Trump Tariffs, 4Imprint AGM and Purplebricks Apologies

US President Donald Trump has created some havoc in world stock markets by threatening in a tweet to impose 25% tariffs on a wider range of Chinese goods from Friday. He is apparently getting impatient with the progress on trade talks between the USA and China, but is pursuing international diplomacy via tweets a good idea?

One company that might be affected by higher tariffs on Chinese products is 4Imprint (FOUR) whose AGM I attended this morning. 4Imprint is an AIM-listed retailer of promotional products (sold via catalogues and the internet). Most of its business arises in the USA with only a relatively smaller operation in the UK, and it imports a considerable proportion of the merchandise from China. I asked the Chairman after the AGM whether this was a concern. He said they discussed tariffs at every board meeting but as their competitors would be in the same position the impact might not be high.

There was a trading statement from the company this morning before the AGM. Revenue up 16% in the first four months and the board is confident that the Group will deliver full year results in line with market expectations.

This is the kind of company I like. Revenue growing, no debt, profits turn into cash and return on equity was 82% last year. Like a lot of retailers, they sell the products and collect the cash from customers before they have to pay the suppliers. In essence a simple business and the AGM in the City was a quite brief affair – duration about 15 minutes.

Only I asked any questions in the formal part of the meeting and one was: what is their market share in the USA? About 4% was the answer, and it’s still increasing. The competition is also fragmented so there is room for growth. You can see the kind of products they sell here: https://www.4imprint.co.uk/ . Having used the company in the past I can recommend them.

I also asked whether there were any substantial numbers of proxy votes against any of the resolutions (this is a question to ask when the Chairman says proxy votes will be disclosed at the end of the meeting as happened here!). Yes there was one. Remuneration Committee Chairman Charles Brady only got 93% support. I later asked him why. He said one institutional investor voted against him because the company does not have an LTIP.

I actually voted for the Remuneration Report because they have a simple remuneration scheme and pay of the executive directors is not unreasonable bearing in mind they are based in the USA. This is the kind of pay scheme that should be applauded, not voted against.

Another AIM company of a very different nature that made an announcement this morning is Purplebricks (PURP). A trading statement gave a financial update but included several very negative points. The Australian operation is being closed down, the US operations are now the subject of a “strategic review” with bad news being hinted at, and founder/CEO Michael Bruce is “stepping down with immediate effect”. That usually means the person named has been fired.

The board acknowledges that performance has been disappointing over the last 12 months and “we sincerely apologise to shareholders for that”. The company blames too rapid geographic expansion and poor operational execution.

The company is still losing money and the share price graph is one of those downward facing ski-slopes that investors hate. The share price is down another 7% today at the time of writing. Still an unproven business model in my view. I do not hold shares in the company for that reason.

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

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Safestore and Fundsmith AGMs

Today I attended the Annual General Meeting of Safestore Holdings Plc (SAFE) in Borehamwood. Their head office is next to one of their self-storage units. They now have 146 stores with a concentration in London/South-East England, and in major UK cities, plus some in Paris.

The Chairman, Alan Lewis, commenced the meeting with a very brief statement. He said 2018 was a good year with good strategic progress. He is confident value creation will continue. Note that Mr Lewis is stepping down as Chairman and they are looking for a replacement as he has now served for 9 years.

Safestore is a growing company in a growing sector. As people accumulate more junk, house sizes shrink and more people live in flats, they run out of space for their belongings. The demand is also driven by divorce and death. In addition to personal users, small businesses find such facilities useful to store goods, tools & equipment, or display material.

Revenue was up 11% last year, and earnings up 125% (or as this can be seen as a property company, EPRA earnings were up 15.5%). The dividend was increased by 13.8%. Self-storage companies can be perceived as property companies but they are best viewed as operating businesses in my view (the CEO seemed to agree with that). The market cap is way higher than the book value of the assets unlike in most property companies of late. Self-storage is one of the few growth areas in the property sector at present.

Page 8 of the Annual Report gives some information on the market for such facilities. Compared with say the USA, the UK storage space per head of population is only a small fraction of the USA. In other words, the UK market is relatively immature and to reach the same level as the USA would require another 12,000 stores!

I asked the Chairman why the company did not expand more rapidly if the potential is there? The response from the CEO was that there were problems with finding suitable new sites and with planning restrictions. They are also conservative on finance. A question on potential acquisitions arose as it is a fairly fragmented market in the UK but it seems few such opportunities are reasonably priced and meet the quality criteria they have. They did take over Alligator last year. Competitors don’t seem to be growing any more rapidly, and the CEO suggested they were gaining market share.

The main other question I raised was about their Remuneration scheme. At the 2017 AGM they only just managed to win the Remuneration Policy vote and at the 2018 AGM the Remuneration resolution was again just narrowly voted through. Remuneration Committee Chairperson Claire Balmforth explained that institutional investors were unhappy with the LTIP and the “quantum” of pay – that’s a polite way of saying it was too high. Indeed remuneration at this company is high in relation to the size of the business – the CEO received a total pay of £1.6 million last year (single figure remuneration). Even the Chairman received £135,000.

However it’s apparently all change after extensive conversations with institutional investors. The executive directors have agreed changes to the LTIP and a “more conventional” LTIP will be introduced in 2020. As a result they did better on the remuneration vote, and the votes on the re-election of Balmforth and Lewis, with the Remuneration resolution passing with 70% support.

It was not until later when I chatted to the directors that I discovered where I had come across Claire Balmforth before. She used to be HR Director, then Operations Director, at Carpetright when I held shares in that company.

Anyway I gave them my views on remuneration. Namely I don’t like LTIPs at all, particularly those that pay out more than 100% of base salary. I prefer directors are paid a higher basic salary with an annual bonus paid partly in cash, partly in shares.

Other than the pay issue, I was positively impressed as a result of attending the meeting.

One issue that arose was the poor turnout of shareholders at the meeting. There were more “suits” (i.e. advisors) than the 3 ordinary shareholders (two of those were me and son Alex). Now it happens that earlier in the day I was watching a recording of the annual meeting of Fundsmith Equity Fund which I had not been able to attend in person this year. Terry Smith was in his usual good form, and he said there were 1,300 investors at the meeting. That’s more than any other UK listed company or fund (most funds do not even have such meetings). An amusing and informative presentation helps enormously to attract investors of course. I wish all companies would bear that in mind.

You can watch the Fundsmith meeting recording here: https://www.fundsmith.co.uk/tv .

Anyone who wishes to learn how to make money in stock markets should watch it. Terry Smith has a remarkable record at Fundsmith. He said last year was not a vintage year as the fund was only up 2.2%. But that beat their benchmark and only 7.8% of UK funds generated positive returns last year. In the top 15 largest UK funds over 3 and 5 years, they are the clear winner.

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

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Persimmon Departure, Abcam AGM and Over-boarding

Persimmon (PSN) issued an announcement this morning saying that CEO Jeff Fairburn was stepping down at the request of the company because “the Board believes that the distraction around his remuneration from the 2012 LTIP scheme continues to have a negative impact on the reputation of the business and consequently on Jeff’s ability to continue in his role”. They are undoubtedly right there.

To remind readers, their misconceived and uncapped LTIP potentially would have meant bonus shares being awarded to Mr Fairburn worth well over £100 million, and similar large sums to other managers. Part of the potential award was later given up but even so it was the most disgraceful example of how pay has been ramped up by LTIPs in recent years. Another example at Abcam (ABC) is covered below.

Persimmon also issued a third quarter trading statement today which was generally positive. They clearly have a good forward committed sales pipeline and the extension of the help-to-buy scheme was positive news in the budget. But I am still somewhat nervous that the housebuilding market may suffer as interest rates rise. New houses are becoming unaffordable for many people despite the demand for accommodation and growing population.

Yesterday I attended the Annual General Meeting (AGM) of Abcam. This is a company that sells antibodies and other life science products/services. It is operating in a high growth sector. I first invested in the shares of the company in 2006 and it has delivered a compound total return of over 32% per annum to me since based on Sharescope figures. I am therefore happy with the financial performance of the business as I said to the board at the AGM. That’s even allowing for recent declines in the share price as analyst forecasts were reduced and general market malaise affected high-flying technology stocks. But I am very unhappy about two aspects: 1) failure to answer simple questions at the AGM, which is the second time in a week where this problem has arisen (the previous being Patisserie); and 2) the remuneration scheme and revised LTIP.

What follows is a report on the meeting, summarised and paraphrased for brevity. The meeting was held at the company’s Cambridge offices at 2.00 pm, but not even a cup of tea was offered.

The recently appointed new Chairman, Peter Allen, introduced the board and there was then a very brief presentation from CEO Alan Hirzel. He said there were between £5 billion and £8 billion of opportunities for the company to grow which they were focused on. They had doubled revenue in the last 5 years, at 11.5% CAGR. There were lots of opportunities to continue to grow the business. They are now focused on 4 areas: 1) RUO Antibodies which are still growing; 2) Immunoassays where growth was 25% last year; 3) China for RUO tools (China could be as big a market as the USA in a few years and they now have 300 people there and are putting more investment in); and 4) CP&L (Abcam Inside). He said the company needs to invest in technology and IT to achieve their growth goals.

Questions were then invited. I commented on the absolutely massive expenditure on new IT systems. They have spent at least £33 million on the Oracle implementation with another £16 million to go and the project is clearly way behind schedule. This level of costs has even caused analysts to downgrade future profit forecasts. As the former IT manager of a large public company, this seemed disproportionate to me in relation to the size of the business. However much one recognises that IT is the key to the business, this looks like a typical project that is way out of control. Who is responsible for this, are they still with the company, who are the outside contractors and what is the current state of this project?

The Chairman first responded that any answers to shareholder questions could only relate to information already in the public domain. This is simply legally wrong and I will be writing to him on this subject and the other issues below.

However Alan Hirzel did respond and accepted the IT project was over budget and covered the history of the project. It was essential to replace some of the legacy systems which were unmaintainable. Many had been built in-house (even an email system apparently) and they had multiple different HR systems in different countries. HR was the first project completed (partner Hitachi as systems integrator) followed by a communication system (part CRM perhaps – it was not clear) but finance and supply chain (manufacturing) projects were yet to be done. He said the CIO had been replaced and a new system integration partner appointed. He assured me that the project was under control now.

I asked who the new IT contractor was, at which point the Chairman refused to answer as that was not in the public domain. I complained that this was a breach of company law as questions must be answered unless there are good reasons to do otherwise. For example, answers can be refused if it is confidential information, not in the company’s interests to do so or may affect the good order of the meeting. The relevant Regulation is here: http://www.legislation.gov.uk/uksi/2009/1632/pdfs/uksi_20091632_en.pdf (see Section 12).

I can see no reason why my question could not be answered as I said to the Chairman and to their lawyer, neither of whom seemed to be aware of the Regulations or the common law principle about answering questions at general meetings. The Chairman also suggested that they could not disclose some information because they would have to issue an RNS announcement to cover it. This of course only applies to “price sensitive” information and I don’t see how knowing who their IT contractor is would be price sensitive. Very annoying and feeble excuses were being given in essence from someone who is supposed to be a very experienced company Chairman. This is the second time in a week (the other was at Patisserie) where the law on answering questions was ignored which is exceedingly annoying.

After that debate, which I will be following up including with a complaint to the FCA as it is not acceptable for companies to ignore the law, we moved on to the Remuneration Resolutions.

I said the following: “Remuneration also seems to be out of control. Although the CEO seems to be generally doing a good job, his pay last year was £1.8 million. This is also out of proportion to the revenue and profitability of the business. Not only that but his basic pay has been increased by 22%, and the maximum award under the LTIP increased from 150% to 400% of base salary. This is obscene and totally unnecessary. Such highly geared schemes promote risky behaviour as we saw with bankers in the financial crash of 2008. I always vote against remuneration policies where the maximum award under LTIPs is more than 100% of base salary and I will be doing the same here. I encourage my fellow shareholders to do likewise”.

There was a response from Louise Patten, chair of the Remuneration Committee to the effect that they could be “traduced” for underpaying rather than overpaying (“criticised” I think she meant). A review had shown that the CEO was underpaid in comparison with market rates in the sector. The LTIP was only a temporary measure as a new policy would be adopted in 3 years’ time.

I also asked whether they had received representations on the subject of remuneration from proxy advisory services and fund managers. She indicated there had been but mainly focused on other issues than the LTIP (in fact they got only 67.1% FOR the Remuneration Report, and 86.7% for the Remuneration Policy which are very low numbers). I said I had no objection to an increase in base pay if justified, but the LTIP was an example of how pay is ratcheting up and it sets a very bad precedent that other companies will follow to have a 400% bonus maximum. I have of course argued with Ms Patten before on the remuneration schemes at this company to no effect, so I chose to vote against her and her two colleagues on the Remuneration Committee but she still collected most of the proxy votes. No other shareholders in the meeting, other than my son Alex who holds the shares also, voted against the remuneration resolutions or the directors which rather demonstrates that when shareholders are happy with a company’s financial performance, they will vote for anything.

There were few other questions from shareholders at the meeting, but after the formal part had finished I asked the Chairman why he only managed to achieve 79.6% of votes in support of his appointment. He said this was because of complaints of “over-boarding”, i.e. that he had too many roles. In fact he has 4 other Chairman roles and one other non-executive directorship which I certainly think is too many and is contrary to ShareSoc’s guidelines. He argued that it was no problem and he did not agree with the current attitude of some proxy advisory services. I disagreed. The duties of directors are more onerous than ever, particularly if the job is to be done properly. Even small difficulties at a company can create a lot of extra work. One of course only has to look at Patisserie Holdings and their recent difficulties where Luke Johnson had lots of other commitments and failed to pick up what appears to be a massive fraud executed by the finance director. Peter Allen seems to think that all he has to do is turn up for a few board meetings each year, let the executive directors get on with business and do not much else. But Abcam is becoming a large company where the Chairman’s role is much more significant than that.

I voted against the Chairman anyway because I think Chairman should be familiar with company law and how to handle questions at meetings. Good ones do of course know how to answer questions without giving out sensitive information or avoiding direct answers but it is certainly not good for the Chairmen to start an argument with a shareholder in a meeting on any subject. Some Chairmen need to take a lesson in how to handle awkward folks like me who are not easily ignored.

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

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Abcam, Pay and Voting

As a long-standing shareholder in Abcam (ABC), I have just received the Annual Report and I am not happy.

Abcam rather surprised the market when they issued their preliminary results which showed a massive investment in a new Oracle IT system was in difficulties. Clearly the project is over-budget and over-schedule. Costs are ramping up in other areas also and the result was a lowered broker forecast and an instant collapse in the share price – down over 30% at one point on the day. It’s been recovering since but it certainly looked like a case of mismanagement of the IT function. As a former IT manager of a large public company, I have seen this kind of thing before so I am none too impressed. Massive commitments to a big-bang approach to a new IT system which is sold on the basis that it will solve all your problems, but rarely does. So that will be one thing to raise at the AGM which I plan to attend.

But remuneration will be another issue to be questioned. The CEO, Alan Hirzell, seems to be doing a good job but his pay last year was £1.8 million. The company is now proposing a new Remuneration Policy which will increase the maximum potential LTIP award from 150% to 400%. In my view this is outrageously generous – I normally vote against any bonus scheme that awards more than 100% of salary as it promotes risky behaviour of the worst kind as we saw in the financial crisis with banker’s bonuses. The CFO will also get an LTIP with a maximum 200% bonus. Although there will be performance targets the justification given is that it will “promote the underlying philosophy of share ownership among our Executive Directors and reward the sustainable delivery of long-term profitable growth”. Hogwash is my comment.

So I will be voting against Louise Patten who is Chair of the Remuneration Committee as I did last year, and against her two colleagues, Mara Aspinall and Sue Harris who also have too many “roles” at other organisations in my view – contrary to ShareSoc guidelines. Also I will be voting against the new Chairman, Peter Allen, who should know better than to allow this kind of pay package to go forward. Plus I will be voting against the Remuneration Report and Remuneration Policy recommendations. In addition, there is a resolution to approve a change to the 2015 Share Option Plan for staff which permits nil-cost awards which seems unjustified so a vote against that also.

Note that they are also introducing a new all-employee share purchase plan which is not even being put to shareholders – not required under AIM rules they say.

Incidentally Louise Patten has an interesting career history. To quote from Wikipedia “In 2006 she started as a non-executive director of Marks & Spencer plc. As chairman of the Remuneration Committee, she was responsible for approving a bonus scheme which was criticised for making it easier for executive directors to change the associated growth targets”. She was also a non-executive director of Bradford & Bingley when the company failed and was nationalised in 2008. There may be more interesting information that I could not see because in Google a search for “Louise Patten” retrieves only a few entries with the statement “Some results may have been removed under data protection law in Europe”.

I suggest other shareholders vote against the aforementioned resolutions likewise.

But it is easy to vote if you are on the register of the company and have been sent a proxy voting form. Equiniti, the company’s registrar, do provide an easy on-line voting system unlike other registrars, although for some peculiar reason they do not advertise the fact this year. All you need is the three numbers on the voting card and you can vote here: https://www.shareview.co.uk/views2/asp/VoteLogin.asp . No need to register or remember your log-in and password – just vote. As I said to a Link Asset Services representative at another AGM last week, why don’t they provide a simple system like that? They just wish to collect email addresses in my view by having people register and there is no security issue as they claim as it’s very unlikely that anyone would intercept the proxy voting card.

Registrars do need regulating by the FCA in my view, as I have said before, to put a stop to this kind of nonsense.

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

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Persimmon Directors, IDOX Profit Warning and Transplants

This morning house building company Persimmon announced that Chairman Nicholas Wrigley and Non-Exec Director Jonathan Davie were departing. The company says that both of them recognise that the 2012 LTIP “could have included a cap” and “in recognition of this omission” they have tendered their resignations.

Holders of Persimmon shares like me, or indeed anyone who has followed the debate on excessive executive pay, will be aware of the outrageous pay that has resulted at this and other companies because of the adoption of complex and aggressive LTIPs. Often these schemes have paid out unanticipated amounts, because the directors seemed not to understand their complexities or the possible outcomes. In the case of Persimmon it has meant that as much as 10 per cent of the value of the company has been paid out to the beneficiaries, allowing the CEO to pocket more than £100 million.

Neither of course did the shareholders understand these schemes and hence voted in favour of them regularly. So long as the company financial performance was good, some shareholders considered the payouts were justified. So the Board of Persimmon “believes that the introduction of the 2012 LTIP has been a significant factor in the Company’s outstanding performance over this period, led by a strong and talented executive team”. No mention of the main factors that have driven performance – high house prices supported by interest rates lower than they have been for thousands of years, the rapid growth in households from immigration and other factors, the Governments “help to buy scheme”, and other contributors. When companies are making hay, few shareholders will pay much attention to remuneration schemes or vote against them which is surely an argument for Government intervention in this area.

The company has appointed a new Chairman of the Remuneration Committee, who is Marion Sears. Will policies and practices change as a result? I doubt it because back in 2015 I argued with her at the AGM of Dunelm where she chaired the Remuneration Committee and subsequently exchanged emails on the complexities of the bonus scheme at that company. I also said to her that it was “difficult to understand the implications of the new policy on the overall remuneration of the senior executives and its sensitivity to different scenarios” and argued that the performance targets were not stretching.

I have come to the conclusion that all traditional LTIP schemes are dysfunctional and I therefore vote against them. There are better ways of recognising superior management performance.

IDOX

Another company I have held for a long time is AIM listed software company IDOX. This company was very successful under the leadership of former CEO Richard Kellett-Clarke. Two days ago the company issued a profit warning (not the first) saying that results for the year ending October 2017 will be delayed until next February. The announcement indicated some concerns about revenue recognition, complicated by the “sudden absence” of the CEO, Andrew Riley, on sick leave.

This is the kind of announcement that investors hate. No real details, and no information on when or if Andrew Riley might return. All we know is that the EBITDA forecast is reduced again to approximately £20 million. But at least we know that Kellett-Clarke is back as interim CEO.

There were concerns expressed by me at the last IDOX AGM about revenue recognition, high debtors and the apparent offering of long payment terms to customers (effectively providing them credit). I opined at the time that this was no way to run a software company because even if the customers are credit worthy, projects can run into unforeseen difficulties causing the customers to argue about the bills. I reduced my holding in the company substantially at the time as a result although it’s still one of my bigger holdings. Leon Boros also made negative comments about cash flows at the company and some investors were shorting the stock at the time – they are probably doing so again.

Comments on bulletin boards also raise the issue about the restating of accounts at 6PM, an acquisition that IDOX made in December 2016. But this is old news. Reference to accounting restatements at 6PM were made in the offer document (page 15, where it says for example that “the Directors expect that the value of the net assets of 6PM under IDOX accounting policies will be reduced materially”). Indeed 6PM subsequently filed accounts in Malta where they are registered showing substantial losses in 2016 and restating the 2015 and 2014 numbers. I thought the acquisition was a dubious one at the time for various reasons and voted against it. But these adjustments were surely known about earlier in the year so the latest announcement suggests some other problems.

Needless to say, with all these uncertainties and lack of clarification from the company (which we may not get until February it seems), all the likely share buyers have disappeared because it becomes very difficult to value the business. Simply too many unknowns. I will be encouraging the company to clarify the position a.s.a.p., but the “transplant” of the CEO, even on a temporary basis, might provide some reassurance that the problems will be sorted.

On the subject of transplants, one public consultation that is of personal interest to me is the Government’s consideration to change the default on organ donation to be an “opt-out” system as opposed to the current “opt-in” arrangement. In other words, unless you had specifically opted out, then it would be assumed that you had no objection to your organs being used for transplantation. Relatives may still be consulted though.

It is hoped that this will increase the number of transplants that are performed. There are a large number of kidney transplants performed each year, with lesser numbers of liver, pancreas, lung and heart transplants. The NHS says that 50,000 people are alive today who would not otherwise be so as a result (including me of course). But there are still long queues of people awaiting transplants. In the case of kidney patients, the alternative of dialysis reduces quality of life substantially and also reduces life expectancy significantly so it is a very poor alternative. Dialysis just keeps you alive, but a transplant gives you a new and better future.

For my financially informed readers, you also need to bear in mind that transplants save the NHS money because maintaining a kidney transplant patient costs a lot less than looking after dialysis patients.

Scotland, Wales and other countries have introduced opt-out systems already. Go here to respond to the public consultation on the matter: https://www.gov.uk/government/consultations/introducing-opt-out-consent-for-organ-and-tissue-donation-in-england

I hope readers will support this change to the law.

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

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Abcam, Voting and Non-Executives

I am a long-standing holder of Abcam (ABC) and have been very happy with my investment – a compound annual return of 33% p.a. since I first purchased the shares in 2006 according to Sharescope. But the notice of this year’s AGM (to be held in Cambridge as normal) has made me unhappy for other reasons.

Firstly, I tried to vote. Rather than use the paper proxy voting form (I am on the register so I get one) I thought it would be easy to do so electronically using the Equiniti ShareVote service. Even though there were no obvious instructions on the paperwork, I found the web site, entered the required three pieces of id information, and pressed submit. But it would not accept it because I have a pop-up blocker turned on. Grrr…..

Why do companies and their registrars make it so difficult to vote? They will be wasting money now because I will use the pre-paid voting card instead.

I then studied the resolutions:

  • Remuneration too high and the usual horribly complex mix of bonuses and LTIPs – but I told them that at the 2015 AGM. The only saving grace is that as an AIM company they don’t need to disclose all the information or have a vote on it, so it was good of them to do so. But I will be voting against the Remuneration Report.
  • What also attracted my attention is the presence of three non-executive directors (other than the former CEO) who are all women. One is the Chair of the Remuneration Committee so she gets a vote against for that reason alone. But all three have numerous other jobs/roles which exceed the ShareSoc guidelines and some seem to have little relevant experience of the markets in which Abcam operates. So I am voting against all three. Now I know that experienced female non-executives to fill public company boards are in short supply now that everyone wants to be “gender” balanced, so such ladies can line up numerous jobs with ease. But this is simply not good enough.

This is of course the result of the “box ticking” syndrome to keep the institutional shareholders and proxy voting advisors happy. But no non-executive director can do a good job if they have more than 4 or 5 positions.

I think I will have to attend the AGM again this year to make some of the above points.

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

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