Brexit Bounce, Green Accreditation, Security Issues and Hargreaves Lansdown AGM

The FTSE and my portfolio jumped up this morning on the hope of a Brexit Agreement after all. RBS is up 16% which seems to be a function of euphoria. I think I’ll wait and see the progress of discussions in the next few days before plunging in to buy some more stocks. But if an Agreement is reached then the market is likely to power ahead so keep that cash handy.

The London Stock Exchange (LSE) announced today a new “Green Accreditation” scheme which will recognize companies and funds that derive 50% or more of their revenues from products or services that contribute to the global green economy. One company that has promptly announced accreditation is Blancco Technology (BLTG) in which I hold a very few shares after a disappointing track record. How do they qualify for this award? They do so because they provided data erasure services thereby helping people to recycle and reuse hardware rather than scrap it. No doubt there will be other “virtue signalers” claiming this award but I doubt it will make a lot of difference to my investment choices.

The takeover of Cobham (COB) has run into a lot of criticism about the threat to national security. The founding family have raised concerns and the Government has decided to intervene. On a personal note should I be worried that our new home security system based on Hikvision technology leaves us open to being hacked? Not only that but I also have a Huawei smartwatch. Both companies have been banned by the US due to their links to the Chinese Government. Hikvision have 1.3 million cameras installed in the UK, often in NHS facilities. This is surely an issue where the Government should be providing some advice. Why do we now have cameras all around our house? Not because of worries that my views on Brexit might stimulate some demonstrators but because the home of two Asian families in our street were recently burgled. Apparently such families are particularly at threat of such attacks because they often keep gold at home. Readers can be assured that there are no gold bars in our house. The burglaries that did take place were to houses with non-functioning alarm systems but my wife was somewhat concerned.

There was an interesting report in the Financial Times on the Hargreaves Lansdown (HL.) Annual General Meeting (I do not hold the shares). It sounds like it was a lively affair. Apparently some shareholders were not happy with the reaction of HL to the Woodford Equity Income Fund suspension after HL had promoted the fund. One shareholder said the reopening of the fund “has been postponed more often than Brexit” and suggested that HL should push for Woodford to liquidate the fund immediately. Comment: liquidating the fund abruptly would be easier said than done due to the nature of its holdings, but I agree that more vigorous action could have been taken. The fact that Neil Woodford is still running the fund when it will clearly be every unlikely to recover rapidly if at all is far from ideal.

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

You can “follow” this blog by clicking on the bottom right.

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

 

LSE General Meeting and Blancco AGM

Yesterday I attended two company general meetings (I hold a trivial number of shares in each). Here’s a brief report on events, with the later one being more interesting than the first one.

London Stock Exchange (LSE) General Meeting.

As readers may be aware, a General Meeting was called at the LSE by The Children’s Master Investor Fund (TCF), which is led by Sir Christopher Hohn, in an attempt to remove the Chairman Donald Brydon. That was the only item on the agenda. This arose from a dispute over the removal of CEO Xavier Rolet after the board decided to do some “succession planning”. Mr Rolet has been a very successful leader of the LSE for eight years (the share price has gone up more than 6 times since he was appointed to the board in 2009).

Mr Rolet was going to depart after the Deutsche Borse merger but when that fell through the board apparently decided that he should be replaced. Sir Christopher Hohn objected to him being eased out. There then appeared a number of press reports (e.g. in the FT) suggesting that Mr Rolet was a difficult person to work with – rude to colleagues, tended to not pay attention in meetings, and other defamatory remarks. The company’s defence document for the meeting referred to Mr Rolet’s “operating style” as an important factor in seeking a replacement.

The meeting was attended by mainly “suits”, with very few private shareholders as is more common at these kinds of events – only the latter asked any questions. Neither Mr Rolet or Mr Hohn attended but the latter certainly had representatives present.

The meeting was chaired by the Senior Independent Director, Paul Heiden, and the acting CEO Donald Warran also spoke. Mr Brydon said little. Mr Warren emphasised the need for a “team” to deliver business success and made positive comments about the prospects for the company.

One shareholder commented that it was a “sorry affair” that had generated considerable opprobrium against the company.

The vote was taken on a poll, with results announced some time later. The votes were 79% opposed to the resolution to remove the Chairman (i.e. 21% supportive although there were also 9 million votes Withheld). Sir Christopher Hohn suggested afterwards that this shows considerable support for a change of Chairman and that the board should look to do that sooner rather than later.

Comment: I agree with the views expressed by one shareholder in the meeting. This seems to have been handled badly. Succession planning for non-executive directors who have reached ten years’ service are routine. But when you decide to remove an executive director you have to tread a lot more carefully. This resulted in a public battle, and then having to pay off Mr Rolet with a very generous compensation package.

The allegations about Mr Rolet’s management style may or may not be true. But forceful personalities are very common in high achieving leaders (Steve Jobs and Bill Gates are two very good examples). Organisations are wisest to put up with such personalities in my experience. Having heard what was said at the meeting, I voted in favour of removing Mr Brydon as Chairman. 

Blancco (BLTG) Annual General Meeting

Blannco is an AIM listed software company that specialises in data erasure and mobile phone diagnostics. It transmogrified from a business named Regenersis which was into hardware repair and there were changes of management and restructuring when that happened.

The meeting was chaired by Rob Woodward with about a dozen, mainly disgruntled, private shareholders present.

The reason for their unhappiness is no doubt the substantial losses reported in the last three years (£4.3 million in the year ending June 2017) compounded by the need to restate the 2016 accounts following the discovery by a new interim CFO that sales worth £3.5 million booked in June and December 2016 were uncollectable. The company had to raise additional funds as a result at that time. The former CEO, Patrick Clawson, departed and the interim CFO is now interim CEO. They are looking for a new permanent CEO.

Mr Woodward opened the meeting by introducing the board and said “last year was a year of substantial challenge”. He summarised the events mentioned above and said “several members of the senior management team had departed”. He suggested the company needed to rebuild trust with all stakeholders, but the market opportunity remains strong. He said he was unable to comment on some of the investigations undertaken into past events for legal reasons.

Shareholders asked questions about current revenue recognition policies. Then the question of who might be accountable arose, e.g. the auditors for failing to spot the abuse or the former CEO. But Mr Woodward said the board did not believe it was in anyone’s interests to take action against individuals.

Note: the auditor at the time was KPMG but they were replaced by PWC at this meeting. Past events were not given as a reason but open tenders following length of service and other platitudes. Mr Woodward stated the auditors correctly prepared the accounts based on management information provided and that the management overrode controls. The company had taken legal advice but were unwilling to disclose it.

I asked whether there had been any report to the FRC asking them to investigate the audit. Apparently not.

A vote on the resolutions was taken on a show of hands. All resolutions passed with 100% voting For in several cases. But there were over 11 million votes Withheld on some of the resolutions. I asked who that might be as clearly some institution was unhappy. Although the Chairman declined to say, a shareholder pointed out that the number matched the holding of M&G/Prudential (see page 29 of the Annual Report).

Simon Herrick, acting CEO, gave us some information on his background (he had recently helped to float Ramsdens, a financial services company). He said Blancco had a great position in the market. Data erasure will be a big market but it is really only just beginning to kick off. The company seemed to have been rationalising its operations by introducing Salesforce everywhere and a new accounting system (NetSuite). He said the company did not need more cash in the short term but they are not generating large amounts either. He suggested shareholders study the last results presentation on their web site where cash flow is analysed (page 14).

Apparently the company is well down the process of finding a new CEO with a software background, strong leadership capabilities and who can grow the business. They are focusing on a US background which is their major market at present and where such people are easier to find. (Comment: but they are also expensive).

Note it is remarkable that this company only has one person on the board with any software industry experience. To my mind this is a major defect.

Concluding Comments: This problem of revenue recognition at software and other IT companies persists, with auditors apparently incapable of identifying the signs. The rules in the accounting standards have been tightened up, but the activities of over enthusiastic management keen to achieve their bonuses or even ramp up the share price persists. This is in reality a fraud on the company and on their investors.

Why auditors are still proving incapable of spotting such frauds is probably because they are not sceptical enough about the information they are given. But they are not that difficult to identify. Large deals done near financial year ends, where the cash is not yet collected or the agreed payment terms are very extended should be examined very closely.

Not that these are foolproof. As we are coming up to the year end, I recall the case of Software International some years ago who got their sales staff to book sales to customers near the year end which were then invoiced. The customers were told they should simply cancel them in the new year. They employed very persuasive female sales staff who begged the customers to help with their bonus entitlements. The company collapsed when this process was discovered.

But there are way too many of these problems still arising, e.g. HP/Autonomy, Globo (both audits still under investigation), and more recently IDOX. Readers can probably suggest others.

As regards the prospects for Blancco, there is certainly a market opportunity but whether it can be exploited profitably remains to be seen. They really do need a good new CEO but they are not easy to hire. In the meantime, the events in the last couple of years must have been somewhat demoralising for the company staff. If I worked for this business, I am not sure that I would have great confidence in the current board. These kinds of businesses need visionary leaders who can promote the merits of the new technology enthusiastically and who have a very strong technology background.

With profits somewhat uncertain, but on a revenue multiple of 1.5 times, the uncertainty is probably reflected in the current share price.

Postscript: Feel sorry for KPMG losing the audit of Blancco? You don’t need to. The average pay of partners in the UK at the firm last year was £519,000 and according to the last annual report there were 623 UK partners. But those at PWC, EY and Deloittes did even better (the latter on £865,000).

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

You can “follow” this blog by clicking on the bottom right.

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

AIM Rules – Response to Consultation

The London Stock Exchange (LSE) is currently undertaking a consultation on the AIM Market Rules (see http://www.londonstockexchange.com/companies-and-advisors/aim/advisers/aim-notices/aim-discussion-paper-july-2017.pdf ).

Anyone can respond to this and the deadline is the 8th September. Those who invest in AIM shares will be aware of some of the past problems in AIM companies and tightening up some of the Rules that apply to AIM companies may surely help to improve the quality of the market. For example, it covers new rules that might help AIM to be more selective in regard to the companies that list on the market.

I have submitted a response to this consultation which is here: http://www.roliscon.com/Roliscon-Response-AIM-Rules-Review.pdf

Investors in AIM should do likewise, otherwise the responses will be dominated by Nomads and company promoters.

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

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

AIM Rules Review

The London Stock Exchange have published a document entitled “AIM Rules Review”. ShareSoc, including me personally, have criticised the LSE in the past for poor regulation of the AIM market. Many investors view it as a casino because of the numerous problems of fraud, poor disclosures, many delistings or simple bankruptcies in AIM companies. See the ShareSoc campaign page here for more information: https://www.sharesoc.org/campaigns/campaign-improve-aim-market/

As you can see we made a number of recommendations on how to improve the AIM market, and had meetings with AIM management where we put these proposals forward. The LSE regulates the AIM market but their responsibility lies primarily in ensuring the AIM Rulebook is adhered to and that Nomads meet their responsibilities. Other aspects of the market such as market abuse or false accounting are covered by other regulatory bodies, which many private investors do not understand.

So have any of the ShareSoc proposals been covered in the latest document? In summary, yes they have been. Here’s a quick review:

The AIM Rules Review does emphasise the improved recent performance of the AIM market and the fact that the average size of companies listed on it is growing. That has helped to improve the quality of the market.

Vetting new listings. One proposal we made was that new listings should be vetted by an independent panel because many investors considered some of the new listings in the past to be very dubious businesses. They have not taken this up directly but are proposing to formalise the “early notification process”. In addition, they propose to give more guidance to Nomads (whose role it is to perform due diligence on prospective listings) on what they need to take into account. For example, the “good” character of directors or managers, the corporate structure and business model, risky contractual arrangements and “related party” interests. This looks to be one way to tackle past problems, but one suggestion I would make is to add to that list the “regulatory structure and upholding of the rule of law in the countries where the candidate is listed or operates”. For example, it has proved very difficult to pursue fraud in China, and even Greece creates difficulties in that regard.

Free float. One concern they cover is the issue of low free floats which is a concern of some investors. For example, many of the companies that have turned out to be problem ones are those where there is an executive Chairman who holds a majority of the stock (or their close relations or associates do). This gives that person enormous power to prejudice minority shareholders, ignore the views of other board members and ultimately commit major frauds. The LSE’s response on this issue though is simply that the LSE would like to understand the position on new applications and the Nomad’s consideration of it. That surely is open to abuse, but the LSE does ask whether more specific free float rules should be brought in (the LSE document is a public consultation one so you can submit your own comments).

Minimum Fundraising. They also propose the introduction of a minimum fundraising rule and pose some questions on that. This would help to ensure institutional involvement in a company.

Composition of Boards. They mention this, but give no specific suggestions. That is surely an omission when ShareSoc made some specific suggestions in that regard.

Disclosure and Corporate Governance Codes. The document covers the issue that AIM companies can avoid any adherence to a specific corporate governance code. ShareSoc suggested a specific code should be available and applied by all AIM companies. The LSE asks a question on this at least.

Education and Breaches of the AIM Rulebook. The LSE asks how the market, particularly individual investors, can be further educated as to what the LSE can and cannot do. A good question indeed, which I will ponder.

Breaches of the AIM Rules. But one issue we raised with AIM management was the failure to enforce the existing Rules, or penalise and publicise those who break them. Indeed the document spells out how poor this has been by giving some statistics. There were 93 recorded breaches or where “education” was required, but only 16 warning notices or private censures/fines issued on average over the last three years. There were zero public censures apparently. They do ask a question about possibly imposing automatic fines on breaches of the AIM Rules, and invite suggestions for other changes. I will have some, but the basic problem is “self-regulation” and the resulting unwillingness to take tough action. Both firmer rules on penalties and a cultural change is required.

In summary, this Discussion Paper on the AIM Rules is a useful step in the right direction and does appear to tackle some of the issues about AIM that I and ShareSoc raised. It is though only a discussion paper and hence that does not mean necessarily that action will be taken. In some regards it is still quite weak but regrettably AIM management have an uphill battle to get change adopted when many market participants consider everything in the garden is rosy. However, it is surely necessary to improve the reputation of AIM if the market is to attract more listings and reduce the number of complaints from investors.

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

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