found guilty of 16 counts of fraud in a Federal Court in California. He was convicted on all 16 counts of wire and securities fraud. This case was based on allegations of false accounting to ramp up the value of the Autonomy business prior to its acquisition by Hewlett-Packard. The latter subsequently wrote down most of the $10.3 billion cost of that acquisition.

More background on this case is given in a previous blog post here: https://roliscon.blog/2018/02/26/autonomy-legal-case-and-revenue-recognition/

Although Autonomy was a UK public company, and the Serious Fraud Office did look at the case they decided to do nothing. However a civil action against Mr Hussain and the former Autonomy CEO, Mike Lynch (who was not indicted in the US case), is still being pursued in the English courts. This decision will clearly strengthen that action.

The US prosecutor suggested in court that the accounts were a façade and eventually proved to be an “unsustainable Ponzi scheme”. Mr Hussain is apparently likely to appeal the verdict, but he faces a prison sentence of up to 20 years – sentencing will take place on Friday.

How different to the UK where prosecutions for fraud based on false accounting almost never take place. Questions were raised about the accounts of Autonomy by investors and a whistle blower also raised issues before the sale to H/P but the UK authorities did nothing. The FRC did announce an investigation into the accounts of Autonomy in 2013. It is still listed as a “current” case on their web site, i.e. no report and no conclusions as yet. Why the delay?

This case demonstrates the typical sloth and inaction of the UK regulatory authorities in comparison with the USA. The FCA/FRC are both very ineffective, and the recent events regarding the Aviva preference shares and the collapse of Beaufort show how ineffective those bodies are in protecting the interests of investors. It’s a combination of a defective legal system and a culture of inaction and delay that permeates these organisations. Well at least that is my personal view.

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

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Beaufort Administration, Intercede and the Mello Conference

Yesterday I attended the first day of the 2-day Mello investor conference in Derby. There were lots of good presentations and some interesting companies to talk to. One hot topic of conversation was the collapse of Beaufort which was forced into administration (see two previous blog posts on the topic for details). There are apparently many people affected by it. There are a number of major issues that have arisen here:

  • The administrators (PWC) have suggested it might cost as much as £100 million to wind up the company and return assets to clients which seems an enormously large figure when the assets held are worth about £550 million. The costs will be taken out of the clients’ funds and as a result there will hundreds of larger clients who will suffer substantial loses (those with assets of less than £50,000 may be able to claim against the Financial Services Compensation Scheme – FSCS – but larger investors will take a hair-cut).
  • The assets (mainly shares) were apparently held in nominee accounts. Surely these were “segregated” accounts, i.e. not available to be treated as assets of the failed business? Most brokers who use nominee accounts will have wording in their contracts with their clients that cover this with often fine words that conceal the underlying reality that if there is any “shortfall” then the clients may be liable. But regardless, PWC are saying that because this is a “Special Administration” they have the right to take their fees out of the client assets/funds.
  • There will be a Creditors’ Meeting as required by all administrations but will the creditors be able to challenge the arrangements put in place by PWC and the costs being incurred? From past experience of such events I think they may find it very difficult. Administrators are a law unto themselves. It is alleged that there were offers from other brokers to take over the assets of Beaufort and their clients very quickly and at much lower cost, but that offer has been ignored. Investors need to ask why.
  • Note that the Special Administration regime was introduced during the financial crisis to enable the quick resolution of problems in financial institutions such as banks. This is where it is necessary to take prompt action to enable a company to continue trading and the clients not to be prejudiced. But in this case it seems we are back to the previous state where client assets are frozen for a lengthy period of time while the administrator runs up large bills at the clients expense.
  • I said only recently that the insolvency regime needs reform after the almost instant collapse of both Conviviality and Carillion. There may not have been a major shortfall in Beaufort and it might have been able to continue trading. But the current Administration rules just provide large, and typically unchallengeable, fees for the administrators who give the impression of having little interest in minimising costs. The result is the prejudice of investors in the case of a broker’s collapse, or of shareholders in the collapse of public companies.
  • Can I remind readers that part of the problem is the widespread use of nominee accounts by stockbrokers. I, ShareSoc and UKSA have long campaigned for reforms to reduce their use and give shareholders clear title and ownership after they purchase shares. In the meantime there are two things you can do: a) Avoid using nominee accounts if at all possible (i.e. use certificated trading or personal crest accounts so your name is on the share register); b) if you have to use a nominee account, make sure you are clear on the financial stability of the broker and that you trust the management. It would not have taken a genius to realise that some of the trading practices of Beaufort might raise some doubts about their stability and reputation.

I do suggest that investors who are affected by the collapse of Beaufort get together and develop a united front to resolve not just the problems raised by this particular case, but the wider legal issues. Forceful political representation is surely required.

See this web site for more information from PWC: https://www.pwc.co.uk/services/business-recovery/administrations/beaufort/beaufort-faqs.html

An amusing encounter at the Mello event was with Richard Parris, the former “Executive Chairman” of AIM listed Intercede (IGP). He was talking in a session entitled “The importance of the right board of directors” and he conceded that “separation of roles” is important, i.e. presumably he would do it differently given the chance. Richard, the founder of the company, has recently stepped down to a non-executive role, they have a new Chairman, and even Richard’s wife who was operations manager has departed. While I was in the session, there was even an RNS announcement saying the “Chief Sales Officer” had resigned (I am still monitoring the company despite having sold all but a nominal holding years back).

Richard pointed out to me that the pressure put on the company over his LTIP package back in 2012 meant that his share options are worthless as the performance targets put in place were not achieved. Well at least he is still talking to me and has joined ShareSoc as a Member apparently. Sometimes time can heal past disputes, and as I said, shareholder activism does work!

But it is regrettable that RBS are recommending voting against a resolution proposing a shareholder committee at their upcoming AGM. Perhaps not surprising, but a shareholder committee could avoid confrontation over such issues as remuneration and would be a better solution that confrontation.

I hope the Mello event becomes a regular feature of the investment calendar.

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

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Persimmon Remuneration – Institutions Duck Responsibility

Most folks are aware of the absolutely outrageous pay levels at Persimmon Plc (PSN) and the perverse LTIP scheme that permitted them. Today was the day of their Annual General Meeting when shareholders had the opportunity to express their displeasure. Some did but a lot of investors (no doubt institutional ones) did not. The results of the vote on the Remuneration Report were:

VOTES FOR: 74.5 million, AGAINST: 70.2 million, ABSTAINED: 64.8 million.

Because of the very large number of abstentions (votes withheld), the resolution was passed by 51.5% to 48.5% of votes cast.

Is this not a sorry reflection on the corporate governance standards in the UK when such a blatantly perverse remuneration scheme is not censored by a vote against? The excuse that last year’s pay was simply a reflection of a previously approved remuneration policy is a very poor one. When the outcome was so appalling, it should have been consigned to the garbage heap by a vote against.

This is the kind of behaviour by UK company directors and institutional investors that might well lead to a socialist Government in due course who will have a mandate to deal with this problem in a more vigorous manner than the current Government.

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

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The Departure of Sir Martin Sorrell

At last the highest paid and longest serving FTSE-100 CEO has departed from WPP after 33 years. His total pay last year was £48 million, down from the previous year’s “single figure” of £70 million. Sir Martin was certainly perceived to be a “star” businessman, and the financial performance of WPP pleased shareholders for many years. Despite recent problems the Annual Report of the company claims a Total Shareholder Return of 1,006% over the last twenty years as against a measly 241% for the FTSE-100.

Will the company find a suitable replacement manager who can continue to grow the business? Will the company survive in its current form or be broken up? Those are the questions all the media are pontificating upon.

My thoughts on this subject were crystalized by reading the business management classic “Good to Great” on a recent holiday break. First published in 2001, the author Jim Collins reported on research he had undertaken to determine what separated out simply “good” companies from the “great” ones, i.e. those that really offered investors superior returns rather than average ones. He also looked at what turned good companies into great ones, i.e. the crystalizing factors or turning points. It’s well worth reading by investors for that reason alone, even if some of the companies reported on as “great” have subsequently gone bust (e.g. Circuit City), and amusingly Berkshire Hathaway was only rated as “good” at the time so was not included in the analysis.

Management and the quality of the leadership was one of the key factors identified. It seemed that humble, self-effacing leaders were best. They often attributed the company’s success to luck or the other senior management team members. Star managers with high profiles such as Jack Welch at GEC or Lee Iacocca at Chrysler frequently proved to be shooting stars whose achievements rapidly disappeared after they left. In other words, they did not build great companies where their legacy lived on after their departure.

This is one very applicable quote from the book when you are considering director pay in companies: “We found no systematic pattern linking executive compensation to the process of going from good to great. The evidence simply does not support the idea that the specific structure of executive compensation acts as the key lever in taking a company from good to great”. In other words, high pay does not generate exceptional performance in managers, and schemes such as LTIPs which allegedly align managers’ interests with shareholders do not help either.

It’s a book well worth reading for tips on how to identify the companies and their CEOs that are likely to generate great returns for investors.

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

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Lack of Transparency at the FRC

The Financial Times ran an interesting article on Friday (13/4/2018) headlined “FRC criticised over transparency”. It reported that the Financial Reporting Council answered only 6 out of 52 Freedom of Information requests since 2013. Atul Shah, Professor of Accounting at the University of Suffolk, was reported as saying: “This shows that there is a real problem within the soul of the FRC. It is a public regulator and not a private members’ club, and it has clear duties of transparency, accountability and reliability which it has been avoiding over many years”. He went on to say they have been fobbing of public queries over a long period and that it was really shocking.

How can they reject so many requests? Because only certain parts of their operations are covered by the Freedom of Information Act and they can claim they cannot comment on on-going investigations.

The Local Authority Pension Funds Forum (LAPFF) sent a long submission to the public consultation on the Corporate Governance Code echoing many of those complaints and adding others and saying that the FRC suffers from “internal cultural problems”. They are clearly very unhappy with the activities of the FRC. The FRC has seen fit to respond with a 5-page rebuttal letter which they have published on their web site.

I have of course covered this issue of the culture and processes of the FRC in two previous blog posts which are here: https://roliscon.blog/2017/12/10/brexit-hbos-globo-and-the-frc/ and here: https://roliscon.blog/2017/11/22/standard-life-uk-smaller-companies-and-frc-meetings/

My view is that although the FRC is under-resourced, the approach that it takes should be reformed. Too many times major accounting and audit issues take years to investigate, and often simply result in no action. For smaller companies, complaints can disappear into a black hole with no response being received at all to complaints. Reform is required.

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

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Low Margin Companies, and McColl’s AGM

Should you invest in companies with low profit margins? Phil Oakley of Sharescope wrote a very interesting article a few days ago which questioned whether they are likely to be good investments. This was one complaint about Conviviality which recently went into administration.

As Phil said, high margins suggest that a company has pricing power and limited competition while low profit margins make a company vulnerable to tough trading conditions or a weak economy. The reason for this is simple. If the overhead costs are relatively fixed but revenues fall even by a small amount, or costs rise, then profits can rapidly disappear. In addition if margins are already tight, then when competitors cut prices to retain volume, a company with low margins can find they simply cannot respond without incurring losses. Low profit margins are often linked to low returns on capital which is always something to avoid.

In essence, companies with low profits margins can be living on a knife edge and hence one needs to be careful about investing in them. A margin of 10% or higher is preferable, and a number of companies I am investing in have operating margins of over 50%. But what about retailers? Their operating margins are often very low. For example, Sainsbury’s is at 1.66% according to Stockopedia, Tesco is at 3.2%, ASOS is at 3.79%, Boohoo at 8.43% and Dunelm at 9.43%. The more specialist the retailer, or the higher the value items of sold, the greater the operating margin should typically be.

Carpetright which has just announced a major restructuring and refinancing was at minus 0.15% a year ago so their recent problems are perhaps no surprise. Likewise Conviviality was at 1.62% although they had both wholesale and retail operations. But ignoring all retailers because they report low profit margins is not a strategy I would follow.

McColl’s Retail Group whose AGM I attended yesterday are a convenience store operator. Their average “basket” size is only £5.62. Their operating margin is only 2.1%. Well at least it’s better than Sainsbury’s and I suspect it’s been low for many years – indeed when I first purchased the shares 2 years ago it was only 2.5%. But if you look at the more conventional valuation metrics it does not look so bad. Prospective p/e of 11.9, dividend yield of 4.7% and like many retailers it generates a lot of cash as it sells its merchandise before it has to pay its suppliers – at least that’s true until they go bust.

They are therefore companies that you need to keep a close eye on to see that margins are not falling, and that revenue on a like-for-like basis is not declining. That’s particularly so when we have a bad patch of weather affecting footfall as we had recently, or where they are vulnerable to erosion from internet retailers. Are McColl’s in that regard? Probably not because 60% of their customers live within 400 meters of their local shop and they provide both fresh/chilled food and services such as a post office. The company is looking to “engage” even more with their customers who typically visit very frequently.

It was a useful AGM with a number of good questions from the audience (less than 10 shareholders attending at the company’s head office in Essex). One question related to the success of the acquisition of 290 stores from the Co-Op which have now been fully integrated but the CEO rejected a suggestion the stores were below targets and said the deal “met the business case”.

However one problem the company has faced in the last year is the collapse of supplier Palmer and Harvey. The business was closed by the administrator almost immediately so McColl’s had to make alternative arrangements very rapidly. This resulted in analysts forecasts of profits being reduced from £54m to £50m according to the CFO. In future they will be reliant to a large extent on Morrisons who they have done a deal with to retail products under the Safeway name. It seems to me that these two companies might become so closely linked that sooner or later it might make sense for Morrisons to acquire the business. Morrisons sold off their own convenience store chain in 2015 which was losing money and not easy to scale up.

One shareholder complained about the remuneration arrangements – a typical complex scheme including LTIPs. He said “why do people need a bonus to do their job?”. The Chairman said there is competition for talent. I also discussed this with the CFO after the formal meeting closed and suggested there were better solutions to incentivise staff.

I also talked to the Company Secretary about the problems with voting via Link Asset Services (see previous blog post on that topic).

One unusual aspect of this AGM was the issuance of the Minutes of the last AGM and request for shareholders to approve. Companies normally do minute their AGMs but don’t publish them.

The votes were taken on a poll with the results only announced later in the day. About 13% of votes were against the Remuneration Policy, against the Chairman and Rem. Comm. Chair Georgina Harvey and over 18% against share allotment and pre-emption resolutions. Plus 13% against company share purchases and the change of notice of General Meetings. These are unusually high figures and the board has committed to look into the reasons why and report back. Note that Klarus Capital hold over 11% of the company having bought the stake held by former Chairman James Lancaster.

My conclusions about this company: The management seem to be making the right decisions but they do need to improve the profit margin and return on capital. However it seems one reason for the deal with Morrison’s was to obtain “improved commercial terms” so that suggests they recognize this. Moving into growing segments such as “food-on-the go” and out of declining ones such as newspapers and tobacco should help as will store refurbishments and the addition of a few more stores.

The share price of McColls has been picking up recently from a low point. But like a lot of my holdings it seems to be somewhat volatile of late. Is that as a result of the holiday period with lower trading volumes, a tax year end effect, or investors being nervous about war in Syria? Will it be war or no war? Investors never like binary bets. Perhaps Donald Trump should get on the hot-line to Russia and negotiate an alternative scenario. After all he has written a book called “The Art of the Deal” so he should know how to finesse a face saving way out of the problem.

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

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