ShareSoc Chairman's Blog

In reply to Roger Lawson, post #66

Good Morning Roger

If I may so your tone appears to have become a tad strident, yours is obviously the only true path to enlightenment and brooks no dissent.

Over and out

If my tone was strident it was because I get frustrated when arguing with people who do not seem to understand what is in essence wrong with appointing a former chief executive as chairman, irrespective of whatever excuse the company may come up with. If you want to get good corporate governance, you need to support those who bring the attention of the public to examples of bad practice. Not attack them for crying wolf. One reason why we have so many examples of bad governance in the UK is because shareholders (and particularly institutional ones) are unwilling to speak out. The English are generally bad complainers because they are too reserved, too polite and do not wish to offend. Knocking those who are "too strident" is part of the same problem. But I suggest we defer further debate until we see the "excuse" the company may issue in due course.

In reply to Roger Lawson, post #69

I suggest we defer further debate until we see the "excuse" the company may issue in due course.

Phew. At last.

Hi all, thanks for a really good/lively debate but this is just a gentle reminder to avoid "ad hominem" points, as they can discourage serious discussion: http://www.stockopedia.co.uk/page/posting-guidelines/

In reply to Roger Lawson, post #69

Roger

If the company cannot provide a rational explanation then I'd be the first to support a campaign, what troubled me was your rush to judgement without having heard what the company had to say in respect of the matter.

I quite understand the British aversion to complaint but it is not a trait I share, indeed there are a number of Directors past and present of quoted companies who've had the dubious pleasure of me forcibly pointing out their shortcomings as custodians of my investment.

I look forward to seeing this unfold.

Cheers

Posted by ShareSoc at 09:10, August 10 2012.

iSoft – The ineffectiveness of the FSA demonstrated again

Earlier this week, the trial of three former executives of iSoft was aborted when the jury failed to reach a verdict after two weeks of deliberation. It is not known whether the FSA will apply to have the case heard again.

The allegations date back to 2006 and earlier. It involved allegedly false recognition of revenue (a common problem in software companies in general). The defendants were specifically accused of making false and misleading statements on a contract with the Irish Health Service.

At one time iSoft had a market capitalisation of over £1bn, but it subsequently had to restate three years of its accounts after an inquiry by Deloittes and had its accounts “qualified” for 2006 in the audit statement. In the same year it also reported major difficulties with a contract with the NHS and changed its accounting policies on revenue recognition.

iSoft was actually created by a group of accountants, but used such practices as extending letters of credit to customers. One contract with the Irish Health Service was allegedly signed on April 30^th, the last day of iSoft’s financial year and which was a Saturday. One of the defendants, Stephen Graham, the former operations director even denied in court that he was aware of iSofts revenue recognition policies. Patrick Cryne, the former Chairman, still faces a trial for the same offences later this year.

Subsequently iSoft was taken over and is no longer an independent listed company.

But this surely demonstrates what is wrong with the FSA. To be effective justice has to be swift. That such delays could happen and the trial not reach a conclusion after what must be very considerable expense is surely not the way to deter potential miscreants. Former shareholders in iSoft must be very disappointed.

Posted by ShareSoc at 07:15, August 15 2012.

Opposition to ENK bid

Nickel miner ENK (LON:ENK) , with major undeveloped assets in the Phillipines, have received a cash bid which is being recommended by the independent directors. The offer is for 19p per share, which is a significant premium to the price at which the shares have recently traded. However some shareholders believe it undervalues the assets and have called it “opportunistic” bearing in mind that a “Bankable Feasibility Study” will soon be received and the company has very significant cash on the balance sheet. Any shareholders with an interest in this company may care to contact Adrian Smith via his email address of: enkvoteno<at>gmail<dot>com . He is trying to mount some opposition to the offer as he considers the bid does not offer fair value.

Posted by ShareSoc at 11:25, August 16 2012.

PV Crystalox Solar – Should they pack up and go home?

PV Crystalox Solar (LON:PVCS) , providers of PV silicon wafers, announced their interim results this morning. Sales revenue was down by 75% on the same period last year (volumes down by 70% so pricing is also down substantially). As a result they produced a loss of €25m for the period, although a lot of that was due to income tax which they reported as being “distorted” due to provisions and write-offs. The dire results are due to general overcapacity worldwide for solar chips, resulting in intense pressure on prices and alleged “dumping” by Chinese suppliers et al.

But the positive news was that they obtained a cash settlement of €90m from one customer for termination of a contract. As a result of that and a strong focus on cash management, they generated net cash flow from operations of over €98m.

Their balance sheet now shows cash of €127m, equivalent to 23p per share when the share price is hovering around 8p. In addition they have net current assets of €162m which is equivalent to 30p per share and long term assets exceed liabilities with little debt (they repaid €44m of borrowings in the period).

As there are no prognostications for any substantial improvement in the world market for PV wafers, if they could exit from any long term contracts they have with customers and suppliers, shareholders might prefer them to wind-up. But in the meantime, they do seem to be managing the difficult situation well.

In reply to ShareSoc, post #74

The offer is for 19p per share, which is a significant premium to the price at which the shares have recently traded. However some shareholders believe it undervalues the assets and have called it “opportunistic” bearing in mind that a “Bankable Feasibility Study” will soon be received and the company has very significant cash on the balance sheet.

Others might correct me here but a couple of observations ..

1.The cash hasn't suddenly appeared on the balance sheet.

2,.If you are thinking we have a bit of a commodities slowdown - pace China taking a breather - Nickel would be close to first in the queue for a correction.

Opportunistic - yes probably - but whats the problem with that given where the share price has been.

I could think of  half a dozen stocks offhand where an opportunistic bid might succeed.

.In fact these days I often wonder why they're aren't more.

Posted by ShareSoc at 09:23, August 17 2012.

Lo-Q (LON:LOQ) and the issue of too many directorships

Our last newsletter had several articles on the role of non-executive directors and it was suggested that there should be some limit on the number of such jobs that any person has if they are to be able to allocate a reasonable amount of time to their role as a director. It was suggested that 4 might be a reasonable maximum unless there were exceptional circumstances. This morning Lo-Q announced the appointment of a new non-executive director named Matt Cooper.

How many other directorships does he have (which are listed in the announcement)? Fourteen to be exact so this one will be his fifteenth. At least 8 of them appear to be public companies where the responsibilities are quite significant.

Obviously this might prompt a question at the next AGM such as “was the board aware of all of his other directorships before appointing him?”

In reply to ShareSoc, post #77

Our last newsletter had several articles on the role of non-executive directors and it was suggested that there should be some limit on the number of such jobs that any person has if they are to be able to allocate a reasonable amount of time to their role as a director. It was suggested that 4 might be a reasonable maximum unless there were exceptional circumstances.

I've previously suggested to Mark that there should be a lower limit than this, though one also has to realise that there will be many circumstances where there are directorships that are within the same groups. I don't think that people should have more than two or three publically-listed groups where they act as a NED - but there is no doubt that many people take no notice of the practicalities of this and try to establish as large a portfolio of NEDs as they can.

This should be stopped - and it is a worthwhile area of focus for ShareSoc, IMO, because such situations will persist unless shareholders actually vote their shares against serial directors at AGMs. Shareholders all have the power to veto Directors and Directors are obliged to submit themselves to a vote at very regular intervals. You DO have the power to stop this sort of thing - so start using it.

ShareSoc is developing some guidelines on the number of other directorships and other aspects of the role of non-exec directors so there is no doubt about our stance on this issue (there is already some guidance on our web site on this web page about when to vote against directors: www.sharesoc.org/voting%20at%20general%20meetings.html ), and as a shareholder in Lo-Q I will certainly consider whether to vote against the appointment of Matt Cooper when he comes up for election at the next AGM.

Posted by ShareSoc at 07:49, August 19 2012.

Lighthouse, Titan and the Prize for Director positions

Following the defeat at a General Meeting of the proposed delisting from AIM of Lighthouse (LON:LGT) , two major shareholders have requisitioned an EGM to remove the Executive Chairman, David Hickey, and appoint Allan Rosengren, a former chief executive, to the board. As the proposed delisting was defeated by a vote of more than 50%, it would appear to stand a good chance of success. Mr Hickey might surely find it wiser to resign, rather than risk being ignominiously booted out?

Another company in which some shareholders are unhappy is Titan Europe (LON:TSW) where it has been announced that an offer for the company has been received from Titan International. It has been recommended by the independent directors. The offer is at only a small premium to the prior share price and is only based on offering shares in Titan International (no cash element). There seems to be very little “bid premium” in the price offered (i.e. a premium for control).

Titan Europe used to be part of Titan International but was sold off some years ago. But they still have some common directors and some inter-company trading presumably, which surely would deter any other bidder from coming forward. But 26% of Titan Europe is held by competitor Mefro Wheels who would no doubt be able to block the deal if they wished. Does the fact that a bid has been publicised mean their support has been obtained? We shall no doubt soon find out.

With Titan International holding 22%, that might mean that it would be fairly certain of conclusion if Mefro supported it. Otherwise the contrary would apply. There is a lot of discussion of this bid on Motley Fool if you wish to learn more.

Lastly, our recent blog post on the number of directorships held by a new director of Lo-Q (LON:LOQ) prompted a response from one reader who pointed out that this was a long way from being a record. Apparently Diane Clarke had 71 (yes “seventy-one”) other directorships when she was appointed a director of AIM-listed Avarae Global Coins (LON:AVR) in 2009. Is this the record?

If you know of any other large numbers then let ShareSoc know. Otherwise we might have to give Ms Clarke the prize for holding the most directorships while being the director of a public company!

Posted by ShareSoc at 14:04, August 21 2012.

 ShareSoc Welcomes U-Turn on LTIP at Intercede

ShareSoc welcomes the announcement today by Intercede (LON:IGP) that the terms of the LTIP devised in August 2011 have been revised. ShareSoc heavily criticised the original terms of that LTIP and subsequently formed a Shareholder Action Group to get it changed.

In a note we issued in March 2012, we criticised the nominal cost of the options awarded under the LTIP, the illogical performance conditions which were based on eps when the company needed to invest heavily to expand its market, and the failure of the company to consult widely with shareholders on the proposals and subsequently engage with them when objections were made. We recently urged shareholders to vote against the directors on the Remuneration Committee at the forthcoming AGM.

However we applaud the changes made which meet most of our objections. The performance condition is now a simple share price target (not always perhaps an ideal approach but better than e.p.s. in this case given the business plan of the company). In addition, if there is an offer for the company, the options effectively are valued based on the share price at the date of the original grant. For more information see this press release: www.sharesoc.org/ShareSoc_Press033_Intercede_UTurn.pdf

This is a good example of the effectiveness of public campaigns as pursued by ShareSoc, the main objectives being achieved after an initial brush-off. If you have not yet joined ShareSoc as a Full Member then please consider doing so because we do need your support to run these kinds of campaigns. You can register as a Member here: www.sharesoc.org/membership_options.html

Posted by ShareSoc at 08:51, August 23 2012.

More non-independent Chairmen – Stagecoach and Essar Energy

Yesterday Stagecoach (LON:SGC) announced that founder Sir Brian Souter will move from the post of Chief Executive to that of Chairman. This is of course contrary to the Combined Code, and is similar to the cases at Bellway and Hiscox we recently commented upon. Of course the Combined Code provides an exception in that the company can provide explanations to justify this. So this is what they give as an explanation: “In light of Sir Brian Souter's unique association with the Company as its co-founder and the architect of its success and his deep knowledge and understanding of the global ground transportation industry, the Board believes that retaining the talent and knowledge of Sir Brian in the role of Chairman will be to the benefit of the Company and all of its shareholders. The entrepreneurial skills of Sir Brian are consistent with the Company's business model to drive growth and take advantage of new opportunities.”

This excuse mainly points out the very reasons why he cannot be considered “independent” because of his past associations with the executive management of the company and hence he should not be considered for the role of Chairman.

In addition Brian Souter and his family own more than 25% of the company which in some jurisdictions would also make him non-independent. No doubt few shareholders would object to him remaining on the board as a director so long as there was a predominance of independent non-executives as there are. But having a non-independent Chairman of a public company is altogether another matter.

Essar Energy (LON:ESSR) is another FTSE-250 company where a new Chairman was appointed by the company who could not be classed as independent. Prashant Ruia was appointed by the board to take over from his uncle who was charged with corruption in India. PIRC has suggested shareholders should vote against his re-election at the forthcoming AGM for that reason and because he has connections with the controlling shareholders.

It would seem that the Combined Code is now being ignored repeatedly (the ones mentioned are 4 cases in as many weeks). Perhaps making it more binding on companies should be considered?

Posted by ShareSoc at 09:27, August 23 2012.

Success in fighting financial crime should be applauded.

Shareholders must surely welcome the legal cases that came to a conclusion this week. Asil Nadir was convicted of multiple counts of simple theft from Polly Peck in the late 1980s. The convictions only related to a few tens of millions of pounds when Polly Peck collapsed with debts of over £500 million. The accounts were very suspect (it’s questionable whether it really ever made any profits despite become a FTSE-100 company) and Mr Nadir was also accused of manipulating the share price by buying shares in the company using its own money.

This is one of the few successful cases for the SFO, and it was seen as a difficult case to pursue after this length of time, with complex accounts at issue and a strong legal team hired by Mr Nadir. He may very probably appeal.

Another case was that of insider trading by Christian Littlewood and his wife when he was employed by Dresdner Kleinwort and hence had access to information about pending deals. He was already earning £1.5m at the company apparently, but obviously judged it insufficient. They received custodial sentences and have now been ordered to repay £1.5m of their ill-gotten gains.

More cases like this, pursued with persistence, and well publicised will surely help to discourage the many lesser attempts at financial fraud that are rampant in the City (the FSA regularly reports unexplained price movements before deals are announced).

In reply to ShareSoc, post #82

This excuse mainly points out the very reasons why he cannot be considered “independent” because of his past associations with the executive management of the company and hence he should not be considered for the role of Chairman.

In addition Brian Souter and his family own more than 25% of the company which in some jurisdictions would also make him non-independent. No doubt few shareholders would object to him remaining on the board as a director so long as there was a predominance of independent non-executives as there are. But having a non-independent Chairman of a public company is altogether another matter.........

It would seem that the Combined Code is now being ignored repeatedly (the ones mentioned are 4 cases in as many weeks). Perhaps making it more binding on companies should be considered?

It is worth taking a small step backwards at this point, and considering why the Common Code recommends that a Chairman should be "independent". It is primarily to ensure that there are checks and balances within the governance structure and  to be as sure as possible that the Chairman and the CEO approach issues of strategy, governance etc independently and not with shared objectives or views (because that would undermine the checks and balances).

In the case of Souter, the massive share stake and the strong personality evident in his leadership over recent decades are certainly valid causes for concern (IMO) that he may attempt to interfere with the CEO's role and routinely over-ride his authority.

But the general point you seek to make by extension is not valid. If there is sufficient separation between the Chairman and CEO (and they deal with each other at arms length and with respect for each other's roles) then it may well be in shareholders' interests to retain experience and knowledge within the company rather than going immediately for full independence in order to appease those who view the Common Code as a box-ticking exercise. That is why the Common Code recommendations are based on "comply or explain" - and it is why shareholders would be best advised to listen carefully to to each explanation before rushing to a sweeping generalised opinion that may in fact not be in their best interests.

ee

Emptyend, thanks for explaining why the Combined Code suggests that appointing a Chief Executive as Chairman is a bad idea. No need to say more perhaps. But anyone who considers Corporate Goverance to be important should not consider the Combined Code to be a "box ticking exercise". That's the kind of excuse given by people who do not wish to adhere to the rules of any game for their own convenience. The Combined Code rules were drawn up after lengthy consideration and the only reason for "comply and explain" being there is that there are always some exceptional circumstances that might justify exceptions. What are they you have to ask yourself in the case of Stagecoach, Essar, Bellway and Hiscox? The fact that a former chief executive knows the business inside out is not one, because that clearly applies to almost all such chief executives and would have been taken into account when that particular rule in the Combined Code was drawn up.

In reply to Roger Lawson, post #85

anyone who considers Corporate Goverance to be important should not consider the Combined Code to be a "box ticking exercise". That's the kind of excuse given by people who do not wish to adhere to the rules of any game for their own convenience.

Not for the first time, you have completely misunderstood my point!

You often appear to come at these issues with a box-ticking mentality, slaveishly following the recommended preference of the Common Code and COMPLETELY IGNORING the fact that the Common Code itself explicitly recognises that there are circumstances in which the recommended preference may NOT actually be the best solution for shareholders. That is precisely why they say "Comply or Explain".

Whilst you are doubtless right that many companies make mealy-mouthed explanations that are mere "flags of convenience" for people who prefer to circumvent the default position of the Common Code for their own purposes, there ARE sometimes good reasons for not complying precisely or immediately - and those are required to be explained to shareholders.

Be sceptical by all means - but do not be a dogmatic box-ticker!

Based on what little I know about the four particular situations you mention (but with some knowledge of  Stagecoach), I think you are perfectly entitled to be sceptical. But please don't generalise - and you should always pay close attention to the particular circumstances and the explanations given. Few things are as potentially disruptive for a company as changes at the top - and smooth working relationships are actually more important than the theoretical optimum arrangement, if one is forced to make a choice (as sometimes happens - the world isn't perfect and circumstances vary).

ee

Hogwash is my only comment.