BP Agm Badly Managed and Disrupted By Protestors

I have been watching the BP (BP.) Annual General Meeting on-line. This was badly disrupted by protestors and the Chairman (Helge Lund) did a very poor job of restoring order. He had to ask for order several times and over 10 minutes in total were wasted before Lund requested removal of the protestors. Much too soft!

BP already supports a transition to net zero carbon which I consider misconceived. How many votes against Lund will he get? We shall soon see.

Note: I am a shareholder in BP.

Postscript: Helge Lund received 9.6% of shares voted against his re-election. Whether that was because of his weak approach to meeting management or dislike about the company’s strategy is unclear.

Requisitioned Special Resolution 25 was voted down by 83% which shows there is little support among shareholders for extreme policies.

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

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IBPO Delisting – A Bloodbath for Investors

There was an interesting discussion last night at the Mello meeting on the recent announcement of a delisting from AIM of iEnergizer (IBPO). IBPO is controlled by 83% shareholder EICR (Cyprus) Ltd whose major shareholder is Anil Agarwal. So he will have no difficulty passing the required 75% votes for delisting.

Unlike common practice, there is no offer to take out the smaller shareholders at a fair price. The share price dropped precipitately on the announcement but has bounced back this morning. This seems to be on the hope that the dividends will be maintained and just one year’s dividends might pay for the shares.

I personally would not bet on that because there are many ways a controlling shareholder can take out value from a delisted company.

I have been a holder of delisted AIM shares in the past and one such case did end happily after a few years but others did not. The key is to avoid investing in companies that could put you into such difficult positions. Prevention is better than cure (the company is registered in Guernsey so should be subject to the Takeover Panel Code which might help but trying to block a dominant shareholder from doing what they want to do is very difficult).

I covered some of the warning signs in my book Business Perspective Investing. These are a couple of extracts from it:

Large or Small Director Share Stakes

Common abuses of corporate governance codes happen when one or more directors have a controlling stake in the business, i.e. own more than 50% of the equity. Even owning 40% usually means they can win any vote and effectively have control.

One danger of such large stakes is that they might be tempted to take a company private if they think the shares are undervalued or they are simply fed up with sticking to the rules required of public companies.

On the other hand, it is important for directors to have a significant interest in a company’s shares so as to align their interests with that of other shareholders. Having a substantial interest provides a powerful incentive to promote the success of the company.  This particularly applies to executive directors but even non-executive directors should have a non-trivial shareholding. It’s even better if the directors acquired their share stakes by purchasing shares in the market rather than simply being a beneficiary of nil-price share option scheme awards.

Share stakes of directors should be big enough to be meaningful and to provide good incentives but not so large that they can dominate the board and other shareholders.

Company Domicile

Where a company is registered is definitely worth checking because it affects the laws under which the company operates. Even in those more developed countries with stronger traditions of protecting investors, e.g. the USA, you may find that there are differences between states. Delaware is generally viewed as more friendly to companies and their management than to their investors.

UK listed companies whose operating base is overseas may not be subject to the Takeover Panel Code (an important protection for minority shareholders), and can often create legal difficulties when wrong-doing needs to be pursued.

It is unfortunately a fact of life that some countries are viewed as protecting investors better than others. For example, when problems with Chinese AIM companies arose in recent years, many investors found it was difficult to enforce their rights in law or take action against errant directors.

In general, for UK listed companies, any domicile outside the UK adds to the risk of investing in a company. Domicile in the Channel Islands or Isle of Man is also not ideal [because company law is different and any shareholder meetings are likely to be held there thus discouraging attendance].

You might ask yourself why did this company register in the Channel Islands? There may be tax reasons why property companies/trusts do so but IBPO is not one such.

Another big question to ask is “do you trust the directors to act in the interests of all shareholders rather than just their own interests?”. Their recent actions clearly answer that question.

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

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Politics and Technology Problems

It’s been a while since I wrote a blog post. Too busy sorting out some technical problems and keeping up with medical issues – I just booked my seventh Covid vaccination which does not scare me. But I would like to comment on some topical issues.

Should Dominic Raab have been fired, or encouraged to resign, which is the same thing in reality? There is one simple question to answer which is “would you like to work for him as a boss?”. My answer would be an undoubted “no”.

Leaders who wish to get things done need to be popular to some extent at least if they wish to have people work hard and follow the policies laid down. You certainly can’t get people to do what you want by bullying them.

Raab was apparently warned several times about his behaviour so the final outcome was hardly unexpected. In any organisation, and Government is no different, you have to have consensus and leadership by example. If Raab could not get Civil Service staff to do what he wanted then he needed to change his approach.

My first technical problem was that BT and Microsoft decided to stop supporting POP email clients, for alleged security reasons after 20 years. That meant potentially losing access to thousands of older emails I have received over the last 15 years. No workarounds provided unless I paid them money. I am very unhappy about being treated in this way and Outlook on the web is not nearly as good as Outlook 2016 as a local client.

My latest technical problem was configuring and learning how to use a new Samsung smartwatch (a Galaxy 4). This is replacing an older Huawei smartwatch which did basic functions very well but was not really compatible with the Apple i-Phone I currently use. I don’t like Apple watches – too expensive and I prefer a more traditional design. The Galaxy watch is also incompatible but you have to read the very small print on their web site to discover that. You even need a Samsung phone to set it up which is ridiculous. The user interface is horribly complex and it’s taken me hours to learn all the functions and configure it. Watches should be installable in a few minutes, not hours, and all common phones should be supported.

That’s the rant over for today.

I was alerted by the new emergency phone alarm just now. I presume that’s in case Russia launches World War 3, and we get 3 minutes warning of a nuclear attack. Reminds me of the 1960s but most people decided then that there was not much to do in 3 minutes except hide under a table.

Meanwhile Sadiq Khan is pushing ahead with the ULEZ expansion despite widespread public opposition. Financially it makes no sense and it will make no difference to air quality in the outer London boroughs. There will be a legal challenge in the High Court in July but I am not very hopeful of a successful outcome. But it’s worth supporting anyway.

The only way you can remove idiots like Sadiq Kahn is at the ballot box.

Roger Lawson

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Lying for Money – Book Review

With the long bank holiday I managed to finish reading the book “Lying for Money” by Dan Davies. This is one of the best books I have read on fraud.

It covers the history of fraud through the ages including most of the great cases and the most recent big ones. Fraud is still rampant despite many of the obvious ways it can be executed blocked by better laws in the last 100 years. For example, the FCA announced last week that three individuals have been convicted and sentenced to a combined 24 years for an “all-or-nothing” investment fraud. Punters were persuaded via cold calling to invest in binary options via a sophisticated online platform that appeared to show their funds being traded, however, this was manipulated to show trading activity when there was none.

His Honour Judge Hehir, remarked that ‘[BMG] was no more than a money-making machine, which operated to transfer as much of its unfortunate customers’ money into [the defendants’] pockets as possible’. ‘All 3 defendants were a loose confederation of criminally minded associates’ and ‘equally responsible’. He stated that they lived a lavish lifestyle from the money and often misery of the victims, including large cash withdrawals, expensive foreign travel, cosmetic dentistry, online gambling, property purchases, a wedding reception and partying in nightclubs. Binary options have subsequently been banned for retail investors.

There is a particularly good chapter under the heading “Cooked Books” on stock market fraud. These paragraphs are from it: “There are many reasons one might want a crooked set of books — to present an image of financial soundness to the victim of a long firm, for example, or to pretend that a sum of money has been spent honestly rather than embezzled. But the most common one is that you want to show your crooked accounts to investors so that they give you money. For this reason, any discussion of accounting fraud needs to be put in the context of stock market fraud, because one is usually the point of the other. With that in mind, here’s how one steals money by lying to the stock market.

A public financial market provides the same service to liars that it provides to honest businesses — it converts stories into cash. If you own a profitable enterprise in an economy with functioning stock markets, you hold a form of ‘Supermoney as the fund manager and auditor George Goodman noted in a book of that name. Super how? Not only does the business provide a steady stream of income; the stock market offers a way to acquire and spend years of future profits before you make them”.

If a company is trading on a prospective p/e of 30 then it is multiplying its future profits by 30 in terms of market capitalisation.

This book should be essential reading for all investors and for all auditors as it covers the most common types of frauds. Does the book help you to spot frauds? Perhaps in that there are often warning signs. Such as high growth rates and consistently better financial performance than similar competitors (Madoff investment funds or Patisserie Valerie).

But here is one warning in the book: “Small investors in the stock market legitimately expect that they ’re going to have a chance to make a profit; if, instead, they’re systematically going to be filled up with the duds, then they are going to find something else to do with their savings and/or gambling money. And even in the modern world of huge fund managers and high-frequency robot traders, retail investors are more important than you might think.

Retail investors have one hugely attractive property when considered by a professional – they’re dumb money. Not only are they unlikely to have private information, a lot of the rime they haven’t taken care to consider all the public information. When the party on the other side of the trade is a small investor (or a lot of orders from small investors all over the country, ‘bundled’ by a retail stockbroker), you can be reasonably sure that you’re not taking too big a risk that the person selling stock to you knows something about it that you don’t.

This makes retail orders very valuable to the market. One of the reasons why stock brokerage commissions are so cheap these days is that retail brokers have actually realised how valuable they are. They charge a quite substantial fee to players like the high-frequency traders for the privilege of dealing against their order flow, and they rebate some of this fee to their customers. But the retail orders would eventually dry up if the customers lost too much or felt that they weren’t being given a fair chance. And without a steady flow of ‘dumb money’ lubricating the wheels, the professionals would find it a lot harder to trade, as they’d always suspect each other’s motives for buying or selling”

The book is an easy read and does not get too bogged down in the technicalities of fraud (even the complexities of VAT carousel fraud). Most frauds are quite simple in essence – lying about assets, revenues or profits.

Altogether a highly recommended book of 300 pages.

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

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Parliamentary Petition and Rio Tinto AGM

A new Parliamentary petition has been raised to give all shareholders a voice by bringing Company Law into the 21st Century. It includes the requirement to make email a requirement for shareholding registration which is an important way to improve shareholder communication both from and to shareholders.

See https://petition.parliament.uk/petitions/636051 . PLEASE SIGN IT!

Today I watched the Annual General Meeting of Rio Tinto Plc (RIO) – all two and half hours of it. I no longer attend meetings in person, particularly FTSE-100 company ones, due to physical incapacity and an unwillingness to be bored.

The Chairman said they are now more aligned with societal aspirations and have a critical role to play in energy transition. But there are environmental dilemmas arising in a critical industry. It was later mentioned that the world needs to produce more copper in the next 20 years than has ever been produced! They cannot overstate the scale of the challenge.

There was an interesting precis of the history of this 150-year-old company. The company had a Return on Capital Employed of 25% last year but has not always been so careful about its capital investment as one shareholder pointed out who was concerned about rising debt levels.

Most of the questions from attendees, including those on-line, referred to local issues in Arizona, Serbia, Australia and Mongolia, particularly environmental protection issues. The Chairman seemed to handle them well and the meeting was generally well run. There were no surprises.

I am happy to continue holding the shares. Current forecast p/e is 8.5 and dividend yield 7.4%.

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

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New Roliscon Web Site

The Roliscon company is one used to promote the books I have written and the web site (https://www.roliscon.com/ ) also contains all the consultation responses I have written over the last few years, a link to my blog and other material.

The web site has been redeveloped in Wix so is now more user-friendly on mobile devices. Take a look at the new web site if you have never visited it before.

This work was done by Barker Online Marketing (see  https://www.barkeronlinemarketing.co.uk/ ) who I can highly recommend if you need some web site development work done.

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

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The Death of Lord Lawson

The media is awash with tributes on the death of Nigel Lawson. A tax cutting chancellor who reinvigorated the UK economy and was a bulwark of Thatcherism. He denationalised whole swathes of UK industry and was subsequently active in support of Britain leaving the EU. He also served as chairman of the Global Warming Policy Foundation think tank which opposed some of the extreme environmental measures now being pushed through by a Conservative Government.  

He also said about traffic conditions in London that changes have done more damage, and is doing more damage, to London than almost anything since the Blitz. He was referring to the “Mayor’s addiction to cycling” and the introduction of the Cycle Superhighways by Boris Johnson and Transport for London.

In summary a highly intelligent and influential politician.

Note: I am no relation to him but people regularly call me Nigel when they can’t recall my first name. Hopefully that will be less frequent in future.

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

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Oil+gas Companies, Woodside Energy Voting and Archie Norman’s Mission

Oil and gas companies share prices are rising today after the price of oil rose on news from Saudi Arabia. One such company I hold is Woodside Energy (WDS) and I now have the opportunity to vote at their Annual General Meeting which I have done on-line (difficult to attend the AGM in person as it’s being held in Perth, Australia).

There are a couple of resolutions to amend the constitution and one on “capital protection”. These have clearly been put forward by climate activists as a way to dictate to the management of the company what they should be doing. I voted against both resolutions as I believe managers should manage and not be directed by a small minority of shareholders, or shareholders in general. If shareholders do not like what the company directors are doing they can change them, or sell their shares of course.

I also voted against the two remuneration resolutions without a close examination. Typically too complex and too generous as with most large company schemes.

On the subject of voting at AGMs, Archie Norman, the Chairman of M&S, is leading a campaign for changes to Company Law to better enfranchise shareholders in nominee accounts and improve AGMs. He has written to the Business Secretary Kemi Badenoch asking for changes to improve shareholder democracy.

Hybrid meetings are allowed now but he apparently wants “all digital” ones to be permitted which I suggest is not a good idea. But otherwise he is right that this area of Company Law needs reforming. The Government is well aware of this after campaigns by ShareSoc et al, but action is progressing at a snail’s pace.

You can find more details of Archie Norman’s views and actions on the web.

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

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Are We Nearing the End of the Bear Market?

There were glimmers of light in the UK stock market last week. I actually purchased a few shares to add to my current holdings although I still have a lot of cash in my portfolios. It is worth repeating what Mark Slater of Slater Investments Ltd said at the end of the week:

“The bear market that started in late 2021 is now getting fairly long in the tooth. It has led to significant de-ratings across the board, with a small number of exceptions among the megacaps that dominate the FTSE 100 index. We have now seen a run on a major bank. Many investors are trying to work out which is the next shoe to drop – perhaps a real estate collapse, perhaps a worse recession than expected. We are well and truly into the disillusionment phase. Sir John Templeton said that “bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.” Conversely, bear markets kill off the euphoria of the previous phase quite quickly and then grind away at any residual optimism until almost all market participants are deeply pessimistic. Given the current mood, the odds are that this bear market is nearing its end.

We are not advocates of market timing for the simple reason that it is extremely hard to get it right, both at the point of entry and exit. Investors who can do this are extremely rare, and most of them get it badly wrong at some point. Instead, we prefer to buy businesses we understand that can compound their earnings over time. We expect the majority of the companies we own to do this even though the economic backcloth is challenging. Some other companies we own will probably see their growth rates slow temporarily but we expect them to improve their competitive positions during tough times by taking market share or by making cheaper acquisitions. Only a handful of companies in the portfolio have experienced problems but these are typically due to unforced errors or things like China’s lockdown, issues that are temporary or fixable.

We have not seen so many companies we own trade on single digit PE multiples since 2008-9. Now, as then, as companies grow their earnings while their multiples fall they are getting cheaper and cheaper. It is analogous to holding a beach ball under water. Sooner or later you cannot hold it down any longer and it jumps above the water. For a more accurate analogy, someone would also be pumping air into the beach ball while you try to keep in down.

It is fashionable to be “down” on the UK, especially after the Truss budget. It is therefore worth remembering that the UK is not all doom and gloom. The Mid 250 index has broadly matched the earnings of the S&P 500 over the past twenty years. The UK market also produces a higher proportion of “tenbaggers” than the US market. Michael Caine might say that “not a lot of people know that” and he would be right. Our view is that we saw peak gloom about the UK last autumn.

While we cannot predict the end of the bear market with any accuracy we also believe we should not try to do so. We are comforted that we own good businesses that are cheaper than they have been for a very long time. If we look ahead a couple of years rather than a couple of months, we expect to make money When things are going wonderfully, people can rarely imagine that they can go wrong. Similarly, when times are tough, people often struggle to imagine that they will one day be wonderful again.”

These are wise words from a very experienced stock market investor.

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

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When Should Directors Intervene in Trust Management and Scottish Mortgage Ructions

The FT published an interesting article on Friday about recent events at Scottish Mortgage Investment Trust (SMT) under the headline “Inside the boardroom bust-up that shook Scottish Mortgage”. It provided some explanation of why director Amar Bhide has left and chairperson Fiona McBain is departing.

SMT has a great long-term track record which it has achieved by investing up to 30% of its assets in unlisted companies – typically high-tech “unicorns” that had good prospects of listing in the future. This all went wrong when the enthusiasm for technology companies collapsed and the share price of SMT has halved in the past 18 months (and the shares are currently on a 19% discount to Net Asset Value).

With a policy that limits the level of investment in unlisted companies, which cannot be easily sold, this has limited the company’s ability to manoeuvre and certainly inhibited new investments as the share prices of listed holdings fell.

This comes back to the old question of how much the board of an investment trust should interfere in the management of the portfolio. Should they let the managers get on with it, or should they review and possibly veto individual investments rather than just set general policy? If they don’t like what the manager is doing should they intervene?

Or should they wait long enough to see whether the manager’s decisions are clearly right or wrong? If obviously wrong they can be fired of course but often that is way too late.

I recall this was a common problem in the early days of Venture Capital Trusts. New and often inexperienced fund managers in the small cap sector took them on and boards of directors would be made up of those with general experience and willing to turn up once a month for little pay to oversee matters, but often with no background in small cap investment management. There were several disasters as a result.

Boards that reviewed new investments and intervened in the management when necessary, proved to be the best. This was not a case of second-guessing the management or looking continually over their shoulder. Simply a way of getting a kind of “peer-review” of the decisions being made.

In the case of SMT should the board have reviewed and revised the management’s predilection to invest in unlisted shares when it started to lose performance? There is not a simple answer to that question.  It should certainly have merited a review but whether it makes sense to change the strategy really depends on how long technology stocks might be out of favour.

There is certainly grounds for criticism that the board lacked directors with hands-on investment management experience and with too many academic professors plus a chair who had been there too long. These things can be easily fixed.

As a holder in SMT, I think it wise however for them to stick with the strategy of holding a significant proportion of unlisted shares. Companies in the technology sector are often reluctant nowadays to go for a stock market listing so if you ignore unlisted companies you can miss out on high growth opportunities. But valuing unlisted companies can be tricky. There is a big temptation to over-value their growth prospects as happened in new VCTs twenty years ago.

The board of SMT should be reviewing carefully the decisions of the investment manager until the company has stabilised, and not be afraid to intervene when necessary.

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

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