ShareSoc Chairman's Blog

Absolutely right, endless abuses go on in the haulage, printing, retail, property and other sectors dominated by SMEs. The excuse the Government gives for doing nothing is that they have a "moratorium" on changes to legislation that affect small businesses. I fear the bankers and accountants have the ear of the Government way too much.

In reply to Roger Lawson, post #145

...and here's another example: http://blogs.mirror.co.uk/investigations/2012/09/pre-pack-king-mcmurray-made-ba.html

Clearly, prepacks make these fraudsters lives easy. A more transparent and independent insolvency process is required.

But Marben:

1. No shareholder appears to have been affected by this so whilst you may have highlighted an abuse of the system it's doesn't actually justify ShareSoc's position, who represent the shareholders. Just because there's a problem doesn't automatically mean that shareholders have been screwed over - the opposite is what's happen in the case that you've highlighted.

2. This particular fraudster has been caught so even if you are correct, in this instance the system would appear to work because he's been caught.

As I'm quite sure I've written at least once before: ShareSoc's position on this topic is nothing more than a "It's not fair, we've lost our money whinge"

There is nothing unethical about JJB’s pre-pack; on the contrary it would be unethical for shareholders, who no longer have any genuine economic interest in JJB, to be able to interfere with a sales process where those with the real interest are secured/unsecured creditors and employees.

JakNife

Posted by ShareSoc at 12:59, October 1 2012.

Direct Line – should one participate?

Direct Line, the personal insurance operation of RBS, is being partly sold via an IPO. Individual shareholders can participate via their brokers. Having studied the prospectus (all 350 pages of it, with of course endless warnings about the risks associated with the shares), it is worth making a few comments.

Like all insurance companies, the accounts are complex, so I’ll just pick out a few highlights. Only the last three years of revenue and profits are supplied. Revenue in that period was effectively static, and profits variable. Operating profit ranged from £166m in 2009, thru a loss of £206m in 2010 to a profit of £422m in 2011. Averaging those out, you can see that net margins as a percentage are quite low and hence are vulnerable to market swings.

If one looks back into the history of this company, it obviously grew rapidly historically when the old “broker” sales channel model to retail customers was superseded by phone and internet direct operations (as pioneered to a certain extent by Direct Line itself). But now price comparison sites are taking more of the business and eroding insurers control over their sales channels.

56% of revenue comes from motor insurance (if one includes the German and Italian operations), which is a notoriously cyclical insurance sector. In the UK it is now subject to a Government inquiry and fraud is an increasing problem (false “whiplash” claims, and fake accidents). The activities of claims management companies have also increased costs rapidly.

The overall Combined Ratio shows that the company actually makes a small loss on insurance underwriting and the profits therefore only arise from other activities (such as the return on investment activity of the retained premiums). It is a particular problem in the motor insurance area.

Return on equity, one of the key performance ratios for any business, only reached 10% in the good year of 2011.

So in summary, it looks like an ex-growth business with some strategic and market challenges. But there is a price for everything, and analysts are suggesting that the anticipated price range of between 160p and 195p may make it look quite cheap on a multiple of net assets basis in comparison with other insurers. It is also expected to pay a relatively high dividend.

But RBS is only selling a part of the business initially with the rest to be placed later (as it needs to dispose of it completely by the end of 2014).

For private investors, you may want to stand on the sidelines until any “share overhang” arising from the large stake yet to be disposed of by RBS is out of the way. It is always tricky when there is one dominant and major shareholder in a public company. Or if you want a stake in this kind of business, simply compare it to other general insurers such as Aviva or RSA, which are both on high dividend yields, before deciding.

In reply to ShareSoc, post #148

Just out of interest, is ShareSoc authorised to provide investment advice?

If not, then surely comments like these (welcome and detailed though they are) would be better made in a way that makes clear it is an individual's own opinion, not actually advice from ShareSoc?

Victoria General Meeting – A decisive victory for the concert party
Posted by ShareSoc at 00:00, October 3 2012.

Victoria – A decisive victory for the concert party

The Victoria (LON:VCP) General Meeting today in Birmingham would have been livelier but for the fact that the votes received before the meeting were displayed on a screen before the meeting commenced (not best practice of course). This made it clear that the outcome was a foregone conclusion as I expected. After 30 minutes of questions, a poll was called and the result was about 66% in favour of all the resolutions (i.e. to remove the existing directors and install Alexander Anton, Geoff Wilding and Andrew Harrison).

I’ll simply give a few impressions of the meeting and give a full report later on the ShareSoc Members Network. About 50 shareholders attended, including some of the Anton family, but the speakers and most attendees were apparently supportive of the board. So it looked like the “populist” rearguard (supported by employees, fearful of their jobs) against the revolutionaries. The issues have been covered to a great extent in past ShareSoc press releases (available on our web site), but as the basic corporate strategy of the two opposing groups did not differ greatly, one simply had to choose who you thought was best fitted to lead the company and improve its rather poor historic performance. That was our final recommendation to shareholders – that they make up their own minds. All I can say is that I personally voted for the resolutions with the few shares I had acquired to enable me to attend the recent meetings as I was not impressed by Mr Bullock or Ms Innes Ker in relation to their past comments and statements. I also did meet with Geoff Wilding a few weeks ago, and he seemed to have a lot of sensible things to say about the business and where it needed improving.

I asked a couple of simple questions in the meeting. Firstly why did Innes Ker reappoint Mr Garman after the AGM vote had removed him? She said it was necessary to appoint another director so that they remained listed. I was aware of this excuse, but why not appoint anyone else? Was there nobody else in the company willing to serve as a director? I did not get an answer to that. It’s a good example of bad corporate governance to ignore the wishes of shareholders. Mr Garman was of course removed for a second time today.

Secondly, Why did the board spend several hundreds of thousands of pounds on this battle (probably in excess of £300,000 when the final bill is in), and in particular persevere with it when it was clear to any intelligent observer some weeks ago that the board was very unlikely to win the vote? A “cat in hells chance” as I said to more than one person, from my experience of proxy battles and the difficulty of getting through to nominee shareholders. I did not get a clear answer to that question, particularly the latter part. For example, a considerable amount was spent apparently on national press advertising (including advertising in the Daily Telegraph which I read each morning but did not even notice), plus on canvassing shareholders via phone.

Now I am all in favour of ensuring all shareholders are informed and given the opportunity to consider the issues and vote. And I am all in favour of a good fight, but this was a fight the board were very unlikely to win because the Anton family (apart from one obvious member) and large holder New Fortress seemed united in wanting a change of management. In reality a considerable amount of shareholders funds have been wasted on this emotionally charged dispute which should have been resolved a lot sooner and more cheaply.

Needless to say that my questions did not apparently find favour with many members of the audience who had no doubt formed a conclusion about who were the bad guys and who were the good guys before the meeting even started, so I was lumped in with the former for challenging the Chairperson on these issues. Trying to uphold reasonable standards of behaviour by directors is never an easy task.

Now that the crucial vote is out of the way, let us hope that the company can now get on with the business of making some profits for shareholders. The majority of shareholders clearly wanted change, and they got it – that’s shareholder democracy in action. With an 80% turnout (much higher than is usually achieved) the result almost certainly reflected the stance of the majority of shareholders.

Geoff Wilding refused to be drawn on any public comments both during the meeting, and after, but did offer to speak to anyone who wished afterwards. I asked Mr Bullock (the CEO removed at the previous AGM as a director but still in the management role) whether he now intended to resign as his position was now surely untenable, but he refused to say. I guess he may want to consult his lawyers first to try and get a big pay-off. I hope the shareholders are not expected to pay that also.

Posted by ShareSoc at 08:47, October 4 2012.

Halfords Trading and New CEO (at some cost!)

This morning Halfords (LON:HFD) issued a trading update and the news was good. Like-for-like revenue was up 5.6% overall in the second quarter, with a particularly strong showing in cycling driven by better weather and Olympic/Tour de France successes. This compares with a very poor first quarter. So the share price climbed 15% in early trading.

The company also announced the appointment of a new CEO – Matt Davies whose past experience was running Pets At Home, and is currently a non-executive director of Dunelm (from whom Halfords could certainly learn some tricks – their sales grew substantially in the rainy weather).

Mr Davies is a keen cyclist according to Chairman Denis Millard in the analysts conference call this morning. But a concern might be his remuneration package which is similar to the previous CEOs. It consists of the usual good base (£500k per year), a maximum bonus of 150% of base (only a third of which is in deferred shares), participation in the Company’s Performance Share Plan (PSP) which might be another 150% of salary with vesting on undefined “stretching performance targets”. He can also participate in a Co-Investment Plan where he puts in £500k and gets up to 3.5 times his investment in matching shares – he only has to get the share price up to 400p by November 2015 to get the first element of the award in full (the share price was about 300p after this mornings rise and it was above 400p as recently as February 2011).

Mark Bentley, one of ShareSoc’s directors, asked Mr Millard in the conference call whether there had been any consultation with shareholders about the appointment of Mr Davies. He said no, it was purely a board decision. He may be the right man for the job, but ShareSoc will be writing to Mr Millard about the remuneration package. We question whether such an arrangement was necessary in this case and it’s a typical example of the aggressive mix of performance related elements which has been so widely criticised. 

Hello Sharesoc.
Thank you for inviting me on a skiing holiday. Please count me as very interested.
But you have not told me where it is to, and the cost.

Mike

In reply to MadDutch, post #152

Hi Mike,

I will e-mail you details - my e-mail address was given as the contact point for enquiries, in case anyone else is confused!

Mark

Posted by ShareSoc at 15:41, October 5 2012.

Excessive discount, excessive pay, and yet another abusive pre-pack

Graphite Enterprise Share Price Discount

Graphite Enterprise Trust (LON:GPE) issued some good news today, but the shares still trade at a significant discount to Net Asset Value. We also issued a note commenting on their interim results this morning (the results came out a few days ago) which you can read here: www.sharesoc.org/Graphite_Update_1.pdf . Although the discount has narrowed slightly over the last six months, at the time of writing, the discount is still 32%.This compares with a 34% discount when we wrote to shareholders in August to launch a campaign on this issue and get something done about it. We suggest that discount is still way too high! If you are a Graphite Enterprise Trust shareholder, please register your interest in our campaign.

Persimmon LTIP

Persimmon (LON:PSN) have called a General Meeting to approve a new LTIP scheme. The company plans to return a large amount of cash to shareholders over the next nine years, and want the management to be rewarded accordingly. In fact they are proposing to grant options of up to 10% of the company’s shares, including a maximum of 4.8m to the Chief Executive (at the current share price of 753p that’s £36m for him alone).

The initial tranche of options will be granted at 620p which is a discount of 18% to the existing share price. In addition the share option price will be reduced in future to take account of the dividends paid out to shareholders (the more paid, the cheaper they get). Now adjusting share options to take account of major returns of cash might be arguable (if the company is being substantially reduced in size by the return of cash, then the share price may fall of course). But the implications of such adjustments are never straightforward. Some of the profits, and hence dividends, might simply have arisen from the normal operations of the business. The only performance conditions attached are related to the amount of dividends paid out. With an asset rich business, downsizing it to return cash may not be particularly difficult.

In summary these proposals, are both exceedingly complex and over-generous. Why should directors or senior management be especially rewarded for running the business in the best interests of the company and of shareholders? That is their normal duty. So I suggest shareholders should vote against the LTIP proposal.

United Carpets Pre-Pack

Lastly, retailer United Carpets (LON:UCG) has put its main trading subsidiary (United Carpets Northern Ltd - UCN) through a pre-pack administration. The parent company’s shares are listed but are currently suspended. After the Administrator was appointed, the business and the majority of assets were immediately sold to United Carpets (Franchisor) Ltd, another wholly owned subsidiary of the public company.

The justification given for this sleight of hand was that without doing this deal (and effectively enabling the company to either exit from its lease liabilities or force the store landlords to reduce them), the company could not continue trading. Needless to say, the landlords are going to be furious about this move. It has enabled the company to break their contracts, but otherwise continue trading as before, with the same management and the same shareholders. In other words a typical “phoenix” company situation.

ShareSoc has consistently opposed pre-pack administrations which permit companies to default on their obligations and undermine normal business practices. There is more information about this in past ShareSoc Newsletters and on our Members Network.

Posted by ShareSoc at 08:39, October 9 2012.

Business Against Greed and “Heads I win, tails you lose”

Last night Channel 4’s Despatches programme profiled the campaign by Sir Michael Darrington against excessive pay in public companies. Sir Michael is the former Chief Executive of Greggs the bakers. He has launched a campaign called “Business Against Greed” which you can read more about on this web page: http://businessagainstgreed.co.uk .

Much of what he says about limiting the size of bonuses and introducing shareholders into Remuneration Committees are very much in alignment with ShareSoc’s policies as submitted in our responses to recent consultations on executive pay (see www.sharesoc.org/consultations.html ). This campaign is surely yet another symptom of the revulsion spreading among both shareholders and the general public against excessive remuneration, and is certainly worthy of shareholder support.

Excessive reliance on bonus schemes can have perverse consequences. Look at the example of Hibu (LON:HIBU) (formerly called Yell). Directors had a bonus scheme based on share options. But the company recently said the shares might well be worthless. So if you aren’t going to make your bonus what do you do? Simply change the rules which is what the directors have now done. Instead bonuses will now be paid in cash. I think that’s a good example of “heads I win, tails you lose”.

In reply to ShareSoc, post #155

So if you aren’t going to make your bonus what do you do? Simply change the rules which is what the directors have now done. Instead bonuses will now be paid in cash. I think that’s a good example of “heads I win, tails you lose”

Is that retrospectively in relation to options already awarded? Surely not, because that would need shareholder approval.

If it relates to the position going forward, then frankly I can see nothing wrong with that at all. It is just like moving someone to a defined contribution pension scheme from a defined benefit pension scheme when you don't affect rights already accrued. And of course shareholders can vote it down with the next Annual Report if they really don't like it.

In fact one might argue that if they have been awarded share options that have subsequently moved out of the money, then shareholders have hitherto had their directors' services "on the cheap" in relation to what would have been paid if they'd paid the cash equivalent of the options awarded!

In reply to ShareSoc, post #154

Persimmon (LON:PSN) have called a General Meeting to approve a new LTIP scheme. The company plans to return a large amount of cash to shareholders over the next nine years, and want the management to be rewarded accordingly. In fact they are proposing to grant options of up to 10% of the company’s shares, including a maximum of 4.8m to the Chief Executive (at the current share price of 753p that’s £36m for him alone)

That line is just complete rabble-rousing cobblers isn't it? What a load of ill-considered rubbish.

If the Chief Exec has to PAY when exercising those options, then they are worth NOWHERE NEAR the amount you have stated.

They may well still be excessive of course, but you do your case no good whatsoever by egregiously exaggerating the numbers and paying zero attention to the actual facts.

Furthermore, you go on to admit there are performance tests (albeit perhaps relatively easy to hit) which means that the options may STILL turn out to be worthless.

Stick to the facts please.

Emptyend: The blog post says a "maximum of 4.8m" shares, and at the current share price that is equivalent to £36m (in the value of shares under option). So in that sense, he alone has an award valued at £36m. Obviously these are not nil cost options (there was no suggestion in that post that they were), but the initial tranche is at a discount to the current share price and later tranches reduce in price if the downsizing plan is executed as expected. So potentially there is an enormous potential value implicit in this award. In addition the performance criteria is simply based on downsizing the business and returning cash to shareholders. It it is not about generating more profits or growing the business, which is the more usual target of an incentive scheme and much more difficult to achieve. I don't think the post was misleading at all, and it was definitely not "ill-considered rubbish". I looked at the details before writing it, which you do not appear to have done. It was fair comment in my view.

Lately you seem to take a very jaundiced view of any suggestion that shareholders should have any say in what directors pay themselves, or even comment on it. And I also note that you have also come out against the latest improvements suggested by the FSA in corporate governance - namely that there should be a majority of non-executives on the boards of premium listed FTSE companies. You are becoming the Victor Meldrew of the bulletin board world - moaning about more "box ticking" as you put it, while being blind to the abuses that have taken place which has generated the demand for more rules. You might act as a director in the best interests of shareholders, but from my experience of companies dominated by one or two shareholders, or one or two executive directors, the outcome is usually unhappy for minority shareholders.
More constructive comments, rather than negative attacks on those who wish to improve matters would surely be wiser.

In reply to Roger Lawson, post #158

You are becoming the Victor Meldrew of the bulletin board world

That's rich, coming from someone who (on a near-daily basis) claims "I don't belieeeeve it" and rails against some (partly imagined) attack on shareholders in an irrational manner!

The blog post says a "maximum of 4.8m" shares, and at the current share price that is equivalent to £36m (in the value of shares under option). So in that sense, he alone has an award valued at £36m. Obviously these are not nil cost options (there was no suggestion in that post that they were)

You wrote "at the current share price of 753p that’s £36m for him alone" in bold. You were PLAINLY seeking to suggest that his was a massive £36 million all for him. It wasn't, as I pointed out. You have no idea what the options will turn out to be worth - though of course you were right (as I clearly acknowledged in my original reply) to complain about the discount....and about the weak performance criteria - as I also acknowledged in my reply!

Lately you seem to take a very jaundiced view of any suggestion that shareholders should have any say in what directors pay themselves, or even comment on it.

Complete rubbish. I am merely trying to encourage you to stick to the facts in your complaints and not to exaggerate or to try to draw general conclusions from extremely particular circumstances (the latter point doesn't apply in this case, fortunately). You appear to take umbrage at being challenged on these matters and prefer to have free rein to spread misleading propaganda. I am used to challenging (as you would expect) - and won't be deterred from pointing out your errors when you overstep the line of truth.

I also note that you have also come out against the latest improvements suggested by the FSA in corporate governance - namely that there should be a majority of non-executives on the boards of premium listed FTSE companies.

Oh really? Where was that then? Please produce the evidence to back up that claim. I certainly can't remember having done that - and see no reason why I would, as I agree that there should be a majority of non-execs.

If you were to stick to the facts and cease your habit of  exaggerating then you would find that our underlying opinions are very similar at least 80-90% of the time.

ee

1) Glad you were amused by my reference to Victor Meldrew.
2) You seem to have jumped to conclusions on the interpretation of the share option value - an interpretation which I did not make and I don't think most people would have.
3) You should bear in mind that my blog posts are simple distillation of the facts, with some opinion added. They are by their nature short summaries. Not everyone will agree with my opinions or interpretation. But to call them rubbish is inappropriate.
4) As regards the comment about your opinions on the new FSA rule regarding a majority of non-execs, I am of course refering to your comments on this web page: http://www.guardian.co.uk/business/nils-pratley-on-finance/2012/oct/04/goodwin-plc-polar-opposite where someone using the name Emptyend added as a comment "Very good article......and an excellent illustration of the folly of allowing mindless box-tickers free rein.". Of course it could be that someone else has purloined your monicker (always a problem with people posting anonymously under invented names), or perhaps you have simply forgotten making those comments. Either way, we should be enlightened.

"!

In reply to Roger Lawson, post #160

As regards the comment about your opinions on the new FSA rule regarding a majority of non-execs, I am of course refering to your comments on this web page

Are you really? Well its a big shame that I didn't mention once the matter of non-execs then - and that you chose to quote selectively.

My comments were:

an excellent illustration of the folly of allowing mindless box-tickers free rein.

What would be best is if the ABI and PIRC could publish whatever they want - but institutions merely note their input as ONE of a number of inputs and form their own view.

Sadly what we seem to have at present is money management sheep led by box-tickers.....and that is most definitely NOT going to have a happy ending.

The point of my comment (and the article) being that those of a box-ticking mentality adopt extreme levels of inflexibility even when the law and the rules under which companies operate are framed the way they are precisely to allow companies some level of flexibility!

The "comply or explain" approach has allowed the company at the centre of that article to explain why it does things its way - and it would seem that shareholders have done OK over many years with that approach.

Having self-appointed "advisers"  chucking their weight around indiscrimately and having institutional shareholders slavishly following these 3rd parties opinions without bothering to form their own is a recipe for disaster. You don't have to take my word for it though - look at all the institutional mugs who took the opinions of 3rd party credit rating agencies on securitisations and lost loads of their clients cash because they couldn't be bothered to think for themselves. Opinions such as those of PIRC and the ABI should be treated as opinions and advice - not as some sort of gospel that must be religiously followed in all cases. They may well be worth following in 95-99% of cases - but intelligent people should recognise that the occasional exception may be merited as a result of other factors.

And, for the avoidance of doubt, I am completely in agreement with the idea that boards should have a majority of non-execs. I do believe, though, that a company should be able to depart from general rules like this IF it can provide a cogent explanation that its owners agree with.

ps...I should also say that I can't see why Goodwin wants all the bother of remaining listed, given that they haven't raised any money for 50 years. If the box-tickers get their way, perhaps that will just mean one less publically-listed firm available for shareholders to put their money into. Is that a good thing?

I did not "selectively quote". I simply quoted the first sentence to remind that you had commented on the subject of non-execs at Goodwin and the FSA's new rule. But at least you have now remembered. And have made it plain that you are opposed to the compulsory new rule on the subject.

As regards your final question, yes it would be a good thing if Goodwin delisted. They appear to want to run it as if it was a private company with the family firmly in control. Not the kind of public company I and many other investors would ever invest in and they may as well delist.

In reply to Roger Lawson, post #162

I did not "selectively quote". I simply quoted the first sentence to remind that you had commented on the subject of non-execs at Goodwin and the FSA's new rule. But at least you have now remembered.....

And have made it plain that you are opposed to the compulsory new rule on the subject.

Look - I'd be obliged if you would stop deliberately misrepresenting the facts and continuing to claim I wrote things that I plainly DIDN'T:

1. I did NOT originally comment on the issue about non-execs. I commented on the topic (also covered by the Guardian article) about PIRC and the ABI appearing to throw their weight around in a way which is NOT justified given the current "comply or explain" approach. Goodwin appear to have been explaining, as required - and anyone who doesn't like their explanation has presumably sold the shares long ago. Your original post was completely false in alleging that I had said something that I hadn't said.
2. There is therefore no "remembering" required - the reason I didn't recognise comments you attributed to me was because I didn't make them!!!!!!!!!!
3. I am indeed opposed to the compulsory nature of proposed rules - and I am a big supporter of the "comply or explain" approach. However, I am also (and it's funny how you omitted this from your summary ;-/) a strong supporter of the principle that a majority of directors should be non-execs.

With regard to this comment.....

As regards your final question, yes it would be a good thing if Goodwin delisted. They appear to want to run it as if it was a private company with the family firmly in control. Not the kind of public company I and many other investors would ever invest in and they may as well delist.

....I would simply point out that, over the years, shareholders seem to have had very good returns from Goodwin. I almost certainly wouldn't invest in them either.....but I don't see why adult, grown-up investors should be deprived of the chance to invest in them if they wish, simply because box-tickers who are making rules think that it is crucial that "one size fits all". My view is that it is wholly legitimate for PIRC/ABI to state their opinion clearly and publically - but that investors should have the right to invest if they wish to ....despite warnings that would put many investors (incl you and me) off.

The nanny state and its various self-appointed agents cannot derisk the real world, except by making it poorer and with less choice for consumers/investors.

And, whilst we are on the topic of my recent contributions to newspapers, you might care to ponder some of the matters that provoked my comments here....which makes precisely the points I have been outlining above.

I'm done on this issue but would remind you not to misrepresent my views again.

Your views were not misrepresented, as you have made clear. Anyone who reviews this exchange will see that. And you should stop alleging I did.