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?

07.09.2020

After six years of successive losses, CEO Andy Palmer oversaw a return to profit for Aston Martin in 2017. However, failures since its October 2018 Initial Public Offering (IPO) led to board and management changes and revealed how an unbalanced and skill-deficient board led to an overestimation of the company’s market appeal.

Background 

Aston Martin, the British luxury car manufacturer whose iconic DB5 model is synonymous with James Bond, has never monetized on its classic brand, with less than 120,000 cars sold in its 107-year history, yet counting seven bankruptcies in the same span.  Andy Palmer was appointed Chief Executive Officer (CEO) in September 2014; determined to turn its fortunes around. He stated at the time: “Aston Martin has always relied on someone stepping in and injecting some more cash and saving it. But that’s not the legacy I want to leave”.(1)

Second Century & IPO

Mr. Palmer indicated short-term planning caused Aston Martin’s previous bankruptcies, as it never generated enough funds from released cars to produce new generation models.(2)

“In the first century we went bankrupt seven times, the second century is about making sure that is not the case…we need to be less dependent on a narrow product ratio and one type of customer…” (3,4)

Aston Martin launched its ‘Second Century’ in 2015 and planned to revitalize its fortunes by releasing seven cars in seven years, including the DB11, Vantage, Vanquish, and its first all-electric car, the DBX.(5) The DB 11 coupe, the first car of the plan was released in 2016 and was well received, helping push Aston Martins total sales to 5,117 in 2017, its highest in nine years(6) and resulted in profits of EUR 87M, its first profit since 2010.(7)

Given the initial success of the Second Century plan, in August 2018 Aston Martin announced its plan to offer at least 25% of its shares in an Initial Public Offering (IPO), the first of a U.K. carmaker in over three decades.(8) In preparation for its IPO, Aston Martin added multiple directors to the board: former InterContinential Hotels CEO Richard Solomons, former Sainsbury’s executive Imelda Walsh, former Deutsche Bank & Deloitte director Peter Espenhahn, and NYU professor Tensie Whelan. Former Coca-Cola executive Penny Hughes was appointed as its first female chairwoman on September 10th, 2018. She was independent on appointment in line with recommendations of the UK Corporate Governance code.

Mr. Palmer described the additions as a “significant milestone in our history and of the successful turnaround of the company.”(9) He felt the new directors, would help Aston Martin avoid its past mistakes by fostering a level of governance it previously lacked.(10) Expectations were high for its IPO, Mr. Palmer claimed “unprecedented” interest from investors. Aston Martin estimated its maximum value of over EUR 5 Billion, with shares trading between EUR 18.50 and EUR 20 a share.(11) It expected to sell between 6,200-6,400 cars in 2018, 7,100-7,300 in 2019, and 9,600-9,800 in 2020.(12)

Underwhelming IPO

On October 3, 2018, Aston Martin began trading on the London Stock Exchange under the ticker ‘AML’ at EUR 19 a share. The debut went poorly, with shares going for as low as EUR 17.75 a share, placing it in the FTSE 250 instead of its intended target of the FTSE 100.

By February 2019, it had lost nearly half its market cap from the IPO and reported an annual loss of EUR 68 Million for fiscal 2018, despite increased total car sales of 6,441 in 2018, due to the EUR 136 Billion it used to secure its listing.(13) Mr. Palmer stated that Aston Martin was only worried about the long-term performance of its stock, but there is reason to question whether its fortunes will improve.

In July 2019, with weak sales for The Vantage, the second model in the ‘Second Century’ plan, and economic uncertainty surrounding Brexit, Aston Martin revised its 2019 sales forecast to 6,400 cars from 7,300. The market cap of the company fell below EUR 1.5 Billion in August 2019, from its market cap of EUR 4.6 Billion at its IPO.(14) Non-executive director Najeeb Al Humaidhi sold his stake in Aston Martin in August 2019, a damning indictment on the ability of Mr. Palmer and the board to stabilize its finances.(15)

Something amiss in the skills and diversity matrix?

Data reviewed in the CGLytics software platform suggests Aston Martin’s board lacked the expertise and necessary independence to properly gauge its market appeal. The Pre-IPO board additions increased the size of Aston Martins board to 14 directors, 5 being independent non-executive directors, with 3 of the 14 directors women.

According to the Division of Responsibilities section of the UK Corporate Governance code Principal G states that:

“the board should include an appropriate combination of executive and non-executive (and in-particular, independent non-executive directors) such that no small group of individuals dominates the board’s decision making”.

The 11th Provision states that:

“at least half the board, excluding the chair, should be non-executive directors whom the board considers to be independent”.(16)

In addition to the UK Corporate Governance code, the Davies Commission stated that by 2020, a third of all directors should be women.(17)

Aston Martin stated its intention to follow all principles and provisions of the UK Governance code and the Davies Commission within a year. Nonetheless, with the 5 independent directors joining the board within a month of its IPO, it is likely that the executive directors and shareholder representing non-executive directors, dominated the board’s decision making. With more of a stake in its IPO, they were more inclined to overestimate Aston Martin’s market appeal.

Below is a display of Aston Martin’s Board Expertise and Diversity on October 3rd, 2018, before its IPO.

AM Board Expertise and Skills
AM Board Diversity
Source: CGLytics Data and Analytics

Reviewing Aston Martins Board Expertise in CGLytics Board Effectiveness tool, of the directors on the board at the time, four had skills in Marketing: Andrew Palmer, Penny Hughes, Peter Rogers, and Matthew Carrington. While seeming sufficient, it should be noted that both Penny Hughes and Matthew Carrington were appointed to Aston Martin’s board just a month before its listing, which is not enough time for a director to immerse themselves and significantly contribute in the marketing strategy prior to the IPO. Peter Rogers was a shareholder’s representative, who would benefit if the IPO met or exceeded internal valuation; Mr. Palmer, as the chief executive was entitled to share awards up to E3.6m.(18)

The diagram also suggests that there was no director with Technology expertise, which is necessary for most issuers. Additionally, we find that the Board at the time of the IPO also lacked expertise in Governance. It is however interesting to point out that the Board had strong presence in Industry and Sector, Leadership, International, Executive, and Financial expertise.

Lawrence Stroll injects cash in Aston Martin. Management & Board changes begin

Despite Andy Palmer’s intention for nobody to save Aston Martin again, in January 2020 with losses mounting, and with no alternative but a substantial investment, Aston Martin sold a 20% stake to a group lead by Lawrence Stroll, who became Executive Chairman in April 2020 as part of the deal. Peter Rodgers passed away in February 2020, Penny Hughes stepped down as Chairwoman on April 7, 2020, and Richard Solomons, Imelda Walsh, and Tensie Whelan, all independent directors appointed before the IPO, declined to stand for re-election.(19) Aston Martin’s Chief Financial Officer (CFO), Mark Wilson, departed in April 2020. Mr. Palmer himself, stepped down in May 2020 with shares down over 90% since the IPO.(20)

New Voices, Same Results?

When Aston Martin announced the departure of Andy Palmer, its share price increased by over 40%, a sign the market believes a new CEO will reverse its fortune. Tobias Moers, the current Chief Executive Officer at Mercedes subsidiary AMG was appointed CEO of Aston Martin effective August 1st, 2020.(21) Kenneth Gregor was named the new Chief Financial Officer on June 22nd, 2020.(22)

With a new Executive Chairman, Chief Financial Officer, and Chief Executive Officer, it is reasonable to expect a new direction for Aston Martin, but data suggests Aston Martin may not be better off than before.

Lawrence Stroll, while the owner of Force India’s F1 Team and a car enthusiast, has no automotive expertise. Tobias Moers fails to diversify the Board’s expertise.

Below is a display of Aston Martin’s board expertise effective August 1st, 2020, when new CEO Tobias Moers assumes control:

AM Board Expertise and Skills post IPO
AM Board Diversity post IPO
Source: CGLytics Data and Analytics

In this scenario, Aston Martin has 9 directors, only 2 who are independent non-executive directors, a 22% independence ratio, an indication Aston Martin has not yet complied with principles and provisions of the UK Corporate Governance code. In August 2020, when the new CEO takes his position, the independence ratio will further drop to 20%. One thing that can also be missed is the lack of gender balance on Aston Martin’s Board. There is currently no female on the Board, Aston Martin is further away from meeting the recommendations of the Davies Commission than before its IPO.

On the expertise and skills side, although the board still has its independent marketing expert in Matthew Carrington, the imbalance between the groups of directors makes it unlikely he will sway the board.

With the new Board, we see a significant drop in their Leadership, Financial, International, Executive, Industry and Sector Expertise. The company still has no Director with Technology and Governance expertise; skills necessary to steer company’s affairs in the right direction.

Aston Martin’s choice to go public may ultimately have been ill-advised. While initially allowing it to raise cash, an IPO was always going to lock Aston Martin into certain financial performance metrics, that given its historical struggles, it was unlikely to meet, despite the initial upturn in fortune under Andy Palmer. Independent non-executive directors with less at stake are more likely to recognize and raise red flags, reducing risk and providing greater corporate governance.

How can Aston Martin improve their corporate governance and gain oversight of their board effectiveness going forward? CGLytics governance data and analytics tools provides the board composition analysis companies, investors and service provides need, now and in the future, to reduce risk and ensure company success.

Interested to see how your company stacks up against 5,900 globally listed companies’ governance practices including their CEO Pay for Performance, board composition, diversity, expertise and skills?

 

Click here to contact CGLytics and learn about the governance tools available and currently used by institutional investors, activist investors and leading proxy advisor Glass Lewis for recommendations in their proxy papers.

References:

[1] Hotten, R. (2015, March 5). Aston Martin battles to reinvent itself. BBC News. https://www.bbc.com/news/business-31727799

[2] Padgett, M. (2016, March 7). Aston Martin promises 7 cars in 7 years–and profits. Motor Authority. https://www.motorauthority.com/news/1102701_aston-martin-promises-seven-cars-in-seven-years–and-profits

[3] Hotten, R. (2015, March 5). Aston Martin battles to reinvent itself. BBC News. https://www.bbc.com/news/business-31727799

[4] Aston CEO calls crossover, daimler deal keys to revival. (2015, April 9). Automotive News Europe. https://europe.autonews.com/article/20150409/ANE/150409991/aston-ceo-calls-crossover-daimler-deal-keys-to-revival

[5] Hotten, R. (2015, March 5). Aston Martin battles to reinvent itself. BBC News. https://www.bbc.com/news/business-31727799

[6] Tsui, C. (2018, January 4). Aston Martin reports record sales, sold more than 5,000 cars in 2017. The Drive. https://www.thedrive.com/article/17370/aston-martin-reports-record-sales-sold-more-than-5000-cars-in-2017

[7] Aston Martin roars back into the Black. (2018, February 26). BBC News. https://www.bbc.com/news/business-43204733

[8] Publication of Reg document & H1 2018 results – 06:03:04 29 Aug 2018 – News article | London stock exchange. (2018, August 29). London Stock ExchangeLondon Stock Exchange. https://www.londonstockexchange.com/news-article/market-news/publication-of-reg-document-amp-h1-2018-results/13770626

[9] Neate, R. (2018, September 25). Aston Martin names first female chair as it prepares for £5bn float. the Guardian. https://www.theguardian.com/business/2018/sep/10/aston-martin-chair-float-penny-hughes

[10] Aston Martin bolsters board as luxury carmaker prepares for IPO. (2018, September 10). Financial Times. https://www.ft.com/content/0c35df58-b4c9-11e8-bbc3-ccd7de085ffe

[11] Ipo. (n.d.). astonmartinlagonda.com. https://www.astonmartinlagonda.com/investors/ipo

[12] Publication of Reg document & H1 2018 results – 06:03:04 29 Aug 2018 – News article | London stock exchange. (2018, August 29). London Stock ExchangeLondon Stock Exchange. https://www.londonstockexchange.com/news-article/market-news/publication-of-reg-document-amp-h1-2018-results/13770626

[13] Kollewe, J. (2020, February 3). Aston Martin shares crash as it reveals £136m IPO costs. the Guardian. https://www.theguardian.com/business/2019/feb/28/aston-martin-sets-aside-30m-for-brexit-as-revenues-rise

[14] Kollewe, J. (2019, November 7). Aston Martin blames tough European market for £13.5m loss. the Guardian. https://www.theguardian.com/business/2019/nov/07/aston-martin-blames-tough-european-market-for-135m-loss

[15] Aston Martin takes another hit as director sells $33 million stake. (n.d.). Driven. https://www.driven.co.nz/news/aston-martin-takes-another-hit-as-director-sells-33-million-stake/

[16] The UK Corporate Governance Code. (2018). Financial Reporting Council. https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.pdf

[17] Aston Martin bolsters board as luxury carmaker prepares for IPO. (2018, September 10). Financial Times. https://www.ft.com/content/0c35df58-b4c9-11e8-bbc3-ccd7de085ffe

[18] Monaghan, A. (2018, September 25). Aston Martin boss in line for £7.2m package as £5.1bn float unveiled. the Guardian. https://www.theguardian.com/business/2018/sep/20/not-a-bond-aston-martin-to-float-shares-on-stock-market

[19] Aston Martin drives through board changes after £104m loss. (2020, February 27). Accountancy Daily. https://www.accountancydaily.co/aston-martin-drives-through-board-changes-after-ps104m-loss

[20] Ziady, H. (2020, May 26). Aston Martin replaces CEO Andy Palmer with Mercedes-AMG chief. CNN. https://www.cnn.com/2020/05/26/business/aston-martin-new-ceo/index.html

[21] Ziady, H. (2020, May 26). Aston Martin replaces CEO Andy Palmer with Mercedes-AMG chief. CNN. https://www.cnn.com/2020/05/26/business/aston-martin-new-ceo/index.html

[22] Appointment of chief financial officer – 07:00:02 22 Jun 2020 – AML news article | London stock exchange. (2020, June 22). London Stock ExchangeLondon Stock Exchange. https://www.londonstockexchange.com/news-article/AML/appointment-of-chief-financial-officer/14586003

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07.06.2020

Wirecard AG, one of the leading Fintech companies in Europe and a DAX constituent, is now in the centre of a major accounting scandal. This article examines Wirecard’s corporate governance practices, board effectiveness score compared to their peers, and shortfalls in board expertise using CGLytics tools.

Wirecard’s now former CEO, Markus Braun, resigned with immediate effect from his position on June 19 and was arrested by German authorities on June 22, after the company’s auditor, EY, reported EUR 1.9 billion missing from the balance sheets, and refused to sign off Wirecard’s financial results[1].

Wirecard claimed that the missing amount does not exist and announced that the company has filed an application for insolvency on June 25[2]. The company’s shares were suspended from trading before it announced insolvency proceedings. Wirecard’s shares fell almost 90% after it admitted to the missing EUR 1.9 billion.

Right after the CEO’s resignation, Jan Marsalek, Wirecard’s former COO and a member of the Management Board, was dismissed (on June 22). James Freis, a former Director of Financial Crimes Enforcement Network for the United States Department of the Treasury and Managing Director, Group Chief Compliance Officer, and Group Anti-Money Laundering Officer at Deutsche Börse AG, was appointed interim CEO of Wirecard on June 19.

To evaluate if the Board of Wirecard was well equipped to prevent the fraud scandal, CGLytics looked at the expertise of Board Members and other factors that define the effectiveness of the Board prior to changes to its composition.

Gaps in board expertise

Prior to changes on the Management Board in June 2020, the Board of Directors of Wirecard consisted of five members of Supervisory Board and four members of Executive Board. According to the Board Expertise analysis, using CGLytics Governance Data and Analytics tools in the software platform, the Board at that time scored low on the Financial and Governance expertise, the two essential skills for successful oversight of financial compliance.

Wirecard’s Board Expertise and Skills Matrix

Wirecard Board Expertise
Source: CGLytics Expertise Diagram and Skills Matrix

Criticism of Wirecard has been raised already in 2019, when the Financial Times started an investigation into the company’s accounting conduct based on numerous whistleblowing cases. Wirecard was denying reports of misconduct and claimed such information was fake[4]. Both Markus Braun and Jan Marsalek, now former members of the Management Board, lacked Financial and Governance expertise, which was also the case with other members of the Management Board (except the Chief Financial Officer Alexander von Koop).

Thomas Eichelmann, independent member of the Supervisory Board and Chairman since January 2020, brings both Financial and Governance expertise to the Board, having served as Chief Financial Officer at Deutsche Börse AG and as a member and Chairman of numerous companies in Germany. Interestingly, he was one of the key figures in pushing Wirecard to undertake an independent review of its accounting issues. The company hired KPMG in October to start such an investigation[5].

With the appointment of James Freis as an interim CEO, the Board has gained compliance and legal experience, however, the Financial expertise is still lacking.

Board effectiveness analysis

To evaluate other factors that add to the Board success, CGLytics looked at various parameters that together form the ‘Board Effectiveness’ score. At the end of 2019 Wirecard’s Board was compared to other Boards in the DAX index at the time. The graph below shows the single score attached to each DAX constituent representing the company’s ‘Board Effectiveness’ coefficient.

In total, Wirecard shows the fifth highest effectiveness score compared to other index constituents (on a scale from 1 to 100).

Board Effectiveness Score of DAX Index (2019)

Wirecard board effectiveness on DAX
Source: CGLytics Board Effectiveness Score

Utilizing the CGLytics peer composer tool, we created a peer group for Wirecard based on their sector to evaluate the company in comparison to their sector peers.

Interestingly, our analysis suggests that Wirecard’s Board Effectiveness score, using the CGlytics Risk Rating tool, is the second highest among competitor companies, as per the end of 2019.

Board Effectiveness Analysis of Wirecard’s Sector Peers (2019)

Wirecard board effectiveness compared to peers
Source: CGLytics Risk Rating tool

Utilizing CGLytics’ Risk Rating tool, we were able to gain insights into Wirecard’s Board Effectiveness score pre- and post-scandal. Using December 2019 as a benchmark, we found that the company’s Board Effectiveness score improved from 78 points to 82 points in June 2020.

However, it is worth noting that the company decreased in Nationality Dispersion and Directors Tenure. Underlying metrics such as Gender Equality and Board Independence has also improved from December 2019 to June 2020.

Board Effectiveness of Wirecard Pre- and Post-Scandal

Board effectiveness pre and post scandal
Source: CGLytics Risk Rating tool

Destruction of Shareholders’ Value

In September 2018, Wirecard boasted of EUR 22.5 billion in market capitalization, and ascended to the blue-chip index of Germany replacing Commerzbank, the country’s second largest financier. However, due to this scandal, Wirecard’s share price has plunged and wiped off millions of dollars of profits for investors; notably a group of SoftBank executives and a UAE (Abu Dhabi) fund that invested in a complex USD 1 BLN trade on the company’s equity.

According to market reports, in April 2019, SoftBank Investment Advisors, which manages the group’s USD 100 billion Vision Fund, structured roughly USD 1 billion investment in Wirecard through a convertible bond. The investment fund is now set to miss out on millions in profits that it might have gained from the Wirecard trade.

What’s next for Wirecard?

After continuous denial of allegations from whistle-blowers and journalists, notably the Financial Times, Wirecard is now going through insolvency proceedings and its former CEO faces charges of misrepresenting the company’s accounts and market manipulation[6]. The Board of Directors of Wirecard had obvious gaps in Financial and Governance expertise, being unable to identify and respond to the issue from its early days. As a result, the shares of the company fell dramatically, leaving lenders and investment funds with losses.

Interested to see how your company stacks up against 5,900 globally listed companies’ governance practices including their CEO Pay for Performance, board composition, diversity, expertise and skills?

 

Click here to contact CGLytics and learn about the governance tools available and currently used by institutional investors, activist investors and leading proxy advisor Glass Lewis in their proxy papers.

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07.01.2020

Takeaway.com has been on a mission for the past few years to assert its dominance as one of the world’s leading online food delivery service providers. In only six months the company has made two major acquisitions; acquiring Delivery Hero, Grubhub and merging with UK based Just Eat plc. All this while fending off counteroffers from competitors such as Prosus NV and out bidding rivals.

The Merger:

The merger between Takeaway.com and Just Eat took nearly six months to complete. The company had to fend off multiple bids, including a GBP 5.5 billion bid from competitor Prosus, the investment unit of South African internet conglomerate Naspers Limited.

The merger between the two companies was announced back in July 2019. Takeaway.com’s initial offer valued Just Eat at 731 pence per share (representing a 15 percent premium) and resulted in Just Eat shareholders owning 52.2 percent and Takeaway.com shareholders owning 47.8 percent of the share capital of the combined group.

The merger also brought significant changes in the combined group corporate governance structure, including, adopting a 2-tier board structure that comprises of an Executive Board and Supervisory Board. The 2-tier structure is a common practice laid out by the Dutch Corporate Governance code.

Additionally, change was announced to both the Supervisory and Executive board with the intention to increase the presence of both companies involved in the newly formed entity. The Supervisory Board increased from four to seven members with four members coming from Just Eat and the three from Takeaway.com.

On the Executive Board, the Co-Founder and CEO of Takeaway.com, Mr Jitse Groen, retained his position as CEO, Just Eat CFO took over as the Group CFO and the positions of COO would be shared as a Co-COO between the other two members.

The intended rearrangement was said to foster “a strong founder-led management team with years of combined experience in the sector”. [1]

CGLytics presented a scenario analysis of the board composition on the date of the announcement and what the board is comprised of before and after the merger.

Takeaway.com’s Board Expertise and Skill Matrix (pre-merger)

Takeaway.com board skills and expertise
Source: CGLytics Data and Analytics

Just Eat Takeaway Board Expertise and Skill Matrix (post-merger)

Takeaway.com and Just Eat board skills and expertise
Source: CGLytics Data and Analytics

In the post-merger analysis, there is improvement to the overall board structure. Governance expertise are increased as well as Financial expertise, which are core competencies and imperative to a board. In a market with tough competition, that includes big names such as Uber Eats, Deliveroo, plus others gradually increasing their presence, not having the right expertise and skills on the board pose corporate governance risks.

The analysis also reveals that the company is lacking in Technology expertise. For a company that carries out most of its business online, it should be an expertise area worth considering to improve.

As much as the merger seemed a good fit for both companies involved, South African owned Prosus had other intentions. The company twice increased its hostile bid for Just Eat including a GBP 5.5 billion bid in cash (740 pence per share), which the company deemed “a more compelling and certain value for Just Eat shareholders at a further premium to Takeaway.com’s offer”[2].

Nonetheless, Takeaway.com was offering Just Eat shareholders more control whereas Prosus’ offer was looking to decrease their control. Just Eat shareholders ultimately rebuffed Prosus’ offer citing the bid as “significantly undervaluing” the group [3].

At the beginning of 2020, rumours started circulating that a deal had been met; Takeaway.com and Just Eat settled on an implied value of 916 pence per share. Subsequently, on February 3, 2020, Just Eat announced it had suspended its listing and trading on the London Stock Exchange. The combined company was renamed to Just Eat Takeaway. The new partnership has brought changes to the company’s compensation strategy.

The Acquisitions:

Within the past year Takeaway.com has made multiple acquisitions.

In 2019 the company won the battle with Delivery Hero in the German market, agreeing to buy the larger rival’s activities in Germany in a deal worth EUR 930 million.

In 2020, after nearly a month of negotiations, US based Grubhub stepped away from a potential acquisition from Uber Eats after concerns of antitrust and instead merged with the newly formed Just Eat Takeaway. The company agreed to acquire Grubhub for USD 7.3 billion in stock. The deal will see the company be able to take on rivals such as Uber Eats and DoorDash, which are also based in the US market.

Just Eat Takeaway shareholders will control around 70 per cent of the combined company, while the rest will be owned by Grubhub’s investors. After the deal, Just Eat Takeway’s CEO was quoted as stating:

“Would it be better to just wait one year after every transaction? Yes, sure. We’d get more sleep. But that’s just not how the world turns” [4]

Impact on CEO Compensation:

During the company’s 2020 Annual General Meeting (AGM), shareholders agreed to significantly increase the bonuses of the CEO and Executive Board. Where it was absent prior, there will be a Short-Term Bonus (STI) of a maximum of 150 percent of the base salary and an on target of 75 percent of basic salary.

In addition, there has been an adjustment to the Long-Term Incentive (LTI). The LTI has increased from a maximum of 150 percent to a maximum of 200 percent of the base salary and will be paid in the form of performance shares rather than performance stock options. The pay is, of course, dependent upon the achievement of performance objectives such as revenue growth relative TSR and a strategic target. [5]

The below table provides an example of what the potential earnings for the CEO might look like if all performance objectives are met versus what was earnt over the past two years.

CEO earnings
Source: CGLytics Data and Analytics

The company argued that the adjustment is to align the remuneration policy with the current size, scope and complexity of the company following the merger with Just Eat. Shareholders seem to agree to the proposal, which earned a resounding 99.2 percent approval at the 2020 AGM.

Takeaway.com is on a mission to become the worlds largest online food delivery service provider and based on the company’s most recent actions, one would say it is well on its way. However, it is not going to be easy road, out-bidding rivals and fending off large competitors in order to do so.

Interested to see how your company stacks up against 5,900 globally listed companies’ governance practices including their CEO Pay for Performance, board composition, diversity, expertise and skills?

 

Click here to contact CGLytics and learn about the governance tools available and currently used by institutional investors, activist investors and leading proxy advisor Glass Lewis in their proxy papers.

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At Tesco’s annual general meeting (AGM) on Friday June 26, 2020, two-thirds of the shareholders voted against the resolution to approve the Directors’ 2019 remuneration report. As mentioned in the previous article published by CGLytics earlier this month, this decision was mainly due to Tesco’s remuneration committee inflating executive bonuses by removing Ocado’s stock price from the peer group used to estimate its performance. In addition to this, Glass Lewis’ decision to advise investors to vote against Tesco’s remuneration report had substantial influence over the final results.

For the record, the exclusion of Ocado from Tesco’s peer group, whose stock has increased dramatically in the recent years, led to an outperformance by 3.3% of Tesco’s Total Shareholder Return (TSR) against its peer group instead of an underperformance by 4.2% in the case of Tesco keeping Ocado in the peer group.

If Tesco’s TSR was below its peer group index, the TSR metric, which is weighted at 0.5 of the 2017 Performance Share Plan (PSP), would have been zero. As a result, this boosted the payments to the CEO and CFO by approximately GBP 1.6 million and GBP 0.87 million, respectively.

Click here for more details about Tesco’s shareholder revolt prior to their AGM.

Tesco announced its AGM results[1] stating that:

“we recognise, however, that a significant number of shareholders had concerns with the principle of the Committee’s adjustment to the TSR comparator group”.

Moreover Tesco added that:

“following recent engagement on our Remuneration Report with a number of our larger shareholders, we have been reassured that the majority agree that the overall outcome of the 2017 PSP award is proportionate given the outstanding turnaround delivered by management”.

For now, the vote on directors’ remuneration report was not legally binding, meaning it is only advisory. Bonuses paid to the executives will still be paid out. On the other hand, the huge percentage of votes against the directors’ remuneration report (67.29%) is the largest pay revolt in Tesco’s history in the last decade.

We have seen that shareholder activism was used through Say on Pay at Tesco’s latest AGM, which means that in the future if the company is not transparent with its investors, investors will not hesitate to raise their voice against any decision they consider inappropriate or gullible.

Using data and analytics found in the CGLytics software platform, companies, investors, proxy advisors and service providers efficiently analyze and spot governance risks and red flags in seconds.

If Tesco understood how they were perceived by proxy advisor Glass Lewis prior to the proxy season and their AGM, they could have prepared adequately and avoided negative votes.

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

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

 

Reference

[1] https://www.londonstockexchange.com/news-article/TSCO/result-of-agm/14593658

Latest Industry News, Views & Information

Diversity on the Board? Metrics Used by Fortune 100 Companies

Examining the diversity of Fortune 100 boards and questioning the metrics currently used to disclose diversity. Are Fortune 100 companies providing the complete picture?

Boeing, We Have a Problem: Starliner’s Debut and the Role of Governance in Spaceflight

Boeing’s issues with the Starliner launch reveals potential Corporate Governance deficiencies. A review of The Boeing Company’s Board skills and expertise suggests a lack of Technology experience amongst Board members. How did this impact the Starliner’s test flight?

Bennett and the Ashford Companies: Corporate Governance Pitfalls and Lessons

The companies controlled by hotelier Monty Bennett have seen controversy for exploiting a government loan program designed to help small businesses. Learn how misaligned Pay for Performance, and an unbalanced board, can result in poor decision-making and increase governance risk.

Diversity on the Board? Metrics Used by Fortune 100 Companies

Examining the diversity of Fortune 100 boards and questioning the metrics currently used to disclose diversity. Are Fortune 100 companies providing the complete picture?

06.29.2020

This article examines the diversity of Fortune 100 companies’ boards, and questions the current metrics used to disclose diversity of board members. Due to the lack of uniformity of diversity disclosures, is the picture painted by some companies comprehensive enough to truly show diversity on their board?

The topic of diversity has grown in importance over the past decade. Large companies are spending time and resources discovering how having a diverse board of directors is affecting their company’s image, perception, and profits. Many companies focus on appointing employees with different education, experience, race, and backgrounds. This is illustrated through companies’ diversity statements. For example, Amazon.com, Inc. in their 2019 Proxy states,

“We take seriously our commitment to diversity and respect for people from all backgrounds, including gender, race, ethnicity, religion, sexual orientation, disability, and other dimensions of diversity, which are enduring values for us as reflected in a number of Company policies, including the Amazon Global Human Rights Principles.”[1]

 

Even with inclusive diversity statements, such as Amazon.com, Inc.’s, when calculating how diverse companies’ boards are, two main diversity metrics are used: gender and race. While acknowledging the positive effects of having a diverse board and showing how diversity is being valued in a company is important, examining how transparent companies are with their diversity metrics shines light on a company’s commitment to diversity.

Why is Board Diversity Beneficial for Companies?

The decisions that the board of directors make for corporations are critical for their success. The board impacts how the company is run by making crucial decisions on executive pay, dividend policies, setting yearly goals, and conducting any other business that concerns shareholders. Having a board composed of people with different backgrounds and experience will enrich conversations and allow the board to approach problems with new perspectives and ideas.[2]

Companies should actively try to understand and represent their clients and customers. In doing so, better marketing decisions and tactics can be set. For example, “Having a diverse board can help you better understand purchasing and usage decisions, particularly as studies have found that women drive 70-80 percent of purchasing in the United States.”[2]

CGLytics data of board diversity reveals the percentage of gender diversity and nationality dispersion on boards of Fortune 100 companies.

As depicted in the following graphs, Fortune 100 company boards are composed of mostly American men. Unfortunately, we can not determine percentages of race within these companies because very few companies disclose information on race/ethnicity. The missing data and the lack of transparency from these companies questions their commitment to diversity.

Fortune 100 diversity on boards
Source: CGLytics Data and Analytics

Reporting Diversity

Based on the Fortune 100 companies’ 2018 and 2019 proxy statements, 23% of the Fortune 100 companies do not report information on diversity and the other 77% report the information using different metrics.

The reporting companies focus on gender alone, combine gender and race/ethnicity, or on nationality. There is no uniformity between companies or industries.  While most companies have statements in their proxies outlining the value of diversity and how they define it, the statements are not always represented in the graphs or numbers that break down their board diversity.

This is clearly shown in Caterpillar Inc.’s 2019 Proxy statement. The company lists one of their key characteristics of their board as being diverse of “race, ethnicity, gender, cultural background or professional experience.”[3]  This diversity statement implies that the board would be diverse. But it is unclear if it is as they combine gender and race in their data. In their governance highlights, Caterpillar Inc. lists their board as 45% diverse (gender and race combined).[3] By combining the percentage of gender and race, and not providing a breakdown of the directors’ backgrounds, it is difficult to determine if the board is diverse in race, ethnicity and gender.

Lack of uniformity when reporting diversity

When examining Fortune 100 companies for diversity, we find that it is difficult to compare companies’ information due to the lack of uniformity of how they are reporting data on board diversity.

For example, Delta Air Lines, Inc. and American Airlines Group Inc., both in the same industry, report their diversity metrics differently. At first glance, both companies report roughly equal percentages of diversity (38.5% and 40% respectively). However, American Airlines Group Inc. displays their information by separating gender and race/ethnicity.

Diversity of boards: Delta Air Lines and American Airlines
Source: Company disclosures found in the CGLytics software platform

Why would a company combine race/ethnicity and gender in their diversity graphs? One reason could be to increase the appearance of a diverse board.

Hypothetically, if Delta Airlines, Inc.’s board consisted of four white women and one non-white male and mirrored the American Airlines Group, Inc.’s diversity chart, it would show 38.5% diversity with 7% racially/ethnically diverse and 30.7% gender diverse. While the 30.7% gender diversity would be high for their industry (as shown in the follow graph), the racial/ethnically diversity would be low. This example could be switched with gender diversity being low and would highlight a similar problem. However, without clear diversity metrics, consumers and shareholders are left questioning Delta Airline’s commitment to diversity, which could result in a loss of business.

By combining the percentages of gender and racial diversity, Delta Air Lines is hiding who is represented on their board of directors. American Airlines Group, Inc. clearly shows their shareholders, investors, and the public that they value diversity and are prepared to make well informed decisions. What does clear diversity metrics look like?

Fortune 100: Women on boards by sector

Percent of women on Fortune 100 boards by sector
Source: CGLytics Data and Analytics

Transparent diversity metrics should give the consumers and shareholders a comprehensive background of the members on the board. This should include race/ethnicity, gender, age, and industry experience. These metrics broaden the knowledge of the board, giving the board members the tools to make successful decisions.

This is illustrated in PepsiCo Inc.’s 2019 proxy statement. Their diversity statement is clear and backed by their diversity percentages. It states, “Diversity including understanding the importance of diversity to a global enterprise with a diverse consumer base, informed by experience of gender, race, ethnicity and/or nationality”[4]. This is clearly shown in multiple graphs that break down backgrounds of each director.

PepsiCo Inc.’s 2019 proxy statement

PepsiCo Inc.’s 2019 proxy statement
Source: Company disclosures found in the CGLytics software platform

It is recommended for more companies to design their diversity statements and data like PepsiCo Inc. They shared a comprehensive view of their board and proved their board was encompassed with directors of various backgrounds. This provides consumers and shareholders with confidence that the board is well equipped to make the best decisions for the success of the company.

To gain access to Governance Intelligence and Oversight of 5,900+ globally listed companies, contact CGLytics. Within the CGLytics software platform, access 125,000+ professional executives and their skills, expertise and backgrounds for recruiting board members and building a robust, diverse board.

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Boeing, We Have a Problem: Starliner’s Debut and the Role of Governance in Spaceflight

Boeing’s issues with the Starliner launch reveals potential Corporate Governance deficiencies. A review of The Boeing Company’s Board skills and expertise suggests a lack of Technology experience amongst Board members. How did this impact the Starliner’s test flight?

Bennett and the Ashford Companies: Corporate Governance Pitfalls and Lessons

The companies controlled by hotelier Monty Bennett have seen controversy for exploiting a government loan program designed to help small businesses. Learn how misaligned Pay for Performance, and an unbalanced board, can result in poor decision-making and increase governance risk.

AMP Receives Second “First Strike” Within Three Years

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Boeing, We Have a Problem: Starliner’s Debut and the Role of Governance in Spaceflight

Boeing’s issues with the Starliner launch reveals potential Corporate Governance deficiencies. A review of The Boeing Company’s Board skills and expertise suggests a lack of Technology experience amongst Board members. How did this impact the Starliner’s test flight?

06.26.2020

The long-awaited unveiling of Boeing’s CST-100 Starliner spacecraft hit some turbulence during the craft’s maiden uncrewed test-flight in December 2019.  The failure of the initial test launch has revealed potential deficiencies in the governance practices of Boeing’s Space and Launch division and skill diversity among leadership that contributed to the test’s problems.

A Botched Test

The Starliner is Boeing’s major contribution to NASA’s Commercial Crew Program and is planned to serve as a transport vehicle for NASA astronauts into Low-Earth Orbit and to the International Space Station (ISS).  The primary goal of the first uncrewed test was to launch the Starliner and have the craft rendezvous with the ISS.

Problems with the craft’s Mission Elapsed Timer software caused the Starliner to prematurely expend, or “burn”, too much fuel, causing the craft to enter an orbit well-below the ISS and precluding any chance that Starliner would be able to dock with the station.  Basically, Boeing shot for the space station and missed.

The software errors were serious enough to the point that the spacecraft itself was threatened and was saved only by quick thinking on the part of the ground control team.  Both NASA and Boeing immediately convened a joint independent review team (IRT) to investigate and identify the problems and their causes.

On April 6, 2020, Boeing announced that the Company would conduct a second uncrewed test flight at its own expense in order to test its new pre-flight procedures and ensure that the problems encountered during Starliner’s initial test are corrected.

The Review Team’s Findings

In the final report presented to NASA and Boeing, the IRT recommended that Boeing address a list of 61 corrective actions to prevent a similar incident in future launches, all of which are related to the three primary software failures that occurred during the mission.  The details of the 61 corrective actions have not been made public, however, officials from both NASA and Boeing have confirmed that Boeing engineers failed to conduct thorough end-to-end testing of Starliner’s entire software system prior to the launch.

Jim Chilton, Senior Vice President of Boeing Space and Launch, and John Mulholland, Vice President and Program Manager of the Commercial Crew Program at Boeing, confirmed the lack of end-to-end testing in a teleconference on February 28th, however, they clarified that the engineering team had taken a piecemeal approach to software testing, checking one “chunk” of code at a time.[1]

Mr. Chilton and Mr. Mulholland defended their team’s decision to conduct the tests in that manner, yet they acknowledged that the more time-consuming end-to-end testing could have led the engineers to catch the software errors.

Boeing has since committed publicly to instituting a more rigorous end-to-end software testing procedure before the next Starliner flight.  The IRT confirmed that its investigation found no defects with the Starliner’s hardware or mission data.

Boeing’s Space Division

Like several aerospace companies that have broken into the private spaceflight industry in the past decade, Boeing’s space launch and spaceflight equipment development is currently just one facet of the Company’s operations.

Boeing’s Space and Launch Division is housed within Boeing Defense, Space and Security.  As with the Company’s other divisions, the Space and Launch division is subject to oversight by Boeing’s Board of Directors.

According to the Board Expertise analysis, using CGLytics Governance Data and Analytics tools in the software platform, the Company almost completely lacks Technology expertise on its Board.  Only recently elected director, Steven M. MollenKopf (elected April 27, 2020), has the professional and industry experience to qualify as a technology expert.  This finding is incredibly interesting given the IRT’s focus on Starliner’s software problems.

Starliner’s initial test failure was linked directly to the engineering team’s failure to conduct an end-to-end test of the system’s software, suggesting that a lack of technology expertise among Board members may have contributed to the organizational and procedural flaws highlighted in the publicly-disclosed portions of the IRT’s report.

The Boeing Company’s Board Expertise and Skills Matrix

Board expertise and skills matrix
Source: CGLytics Expertise Diagram and Skills Matrix

As illustrated by the diagram above, Boeing’s Board of Directors weakest area of expertise is Technology.  By contrast, Boeing’s closest competitors rely heavily on personnel with previous experience in technological development and astronautical engineering in leadership positions.

For example, Bob Smith, the Chief Executive Officer of Jeff Bezos’ private spaceflight company Blue Origin, had a cumulative 26 years of experience working in leadership positions overseeing technological development and astronautical engineering before his appointment as CEO.

SpaceX President and Chief Operating Officer, Gwynne Shotwell, served in a number of leadership roles in the Aerospace Corporation’s Space Systems Engineering and Technology program and as a Director of Microcosm’s Space Systems Division prior to her appointment as SpaceX.  Ms. Shotwell is also an inductee of the Women in Technology International Hall of Fame in recognition of her contributions for technological development of space launch and satellite equipment.  SpaceX recently gained the distinction of becoming the first private-sector company to successfully launch astronauts into orbit on May 30th, 2020.

Boeing’s Plans Going Forward

Some big questions remain.

    • – How does Boeing proceed with its pre-launch testing procedures and how will the IRT report influence Boeing’s plans going forward?
    • – What can other private-sector launch service providers learn from Starliner as their own launch dates approach?
    • – And, what are the overall implications for governance in spaceflight as the industry continues is exponential growth?

The most immediate impact of the test failure is that Boeing will fly a second uncrewed test at the Company’s expense.

According to the Company’s 2019 4th quarter results, the Company accrued a “[USD]$410 million pre-tax Commercial Crew charge primarily to provision for an additional uncrewed mission.” [2] As a result of the charge, the Company’s 4th quarter operating margin decreased to .5 percent.

To prevent similar problems in the future, Boeing must consider restructuring its Space and Launch division to allow for proper governance and oversight.

Boeing already has a valuable resource in former NASA Astronaut, Chris Ferguson, who currently serves as a director of Boeing’s Director of Crew and Mission Operations and is also slated to pilot Starliner’s first crewed flight. Despite his invaluable experience and expertise, Ferguson’s dual role presents a managerial problem for Boeing as Ferguson must both oversee Starliner’s development efforts and train to pilot the spacecraft.  This approach may seem intuitive and astronauts have historically played an integral role in spacecraft design, however, this places an undue burden on Mr. Ferguson.

Rigorous oversight of even the most experienced and qualified personnel is a necessary governance practice to ensure that the dangers of spaceflight are mitigated to the fullest extent possible.

Due to the IRT’s focus on software, Boeing should consider appointing more personnel to leadership positions with experience in technological development and astronautical engineering. 

Effective June 26th, 2020, Mr. Mullholland has been promoted to the role of Vice President and Program Manager for the International Space Station and will be replaced by Chief Engineer of the International Space Station Program, John Vollmer.  Mr. Vollmer has been involved with Boeing’s International Space Station Program since the ISS itself was in its early design stages and has over 30 years of experience the relevant fields.  Mr. Vollmer’s technological expertise will allow for an additional layer of oversight for a program that depends on rapidly evolving technology and software.

As pressure mounts to keep pace with competitors, Boeing will need to continue increasing the number of personnel in leadership positions with experience in technological development, even among the Board of Directors.

Boeing has committed to incorporating the IRT’s corrective actions into its pre-launch procedures.  Mr. Mulholland has confirmed that the engineering team will discontinue its piecemeal strategy in favor of an omnibus testing procedure.

As competing companies such as SpaceX and Blue Origins plan crewed launches for 2020, Starliner’s initial test and subsequent need for further, costly, testing can provide a blueprint for incorporating thorough governance practices into launch and spaceflight procedures.

Considering the extremely dangerous nature of spaceflight, crew safety is paramount to the success of any mission, and as Starliner’s initial test demonstrates, proper governance and accountability can help mitigate the problems that are going to arise during the development, planning, and execution of a spaceflight.

To gain access to Governance Intelligence and Oversight of 5,900+ globally listed companies, contact CGLytics. Additionally, within the CGLytics software platform, access 125,000+ professional executives and their skills, expertise and backgrounds for recruiting board members and building a robust, diverse Board.

References

[1] Mr. Mulholland was promoted to the position of Vice President and Program Manager for the International Space Station, effective June 26, 2020.

[2]https://www.sec.gov/Archives/edgar/data/12927/000119312520017662/d856652dex991.htm

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Bennett and the Ashford Companies: Corporate Governance Pitfalls and Lessons

The companies controlled by hotelier Monty Bennett have seen controversy for exploiting a government loan program designed to help small businesses. Learn how misaligned Pay for Performance, and an unbalanced board, can result in poor decision-making and increase governance risk.

AMP Receives Second “First Strike” Within Three Years

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Bennett and the Ashford Companies: Corporate Governance Pitfalls and Lessons

The companies controlled by hotelier Monty Bennett have seen controversy for exploiting a government loan program designed to help small businesses. Learn how misaligned Pay for Performance, and an unbalanced board, can result in poor decision-making and increase governance risk.

Poor corporate governance not only endangers a company’s operations and shareholder value, but also results in poor business decisions [1]. Board composition and executive compensation are key elements of corporate governance, and this article examines these key factors in relation to Bennett and the Ashford companies.

In April 2020, the group of hotel companies controlled by Texan hotelier Monty Bennett became the face of the controversies surrounding the Paycheck Protection Program (PPP), a program meant to help small businesses survive the economic impact of COVID-19. Three public companies controlled by Bennett (Ashford Inc., Ashford Hospitality Trust and Braemar Hotels & Resorts) applied for USD 126 million in loans under the PPP and received at least USD 58 million in return. The Ashford group is the largest known applicant of the government’s relief program, and Ashford Hospitality Trust alone applied for USD 76 million in 117 separate loans, the most by a single company[2]. These companies took advantage of a provision that allowed hospitality and restaurant chains to receive assistance if individual locations had fewer than 500 employees[3].

Ashford companies soon received backlash for exploiting a government loan program designed to help small businesses during a difficult time. Bennett initially refused to return USD 58.7 million his companies received and denied any wrongdoing. On April 28, 2020, Treasury Secretary Mnuchin announced that all companies that had received more than USD 2 million could be audited and held criminally liable for failing to meet the program’s criteria[4]. With mounting public scrutiny and the threat of congressional investigation, on May 2 Bennett declared his companies would return all funds.

A few days later, Douglas Kessler voluntarily resigned as President and CEO of Ashford Hospitality Trust.

Intense media scrutiny and Bennett’s initial refusal to return the funds shone a light onto the companies’ governance structure and poor financial performance. Ashford Inc., which provides asset management services, acts as an external advisor to real estate investment trusts Ashford Hospitality and Braemar. As Chairman of all Ashford companies and CEO of Ashford Inc., Bennett receives compensation from all three entities. These companies were already suffering from heavy losses and sinking stock prices long before COVID-19 struck. Ashford Hospitality had more than USD 100 million in losses in FY 2019. Amid the scandal, the NYSE threatened the company with delisting after its share price fell below USD 1, the minimum average closing price per share required to maintain listing on the NYSE[5]. Overall, the companies’ share prices have fallen over 70 percent on average over the last five years.

Pay for Performance analysis of Ashford Inc.’s CEO

However, the compensation of the Ashford group’s top executives did not decrease due to its poor financial performance. When using CGLytics’ Pay for Performance modeler to consider Ashford Inc.’s relative position compared to its industry peer group, it is revealed that Bennett’s compensation over three years as CEO is disproportionally high compared to the company’s earnings per share. Their CEO’s granted compensation is ranked on the 95th percentile whilst Earnings Per Share (EPS) is ranked in the 5th percentile displaying a misalignment between pay and performance.

Ashford Inc. also received an F grade in Glass Lewis’ Pay for Performance Analysis for FY 2018, meaning that the company’s poor financial performance is not in line with its high compensation levels.

Ashford Inc.’s Pay for Performance Analysis (2019)

Pay for Performance Ashford
Source: CGLytics Data and Analytics

Understanding the skill set of the Board

When analyzing the Ashford companies’ boards through CGLytics’s board composition and expertise tools, it is noticed that directors were unlikely to be effective lines of defense against the public’s backlash. To have an effective response, we would expect to observe board members with governance, financial, legal or risk expertise. Of the seven directors sitting on Ashford Inc.’s board, only three have governance expertise which is derived from their exposure in governance committee roles. The only member with financial expertise, J. Robinson Hays, is dependent, and no members of the board have legal or risk experience. While all directors have worked in real estate, capital management or hospitality, only three – of which two are dependent – have experience in Ashford Inc.’s specific field.

Ashford Inc.’s Board Expertise and Skills Matrix

Ashford Inc.’s Board Expertise and Skill Matrix
Source: CGLytics Data and Analytics

Looking at Ashford Hospitality Trust, only one of the three directors with governance expertise has worked in a compliance and governance role. Only two have financial expertise, with one being the outgoing CEO, and of the two individuals with legal expertise, only one has practiced law. No director has risk experience.

Ashford Hospitality Trust’s Board Expertise and Skills Matrix

Ashford Hospitality Trust’s Board Expertise and Skill Matrix
Source: CGLytics Data and Analytics

Of Braemar Hotels and Resorts’ seven directors, none has risk expertise and only one has held financial roles.

Braemar Hotels & Resorts’ Board Expertise and Skills Matrix

Braemar Hotels & Resorts’ Board Expertise and Skill Matrix
Source: CGLytics Data and Analytics

From this analysis, few directors held the expertise and skills necessary to advise the companies on the proper course of action. All companies are led by Bennett as Chairman, and the New York Times asserts that the boards are “filled with people with close ties to Bennett,” including a director whose wife’s firm provides services to the entities[6].

Board tenure is also a factor to consider in a board’s effectiveness. While long tenure can have advantages, they can be an issue if members lack the necessary expertise or if they compromise independence[7]. Two of the three boards have an average tenure of almost seven years and Ashford Inc. has only appointed one director in the past six years.

Overall, the effects of public backlash against Bennett and the Ashford companies could have been mitigated with good governance practices and decisions. In order to acquire credibility in the eyes of the public and investors, the companies should consider restructuring their compensation levels and appointing independent directors with the right skills to oversee executive management and add value to the company.

Interested to see how your company stacks up against 5,900 globally listed companies’ governance practices including their ceo pay for performance, board composition, diversity, expertise and skills?

 

Click here to contact CGLytics and learn about the governance tools available and currently used by institutional investors, activist investors and leading proxy advisor Glass Lewis in their proxy papers.

Refererences

[1] https://diligent.com/wp-content/uploads/sites/8/2019/06/Whitepaper_modern_governance-1.pdf

[2] https://www.washingtonpost.com/news/powerpost/paloma/the-finance-202/2020/04/27/the-finance-202-joe-biden-blasts-big-banks-corporateamerica-over-coronavirus-response/5ea60fc688e0fa3dea9c3036/

[3] https://www.bisnow.com/dallas-ft-worth/news/hotel/ashford-group-of-companies-affiliates-return-controversial-ppp-funding-blame-inconsistentfederal-guidance-104218

[4] https://www.bloomberg.com/news/articles/2020-04-28/mnuchin-says-all-relief-loans-of-2-million-will-be-audited

[5] https://www.sec.gov/ix?doc=/Archives/edgar/data/1232582/000123258220000019/ahtnyse8-k.htm

[6] https://www.nytimes.com/2020/05/01/business/economy/monty-bennett-small-business-loans-coronavirus.html

[7] https://insights.diligent.com/board-succession-planning/leaving-a-board-removing-board-members-term-limits-and-more

Latest Industry News, Views & Information

AMP Receives Second “First Strike” Within Three Years

This article examines AMP Limited’s governance practices, board of directors’ skills and expertise, and their CEO Pay for Performance, to undestand why it found itself in hot water with the Australian Royal Commission.

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The board of NMC Health lacked key financial expertise. A review of NMC’s board effectiveness and composition reveals what may have led to poor decision-making and the financial scandal.

AMP Receives Second “First Strike” Within Three Years

This article examines AMP Limited’s governance practices, board of directors’ skills and expertise, and their CEO Pay for Performance, to undestand why it found itself in hot water with the Australian Royal Commission.

Ever since the Royal Commission has been investigating alleged cases of misconduct in banking, superannuation and financial services firms in 2017[1], it has scrutinized and fined Australia’s largest financial institutions and banks. This article examines AMP Limited’s governance practices, board of directors’ skills and expertise, and its CEO Pay for Performance, to understand why it found itself in hot water.

AMP Limited is one of those companies that has frequently dealt with the Royal Commission. The company has been investigated for several cases of misconduct in recent years, making shareholders furious over the company’s mismanagement and dishonesty. As a result, shareholders have questioned both the executives’ performance and their compensation.

On May 8, 2020, AMP obtained a ‘first strike’ on its remuneration report during its Annual General Meeting (AGM) after 67.25 per cent of its shareholders voted against the adoption of the remuneration report for the financial year ending December 31, 2019[2]. However, this is not the first time the wealth management firm had experienced a first-strike. During its 2018 AGM, 61.46 per cent of shareholders voted against the adoption of its remuneration report because of the numerous scandals the firm was involved in[3].

In 2018, the company faced backlash for charging their clients service fees over a period of 90 days without rendering any advisory services[4]. AMP executive Anthony Regan admitted that the firm repeatedly misled the Australian Securities and Investments Commission (ASIC) about the deliberate nature of the 90-day fee policy. The company has announced that it will return AUD 778 million for the service fees charged to its clients, with a further AUD 440 million being returned to clients that were given inappropriate advice[5].

The company was also questioned for its implementation of the government’s Banking Executive Accountability Regime (BEAR), which was intended to hold executives accountable for misconduct and malpractice. AMP explained that it adopted a “hybrid model” where only executives from AMP Bank, as opposed to executives from the larger AMP Group, would be held accountable. The company stated such a model would be more “flexible and pragmatic” in achieving the company’s
long-term objectives.

Unfortunately, the company again found itself in hot water in 2019 when AMP and the trustees of its superannuation funds, AMP Superannuation and NM Superannuation, were confronted with a new class action for excessive fees on their accounts since 2013[6]. The law firm Maurice Blackburn claims that AMP billed unreasonably high fees to customers and violated its legal duty to act in the best interest of its clients.

One of the well-known violations of AMP was the case involving the late Mr. Daryl Oehm, who despite having passed away in October 2018 was charged fees from his account until March 2019. This occurred even after the company was informed of Mr. Oehm’s passing and the company’s subsequent agreement to “freeze” the account[7]. The Royal Commission discovered that at least 3,124 clients of AMP were continuously charged a collective total of AUD 922,000 in life insurance premiums even after their passing.

The financial giant released a statement in August 2019 announcing that it developed a three-year investment program to “fund growth, cost reductions and fix legacy issues.” The cost minimizing program plans to achieve AUD 300 million annual run-rate savings by FY22[8]. Despite its aggressive initiative, shareholders still voted against the adoption of its remuneration report during the 2020 AGM after reporting an AUD 2.5 billion loss, with AUD 2.35 billion spent on non-impairment charges and AUD 190 million on misconduct fees[9]. Shareholders protest that even though the company’s share price has declined by 25 per cent in the past 12 months from AUD 1.91 to AUD 1.42 and declared a non-payment of a final dividend, current Chief Executive Officer Mr. Francesco De Ferrari was still able to take home more than AUD 4 million in salary and short-term awards[10].

CGLytics’ Pay for Performance analysis compares CEO Mr. De Ferrari’s total realized pay with the industry peer group’s three-year total shareholder return (TSR). The CEO’s pay is disproportionately higher than the company’s TSR, with the CEO pay in the 40th percentile rank and the company’s TSR in the 0 percentile rank. The misalignment shows that the CEO’s compensation is not tied to the company’s performance resulting in the CEO receiving a generous reward despite the company’s poor performance. AMP Chairman Mr. David Murray defended the CEO’s compensation stating that the hurdles faced by the executive were of an extremely challenging nature[11].

AMP Limited’s Pay for Performance analysis

AMP Relative Positioning
Source: CGLytics Data and Analytics

The financial giant initially planned to divest its New Zealand wealth management business but ceased its proposal due to the uncertainty caused by the COVID-19 pandemic[12]. The company focuses instead on the development and growth of its businesses. The company has also stated that it is continuing with the sale of AMP Life, a life insurance arm of the company, and payment of the next dividend will be conditional on the completion of AMP Life’s sale for AUD 3 billion[13].

AMP’s numerous counts of misconduct has brought The Australian Prudential Regulation Authority (APRA) to identify certain areas for improvement for AMP’s superannuation trustees such as governance and risk management policies, breach remediation procedures, risk culture and accountability processes[14]. With not only AMP’s superannuation arm in difficulty, the company must move to expand these recommendations to the whole AMP group to strengthen its board. According to the CGLytics Board Expertise and Skill Matrix, the board is experienced in advisory, banking and investment management. However, the company lacks expertise in governance and sustainability, skills useful for compliance[15], disclosure and accountability[16].

AMP Limited’s Board Expertise and Skills Matrix

AMP Board
Source: CGLytics Data and Analytics

Using data and analytics found in the CGLytics software platform, companies, investors, proxy advisors and service providers efficiently analyze and spot governance risks and red flags in seconds. AMP will need to understand how they are perceived by proxy advisors and stakeholders going forward, not only to avoid ‘strikes’ in the future but understand areas of improvement for good governance and stewardship, ultimately driving the company forward.

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

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

Reference

[1] https://www.theguardian.com/australia-news/2018/apr/20/banking-royal-commission-all-you-need-to-know-so-far

[2]https://client.cglytics.com/media/documents/df/34/df34b2de121967bc1e33fdc360a284b581094956/2020.pdf?v=1588940146

[3]https://client.cglytics.com/media/documents/74/4e/744e81f4e2eb8d40209410561f32f928f015e34e/2018_results.pdf?v=1536325991

[4] https://www.abc.net.au/news/2018-04-16/banking-royal-commission-financial-planners/9662166

[5] https://www.smh.com.au/business/banking-and-finance/amp-s-fees-for-no-service-scandal-could-top-1-billion-20181127-p50iqg.html

[6] https://www.smh.com.au/business/companies/it-stinks-amp-faces-class-action-on-behalf-of-1-million-customers-20190529-p51sf4.html

[7] https://www.abc.net.au/news/2019-11-11/amp-continued-to-charge-customer-months-after-death/11691870

[8]https://corporate.amp.com.au/content/dam/corporate/shareholdercentre/files/asx-announcements/2019/8_August_2019_New_strategy_to_reset_AMP.pdf

[9]https://client.cglytics.com/media/documents/3e/30/3e305d791339d441e817b1cab401ee6d336e792b/2019.pdf?v=1585294896

[10] https://www.news.com.au/finance/business/breaking-news/amp-shelves-plan-to-divest-nz-wealth-ops/news-story/3668460e76affd0f5464d5bf0861b083

[11] https://www.smh.com.au/business/banking-and-finance/shareholders-hit-amp-with-first-strike-against-executive-pay-packets-20200508-p54r6f.html

[12]https://corporate.amp.com.au/content/dam/corporate/shareholdercentre/files/asx-announcements/2020/MAY/200508_Update_on_New_Zealand_wealth_management.pdf

[13] https://www.msn.com/en-au/money/markets/shareholders-strike-against-executive-pay-at-this-asx-financial-share/ar-BB13STZ3?li=AAFsTE5

[14] https://www.apra.gov.au/news-and-publications/apra-imposes-directions-and-conditions-on-amp-super-rse-licensees

[15]https://corporate.amp.com.au/content/dam/corporate/aboutus/files/2020/April/200409_Corporate_governance_statement.pdf

[16] https://theconversation.com/amps-murray-right-to-question-the-value-of-corporate-governance-rules-100954

Latest Industry News, Views & Information

In the Headlights: Understanding the Pay for Performance of USA Truck, Inc.

The 2020 AGM of USA Truck Inc. saw a much lower approval rate of its executive compensation program than previous years. A Pay for Performance analysis by CGLytics reveals why.

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In the Headlights: Understanding the Pay for Performance of USA Truck, Inc.

The 2020 AGM of USA Truck Inc. saw a much lower approval rate of its executive compensation program than previous years. A Pay for Performance analysis by CGLytics reveals why.

USA Truck, Inc. held its annual meeting of shareholders on May 21, 2020, where shareholders voted on advisory approval of the company’s executive compensation. However, this year saw the proportion of approval at a lower rate than ever before. This report provides the reasons why USA Truck, Inc. should have seen it coming.

Increasingly, shareholders and institutional investors expect executive compensation to be linked to performance of the company, and remuneration committees deploy various methods and tools to determine executive compensation plans.

CGLytics, and its strategic partnership with Glass Lewis, has developed an array of tools for remunerations committees and boards to utilize, including Pay for Performance modeling. Replicating Glass Lewis’ Pay for Performance analysis used in their proxy papers, remuneration committees can visualize (ahead of time) how shareholders will react to compensation plans and craft around the predicted response.

In prior years USA Truck, Inc. has achieved a Glass Lewis Pay (Pay-for-Performance) Grade of C, indicating a fair balance between performance and executive pay.

However, in 2019 the company received a score of F, indicating an unaligned increase to executive compensation in comparison to company performance.

Glass Lewis Pay Grade of USA Truck, Inc.

GL pay
Source: Glass Lewis CEO compensation analysis found in the CGLytics platform

This was reflected in shareholder votes of advisory approval of the company’s executive compensation. In 2017 and 2018 the ratio of shareholder approval to disapproval was 45:1 and 55:1 respectively, in 2019 this changed to 2:1.  While the majority of votes were cast in approval of executive compensation, this stark change compared to prior years indicates future problems for the board of USA Truck, Inc. and could serve as a cautionary tale.

The chart below details in absolute numbers the changes in shareholder approval gathered from USA Truck, Inc.’s SEC filings via CGLytics.

Shareholder Approval and Disapproval of Executive Compensation for USA Truck, Inc

Approval
Source: CGLytics data and analytics

This change may be explained by poor performance, the introduction of an additional 2019 EPS (Earnings Per Share) Cash Incentive Plan, and poor Pay for Performance metrics.

Between 2018 and 2019, USA Truck, Inc. granted an additional cash bonus program; a performance driven cash incentive plan. This, along with traditional increases to the existing executive compensation plan, dramatically increased the potential payouts to executives. Using the Pay for Performance tools in the CGLytics software platform, it is possible to model how executive compensation reflects both performance and a selected peer groups.

Glass Lewis Granted Executive Compensation of USA Truck, Inc. against Peers

Pay against peer group
Source: Glass Lewis CEO Pay for Performance analysis found in the CGLytics platform

The above chart depicts the granted executive compensation of USA Truck, Inc. and its peer companies, which is the potential pay described in company performance goals; the realized pay of USA Truck, Inc. and peer companies, which is the payout based on achievement of goals; and a line depicting the EPS of USA Truck, Inc. and peer companies. These peer companies are generated and determined by Glass Lewis, found in the CGLytics platform. What can be drawn from this analysis is that in 2019, USA Truck, Inc. had a compensation plan that was out of line with its peers.

CGLytics’ powerful analytical tools enable a remuneration committee to model executive compensation in comparison to peers across an array of metrics. Using the Glass Lewis Pay for Performance snapshot tool, it is easy to visualize how USA Truck, Inc. underperformed compared to its Glass Lewis determined peers.

Glass Lewis Shareholder Wealth and Business Performance of USA Truck, Inc. against Peers

wealth and business performance
Source: Glass Lewis CEO Pay for Performance analysis found in the CGLytics platform

In 2019 USA Truck, Inc. saw a dramatic decrease in Total Shareholder Return (TSR), compared to a marginal increase of TSR by its peers. As well as a large Operating Cash Flow (OCF) increase, but one that was not reflected in shareholder approval. USA Truck, Inc. underperformed in Return on Assets (ROA), a comparison of business accomplishment in comparison to company assets, similarly it underperformed in Return on Equity (ROE).

Performance-based incentive plans are a crucial tool in the renumeration committee’s arsenal for encouraging persistent growth and success. In the case of USA Truck, Inc. this tool was applied in response to weakening performance to the extent that USA Truck, Inc. fell to the bottom position within a group of industry peers. Plotting USA Truck, Inc. against peers comparing granted compensation to EBITDA (earnings before interest, taxes, depreciation and amortization). It had a 31st percentile rating for granted executive compensation, with a 0th percentile rating for EBITDA.

USA Truck, Inc. Pay for Performance alignment – CEO Total granted compensation (3Y)

relative positioning
relative positioning table
Source: CGLytics data and analytics

In terms of realized pay (the payout for attaining certain goals) USA Truck, Inc. was again misaligned compared to its peer. The EBITDA for the company ranked 0 percentile among its peers, while the Total Realized compensation ranked 23rd percentile.

USA Truck, Inc. Pay for Performance alignment – CEO Total realized compensation (3Y)

relative positioning realized
relative positioning realized table
Source: CGLytics data and analytics

Although USA Truck, Inc. did secure an advisory approval for its executive compensation program, this change to a more tepid support should act as a warning, not only to them, but to other remuneration committees as well. When making compensation decisions and plans, CGlytics’ array of powerful data analytical tools, including Glass Lewis Pay Grade modeling, can be used to forecast shareholder approval, view how a company’s compensation falls in line with its peers, and predict proxy advisor recommendations prior to the proxy season.

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

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

 

Reference Links to 8-k Filings

https://www.sec.gov/Archives/edgar/data/883945/000143774918010507/usak20180518_8k.htm

https://www.sec.gov/Archives/edgar/data/883945/000088394519000094/form8-kx2019annualmtgv.htm

https://www.sec.gov/Archives/edgar/data/883945/000088394520000043/usak-20200526x8k.htm

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NMC Scandal and its Corporate Governance

The board of NMC Health lacked key financial expertise. A review of NMC’s board effectiveness and composition reveals what may have led to poor decision-making and the financial scandal.

An ongoing investigation into the financial scandal involving NMC, the biggest private provider of healthcare in the United Arab Emirates (UAE) and a previously listed FTSE 100 company, has taken the financial world by storm. The big scale fraud of over USD 6 billion of hidden debts, according to the latest reports, has raised several concerns over the practices that led to this catastrophe. Reviewing governance practices are central to figuring out what went wrong.

The story behind the biggest scandal involving a FTSE 100 listed company

NMC was founded in 1975 by Dr. BR Shetty, an Indian entrepreneur who emigrated to the UAE. Despite its humble beginnings, NMC, headquartered in Abu Dhabi, found its way into the FTSE 100 in 2012. This was considered a great success for Shetty as well as for the emerging market of the UAE.

In December 2019, Muddy Waters, a hedge fund, raised some concerns regarding possible fraud and theft after noticing inconsistencies in the company’s accounting. As a result of these concerns, the Financial Conduct Authority (FCA) launched an official investigation on February 27, 2020. NMC’s shares were temporarily suspended from trading on FTSE 100, while its CEO Mr. Prasanth Manghat was removed from his position as CEO by the Board.

Initially NMC was forced to admit fraud of USD  2 billion in debt, which was eventually increased to a staggering USD 6.6 billion, according to the latest report released on March 23, 2020. Following the discovery of NMC’s debt, one of its biggest creditors, Abu Dhabi Commercial Bank, filed a criminal complaint against the company for approximately USD  1 billion of owed funds. The High Court of England and Wales responded to Abu Dhabi Commercial Bank’s complaint by appointing the restructuring firm Alvarez & Marsal as the administrators of all NMC’s clinics and services and replaced the entire Board. By the end of April 2020, NMC was permanently delisted from FTSE 100. Moreover, the FCA is also investigating Ernst Young (EY) over the auditing of NMC in 2018 for potential implication in the scandal.

Corporate Governance practices come into question

Boards of Directors are intermediaries between the shareholders and management of a firm. Boards decision-making roles include monitoring and evaluating company’s performance, hiring and firing the company’s management, and nominating new Board members, just to name a few. Boards of Directors are considered trustees of investors interests and are required to have sense of good business judgement when executing their duties. Therefore, it is very important for companies to have the suitable Board members to protect the shareholders’ investments.

NMC’s Board Expertise and Skill Matrix (2018)

Note: This figure illustrates the skills and expertise of NMC’s Independent Directors (INED) in 2018. All the data used in this figure is available in the CGLytics platform.

Understanding the skills set of NMC’s previous Board

The figure above shows the expertise and skills of the Independent Directors (INEDs), who sat on the Board in 2018. Attention is drawn to NMC’s INEDs lack of financial expertise. The Audit Committee of 2018 comprised of four members, one of whom left in the early part of March 2018 and only one with financial expertise. Moreover, the latest appointed chairman of the Audit Committee in March 2018 (and up until 2020), did not qualify as an accountant and neither has he worked as a principle in a financial position in the past. Therefore, he did not have the financial expertise to govern the auditing committee[1]. It is also noteworthy that the member with the financial expertise was also the previous chairman of the Audit Committee and more interestingly a past partner at EY; the Independent Auditor of NMC.

It becomes clear therefore that the Board’s lack of financial expertise and the Audit Committee Chairman’s lack of financial knowledge must have played an important role in prohibiting the correct functionality of the Board that might have eventually led to the financial catastrophe of NMC.

Note: This table presents data for NMC’s Board characteristics, which is collected by CGLytics.

Looking at the characteristics of NMC’s Board, it is revealed that NMC’s Board size in 2018 and 2019 was equal to 11. For 2018 and 2019, two of the Board members were joint chairs for both years, namely the founder who was considered Non-Executive Chair (dependent) and an Independent Non-Executive Chair, three members were Executive Directors and six were Non-Executive Directors, of whom only one is dependent while the rest are independent.

The average age of NMC’s Board is close to 57 for both years. Gender diversity includes three women sitting on the Board in 2018 and two women in 2019. Between 2018-2019, most of the Board of Directors were non-nationals[2] with a percentage equal to 73%. The average tenure of the Board is six years which reveals that the Board in both years were not particularly stale. Finally, 55% of NMC’s Board (referring to all the members of the Board) were independent across both years. In addition to the dependence ration, the UK corporate governance code states that “at least half the Board, excluding the chair, should be Non-Executive Directors whom the Board considers to be independent”, according to which 55% the Board of NMC, excluding the Chairs, is independent.  As it appears from the data described, there is no significant indication that these Board characteristics may have led to bad governance.

Interested to see how your company stacks up against 5,900 globally listed companies’ board composition, diversity, expertise and skills?

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What could have been the problem then?

Taking a closer look, an important fact comes to surface: NMC is headquartered in Abu Dhabi and was listed on the FTSE 100 index. Therefore, this company should not necessarily be treated as an average FTSE 100 company. Without a doubt we must take into consideration that the UK and the UAE are two entirely different countries; the former a developed economy while the latter is considered an emerging economy, not to mention having different legal systems, corporate governance codes, culture and norms. Looking at the Board characteristics of NMC, with this in mind, a few facts come to light that may have impacted corporate governance monitoring, avoiding this disastrous event.

Over the last decade, the increasing flow of capital around the world has forced many emerging economies to increase corporate governance in order to attract foreign funds. Moreover, many companies changed their board composition by adding more foreign directors in order to attract foreign capital, as foreign directors mitigate the agency problem between domestic and foreign shareholders in favor of the foreign investors.

Nationality of directors during 2018-2019

Note: The data used in this table is collected by CGLytics.

Observing NMC, the data indicates that 66.67% of its INEDs are foreigners, equating to two-thirds of the board. When the core sector of NMC, healthcare, does not typically rely on foreign sales, this generates questions. Is the high percentage of international INEDs merely there to serve the purpose of raising foreign capital? Raising foreign capital may have been achieved but at the same time weakened the Board’s governance and monitoring of activities.

International directors sometime lack the local knowledge of regulations and requirements. Furthermore, the greater the distance the foreign directors are from the foreign company, the less monitoring pressure is put on executives, which could allow executives to act irrationally and not in the shareholders’ best interests. Despite the fact that the dependency ratio of NMC’s Board is 5% above the threshold of the UK governance code, in countries where Corporate Governance is not well established – as in the UAE for example – this may play a significant role in negatively affecting the monitoring of the INEDs. Thus, combining all the above, we can conclude that the Executives together with the dependent members of the Board could have easily dominated the Board’s decision-making.

In legal systems that have a weaker legislation, companies’ are expected to have more concentrated ownership. The top three institutional investors of NMC are foreign companies with spread ownership stakes. The addition of foreign directors have legitimated the company to the foreign investors, but the institutional investors may have overseen the fact that the company is based and operating in the UAE, an emerging economy with a corporate governance system still under development; in no way on par with the UK Corporate Governance regulations or that of other developed economies. Therefore, the combination of the (physical) distance of the institutional investors and the assumption that the corporate governance system in the UAE is as strong – an additional reassurance created from NMC’s listing in FTSE 100 – could have very well affected the external monitoring of the NMC in a negative way.

With the ongoing investigation into NMC, we cannot be certain as to the exact reasons that led to the current state. Nevertheless, we can say that a combination of bad decision-making and other factors relating to corporate governance played a significant role. The lack of financial expertise of the INEDs along with the wrong composition of the Audit Committee, plus the prioritization of attracting foreign capital via the FTSE 100 and including foreign directors, may have resulted in the executives dominating the Board. We can ultimately conclude from the NMC’s hidden debt that the Board and their INEDs did not perform their corporate governance and monitoring adequately, proving detrimental to NMC.

Using data and analytics found in the CGLytics software platform, companies, investors, proxy advisors and service providers efficiently analyse and spot governance risks and red flags in seconds.

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.

 

[1] Definition of financial expertise defined by CGlytics can be found here: https://audit.cglytics.com/documents/cg_guideline_expertise_20181123.pdf?ts=1575895304

[2] Nationals are considered to be members who are from UAE.

 

Interested to see how your company stacks up against 5,900 globally listed companies’ board composition, diversity, expertise and skills?

Request your governance health score to understand your board’s governance effectiveness, risks and red flag exposure.

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