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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RBS, Shareholder Committees, LTIPs and Weir

It is good news that the Royal Bank of Scotland (RBS) have accepted a requisition for a resolution on a Shareholder Committee at their forthcoming AGM. ShareSoc and UKSA, who jointly promoted this under the leadership of Cliff Weight have issued a press release confirming the resolution has finally been accepted after some legal evasions to try and avoid it.

Shareholder Committees are a way to improve corporate governance at companies and ensure that the views of shareholders (and potentially other stakeholders) are noticed by the directors. It might put a stop to such problems as wildly excessive pay in public companies which non-executive directors have been unable to do – mainly because they are part of the problem.

RBS has an appalling track record of mismanagement and dubious ethics in recent years, from the dominance of Fred Goodwin who pursued a disastrous acquisition and then a right issue (in 2008) that was promoted by a misleading prospectus, to the activities of its Global Restructuring Group (GRG) which is still the subject of regulatory action and law suits, through involvement in the sub-prime lending problems that caused the financial crash to PPI complaints.

A Shareholder Committee might have tackled some of these issues before it was too late. You can read more about the campaign to get one at RBS, and how shareholder committees operate here: https://www.sharesoc.org/blog/campaign-to-obtain-shareholder-committee-at-rbs/ . I wrote the original note on the subject published there by ShareSoc back in 2011 and I still consider that it would be a step forward in UK corporate governance to have one in all public companies. But there is still strong opposition from boards to the idea mainly apparently on the principle that it might interfere with their decisions. That may be so but only if they are unjustifiable and it would not undermine the “unitary” structure of UK boards.

Shareholders in RBS should make sure they vote for the resolution to appoint one at the AGM, but winning the vote will not be easy. RBS have made it a “Special Resolution” which requires 75% support.

Another aspect of RBS that has concerned investors is the delay in paying out the legal settlement that was agreed over the Rights Issue. This has received a lot of media coverage but the problems faced by the legal firm now handling the settlement, Signature Litigation, should not be underestimated. It appears that they face two problems: 1) confirming the eligible claimants and their shareholdings; and 2) confirming the contracts with “litigation funders” who helped to finance the legal action and their entitlements.

You might think that confirming the shareholders would be easy but it is not. A very substantial number of the claimants will have held shares in nominee accounts (i.e. the shares they subscribed for were not put on their names on the share register of the company). They are quite likely to have subsequently sold the shares due to the collapse in the share price. After 10 years the nominee operator may not be able to confirm their past holding, and if they ever received a contract note or other written confirmation of their holding they may not have printed it out or retained a copy in digital form. Many claimants may have died in the meantime or become senile, or moved house or changed their email address so that would create other problems.

There are two morals to this story: 1) Make sure you always keep accurate records of share transactions, including any contract notes or confirmation of subscriptions; 2) do push for reform of the share registration system so that everyone is on the share register and there is no doubt about who owns what and when the shares were acquired.

As regards the contracts with litigation funders, it is entirely appropriate that Signature Litigation seek to confirm the details of those contracts and that they were appropriate, i.e. that real services or funding was provided and the commission due was fair and reasonable. The fact that these arrangements seem to be difficult to confirm, or at least are taking time, certainly raises some doubts that the campaign and legal action was competently managed all through its duration.

However, as I recently said to a member of the fourth estate, the action group(s) and shareholders involved in this case should be complimented in continuing the fight for ten years against very difficult odds and a ridiculously expensive legal system. I know exactly how difficult these cases are – the Lloyds Bank one is similar and is still in court. To obtain a settlement at all in the RBS case was an achievement, when there was no certainty at all that it would be won.

As regards corporate governance, an interesting item of news today was that from Weir Group Plc (WEIR) who are changing their remuneration scheme to replace LTIPs. That was after losing a “binding” vote on pay two years ago. The new scheme means shares will be awarded (valued at up to 125% of base salary for the CEO per year) with no performance conditions attached, although the board may be able to withhold awards for underperformance. The base salary of the CEO was £650,000 in 2016 while Weir’s share price is still less than it was 5 years ago. The justification for scrapping the LTIPs was that they paid out “all or nothing”, often based on the prices of commodities that directly affect Weir’s profits and share price. They are also changing the annual bonus so that it focuses more on “strategic objectives” rather than “order intake and personal objectives”.

Comment: as readers may be aware, I regularly vote against LTIPs on the basis that I am not convinced they drive good performance and tend to pay out ludicrously large amounts. The new scheme might ensure that directors do hold significant numbers of shares, which is a good thing, but with minimal performance conditions this looks like a simple increase in base salary, in reality a more than doubling for the CEO. Looking at the history of remuneration at Weir this looks like a case of wishing to continue to pay out the same remuneration by changing the remuneration scheme when past targets were not achieved.

They really have not learned much from past mistakes have they? This would be another company where it would be good to have a Shareholder Committee to bring some reality into the minds of the directors.

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

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Persimmon Pay and Rightmove Results

This morning the directors of Persimmon (PSN) gave in to demands to revise the benefits they would get from their LTIP scheme. This has drawn lots of criticism from investors, even institutional ones who voted for the scheme a few years back. They clearly either did not understand the workings of the scheme or did not understand the possible implications. I voted against it at the time as a holder of shares in this company, but then I do against most LTIPs. The LTIP concerned potentially entitles three directors and other staff to hundreds of millions of pounds in shares.

Three of the directors have agreed to cut their entitlement to shares on the “second vesting” by 50%. They have also agreed to extend the required holding period and put a cap on the value of any future exercise.

However, they have not conceded anything on the first tranche of vesting which vested on the 31st December 2017. Director Jeff Fairburn, has said he will devote a substantial proportion of his award to charity, but surely that is simply a way to minimise his tax bill.

One particularly annoying aspect of the announcement this morning is this statement therein: “The Board believes that the LTIP put in place in 2012 has been a significant factor in the Company’s outstanding performance.  In particular, it has contributed to industry-leading levels of margin, return on assets and cash generation”. This is plain hogwash. The main factors were a buoyant housing market, supported by the Government’s “Help to Buy” scheme. House prices rose sharply driven by a shortage of housing while record low interest rates encouraged buy-to-let investors. It was the most benign housing market for decades.

So although the three directors have made some concessions, and the company Chairman has resigned, I suggest this has not really been as satisfactory an outcome as many folks would have liked to see.

Rightmove Results

Another company I hold who also operate in the property sector is Rightmove (RMV). This business mainly provides an advertising platform for estate agents. Results were much as forecast with revenue up 11% and adjusted earnings per share up 14%. These are good figures bearing in mind that there were some concerns about increased competition from two other listed companies, Zoopla and OnTheMarket, plus concerns that the business was maturing. In addition the number of house moves has been falling, thus impacting one would have assumed on estate agent transactions, but they seem to be spending more to obtain what business is available to them.

There are very few estate agents, traditional or on-line ones, that are not signed up with Rightmove plus one or other of the competitors. Although growth in revenue to Rightmove has been slowing, it’s still improving mainly because of price increases and new options available to advertisers. It is clear that Rightmove has considerable “pricing power” over its customers.

The really interesting aspect of this business is their return on capital that they achieve. On my calculations the return on equity (ROE) based on the latest numbers is 1,034% (that’s not a typo, it is over one thousand per cent).

This is the kind of business I like. A dominant market position due to the “network” effect of being the largest property portal, plus superb return on capital.

But their remuneration scheme is not much better than Persimmon’s. Retiring CEO Nick McKittrick received £159,200 in base salary last year, but the benefit from LTIPs is given as £1,063,657, i.e. seven times as much. Other senior directors had similar ratios if other bonuses are included (cash bonuses and deferred share bonuses). Such aggressive bonus arrangements distort behaviour. In the case of Rightmove I believe it might have resulted in an excessive emphasis on short-term profits which has enabled their two listed competitors to grab significant market shares.

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

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Government To Review Share Buy-Backs

The BEIS Department of the Government has announced a review of share buy-backs. That’s where the company buys its own shares in the market, a practice that used to be illegal but is now very widespread.

Business Secretary Greg Clark said: “…there are concerns that some companies may be trying to artificially inflate executive pay by buying back their own shares. This review will examine how share buyback schemes are used and whether any action is required to prevent them from being abused.”

If a company buys back its shares, then it will increase the earnings per shares (EPS) because the same profits will be spread over fewer shares. But EPS is often an element in the calculation of performance related bonuses, e.g. in LTIPs. So effectively management can earn bonuses by simply deciding to buy back shares rather than really improving the underlying performance of the business.

Obviously cash has to be used to buy back the shares, and another concern is that this is money that should be used to develop new products, services or markets. In other words, it contributes to the lack of investment in the UK economy. In extremis companies can borrow money (i.e. gear up) to provide the funds to cover the buy-back which increases the risk profile of the company.

There is also the suspicion that some companies undertake large scale buy-backs to support their share price, often encouraged by institutional investors who wish to exit. The directors always deny this, but one can see the sub-conscious motive to “clear-up a share over-hang” that may be present. In practice, share buy-backs may benefit shareholders who are departing more than they benefit shareholders who remain.

In theory, if a company cannot find a good use for surplus cash, i.e. cannot reinvest it in the business profitably, then buying in shares where the per share intrinsic value of the company is more than the market share price should make sense. But determining what is the “intrinsic value” is not at all easy.

There are also tax issues to consider. Some investors think it’s best to retain the cash in the business because paying it out in dividends might incur more tax, and sooner, than the capital value growth that might otherwise be obtained.

You can see there are many complex issues around this topic that could fill a book, or at least a pamphlet. But here are some comments on the approach I take:

  1. I always vote against share buy-backs unless there are very good justifications given by management (and that’s about 1 in 20 votes in practice).
  2. The only general exception I make is investment companies (e.g. investment trusts) where it does make logical sense and can be used to control wide discounts.
  3. I prefer management to reinvest in growing the business if they have surplus cash (and as I rarely invest in no-growth businesses, you can see why the above rules are easy to apply).

If the advisors to the Government determine that share buy-backs are being undertaken for the wrong motives, what could they advise the BEIS to do about it? Reading the minds of directors about their motives for share buy-backs will not be very practical. If they simply wish to stop the abuses related to incentive schemes they could insist that all such schemes (including all share options) should be adjusted for the buy-back – they often are not at present. But would it not be simpler just to revert to the old regime and outlaw them except for investment companies? I do not recall it created any major practical problems.

If a company’s shares consistently trade below “intrinsic value” then someone will buy them sooner or later – after all many people believe in the perfect market hypothesis and it’s probably true to a large extent – particularly with large cap companies where share buy-backs are the most common. So simply banning share buy-backs should not create significant problems.

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

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Sophos, Interquest and the Government

Yesterday I missed the Sophos (SOPH) AGM due to having a clashing engagement, but I noticed that in the announcement of the voting results that there were substantial votes against the Remuneration Report (29.8% against) and also high votes against most of the directors. One only needs to glance at the Remuneration Policy to see why.

The maximum bonus opportunity is 200% of salary, and the maximum LTIP award is 500% of salary in normal circumstances and up to 750% in exceptional circumstances. So total incentive payments can reach nearly 10 times normal salary. That’s the kind of scheme I always vote against.

For what is actually a relatively small company that has never reported an annual profit, the actual pay figures are way too high – CEO got a base salary of $695,000 last year and total single figure remuneration of $2.32 million. Other directors, even the non-execs, have similar generous pay figures. It might be a rapidly growing company in a hot sector (IT security) but I am beginning to regret my purchase of a few shares.

Although I missed the AGM, I did “attend” the previous days Capital Markets Day. I was refused physical access but anyone could log into the web cast of the event. Not quite the same thing but it was exceedingly boring with a lot of the time spent on the wonders of their technology rather than important business questions. Is it not despicable though that companies and their PR advisors try to keep such events solely to institutional investors?

Interquest (ITQ) is an AIM listed company that received an offer for the company from some of the directors but they only got 58% committed support. That’s not enough to delist the company under the AIM Rules which requires 75% so the offer was abandoned. What did the directors do then? They notified their Nomad of termination of their contract and subsequently said they would be unlikely to appoint another Nomad within the one month period allowed. This means the shares will automatically be suspended from AIM and subsequently delisted if no Nomad is appointed.

The moral is that if directors or anyone else control 58% of the company then minority shareholders are in a very difficult position because they will have the ability to do lots of things that prejudice the minority shareholders – for example pay themselves enormous salaries. A legal action for prejudice of a minority is available but as my lawyer said yesterday, these are complex cases, as I well know from having run one myself in the past, and successfully (we were discussing my past legal cases). It’s difficult enough in a private company, and even more so in a public one. In summary, having an AIM Rule about delistings may not help if one cannot win a vote of shareholders on other matters that require just 50%.

Having control of a public company in the effective hands of a concert party of a few people is something to be very wary about, and something all AIM company investors should look at.

Government policy on tackling excessive pay levels for the directors of public companies has taken a step backwards this week. Tougher measures which Theresa May threatened have been watered down, and the core of the problem – the fact that Remuneration Committees consist only of directors, whose appointment and pay is controlled by other directors, has not been tackled. In addition, the potential to control pay by votes at General Meetings has been undermined by the disenfranchisement of private shareholders as a result of the prevalence of the nominee system and the dominance of institutional voters who have little interest in controlling pay.

Another bit of news from Government sources this week is that the hope of some change in shareholder rights that might have improved private shareholder voting is fading away after a decision to postpone yet again the issue of “dematerialisation”. The staff involved in that project have been moved and expertise will be lost. This is likely to be the result of both lack of interest in tackling a difficult and complex problem, and the need to put in effort on Brexit matters at the BEIS Department.

Will we ever get a proper shareholder system where everybody is on the share register and automatically gets full rights, including voting rights? It remains to be seen but I will certainly continue to fight for that. Without it we will never get some control over public companies and their directors. I suggest readers write to their Members of Parliament about this issue.

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

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Corporate Governance Reform and Pay – No Revolution

Yesterday the Government published its response to the consultation on the green paper entitled “Corporate Governance Reform”. The paper aimed to tackle some of the perceived problems in UK public companies and Theresa May hoped that it would tackle “the unacceptable face of capitalism” demonstrated by outrageous pay levels in some companies as she described it.

Has it done that? Well most of the responses from the media suggested not with comments such as “watered down” being printed as tougher binding votes on pay have been dropped (possibly because of legislative log-jams in Parliament), and workers on boards not supported. However, we do have a commitment to publish pay ratios of employees to directors – not that this writer thinks that will help much.

If you read the full Government response (present here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/640631/corporate-governance-reform-government-response.pdf ), you can see that the Government has responded in many detail ways to the consultation responses. As in UK politics in general, particularly when your party has a narrow majority and many other problems on their minds, no revolutions are advocated. Just minor improvements, and more red tape, are the order of the day.

Not that I expected any great result from the matters being considered in the consultation. This is what I said in my personal response to the consultation back in February:

“As regards director pay, the document makes clear that despite more obligations on companies on reporting and voting on pay introduced in 2013, not a lot has changed in reality. Although there is widespread public concern about pay levels, the paper notes that the average vote in favour of remuneration reports was 93% (see page 19) and only one binding vote has been lost. I certainly support further significant reform in this area. The key problem is that remuneration of directors is still decided by the same directors and there is very little external input from shareholders, employees or other stakeholders before it is put to a vote at an AGM – but this is too late and institutions hate voting against directors’ wishes. 

In addition, retail shareholders have little say and are effectively disenfranchised because of the widespread use of the nominee system. A substantial reform of this area of company law and the activities of stockbrokers and company registrars needs to be undertaken to fix that problem. All shareholders (including beneficial owners in nominee accounts) should be on the share registers of companies with full rights as members of the company including voting, information and other rights.

Shareholder Committees are a core part of the solution to the problems of corporate governance. There are many other aspects of corporate governance that can be improved. However, without Shareholder Committees, and concomitant reform to restore the rights of individual shareholders, other amendments to corporate governance are unlikely to produce meaningful change.”

NONE OF THESE THREE POINTS HAS BEEN TACKLED IN THE GOVERNMENTS RESPONSE.

There are some detailed proposals to encourage more “engagement” between boards and their shareholders plus employees which might be welcome, but whether they will have any real impact is very doubtful. So long as directors can ignore you, some will do so – a typical recent example is Sports Direct.

ShareSoc/UKSA have issued a joint press release which is very critical of the Government’s response particularly about the proposal that the Investment Association keeps a register of “infringements”. John Hunter is quoted as saying: “Asking the Investment Association to keep a register of ‘baddies’ has all the authority and credibility of appointing foxes to keep a register of poor builders of chicken coops!” 

One has to agree with ShareSoc and UKSA that this is a very disappointing outcome. It looks a classic case of Government civil servants and politicians having little understanding of how companies work and the dynamics of boards, as usual, and have listened to the fat cats in preference to others.

In summary, TOO TIMID is my final comment.

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

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Why Institutions Cannot Control Pay

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

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

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

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

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

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

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

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

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

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