COVID-19: Changes to Executive and Shareholder Pay in Europe’s Biggest Banks

To evaluate the financial industry’s response to the COVID-19 crisis, CGLytics reviews the executive compensation changes and dividend amendments of 20 listed banks across Europe.

In March 2020, the European Central Bank (ECB) published a recommendation to banks on dividend distribution, asking financial institutions to refrain from paying dividends or buy back shares during the COVID-19 pandemic. The measure was introduced to help banks cope with losses and support lending in times of the crisis and concerned dividends for financial years 2019 and 2020. The ECB suggested banks to amend dividend proposals for the upcoming Annual General Meetings, at least until October 1, 2020[1]. This article reviews the executive compensation changes and dividend amendments of banks across Europe in response to the COVID-19 crisis.

Numerous banks across Europe decided to follow the recommendation and cancelled, or delayed, dividend payments. Furthermore, senior management and non-executive directors of some institutions also decided to waive parts of their compensation to support the business or donate to the pandemic funds. Some other banks, however, have not announced any changes to executive remuneration at the time of generating this report.

To evaluate the financial industry’s response to the COVID-19 crisis, CGLytics has looked at the executive compensation changes and dividend amendments of 20 listed banks across Europe, with market capitalisation varying from EUR 9B to EUR 148B. The geographical representation of the peer group covers eight countries – Spain, United Kingdom, France, Norway, the Netherlands, Italy, Belgium and Sweden.

Changes in Executive and Non-Executive Compensation

Top executives across the industry chose to contribute part of their fixed or variable compensation in order to help their company or society to combat the crisis. 12 out of the 20 evaluated banks announced various actions taken by the executives, among them reductions in a salary, cuts or waiving of a bonus, or agreement to postpone planned compensation increase.

Source: CGLytics Data and Analytics

For example, the CEO of Banco Santander SA, José Antonio Alvarez, contributed half of his base salary as well as his bonus to the medical equipment fund[2]. Chief executives of three UK banks also announced that both their salary and variable bonuses will be affected by donations or cost cuts. These banks are HSBC Holdings plc, The Royal Bank of Scotland Group plc and Standard Chartered PLC.

Out of the reviewed sample, only Barclays plc chose to delay releasing of a portion of the long-term incentives awarded in 2017 and due to vest in June 2020. In addition, both the CEO and CFO of the bank have requested any increase to their fixed pay to be postponed until at least 2021. The bank’s Chief Executive, James Staley, has also volunteered to contribute one-third of his salary for the next six months to charitable causes[3].

Eight out of 20 banks have not reported any changes to the executive remuneration caused by the pandemic, including all Swedish banks represented. However, it is worth noting that senior management of Swedbank AB has been affected by pay cuts due to a money laundering scandal[4].

The situation with compensation adjustments for non-executive directors differs significantly for the chosen peer group. Only six out of 20 banks announced that the Chair or members of the Board of Directors agreed to forego wholly or partially the annual fees.

BOD Compensation Cuts
Source: CGLytics Data and Analytics

Chairs of Banco Santander, Barclays PLC, Banco Bilbao Vizcaya Argentaria and The Royal Bank of Scotland Group took cuts in their fees to support charities. Mark Tucker, Chairman of HSBC Holdings plc, donated his entire fee for 2020 (roughly GBP 1.5m)[5].

Non-executive directors of Banco Santander volunteered to contribute 20% of their fees to charity while Directors of Svenska Handelsbanken AB proposed to recall an increase of the Board fees. However, no other banks from the sample announced any changes to the fees paid to non-executive directors due to the pandemic crisis.

Changes in Dividend Payments

All 20 banks announced changes to the dividend payments in response to the ECB recommendations or the losses due to the crisis. Banks chose to cancel or postpone the dividend payments for 2019 financial year until more certain circumstances.

Dividends 2019
Source: CGLytics Data and Analytics

Following the ECB suggestion, the banks did not cancel interim dividends that have already been paid out but amended payments of the final dividends for 2019. Most of the banks chose to postpone the decision regarding the dividends for 2019 until later this year, hoping for clearer overview of the results and forecasts, while allocating the 2019 profits to the reserve accounts. CaixaBank SA decided instead to reduce 2019 dividends and change the 2020 dividend to a cash pay-out not higher than 30% of reported consolidated earnings[6].

Regarding the interim dividends for financial year 2020, some of the banks have already announced that they do not plan to undertake any dividend payments until uncertainties caused by COVID-19 disappear.

Financial regulators and banks across Europe are taking measures in times of the COVID-19 pandemic to support the economy. The recommendation of the European Central Bank to refrain from paying 2019 dividends until more certain times led to many financial institutions cancelling or postponing the dividend payments and using all funds available to combat the crisis or as a reserve backup.

Moreover, top managers and members of the Board of Directors are voluntarily donating part of their fees for 2020 financial year to charities and to support the business. Even though all evaluated banks have chosen to amend dividend payments, only some have been spotted on account of voluntary contributions from the top management. The results and impact of current decisions made by the banks will be visible by the end of the current crisis, when companies will evaluate the state of their business to estimate what kind of return they will offer to their shareholders.

Would you like to see how your executive compensation is viewed by leading independent proxy advisor Glass Lewis?

Click here to learn more about the Glass Lewis CEO compensation analysis and peer group modeling for Say on Pay engagement, available exclusively via CGLytics.

Latest Industry News, Views & Information

Aston Martin: Speeding Towards 8th Bankruptcy or Revitalization?

A skill-deficient board led to the overestimation of Aston Martin’s market appeal. How does the introduction of new CEO Tobias Moers impact Aston Martin’s board composition, skillset, and expertise?

Wirecard Pre- and Post-Scandal: A Board Effectiveness Analysis

This article examines Wirecard’s corporate governance practices, board effectiveness score compared to their DAX and sector peers, and shortfalls in board expertise pre- and post-scandal.

Takeaway.com is on a mission

Takeaway.com is on a mission to assert its dominance as one of the world’s leading online food delivery service providers. Mergers and acquisitions have resulted in an increase in bonuses for the CEO and the board, plus an improvement in board structure.

Can Tesco Escape a Revolt on their Remuneration Report?

Will Tesco be confronted with shareholder revolt after its remuneration committee decided to remove Ocado from its custom peer index? Only time will tell with the Annual General Meeting scheduled for June 26, 2020.

Tesco PLC is currently confronted with a shareholder revolt after the Company’s remuneration committee inflated executive bonuses by removing Ocado from the peer group used to estimate its performance. The Annual General Meeting (AGM) of Tesco is scheduled for June 26, 2020, and is set to expect a higher percentage of negative votes against the directors’ remuneration report, particularly following Glass Lewis’ advice to investors to vote against Tesco’s remuneration report.

The removal of Ocado from Tesco’s peer index

Tesco’s remuneration committee decided to remove Ocado from the custom peer index[1] used to measure its relative Total Shareholder Return (TSR) for the 2017 Performance Share Plan (PSP) after May 16, 2018. The argument behind this action, according to Tesco’s report:

“Ocado has experienced significant share price growth which analysis shows is directly correlated to the sales of its technology platform as opposed to its food business. This was when Ocado signed its third major technology deal, establishing a clear pattern of pursuing a technology strategy. As a result of Ocado’s divergence from the retail market (and hence as a direct comparator for Tesco)[2]”.

As a result, the impact of the removal of Ocado from the peer group contributed to changing the actual performance from underperforming the custom index by 4.2% to over-perform the custom index by 3.3%. If Tesco’s TSR was below the custom index as it was before removing Ocado, the TSR metric, which is weighted at 0.5 of the PSP, would have been zero.

However, omitting Ocado resulted to a share vesting equal to 33.4% of the maximum PSP. The long-term incentive payments to the CEO and CFO were approximately boosted by GBP 1.6 million and GBP 0.87 million, respectively.

Historical remuneration report outcome

Figure 1 below illustrates the outcomes of voting of historical director remuneration reports at the AGMs of Tesco between 2010-2019. The three largest negative outcomes against the directors’ remuneration report took place in 2010, 2015 and 2017.

In 2010, the remuneration report received the most negative votes with more than one-third of the total votes against. The cause which led to this shareholder revolt against the directors’ remuneration report in 2010 was the director’s excessive pay in relation to poor company performance in the US.

Sir Terry Leahy, the CEO at the time, received GBP 10 million and Tim Mason, who was responsible for the US market, received about GBP 7 million.

Five years later, in 2015, almost 11% failed to back Tesco’s remuneration report. This was due to a huge payment of GBP 4.13 million to the newly arrived CEO for just six months’ work at Tesco and a slightly more that GBP 1 million to the former CEO, who oversaw negative sales and profits.

Finally, in 2017, 9.4% voted against the directors’ remuneration report due to excessive relocation costs to the current CEO, which is not considered appropriate.

Fast-forwarding to 2020 and the upcoming AGM, it is expected that another big shareholder revolt will be recorded after the company’s remuneration committee inflated executive bonuses by approximately GBP 1.6 million by removing Ocado from the peer group. According to the Sunday Times, Glass Lewis, the proxy advisor, expressed their “severe reservations” with regards to the exclusion of the online grocer from its calculations. Moreover, Glass Lewis advised investors to vote against Tesco’s remuneration report at Tescos’ upcoming 2020 AGM, arguing that such “discretionary” actions “undermined the idea of transparent, target-based pay”.

Figure 1

Source: CGLytics Data and Analytics

Tesco’s descriptive statistic of 2019 compared to the past 10 years

The table below (Table 1) presents the average remuneration of Tesco’s CEO and performance measures from 2010-2019. The average realized pay to Tesco’s CEO is slightly more than GBP 6 million, of which 21% is base salary, 39% STI and 55% LTI. The average Return on Assets (ROA) and the average Return on Equity (ROE) have positive results over time. However, the average three-year TSR is negative. Tesco’s CEO total realized pay in 2019 is GBP 6.8 million, which is 11.6% higher than the average total realized pay over the past 10 years. Comparing the performance measures in 2019 to the past 10 years combined, ROA (2.8%) underperform the average values and ROE (10.4%) and TSR (3Y) (29.7%) overperform the average.

Table 1. Average remuneration of Tesco’s CEO and performance measures (2010-2019)

Tesco’s CEO compensations against its peer group (including Ocado)

Figure 2 shows Tesco’s CEO total realized pay and Tesco’s change in TSR (3Y) [3] against its peer group[4]. Between 2010-2019, Tesco overpaid its CEO compared to its industry peers, particularly in 2010 and 2019 when Tesco awarded the highest total realized pay to its CEO. Moreover, the first five years it is observed that the peer group has higher change in TSR (3Y) when compared to Tesco. However from 2015 Tesco overperformed the peer group until 2018. Again, in 2019, the change in TSR (3Y) of Tesco’s peer group is higher. Therefore, Tesco’s higher payments to its CEO did not guaranty better performance.

Figure 2

Source: CGLytics Data and Analytics

Comparing Tesco’s CEO pay and change in TSR (3Y) against peer group with and without Ocado

This section describes the impact of omitting Ocado from Tesco’s peer group. Figure 3 illustrates Tesco’s CEO total realized pay and Tesco’s change TSR (3Y) against its peer group with and without Ocado. It is clear from the figure that the change in TSR (3Y) is higher in the peer group that includes Ocado, compared to the peer group without Ocado, with a difference of 4.3%.

Therefore, the omission of Ocado from the peer group provides lower change TSR (3Y) value, which in its turn lowers the threshold. Thus, as a result of this omission, Tesco’s executive payments based on TSR – a total payment of approximately GBP 2.47 million – could be justified, whilst otherwise would have ended up with zero.

Figure 3

Source: CGLytics Data and Analytics

Where does Tesco’s CEO Pay for Performance rank?

The Long-Term Incentive Plan of Tesco in 2017 was weighted as TSR equal to 0.5, cumulative cash generation equal to 0.3, and key stakeholder measures equal to 0.2 over a three-year performance period. Comparing Tesco’s CEO pay practice in relation to its peer group (including Ocado) using CGLytics’ Pay for Performance model, we observe a misalignment between the CEO’s total realized pay and TSR (3Y).

Hence, Tesco’s CEO 2019 total realized pay ranks slightly lower than the upper quartile at the 73rd percentile, while its TSR (3Y) ranks slightly higher than the median at the 55th percentile. Thus, the results of the test we conducted, using CGLytics Pay for Performance modeler, in Figure 4 suggest that Tesco is over-paying its CEO relative to its peer group.

Three-year Pay for Performance of Tesco PLC (2019)

Source: CGLytics Data and Analytics

Upcoming Tesco AGM

Looking back at Tesco’s history, shareholder revolts may not be a new incident and they may also be expected during the upcoming AGM, especially given the observations that Ocado’s omission from the peer group led to an inflation of the executive payments. The real question now is to see whether the shareholders will consider Ocado as a direct competitor or not, and as to whether they will follow Glass Lewis’ advice to vote against Tesco’s remuneration report. Moreover, this analysis brings to the front that Tesco’s pay practices were much higher over the recent years compared to its peer group, recording its 2nd highest payment in 2019, when looking at the period between 2010 and 2019. Evidently, this may be a signal that Tesco’s remuneration policy must be reviewed, re-evaluated and perhaps change soon.

Would you like to see how your executive compensation is viewed by leading independent proxy advisor Glass Lewis?

Click here to learn more about the Glass Lewis CEO compensation analysis and peer group modeling for Say on Pay engagement, available exclusively via CGLytics. Make data-driven decisions this proxy season with CGLytics.

 

References

[1] “Benchmark index made up of FTSE 350 Food and Drug Retailers and FTSE 350 General Retailers weighted 85% and 15%, respectively”. Tesco’s Annual Report 2019 [https://www.tescoplc.com/media/755761/tes006_ar2020_web_updated_200505.pdf].

[2] Reference: Tesco’s Annual Report 2019 [https://www.tescoplc.com/media/755761/tes006_ar2020_web_updated_200505.pdf].

[3] Change TSR (3Y) refers to one-year growth of the three-year TSR.

[4] This analysis attempts to simulate Tesco’s custom peer group, which includes 34 UK companies in the same industry as Tesco from the FTSE-100 and FTSE-250.

Latest Industry News, Views & Information

Aston Martin: Speeding Towards 8th Bankruptcy or Revitalization?

A skill-deficient board led to the overestimation of Aston Martin’s market appeal. How does the introduction of new CEO Tobias Moers impact Aston Martin’s board composition, skillset, and expertise?

Wirecard Pre- and Post-Scandal: A Board Effectiveness Analysis

This article examines Wirecard’s corporate governance practices, board effectiveness score compared to their DAX and sector peers, and shortfalls in board expertise pre- and post-scandal.

Takeaway.com is on a mission

Takeaway.com is on a mission to assert its dominance as one of the world’s leading online food delivery service providers. Mergers and acquisitions have resulted in an increase in bonuses for the CEO and the board, plus an improvement in board structure.

ProPetro: The Intricacy of Related Party Transactions and Effective Board Supervision

A review of ProPetro’s Board Effectiveness and corporate governance practices in the wake of their scandal. Is there a way their governance issues could have been detected earlier?

On March 13, 2020, Dale Redman resigned his position as Chief Executive Officer of ProPetro Holding Corporation with immediate effect. His departure marked the end of a seven month-long inquiry into violations of SEC regulations and company policy.  By the time the facts came to light, ProPetro’s stock had fallen 86% and the Company found itself embroiled in investor lawsuits and a federal investigation. This article examines the corporate governance deficiencies that have been uncovered.

 

Background and Timeline

ProPetro Holding Corporation is a hydraulic fracturing equipment and services company at the heart of the 21st century U.S. oil boom.  Founded in 2007 and operating in the Permian Basin oil field of west Texas, the company has seen healthy growth over the years and was in the process of bringing new hydrofracking technology to market when problems surfaced with the company’s management.

In August of 2019, ProPetro initiated an internal review that originally focused on the disclosure of contracts it signed with AFGlobal Corporation to purchase a number of fleets of its Durastim® fracking pumps.  The review, which included outside counsel and advisors, then expanded to include expense reimbursements made to ProPetro executives, related party transactions and potential conflicts of interest.

Review Uncovers Improper Activity

The preliminary findings of the internal review, which was conducted by management, found that due to inadequade documentation ProPetro was improperly expensed $370,000 by senior management but did not find any evidence of improperly disclosed related party transactions.  However, the company did annouce that the review would likely find material weaknesses among its internal controls.

Nevertheless this prompted a class action lawsuit by investors filed in Septemeber.

In October, 62 days later, ProPetro announced substantive completion of its review and a round of management changes took place, although none of the executives under review actually left the company. The company also announced that it had confirmed the existence of accounting deficiencies and the review would need additional time to investigate previously undisclosed related transactions that had come to light.

Among the senior managers that were reshuffled included Chief Executive Officer Dale Redman, who retained his title, although was removed from day to day duties.  Phillip Gobe, ProPetro’s Chairman was appointed as Executive Chairman and became the Company’s Principal Executive Officer.  Jeffrey Smith, the Chief Financial Officer, filled the newly created role as Chief Administrative Officer and was replaced by Darin Holderness as Interim Chief Financial Officer.  Chief Accouting Officer Ian Denholm resigned.

Following the announcement of this “improved organizational struture”, ProPetro’s shares rallied +19% appearing to quell market concerns and reassure investors that any governane issues were well in hand.  Though this reassurance was shortlived.

Later that Month on October 24, 2019, the Securities and Exchange Commision (SEC) announced it had opened an investigation into ProPetro.  And on Novemeber 13 more details were revealed about ProPetro executive’s undisclosed transactions as the company announced that its former Chief Accounting Officer, Ian Denholm, had loaned money to a business partner for the development of real estate which was in turn sold or leased to ProPetro.  In total, ProPetro paid out $3.6 million to Denholm’s business partner.

Undisclosed Entities were used to Personally Enrich ProPetro Leadership

Eventually it came to light that members of ProPetro’s board and senior executives were named as leaders (or involved parties) of several companies with whom ProPetro was doing business.  FloCap Injection Services, LLC,  a company that had named Chief Executive Officer Dale Redman, who later resigned, as a managing member along with ProPetro Finance Chief Jeffrey Smith.  ProPetro board member and Audit Committee member Alan Douglas was also found to be Redman’s personal accountant and and involved party to outside entitites in which Dale Redman was named as a managing member: Red Hogg, LLC and Energy Entreprenuer Fund 1, LLC.  In fact, ProPetro employees had been in involved with a number of other undisclosed companies (Clarabby Development LLC, Conquistador Capital LLC, Dahlia Development LLC, Ener-Coil LLC, HR Double S LLC, South of the Border Materials LLC and others) to whom the ProPetro had eventually awarded business.  And at least four deals, it was discovered, were awarded to private ventures owned by Redman.  These undisclosed connections personally enriched Redman to the tune of hundreds of thousands of dollars.

Redman Steps Down

On March 16, 2020, ProPetro announced that Dale Redman resigned his position as Chief Executive.  In that announcement it was also disclosed that, “… the company discovered that its former Chief Executive Officer entered into a pledge agreement covering all of the company’s common stock owned by him at that time as collateral for a personal loan in January 2017, in violation of the shareholders agreement then in place …”  Redman put up 35% of his holdings in ProPetro worth $8 million, around 601,200 shares in all.

A Reformed ProPetro?

Clearly, over the past several years, ProPetro has been suffering a number of governance deficiencies. An era of improper personal enrichment on the part of executives, lack of board independence, weak interal controls, violations of SEC regulations and poor disclosure practices, should have come to end with the resrtucturing announced in October of last year and the resignation of CEO Dale Redman.

An analysis of ProPetro’s Board Effectiveness should help investors find out if the company is well positioned to resume healthy operation going forward.  Board Effectiveness is calculated by averaging the scores of a company on a number of underlying attributes outlined by the NYSE and other US guidelines. The CGLytics Risk Rating tool, of which Board Effectiveness is one the of main pillars, enables Corporate Boards to stand back and assess their strengths and areas for development through an independent lens and identify gaps and changes that will enable them to achieve their full potential.

Board Effectiveness percentile rank within S&P Small Cap 600 - Energy Sector

Source: CGLytics Data and Analytics

ProPetro’s Board Effectiveness score has improved slightly from 73 to 75 since the internal review was first announced in August of 2019 and since the company’s leadership underwent restructuring.  Even though the changes made at ProPetro have improved effectiveness in a couple of areas, the company’s percentile rank did fall from 43% to 38%, placing it below median when compared to other companies listed on the S&P Small Cap 600 in its sector.  However, this is mostly due to the improving scores of other companies comparatively.

ProPetro - Board Effectiveness Scores

Source: CGLytics Data and Analytics

Of the factors contributing to ProPetro’s improving score are gender equality due to the addition of Michele Choka to the all male board of directors in February of 2020.  ProPetro also receives a modest 7 point boost on Board Independence due to the departure of long tenured individuals.  The data suggests that the issues of Board Independence, Gender Equality and Director Interlocks may be connected to the Nationality score, which is where ProPetro is weakest.

The nationality attribute reflects variation in the nationalities of board members.  The more nationally homogenous, the lower the score.  This is likely a function of the regional character of ProPetro’s business, being so closely linked with Permian Basin and the west Texas region generally. Nevertheless, it appears evident that board diversity is the key governance challenge for ProPetro going forward.

Altogether, the company’s response in the form of its internal review and subsequent actions succeded in bringing matters to light and holding executives accountable, but not before the company’s share price collapsed.  Since the restructuing, ProPetro’s stock has made a modest recovery and confidence in leadership appears to be returning.  Long term success will depend on ensuring board diversity and Independence.

Interested to see how your company stacks up against 5,900 globally listed companies’ board composition, diversity, expertise and skills? Click here to find out about CGLytics’ boardroom intelligence capabilities and obtain the same insights used by institutional investors, activist investors and leading proxy advisor Glass Lewis.

References

Culper Research. (2019). ProPetro Holding Corp (PUMP): Friends & Family First at this Permian Cesspoolhttps://img1.wsimg.com/blobby/go/cc91fda7-4669-4d1b-81ce-a0b8d77f25ab/downloads/Culper_PUMP_10-31-2019.pdf?ver=1589202898850

Globe Newswire. (2019, December 3). Lawsuit for investors in ProPetro holding Corp. (NYSE: PUMP) shares announced by shareholders Foundation. Finance.Yahoo.com. https://finance.yahoo.com/news/lawsuit-investors-propetro-holding-corp-130010662.html

Liz Hampton. (2020, March 19). How a Texas oil CEO’s luxury land deals cost him his job. Reuters.com. https://www.reuters.com/article/us-usa-oil-propetro-investigation-insigh/how-a-texas-oil-ceos-luxury-land-deals-cost-him-his-job-idUSKBN2161FD

ProPetro holding Corp. (2019, October 9). ProPetro announces substantial completion of fact finding for previously disclosed internal review. propetroservices.com. https://ir.propetroservices.com/press-releases/detail/45/propetro-announces-substantial-completion-of-fact-finding

United States Securities and Exchange Commission. (2019, August 8). Form 8-K. SEC.gov. https://www.sec.gov/Archives/edgar/data/1680247/000110465919044899/a19-16860_18k.htm

United States Securities and Exchange Commission. (2019, October 3). Form 8-K. SEC.gov. https://www.sec.gov/Archives/edgar/data/1680247/000110465919053592/a19-19705_18k.htm

United States Securities and Exchange Commission. (2019, November 13). Form 8-K. sec.gov. https://www.sec.gov/Archives/edgar/data/1680247/000110465919063353/a19-22679_18k.htm

United States Securities and Exchange Commission. (2020, February 11). Form 8-K. sec.gov. https://www.sec.gov/Archives/edgar/data/1680247/000110465920022476/tm208021d1_8k.htm

United States Securities and Exchange Commission. (2020, March 16). Form 8-K. sec.gov. https://www.sec.gov/Archives/edgar/data/1680247/000110465920033704/tm2012779d1_8k.htm

Latest Industry News, Views & Information

Aston Martin: Speeding Towards 8th Bankruptcy or Revitalization?

A skill-deficient board led to the overestimation of Aston Martin’s market appeal. How does the introduction of new CEO Tobias Moers impact Aston Martin’s board composition, skillset, and expertise?

Wirecard Pre- and Post-Scandal: A Board Effectiveness Analysis

This article examines Wirecard’s corporate governance practices, board effectiveness score compared to their DAX and sector peers, and shortfalls in board expertise pre- and post-scandal.

Takeaway.com is on a mission

Takeaway.com is on a mission to assert its dominance as one of the world’s leading online food delivery service providers. Mergers and acquisitions have resulted in an increase in bonuses for the CEO and the board, plus an improvement in board structure.

A diverse supervisory board: This is how to unlock a wealth of talent

Aniel Mahabier, CEO of governance data specialist CGLytics, welcomes the fact that selection committees are using corporate governance analytics to assess the diversity of their own supervisory board. Technology is bridging the gap between the available talent and the knowledge and experience that committees already have in-house.

“Selection committees are looking for the right candidates outside their traditional networks”, says Aniel Mahabier, founder and CEO of governance data specialist CGLytics. Such an alternative approach, for example through the use of data analysis, has major advantages: people with unique experience and unique talent are put on the radar.

In many organizations – listed and unlisted – supervision is far from diverse. A supervisory board with only people of the same generation, background and education cannot properly monitor the continuity of the company in the changing society. Such a homogeneous council cannot sufficiently monitor the interests of the various stakeholders.

An important task therefore lies with the selection committees that are responsible for a balanced composition of the supervisory board. We see that selection committees use our corporate governance analytics to assess and benchmark the diversity of their own supervisory board. For example, to be able to answer questions from international shareholders and when planning succession. For example, they test the current composition against the various international corporate governance codes and sustainability regulations. This contributes to effective management and good risk management.  

Click here to continue reading the full article.

Latest Industry News, Views & Information

Aston Martin: Speeding Towards 8th Bankruptcy or Revitalization?

A skill-deficient board led to the overestimation of Aston Martin’s market appeal. How does the introduction of new CEO Tobias Moers impact Aston Martin’s board composition, skillset, and expertise?

Wirecard Pre- and Post-Scandal: A Board Effectiveness Analysis

This article examines Wirecard’s corporate governance practices, board effectiveness score compared to their DAX and sector peers, and shortfalls in board expertise pre- and post-scandal.

Takeaway.com is on a mission

Takeaway.com is on a mission to assert its dominance as one of the world’s leading online food delivery service providers. Mergers and acquisitions have resulted in an increase in bonuses for the CEO and the board, plus an improvement in board structure.

CGLytics Reponse to COVID-19

From ensuring our employees are safe and feel connected, to continuing to deliver best of class services to customers, the steps that CGLytics are taking in regard to the COVID-19 outbreak.

CGLytics Response to COVID-19

As a steward of modern governance, the CGLytics team is taking comprehensive measures to ensure our employees, products, and services continue to operate at the highest levels of performance and support as the COVID-19 epidemic continues to evolve. Governance is critical in times of uncertainty, and we want to make sure our customers and partners know that they can confidently rely on CGLytics during this time.

To provide greater visibility and assurance, we are highlighting a few ways CGLytics is upholding its devotion to supporting our customers, partners and employees.

Secure Infrastructure & Communications

Leaders and governance professionals worldwide rely on the CGLytics platform for their governance oversight, decision-making and driving modern governance best practices in their organization. We are committed to maintaining all product service levels for availability, access, and security, globally, despite any virus-related challenges that we face.

This includes continual improvement and releases of new product capabilities to support our customers’ modern governance needs.

Protecting Our Workforce

The health and safety of our employees are of the utmost importance to CGLytics. As the situation evolves, the CGLytics leadership team is ensuring that every employee has the tools and technology to work remotely to maintain business continuity. As a company that works to improve the remote work of business and organizational leaders, CGLytics use best-in class tools for collaboration, audio and video communication, messaging, and secure identity, along with other business-critical technologies.

Furthermore, CGLytics has restricted all non-essential travel, including all conferences, until risks have subsided. Executive leadership has emphasized the importance of following CDC and WHO recommendations to ensure safety. CGLytics have also adjusted its internal work structure to limit potential risks in the workplace.

Support Resources

We know that governance software and the resources available to customers are mission critical. Therefore, we want to assure customers that our Customer Success and Support Teams will continue to operate as normal and are available to assist customers with any and all account management requests.

We highly value your partnership with CGLytics. We are always here to support business continuity and wellbeing, and especially during uncertainty.

Aniel Mahabier
CEO
CGLytics

With Over 1 Billion Data Points and Powerful Algorithms, CGLytics is Utilised by Leading Investors and Proxy Advisors.

m2

5,500+

Listed Companies

m4

125,000+

C-Level Profiles

m5

8 MIL+

Company Disclosures
and Filings

m3

800 Mil+

N-PX proxy voting
resolutions

m6

1.3 Mil+

Relationships Connections

noun_metrics_1820608 (2) copy

Key financial metrics from 2008 onwards for predictive analysis and companies top 25 ownership data

1

More than ten years of historical compensation data and array of unique performance indicators

2

Current and historical board composition, skills data and millions of business relations

4

Curated governance news in real-time

What’s your flavor? Companies get a taste of CEO pay for the proxy season

This article, originally published in Dutch in Mgmt. Scope, CGLytics examines CEO compensation issues going into the 2020 proxy season

This article by CGLytics CEO, Aniel Mahabier, first appeared in Dutch in Mgmt. Scope on 11th March 2020: https://managementscope.nl/opinie/bestuurdersbeloningen-bedrijfsprestaties

Executive compensation gains attention in the run-up to annual shareholder meetings. The key question is whether compensation plans are socially responsible and align with company performance relative to its peers.  In 2019, companies already got a taste of the increasing interest in CEO pay from shareholders. “That attention is only increasing,” says Aniel Mahabier, founder and CEO of CGLytics, the leading global provider of governance data and executive compensation tools. “Executives  and directors  who are not sufficiently prepared are facing reputational risks.”

As shareholders and other stakeholders prepare themselves for annual shareholder meetings, it’s the moment to speak out on these important issues. Shareholders will again make themselves heard this year. For several years now, engagement between shareholders and companies has been growing. Parties are more likely to vote and use their voting rights to steer business policy: the number of votes against remuneration policies are increasing proportionally at the meetings of the 5,900 listed companies we track. An increasing number of shareholders want compensation to reflect the company’s long-term performance and value creation (in other words, pay for performance and earnings per share).

Pay for performance

It is obvious that the compensation of executives should reflect the company’s performance, however data shows a different picture.

In a large number of the publicly listed companies, there is pay for performance misalignment. The CEO’s compensation is – consciously or unconsciously – not in line with the value create by the company over multiple years.

More than half of companies in the US S&P 500 Index lack a correlation between CEO compensation in 2019 and the development of the company’s earnings per share over the past three years.

In some instances, the CEO compensation is lower than expected based on CEO value creation. With a much larger proportion of companies, the value created by the CEO is much lower than you would expect based on the level of their compensation received. In many situations, at the general meeting of shareholders, companies proposed increasing executive pay, although the company’s performance declined.

Mismatch

This misalignment between CEO compensation and company performance is increasingly gaining the attention of shareholders, employees, governments and other stakeholders. The top 35 executives of companies in the S&P 500 collectively earn almost more than $3 billion, which contributes to the discussion. In Europe we see a similar picture. For a third of the listed companies in the Benelux, the CEO’s compensation does not align with the realized value creation. A similar picture is seen at a third of companies in Britain’s FTSE 350 Index.

Drivers of change

The focus on responsible compensation is in line with the focus in society on sustainable business growth.

Large investors – pension funds and insurers – are drivers of the change in compensation.  Passive investors, such as asset managers Vanguard and BlackRock, are also increasingly using their control to influence compensation proposals.  We see that they are trying to encourage a more socially responsible compensation policy in different ways. For example, by engaging  on compensation  policies and proposals with shareholders and other stakeholders before the general meeting of shareholders and underpinning this with data. We see signs that this is reducing the number of dissent votes against the proposed policy.

Shareholders do not hesitate to enforce change where necessary. For example, by voting against incentive proposals including equity plan proposals at the meeting. A large investor has stipulated that if more than 25% of shareholders speak out against a compensation proposal, they will in turn vote against the reappointment of the chairman of the compensation  committee. The same strategy is used if the compensation proposals provoke a substantial number of counter-voters in two consecutive years.

Reward regulators

All efforts to promote sustainable value creation are having an effect: short-term pay is making way for a long-term performance-based compensation structure. Several listed companies have either decreased, shifted or changed the variable compensation component of their executives’ pay plan into fixed compensation. The latter includes, more often, a combination of cash and shares of the company. Using shares as an incentive, there is a direct alignment between the pay of the CEO and the performance of the company.

The same development is also seen when looking at the compensation of directors (non-executive directors). Where it is common practice in the United States to reward directors with, among other things, shares of the company, this was not common, or even prohibited, in Europe for a long time. That has changed. For example, the new corporate governance code in Belgium offers the possibility to reward non-executives partly in shares. This creates a shared interest with shareholders.

Sustainable criteria

An important development is seen in the use of non-financial metrics for executive and CEO compensation.

Shareholders expect companies to include non-financial guidelines such as ESG criteria in their compensation system in addition to financial guidelines – such as earnings per share and Total Shareholder Return (TSR). These criteria show how the company takes into account various ESG  sustainability criteria: Environmental, Social (social policy) and Governance (good governance).

In many countries in Europe, listed companies are obliged to include such non-financial disclosure in their annual reports. It therefore seems logical to also link the compensation of the executives to the goals set by the company in the field of corporate social responsibility. The recent governance crisis at a major Swiss bank illustrates how the lack of good governance can affect the oversight and value creation of a company in the long term.

Although attention to the inclusion of non-financial metrics is increasing, the application is still limited in practice. Only 27% of FTSE 350 and ISEQ 20 companies have included some form of measurable ESG criteria in incentive plans. And even in these companies, the proportional share of compensation determined by ESG performance is small. This deserves attention: if the sustainable objectives are not included in executive compensation, there is a risk that the compensation policy will lose connection to the business strategy.

Risk factors

A responsible compensation plan based on financial and non-financial metrics is more important than ever. An increasing number of directors, regulators, compensation committees and investors are therefore scrutinizing CEO compensation and use CGLytics data and pay for performance benchmarking tools to review compensation proposals and policies. Directors are using this information to prepare their engagement with active shareholders, proxy advisors like Glass Lewis and other stakeholders. Investors are looking for red flags, undiscovered risk factors that threaten the quality of governance in the company. Having access to similar information and tools ahead of the proxy season, is allowing compensation committees to respond in a timely manner to pitfalls in the existing compensation plan and proposal to avoid potential reputational and activism risk.

Would you like to gain instant insights into more than 5,900 globally listed companies’ board composition, diversity, expertise and skills?

Or access the same CEO pay for performance insights used by Glass Lewis in their proxy papers?

Click here to request a demo to learn more about CGLytics’ boardroom intelligence capabilities and executive remuneration analytics, currently utilized by world-leading institutional investors, activist investors and advisors.

About the Author

Aniel Mahabier: CEO of CGLytics

Aniel Mahabier  is CEO and founder of CGLytics, the leading global provider of governance data and executive compensation tools. Mahabier interviews and writes for Management Scope about the remuneration of directors and corporate governance analytics.

Latest Industry News, Views & Information

Aston Martin: Speeding Towards 8th Bankruptcy or Revitalization?

A skill-deficient board led to the overestimation of Aston Martin’s market appeal. How does the introduction of new CEO Tobias Moers impact Aston Martin’s board composition, skillset, and expertise?

Wirecard Pre- and Post-Scandal: A Board Effectiveness Analysis

This article examines Wirecard’s corporate governance practices, board effectiveness score compared to their DAX and sector peers, and shortfalls in board expertise pre- and post-scandal.

Takeaway.com is on a mission

Takeaway.com is on a mission to assert its dominance as one of the world’s leading online food delivery service providers. Mergers and acquisitions have resulted in an increase in bonuses for the CEO and the board, plus an improvement in board structure.

Concern over Wesfarmers’ executive pay?

Wesfarmers, which owns some of Australia’s most recognizable brands, sees concerns from shareholders and proxy advisors regarding its CEO and executive pay during the last proxy season

Wesfarmers, one of the biggest conglomerates in Australia, saw concern from its shareholders with a negative response during the recent 2019 Annual General Meeting (AGM) that was held last November 14, 2019.

Although all resolutions were passed, there was a large number of shareholders that voted against the adoption of the remuneration report, resulting in a 21.45 percent disapproval. One of the biggest causes of the pessimistic response from shareholders was due to proxy advisor ISS advising investors to go against the remuneration report because of an “excessive” compensation plan.

Although Wesfarmers’ demerger from Coles supermarket resulted in a 360 percent increase in after-tax profit to AUD 5.5 billion, the company will neither give incentive nor penalize its executives [1].

Shareholders were concerned over the pay for both Chief Executive Officer (CEO) Robert Scott and Independent Chairman Michael Chaney [2]. Mr. Scott has received over AUD 4 million in total realized pay and Mr. Chaney has received AUD 780,000 in total compensation, which ISS claims is higher than its industry peers.

CGLytics Pay for Performance Analysis

According to our CGLytics analysis, Wesfarmers has a higher CEO total realized pay over three years than its three-year increase in total shareholder return (TSR), when compared against its country and industry peers.

This misalignment of the CEO pay compared to company performance may have been the cause of the company almost undergoing a first-strike. A first-strike occurs when 25 percent of shareholders vote against the adoption of the remuneration report and the company would need to either amend or justify its remuneration policies before the next AGM [3].

Wesfarmers Limited's CEO Pay for Performance

wesfarmers CEO pay
Source: CGLytics Data and Analytics

Not only was there concern over the CEO pay for Wesfarmers, but the ambiguous changes in awards policies [4]. This was also seen as an issue for other proxy firms such as Glass Lewis and the Australian Shareholders’ Association (ASA).

What is the KEEPP bonus scheme?

The 2016 and 2017 Key Executive Equity Performance Plan (KEEPP) bonus had been cancelled following the demerger of Coles supermarket, but a bonus will be rewarded with the same principles as KEEPP, however with different performance conditions.

The 2017 KEEPP Allocation for the CEO and the Chief Financial Officer (CFO) had the following performance metrics: 50 percent weighting on Wesfarmers relative to the TSR of the ASX 100 Index, 20 percent weighting on absolute Return on Equity (ROE) and 30 percent weighting on strategic measures.

Because of the demerger in 2018, the company has removed the performance condition on absolute ROE as it may have an impact on the targets of executives. The 2018 KEEPP allocation for the CEO and CFO is as follows: 60 percent weighting on the Wesfarmers’ relative TSR against the S&P/ASX100 Index, 20 percent weighting on Wesfarmers’ portfolio management and investment outcomes and 20 percent weighting on strategic measures. However, the company was not able to be fully transparent and clear in its disclosure of strategic measures and investment outcomes, only stating the improvement of data analytics and better progress in gender balance.

Wesfarmers underpays due to complications in payroll

After the release of the 2019 AGM results, another scandal arose when it came to light that Wesfarmers had underpaid up to 6,000 current and former employees of its industrial division, resulting in AUD 15 million or more in underpayments [5]. The company stated that its cause was due to a defect in a payroll system. The company plans to expedite the sending of payments into the banks of underpaid current and former employees before the end of 2019, but is hindered by the complication of its payroll system [6][7].

Linking director pay to competency and expertise

Companies not only link executive pay to performance, but more often than not, companies also link director pay to competency and expertise [8]. With the current events that Wesfarmers has experienced, it is suggested that the company would benefit from a board that can guide it towards its strategic direction, mitigate risk and oversee company performance.

According to our analysis (performend using the CGLytics application), Wesfarmers’ board has strengths in the areas of ‘advisory’ and ‘finance’. Wesfarmers recent acquisition of the Catch Group in 2019 (an e-commerce company that runs Catch.com.au, Mumgo, Grocery Run and Brands Exclusive), should see greater skills and expertise added in the area of ‘technology’, which is currently very low. ‘Governance’ experience, to spot and mitigate risks, is also worth looking at to ensure issues are resolved smoothly in the future.

Wesfarmers board's expertise and skills

Wesfarmers skills and expertise
Source: CGLytics Data and Analytics

Would you like to gain instant insights into more than 5,500 globally listed companies’ board composition, diversity, expertise and skills?

Or access the same CEO pay for performance insights used by Glass Lewis in their proxy papers?

Request a demo to learn more about CGLytics’ boardroom intelligence capabilities and executive remuneration analytics, currently utilized by world-leading institutional investors, activist investors and advisors.

Request a Demo

Latest Industry News, Views & Information

Aston Martin: Speeding Towards 8th Bankruptcy or Revitalization?

A skill-deficient board led to the overestimation of Aston Martin’s market appeal. How does the introduction of new CEO Tobias Moers impact Aston Martin’s board composition, skillset, and expertise?

Wirecard Pre- and Post-Scandal: A Board Effectiveness Analysis

This article examines Wirecard’s corporate governance practices, board effectiveness score compared to their DAX and sector peers, and shortfalls in board expertise pre- and post-scandal.

Takeaway.com is on a mission

Takeaway.com is on a mission to assert its dominance as one of the world’s leading online food delivery service providers. Mergers and acquisitions have resulted in an increase in bonuses for the CEO and the board, plus an improvement in board structure.

The DOs and DON’Ts when rethinking incentive plans

Why have 75% of first-time say-on-pay votes failed in 2019? A large number of negative votes can be attributed to incentives. Companies need to rethink their incentive plans and make sure metrics truly benchmark performance.

Seventy-five percent of first-time say-on-pay (SoP) votes failed in 2019, and a large number of these negative votes focused on incentives.

There is an increasing need for companies to fully rethink their incentive plans, as the CGlytics whitepaper “How to take the testing of equity-based compensation plans into your own hands” points out.

“It is imperative that companies design their equity pay plans to ensure they receive shareholder approval first time, every time. In order to meet investor expectations, companies need to understand how they, and the proxy advisors they rely on, evaluate equity plans and make voting decisions.”

Marc Ullman, a partner with Meridian Compensation Partners explains what to do and what not to do in rethinking incentive plans.

First of all, companies need to fully rethink their compensation plans, and not to just tweak them. Making just a few cosmetic changes will not suffice to ensure that incentives are effective. At least every two years, a real restructuring is needed.

Often shareholder pushback will incite a rethink, but even with shareholder support, benchmarking for effectiveness is critical as priorities change and the business climate evolves. The plan must reflect the new realities the business faces.

Or the incentive plan may simply become too complicated to be useful, as continually including more metrics and other add-ons makes application confusing. This often happens as businesses try to simply tweak the plan instead of really rethinking it.

 

Here are the do’s and don’ts to achieve as near optimal alignment between pay and performance as possible:

– If you need a full-scale rethink, don’t settle for a mere tweak. Make sure that what you do matters, don’t nibble around the edges. Make sure the metrics truly benchmark performance.

– But don’t overdo it. Pick out the key metrics and focus on that; don’t try to transform the whole structure unless you really feel that you have to.

– As the rethinking process is underway, take note of the solid rationale that stems from the business model. This will be something to communicate at the end of the process, and one that can be used for grounding the basis of your thinking.

– Make sure you include all the right people: Finance, HR, Corporate leadership, corporate leadership and the business unit. Everyone should buy in to the metrics and the targets that are being set.

– Make sure your plan pays something in year one. After a big rollout you need to make sure that design provides results. Otherwise it could hurt your credibility.

– Take advantage of feedback from shareholder outreach. More and more companies are actively talking to shareholders, and their points of view should at least be considered as the design is taking shape. Consider investor relations and investor perspective and proxy advisors like ISS and Glass Lewis.

– Communicate internally and externally. You have multiple audiences internally.

 

Predict Shareholder Approval with Glass Lewis’ Equity Compensation Model

 

The Glass Lewis Equity Compensation Model (ECM) allows you to instantly test and review your incentives plan using the same key criteria and scoring system as leading proxy advisor Glass Lewis. The ECM supports testing of 4,300+ publicly-traded U.S. firms including the Russell 3000 and exclusively available via CGLytics.

With the ECM you can confidently engage, knowing the strengths and weaknesses of your current and future equity plans. Ensure you get the votes to legally grant equity compensation to your executives, board members and staff.

Click here to learn more about the ECM application or request a no-obligation demonstration.

Latest Industry News, Views & Information

Aston Martin: Speeding Towards 8th Bankruptcy or Revitalization?

A skill-deficient board led to the overestimation of Aston Martin’s market appeal. How does the introduction of new CEO Tobias Moers impact Aston Martin’s board composition, skillset, and expertise?

Wirecard Pre- and Post-Scandal: A Board Effectiveness Analysis

This article examines Wirecard’s corporate governance practices, board effectiveness score compared to their DAX and sector peers, and shortfalls in board expertise pre- and post-scandal.

Takeaway.com is on a mission

Takeaway.com is on a mission to assert its dominance as one of the world’s leading online food delivery service providers. Mergers and acquisitions have resulted in an increase in bonuses for the CEO and the board, plus an improvement in board structure.

Blue Sky Downfall – What went wrong?

While no company wants to find itself in a state of voluntary administration, it is a stark reality faced by the Australian-based fund manager Blue Sky Alternative Investments Limited. The company is currently undergoing administration, following years of challenging circumstances starting as early as 2017.

When facing bankruptcy or insolvency, companies have the option of going into voluntary administration. This is when an independent and qualified person (a voluntary administrator) takes over a company’s assets and business operations in an attempt to salvage the company [1].

While no company wants to find itself in a state of voluntary administration, it is a stark reality faced by the Australian-based fund manager Blue Sky Alternative Investments Limited. The company is currently undergoing administration, following years of challenging circumstances starting as early as 2017. The future of a company that was once named one of Brisbane’s top companies is now uncertain [2] after US-based short-seller Glaucus reported that the company had overstated its valuation and disregarded some of its key business obligations [3].

Despite Blue Sky’s former Chief Executive Officer Robert Shand’s claims that the company had grown by 50 per cent across key performance metrics, Glaucus expressed skepticism regarding the credibility of Blue Sky’s valuations [4]. The research company’s analysis showed that Blue Sky’s real fee earning asset under management was valued at maximum AUD 1.5 billion, which was 63 per cent short of the AUD 3.9 billion that Blue Sky had reported [5]. The inflated representation of figures may have helped with boosting share prices and more access to capital. Blue Sky was also criticized for allegedly overcharging its clients with inflated management fees.

Shortly after the release of the Glaucus report, Blue Sky suspended its trading to review the claims of the short-seller hedge fund [6]. Just one week later, the company’s share prices dropped by 41 per cent by April 5, 2018 [7]. Despite its free falling share prices, Blue Sky’s response in the face of such accusations was to call on the Australian Investments and Securities Commission (ASIC) to investigate and question the integrity of Glaucus rather than to refute the latter’s claims with evidence, fostering even more pessimistic investor sentiments.

Even in the midst of battling to keep themselves afloat and avoiding more trade suspensions, Blue Sky nonetheless remained optimistic. This was until September 2018, when it confirmed that a US-based investment firm, Oaktree Capital, would be providing the Australian company with a seven-year-loan facility of AUD 50 million to facilitate the recovery of the company [8].  However, not long after the loan agreement, Blue Sky announced it will fail to meet its obligations to Oaktree [9], breaching its financial covenant as it reported an after tax net loss of AUD 25.7 million for the first half of 2019. Blue Sky Alternative Access Fund, Blue Sky Alternative Investment’s fund management subsidiary, also decided to withdraw from its parent company until ongoing legal actions were concluded [10].

After many failed deals and breaches of financial obligations, Blue Sky was suspended from the ASX 300 on May 2019. The company has also announced that the advisory and investment firm, KordaMentha, has been selected as its receiver and manager, and is currently still in administration [11].

What went wrong?

Not only did Blue Sky fail to display transparency during the short-seller report, but it also failed to comply with the 3rd edition of the ASX’s Corporate Governance Principles and Recommendations, where a listed entity must maintain a majority of independent directors in their board [12]. In early 2017, John Kain, who served as the Chairman of Blue Sky, was the only independent member of the board, the other six being Executive Directors. This pushed Blue Sky to appoint two more independent directors in February 2017 but still failed to compose a board with an independent majority board of directors [13]. The Australian Institute of Company Directors states that Non-Executive Directors provide independence and objectivity to the board. An objective and outside perspective supports the idea of acting in the best interest of the company and monitoring the Chief Executive Officer and senior executives without partiality [14]. Independent directors also act as expert advisors in areas where the company aims to grow and develop [15].

Board diversity Blue Sky

As of February 2017, the board of Blue Sky was composed of: John Kain (Independent Chairman), Michael Gordon (Independent Non-Executive Director), Philip Hennessy (Independent Non-Executive Director), Alexander McNab (Executive Director), Kim Morison (Executive Director), Timothy Wilson (Executive Director) and Mark Sowerby (Founder and Executive Director). Based on the CGLytics analysis, only 43 per cent of the board in 2017 were independent non-executive directors, even after the appointment of two additional independent directors. In addition, the analysis also shows that there are no female members, resulting in a less diverse board [16].

Board expertise Blue Sky

The board expertise tool of CGLytics that provides insight of the board skills matrix shows that the company lacked an expertise in risk. Although Blue Sky’s Board is strong in the finance expertise due to its company sector, independent directors experienced in risk management could facilitate in monitoring and assuring the reliability of the financial information provided by the company. However, both independent members and risk expertise were lacking.

There was also a high turnover of board members and senior executives during the whole debacle. The first to depart the company in 2016 was founder Mark Sowerby. This raised concerns due to his sale of approximately AUD 27 million worth of company shares and may have started the downfall and speculation of Blue Sky’s future [17]. In April 2018, Robert Shand, the supposed optimistic managing director of Blue Sky has also stepped down from the board [18]. Moreover, the company had to appoint three different Chief Financial Officers in a span of seven months [19]. Mr. Joel Cann was appointed as Chief Executive Officer as he had extensive experience in rebuilding Aspen, where he was also appointed as CEO in 2016 [20]. After just two months, Blue Sky announces that it no longer required a CEO, forcing Joel Cann to depart the board [21]. The high rate of departures could have led to an inefficiency in productivity [22]. A recent analysis performed by CGLytics on executive departures from S&P 500 companies reveals that having more than one executive resignation in a year may cause the company’s Total Shareholder Return to decline [23].

exec departures

A significant number of departures may potentially lead to a lack of confidence for the future and can slow down the growth of shareholder investments.

Conclusion

Although no one would have expected the drastic plunge of Blue Sky, it could have been minimized or mitigated with good governance practices and decisions throughout the volatile season of the company. Appointing competent and independent directors that have the right skills to oversee executive management can effectively and ultimately add value to the company and avoid risks of uncertainty in businesses.

Click here to learn more about CGLytics’ boardroom intelligence capabilities and executive remuneration analytics, used by institutional investors, activist investors and advisors.

[1] https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-employees/voluntary-administration-a-guide-for-employees/

[2] https://www.businessnewsaus.com.au/articles/2017-brisbane-top-companies-21-30.html

[3] https://www.bonitasresearch.com/company/blue-sky-alternative-investments-ltd-asx-bla/

[4] https://www.asx.com.au/asxpdf/20161006/pdf/43brx5pyfghn67.pdf

[5] https://www.bonitasresearch.com/company/blue-sky-alternative-investments-ltd-asx-bla/

[6] https://www.businessnewsaus.com.au/articles/short-seller-hits-blue-sky–sends-shares-tumbling.html

[7] https://www.businessnewsaus.com.au/articles/blue-sky-shares-take-another-big-hit-on-glaucus-stoush.html

[8] https://www.businessnewsaus.com.au/articles/oaktree-saves-blue-sky-with–50m-investment.html

[9] https://www.businessnewsaus.com.au/articles/blue-sky-fails-to-meet-oaktree-loan-conditions.html

[10] https://www.businessnewsaus.com.au/articles/blue-sky-s-alternative-access-fund-cuts-supply-to-mothership.html

[11] https://www.businessnewsaus.com.au/articles/blue-sky-calls-in-receivers.html

[12] https://www.businessnewsaus.com.au/articles/critics-call-for-more-independent-directors-on-blue-sky-board.html

[13] https://www.asx.com.au/asxpdf/20170220/pdf/43g3njpm12fzft.pdf

[14] https://aicd.companydirectors.com.au/-/media/cd2/resources/director-resources/director-tools/pdf/05446-1-11-mem-director-tools-bc-non-executive-directors_a4_web.ashx

[15] https://medium.com/@theBoardlist/five-reasons-you-need-an-independent-director-on-your-board-dc300f668a41

[16] https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf

[17] https://www.businessnewsaus.com.au/articles/blue-sky-in-freefall–calling-for-asic-intervention.html

[18] https://www.businessnewsaus.com.au/articles/blue-sky-md-and-executives-resign-in-the-wake-of-glaucus-saga.html

[19] https://www.businessnewsaus.com.au/articles/blue-sky-appoints-third-cfo-in-seven-months.html

[20] https://www.businessnewsaus.com.au/articles/joel-cann-takes-the-reins-at-blue-sky.html

[21] https://www.businessnewsaus.com.au/articles/blue-sky-ceo-no-longer-required.html

[22] https://boardmember.com/sudden-ceo-departures-can-upend-an-unprepared-board/

[23] https://cglytics.com/the-effect-of-executive-departures-on-company-performance/

About the author

Alex Co: APAC Research Analyst

Alex graduated from the S P Jain School of Global Management in Sydney with a degree in finance and entrepreneurship. She previously worked in the compliance division at a large financial institution and gained her experience as a research analyst.

Latest Industry News, Views & Information

Aston Martin: Speeding Towards 8th Bankruptcy or Revitalization?

A skill-deficient board led to the overestimation of Aston Martin’s market appeal. How does the introduction of new CEO Tobias Moers impact Aston Martin’s board composition, skillset, and expertise?

Wirecard Pre- and Post-Scandal: A Board Effectiveness Analysis

This article examines Wirecard’s corporate governance practices, board effectiveness score compared to their DAX and sector peers, and shortfalls in board expertise pre- and post-scandal.

Takeaway.com is on a mission

Takeaway.com is on a mission to assert its dominance as one of the world’s leading online food delivery service providers. Mergers and acquisitions have resulted in an increase in bonuses for the CEO and the board, plus an improvement in board structure.

Harvey Norman AGM; Strike 2 in the making?

Harvey Norman’s Annual General Meeting is to be held this Wednesday November 27, 2019. With leading independent proxy advisor CGI Glass Lewis advising to vote against the reappointment of the company’s chief executive, Katie Page, and the remuneration report, the gloves are off.

Shareholders have braced themselves for the upcoming Harvey Norman Annual General Meeting (AGM) to be held on November 27, 2019. The meeting will not be taken lightly following the shocking results of the 2018 AGM. Here we take a look at the controversial corporate governance practices that has investors and proxy advisors concerned.

Votes against remuneration report in 2018

What happened in 2018? Majority of the shareholders voted against the adoption of the remuneration report, resulting in 50.63 per cent of shareholders disapproving the resolution earning the company a first strike. Not only did a large percentage of shareholders vote against the remuneration report, but an average of 27.76 per cent opposed the re-election of the following directors: Non-Executive Director Mr. Michael John Harvey, Non-Executive Director Mr. Christopher Herbert Brown, and Executive Director and Chief Operating Officer (COO) Mr. John Slack-Smith. An average of 17.5 per cent of shareholders also voted against the grant of performance rights under the Harvey Norman 2016 Long-term Incentive Plan to the following Executive Directors: Executive Chairman Mr. Gerald Harvey, Chief Executive Officer Ms. Kay Lesley Page, Executive Director and COO Mr. John Slack-Smith, Executive Director David Ackery, and Executive Director and Chief Financial Officer and Company Secretary Chris Mentis.

Questions over what will happen at 2019’s AGM

Harvey Norman is now in hot waters, especially if majority of the shareholders continue to vote against the adoption of the remuneration report in the 2019 AGM, leading to a spill resolution. The Corporations Act 2001 has been amended to include a “two-strike” rule [1]. A company will be given a first strike if 25 per cent or more vote against the remuneration report. Until the next AGM, the company is required to review and respond to the shareholders’ growing concerns regarding executive pay. The next AGM will determine whether a company gets a second strike [2]. This occurs when 25 per cent or more shareholders still vote against it. During the same AGM, shareholders will establish whether directors need to stand for re-election. If 50 per cent or more shareholders vote for to pass a “spill” resolution, a “spill” meeting will be held within 90 days. Proxy advisors Ownership Matters and CGI Glass Lewis have advised investors to vote against the remuneration report and face a spill resolution to effectively improve its corporate governance [3].

ASX’s Corporate Governance Principles comes into question

Minority shareholders are dissatisfied with the number of independent directors present in the board. The board is currently composed of: Executive Chairman Gerald Harvey, Chief Executive Officer Katie Page, Executive Director and Chief Financial Officer/ Company Secretary Chris Mentis, Executive Director and Chief Operating Officer John Slack-Smith, Executive Director David Ackery, Non-Executive Director Christopher Brown, Non-Executive Director Michael Harvey, Independent Non-Executive Director Maurice Craven, Independent Non-Executive Director Kenneth Gunderson-Briggs and Senior Independent Non-Executive Director Graham Paton.

There are 10 board members and only three of which are independent. The company disregards the 4th edition of ASX’s Corporate Governance Principles and Recommendation that states majority of board members must be independent [5].

Data from CGLytics suggests that only 30% of the Harvey Norman board members are independent. Independent directors are vital members of the board because they provide more transparency to shareholders and fill the gap of skills required by the company [6]. The lack of independent directors poses a huge problem for minority shareholders especially when the board of directors have a total of 56.9 per cent stake in the company, making them the majority shareholders. This gives a disadvantage to minority shareholders that want to voice concerns regarding re-election of directors and the adoption of the remuneration report.

HN Board

Proxy advisory firm Ownership Matters even goes so far to propose the voting against the re-election of non-Independent Directors to force the company to make board changes [7]. In the Harvey Norman 2019 Annual Report, the company responded to the reason behind appointing fewer independent directors, stating that each executive director (including non-executive directors that are not independent) still provide quality independent judgment to the issues that arise.

Tenure reveals a stale board

The board also appears to be stale. The average tenure of the board directors is 20 years. For some time now, corporate governance stakeholders; governance experts and shareholders alike have paid substantial attention to the issue of board refreshment or entrenched boards. Usually, when a board is stale, there is the concern that they may lack new perspectives, become complacent which may affect the long-term performance of the company as well as provision of effective oversight and management.

One more independent director added to the board

In March 2019, the company added John Craven who was an independent director to the board. This was the first time in 14 years that the board had appointed an independent director to its fold since Graham Paton joined the board in 2005.

Data from CGlytics shows that although there are 10 board members, most of their skills are concentrated on three areas: finance, advisory and technology. This shows that the composition of the skills matrix is not balanced between the members and is not aligned with the skills that the company requires. Having a skill such as risk is a vital key competency a board needs, especially in turbulent times that may make or break the company.

Harvey Norman's board expertise

What are the proxy advisors’ view?

Because of the criticism and frustration of stakeholders, proxy advisors such as ISS Governance and Ownership Matters  encourage investors to vote for the appointment of self-elected Mr. Stephen Mayne as a director. Mr. Stephen Mayne is a journalist and a shareholder activist that constantly offers himself up for election on boards. Executive Chairman Gerald Harvey has urged Australian regulators to question the credibility of the proxy advisors that advise shareholders to appoint someone who has no experience in the retail industry [8].

Different proxy advisory firms Ownership Matters and CGI Glass Lewis are also recommending against the re-election of Chief Executive Officer Katie Page [9].  The company is being questioned by the Australian Securities and Investment Commission regarding the high increase in pay for Ms. Page despite the decrease in the Total Shareholder Return (TSR) of the company [10].

Where does Harvey Norman’s CEO Pay for Performance rank?

The CGLytics Relative Positioning Pay for Performance tool compares Harvey Norman’s CEO pay with that of the industry peer group’s three year TSR. The performance evaluation shows that it is misaligned. The company’s total realized pay is in the 45th percentile while the three-year TSR ranks in the 15th percentile and shows that the CEO is compensated more than the increase in TSR.

HN P4P analysis

Changes in remuneration was included in its 2019 Annual Report, changing the short-term incentive financial metric from return on net assets to earnings per share adjusted for the after tax effect of property increments decrements. The short-term incentives will be measured 50 per cent on earnings per share adjusted for the after tax effect of property and 50 per cent as non-financial conditions. Short-term incentives will still be given in cash except when the executive directors have shares lower than the benchmark level. The STI pool will also be increased to the maximum level at 120%.

As to whether, these changes have the potential to avert a potential revolt at the upcoming AGM, it remains to be seen.

Would you like to gain instant insights into more than 5,500 globally listed companies’ board composition, diversity, expertise and skills? Or access the same CEO pay for performance insights used by Glass Lewis in their proxy papers?

Click here to learn more about CGLytics’ boardroom intelligence capabilities and executive remuneration analytics, used by institutional investors, activist investors and advisors.

About the Author

Alex Co: APAC Research Analyst

Alex graduated from the S P Jain School of Global Management in Sydney with a degree in finance and entrepreneurship. She previously worked in the compliance division at a large financial institution and gained her experience as a research analyst.

Latest Industry News, Views & Information

Aston Martin: Speeding Towards 8th Bankruptcy or Revitalization?

A skill-deficient board led to the overestimation of Aston Martin’s market appeal. How does the introduction of new CEO Tobias Moers impact Aston Martin’s board composition, skillset, and expertise?

Wirecard Pre- and Post-Scandal: A Board Effectiveness Analysis

This article examines Wirecard’s corporate governance practices, board effectiveness score compared to their DAX and sector peers, and shortfalls in board expertise pre- and post-scandal.

Takeaway.com is on a mission

Takeaway.com is on a mission to assert its dominance as one of the world’s leading online food delivery service providers. Mergers and acquisitions have resulted in an increase in bonuses for the CEO and the board, plus an improvement in board structure.