CSR Limited: Strike One on Remuneration Report

At the CSR Limited AGM in June 2019, the remuneration report received 34% of votes cast against which constitutes a first strike for the purposes of the corporations ACT 2001. CGLytics looks at the alignment of pay against performance and some of the key drivers behind the investor response.

CSR Limited, a major Australian industrial company held its Annual General Meeting on June 26, 2019. The board presented three ordinary resolutions and one special resolution to its shareholders. Included in the ordinary business proposal was to consider the re-election of non-executive director, Matthew Quinn, this year. The company also sought to receive shareholders’ support for the financial report, the director’s report and the auditor’s report for the financial year. Another ordinary resolution that was proposed by the board was to approve and adopt the remuneration report for the financial year ended March 31, 2019.

For the special resolution, the board advised shareholders to consider the granting of long-term incentives for Julie Coates, who will be taking up the position of managing director this September 2019.

The board’s expertise ahead of the AGM

CSR’s corporate governance states that the company seeks to maintain a board composed of directors that have a range of collective skills and experience to ensure corporate development. CSR also elaborates that it considers individuals that are highly-experienced in manufacturing, finance, law and other sectors that the company seeks to pursue in the future.

CSR Board Skills Matrix
Source: CGLytics Data and Analytics

Using the Board Expertise functionality of CGLytics’ platform, we were able to gain insight on the current skills of the members of the board. The Skills Matrix functionality also aids companies to identify any skills gaps in its current matrix. For CSR, of the six directors currently sitting on the board, the graph shows that CSR’s strongest expertise is Finance. The second strongest suits of expertise include Corporate Development, Operations, Project Management and Sales. One area where the company is missing a director with specific expertise is in Governance. The company also lacks directors that have any relevant company Industry and Sector experience. However, the upcoming appointment of a new managing director on September 2019, Julie Coates, may be able to alleviate this missing element to the board’s skill set.

Julie Coates’ Expertise from the CGLytics platform

Board Expertise

Pay for Performance

Another board resolution the company was seeking approval on was the remuneration report and financial report. CSR promotes consistency in the remuneration of senior executives by ensuring that the company and individual performance are aligned with their incentives. The company focuses on compensation that generates long-term value for senior executives. The company only uses two performance criteria in the determination of executive compensation: Total Shareholder Return (TSR) and Earnings Per Share (EPS) for the long-term incentive plan in which both have equal weight of 50 percent.

The board states that absolute TSR instead of relative TSR helps align shareholder interests by keeping senior executives focused on increasing earnings and share price. On the other hand, the EPS helps measure the continued growth in earnings of the company and is parallel to the interests of the shareholders.

The CGlytics Absolute Positioning tool allows insight into the relationship between the two performance conditions and the Managing Director’s granted compensation from 2013 to 2018. As indicated in the graph below, there exists significant volatility in the movements of all performance criteria used in the determination of executive pay: TSR and EPS. From 2015 to 2016, CEO pay, EPS and TSR increased. The latter especially increased by 91.6%. From 2017 to 2018, CEO pay increased by 48% and TSR fell by 46.5%.

CSR CEO pay vs EPS and TSR
Source: CGLytics Data and Analytics

CGLytics’ data and analytics are trusted and used worldwide by Glass Lewis, the leading independent proxy advisor, as a basis for their research on companies. Find out more.

The CGLytics Relative Positioning Pay for Performance Evaluation tool compares CSR’s CEO compensation with that of the company’s own peer group against the peer group’s three-year TSR. The Pay for Performance evaluation demonstrates that CSR’s Total Realized Compensation appears misaligned compared to its peers. The company’s Total Realized Pay ranks above median at 69th percentile while three-year TSR ranks in the 15th percentile.

Source: CGLytics Data and Analytics

Granting of Rights

In the Annual report for the financial year ended March 31, 2019, CSR disclosed that it developed a performance-related pay which includes both the Short-Term Incentive (STI) and Long-Term Incentive (LTI) plans, both of which are measured against performance conditions.

The plan would utilize the same performance criteria as mentioned above: TSR and Earning Per Share (EPS) over a three-year performance period (April 1, 2019- March 31, 2022) in financial year-end 2020. The two performance conditions will be weighted at 50 per cent of the overall grant.

The board uses an annual growth rate of 14 percent for 75 percent vesting and an 18 percent stretch for a full vesting of rights for the TSR condition. The board also uses a compound growth rate of 5 percent target for a 50 percent vesting and 10 percent stretch for a 100 percent vesting for EPS condition. There was no change in the hurdles applied in 2017, 2018 and 2019.

The board is seeking for the granting of 360,241 performance rights for Julie Coates, the newly appointed managing director. The amount is pro-rata of her one-year long-term incentive remuneration based on her date of appointment on September 2, 2019. The board also proposes that Ms. Coates is entitled to a maximum LTI award of up to 120 percent of her total fixed remuneration.

Highlights of the AGM

At the AGM which took place on June 26, 2019, all the resolutions were passed as ordinary resolutions. However, as suggest in the potential Pay For Performance misalignment demonstrated above, the remuneration report received 34% of votes cast against which constitutes a first strike for the purposes of the corporations ACT 2001.

CGLytics offers the broadest, up to date global data set and powerful benchmarking tools to conduct comprehensive analysis for executive compensation decisions and risk oversight. CGLytics is Glass Lewis’ source for global compensation data and analytics. These analytics power Glass Lewis’ voting recommendations in both their proxy papers and their custom policy engine service.

For more information on how CGLytics’ can support modern governance decision-making and potentially identify any areas of risk, click here.

 

Sources:

CGLYTICS DATA AND ANALYTICS

CSR LTD 2019 NOTICE OF MEETING

CSR LIMITED ANNUAL REPORT

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Bed Bath & Beyond: Cleaning House

New Jersey-based company Bed Bath & Beyond has recently become the target of an activist campaign. CGLytics examines the drivers, the response and the outcomes of this campaign.

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Bed Bath & Beyond: Cleaning House

New Jersey-based company Bed Bath & Beyond has recently become the target of an activist campaign. CGLytics examines the drivers, the response and the outcomes of this campaign.

New Jersey-based company Bed Bath & Beyond operates 1,533 retail stores as of March 2, 2019. The company has recently become the target of an activist campaign initiative led by a trio of activist investors: Legion Partners Asset Management LLC, Macellum Advisors GP LLC and Ancora Advisors LLC. Jointly, this group of investors owns about 5.2% of the company.

After initially filing for a potential proxy fight, in late April 2019, the activist campaign at Bed Bath & Beyond kicked off with a lengthy presentation from the above entities to the company’s investor base. This presentation criticized almost every facet of the company’s management; from executive pay to individual store design.  The presentation focused particularly on their CEO Steven Temares’ compensation package, which totaled USD 14,605,042 in 2018, while the remaining Named Executive Officers collectively made USD 30,271,726. Temares, who had served in the role since 2003, resigned shortly thereafter.

In response to this campaign, the company’s board has recently seen a significant reshuffle. In May 2019 alone, nine new directors joined the board, five being appointed on May 1, 2019 : Harriet Edelman, Harsha Ramalingam, Andrea Weiss, Mary A. Winston and Ann Yerger. In addition to these new members, another four were appointed to the board effective May 29, 2019, pursuant to an agreement with the activist group: John E. Fleming, Sue E. Gove, Jeffrey A. Kirwan and Joshua E. Schechter. The addition of these new members results in an almost complete board turnover during the past two years, with 12 of the 13 members having joined within that timeframe. Moreover, former directors and co-founders, Warren Eisenberg and Leonard Feinstein were displaced from their positions as co-Chairmen of the board, and granted the status of co-Chairmen Emeriti, with no entitlement to attend board meetings and no voting powers at such meetings.

While the activist campaign calling for an increase in value creation is not new in the field of corporate governance, conflicting ideas about how to best create that value has been a core issue between boards, executive teams, and investors across the business world for years. So why, in this particular case, was the activist campaign successful?

We do note that the company reported its first decrease in sales in conjunction with its first net loss for the FY 2019. However, the company has been lagging behind the median of its own disclosed peer group in several key financial performance indicators such as net income, enterprise value, three-year TSR, and economic profit since at least 2016. Moreover, the CEO’s compensation has outpaced that of the median of the company’s peer group, as displayed in the graph below:

Bed Bath and Beyond’s Disclosed Compensation Peer Group (2018)
Dillard’s, Inc. AutoZone, Inc.
Burlington Stores, Inc. Williams-Sonoma, Inc.
Dick’s Sporting Goods, Inc. Nordstrom, Inc.
Big Lots, Inc. Macy’s, Inc.
Advance Auto Parts, Inc. L Brands, Inc.
Tractor Supply Company Kohl’s Corporation
Ross Stores, Inc. The Gap, Inc.
O’Reilly Automotive, Inc. Foot Locker, Inc.
Dollar Tree Dollar General Corporation
Office Depot, Inc.
Source: CGLytics Data and Analytics

Moreover, we find that the activists’ criticisms of the CEO’s remuneration may have gained traction when comparing the company CEO’s Total Realized Pay versus its own disclosed peer group for FY 2018. Bed, Bath and Beyond’s Total Realised Pay appears to be out of alignment with the company’s performance.

 

CGLytics’ data and analytics are trusted and used worldwide by Glass Lewis, the leading independent proxy advisor, as a basis for their research on companies

bedbath&beyond2
Source: CGLytics Data and Analytics

The CGLytics research team has also taken a deeper look to evaluate the current board. Utilizing CGLytics’ governance and data analytics platform we find that after all changes recently undergone to the board, Bed Bath & Beyond scores extremely well in nearly every category, except for the Director Interlocks and Nationality Dispersion metrics. The board does have several director interlocks, and diversity of nationality also appears low, as 92% of the board is local to the US.

All other effectiveness attributes score high, with most of them having a score of 100, driving the overall health score of the company at 85 points (Excellent), 10 points above the sector average.

These metrics show that the board contains an age gender diverse group of directors with experience and expertise in all areas measured by the CGLytics platform.

bedbath&beyond3
bedbath&beyond4
Source: CGLytics Data

The effectiveness attributes in the chart above are based on the company in question’s governance practices compared to the corporate governance code of the market in which it is primarily based (in this instance, the NYSE Governance Guidelines). The thresholds above are set by empirical research performed by CGLytics. Each attribute receives a score from 0 to 100, with a score of 100 reflecting the best governance practices

In summary, as Bed Bath & Beyond’s stock price has fallen approximately 80% over a five-year span due to potential mismanagement, ineffective business strategy, and a lack of innovation, the recent changes within the structure of the management and advisory team provide a potential clean slate for the company. Interim Chief Executive Officer, Mary Winston will be at the helm looking to captain the ship as the company searches for stability after an intense period of significant upheaval.

Corporate boards and executive teams increasingly require a broader range of analytical tools to identify potential areas of reputational risk, even for controlled companies, which could make them the target for activist campaigns. For more information regarding how CGLytics’ deep, global data set and unparalleled analytical screening tools can potentially help you identify these areas of risk, click here.

CGLytics offers the broadest, up to date global data set and powerful benchmarking tools to conduct comprehensive analysis for executive compensation decisions and risk oversight. CGLytics is Glass Lewis’ source for global compensation data and analytics. These analytics power Glass Lewis’ voting recommendations in both their proxy papers and their custom policy engine service.

Sources

CGYLTICS DATA AND ANALYTICS

Proxy 2018       Proxy 2017       Fox Business       Business Insider       Wall Street journal      Motley Fool

Header Image: Bed Bath and Beyond store by Anthony92931  licensed under the Creative Commons license.

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Facebook: Increasing Shareholder Pressure Exerted on Zuckerberg’s Role as Chairman

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Mark Zuckerberg has been Chief Executive Officer of Facebook, Inc. since he founded the company in 2004 and has held the combined position of CEO/Chair since the Company’s IPO in 2012. Shareholders have increasingly voiced their concerns regarding the combination of both roles. Those opposing the combined CEO/Chair position state that it gives Zuckerberg too much control over the company, where minority shareholders already have very little influence. Founder Mark Zuckerberg controls over 51% of the vote although he owns only 13% of the economic value of the firm. Additionally, headlines surround the billionaire founder, as Zuckerberg again failed to address a committee of international lawmakers who are amid an investigation into Facebook’s disinformation, antitrust, and privacy scandals.

Shareholders Try to Force Zuckerberg’s Hand…Again

In light of the above, several investors have banded together and filed multiple shareholder proposals for consideration at the company’s 2019 AGM, which took place on May 30th, 2019, aimed to alleviate their concerns over Zuckerberg’s influence and lack of oversight of the company. Of interest were proposal five and six filed.

Proposal Five: Proposed primarily by NorthStar Asset Management, in conjunction with other groups of shareholders, requesting that each share be given an equal vote. Currently, Class B shares (controlled by Zuckerberg and a small group of others) have 10 times the voting power of Class A shares. They continued in their supporting statement noting “since July 2018, Facebook value dropped as much as 40% due to Management and Board decisions that have not protected shareholder value. By allowing unequal voting power, our company takes public shareholder money but does not provide us an equal voice in our company’s governance…”

Proposal Six: Recommended that the Chair of the Board of Directors operates as an Independent Member of the Board. The supporting statement offers that there exists no form of checks and balances in order to limit Mr. Zuckerberg’s power. The statement continues, “we believe this weakens Facebook’s governance and oversight of management. Selecting an independent Chair would free the CEO to focus on managing the Company and enable the Chairperson to focus on oversight and strategic guidance.” It’s of importance to note that nearly 60% of the S&P 1500 has separated the roles of Chief Executive Officer and Chairperson as of April 2018. This proposal received the public support of both the Council of Institutional Investors (CII), as well as Trillium Asset Management.

Unsurprisingly, the Board of Directors has concluded with a recommendation to vote against all stockholder proposals mentioned above. However, the requests made through these proposals heavily resemble several that have been proposed in past years.

CGLytics has taken a deeper look into Facebook’s board composition and effectiveness when compared to all other companies in the US market. Utilizing CGLytics’ governance data and analytics in the specialized platform it was discovered that the key area where the company is underperforming, compared to the sector average, lies primarily in the combination of the role of CEO and Chairman.

Facebook Effectiveness Attributes
Source: CGLytics’ board effectiveness data and analysis

The zero score for the CEO/Chair criterion is in sync with the concerns of the shareholders who are seeking the dissolution of the combined position. This is also supported from the NYSE Stewardship guidelines, where the separation of the CEO/Chair position is required. However, taking all other factors into consideration, Facebook’s board composition and effectiveness is rated ‘Very Good’ and higher than the sector average. Even though the CEO/Chair combination has a score of 0, the majority of the other effectiveness attributes rank above the sector average.

The effectiveness attributes in the chart above are based on the company in question’s governance practices compared to the corporate governance code of the market in which it is primarily based (in this instance, the NYSE stewardship guidelines). The thresholds above are set by empirical research performed by CGLytics. Each attribute receives a score from 0 to 100, with a score of 100 reflecting the best governance practices.

The health score of Facebook and of the market is calculated as the average scoring of all of the effectiveness attributes, respectively. Facebook has an average score of 76, with three effectiveness attributes (Nationality Dispersion, Board Independence and CEO/Chair combined) falling under 60, two effectiveness attribute (Gender Equality, Director Interlocks) at 60 points, and the rest of the effectiveness attributes at 100 points.

Source: CGLytics’

Given the repeated failure of such proposals at the company’s most recent AGM, the future of Facebook seems to remain in the hands of Mark Zuckerberg. It comes as no surprise that these proposals would have similar results as those at previous AGMs, given Zuckerberg’s voting power at the firm. However, the increasing regularity of these types of proposals have been making headlines around the company’s governance structure and posing serious questions to the general public regarding Zuckerberg’s current and future role at the company.

Corporate boards and executive teams increasingly require a broader range of analytical tools to identify potential areas of reputational risk, even for controlled companies, which could make them the object of activist campaigns. For more information regarding how CGLytics’ deep, global data set and unparalleled analytical screening tools can potentially help you identify these areas of risk, click here.

CGLytics offers the broadest, up to date global data set and powerful benchmarking tools to conduct comprehensive analysis for executive compensation decisions and risk oversight. CGLytics is Glass Lewis’ source for global compensation data and analytics. These analytics power Glass Lewis’ voting recommendations in both their proxy papers and their custom policy engine service.

Sources

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CGLytics, a leading global provider of governance data and analytics, looks at Burberry’s proxy statement, in connection with its compensation proxy vote proposals, ahead of its 2019 Annual Meeting of Shareholders (the “Annual Meeting”), scheduled for July 17, 2019

Included in the Agenda for this year is the approval of the advisory remuneration report. At the Annual General Meeting, a total of Nine directors will be seeking re-election at the meeting. Two long Serving directors of the Board have been announced not to be seeking re-election at the meeting and hence will be retiring at the end of the Annual General Meeting. This year, the Board is proposing a total of sixteen ordinary resolutions and three other special resolutions.

Executive Pay and remuneration report vote outcomes

The Annual General Meeting of Burberry historically had some stand-offs with shareholders and proxy advisors. The remuneration report for the financial year ended March 31, 2014 received only 47.32% of votes in favor. In 2014, then CEO, Christopher Bailey received a realized pay of GBP 7.5 million, which the company admitted that it was a lot of money but was necessary to retain the CEO.  On his appointment, he was also given 500,000 shares in the company, which was worth more than GBP 7 million in 2014. In addition, investors expressed concerns about 1.35 million shares he was allocated before becoming Chief Executive, which had no performance criteria attached to them.  Ahead of the AGM, that year, PIRC (Pensions and Investment Research Consultants) advised its members to vote against the company’s 2014 remuneration report.

For the financial year 2015, Christopher Bailey took a pay cut, in which he received a total pay of GBP 1.9 million as compared to GBP 7.5 million in 2014.  At their 2017 AGM, the remuneration report for the financial year ended March 31, 2017 had 68.52% of votes in support from shareholders who participated in the AGM. Due to the revolt on the remuneration report, Julie Brown who joined the company as Chief Financial Officer in 2017 decided to waive GBP 2.4 million of the remuneration package she agreed a year prior. This included benefits of a GBP 800,000 share award that related to a potential performance payment from her former employer, Smith and Nephew, which was worth less than the Burberry board had previously assumed. Interestingly, advisory group ISS had recommended shareholders to vote down the remuneration report at the Annual General Meeting, declaring unsatisfaction with Ms. Brown’s pay package.

Source: CGLytics Data and Analytics

The Remuneration Policy in the spotlight

In line with the UK’s corporate governance code, Burberry submitted its first remuneration policy for shareholders voting at their 2014 Annual General Meeting. The Remuneration policy received 83.92% in support. Before the AGM, The Investment Management Association (IMA), issued a warning about Burberry’s pay policy.

2017 was the last AGM where the remuneration policy was submitted for shareholders’ voting. During the AGM, the remuneration policy had a support of 93.4% votes in favor, which was an improvement on the prior remuneration policy voting outcome.

Ahead of their AGM, the board revised the remuneration policy to avert a possible shareholders’ rebellion. Burberry reduced its executive’s bonus pay and Christopher Bailey also refused his bonus for the 2016/17 financial year. In the Annual report for the financial year ending March 31, 2017, the company disclosed plans to lower the maximum annual salary increase for its top executives from 15% to 10% and proposed that bonus pay outs to be capped at twice the base salary compared to 2.25 times under the previous policy.

In addition, compensation under the executive share plan awards for ‘exceptional performance’ will be reduced from 6 times the salary to 3.75 times, while the maximum award for ‘normal’ performance will fall to 3.25 times the base salary from 4 times under the previous policy. Burberry also reduced pension contributions for new external executive directors from 30% to 20% of salary and scraped ‘sign on’ bonuses. The Shareholding guideline was however maintained at 500,000 shares for the CEO and increased from two times to three times base salary for other executives.

In line with the UK Corporate Code, the remuneration policy is therefore not being submitted for shareholders’ approval given the overwhelming support it received in 2017. The remuneration policy will therefore be put forward for shareholders voting in 2020’s AGM.

CGLytics’ data and analytics are trusted and used worldwide by Glass Lewis, the leading independent proxy advisor, as a basis for their research on companies

Pay for performance

Utilizing CGlytics’ peer composer and pay for performance modeler, we replicated the peer group that Burberry disclosed in its annual report in 2014 and performed a compensation benchmark. The analysis shows that Burberry’s CEO realized compensation was above the median of its peer companies in 2013. In the same year, Burberry’s TSR outperformed its peer companies.

In 2017, Burberry’s CEO compensation practice showed a pay for performance misalignment relative to its peers. The CEO received a compensation package in the amount of GBP 19 million while the peer median pay was GBP 9 million. The company’s total shareholder return for 2017 was 26.6% compared to the median TSR of 32.4% for its peers.

For the financial year 2018, the CEO of Burberry, Marco Gobetti’s, received a total payment of GBP 4.3 million. This is above the median of the FTSE 100 CEO pay of GBP 3.7 million and Burberry’s peer group which is at GBP 4.2 million.

Source: CGLytics Data and Analytics

Burberry’s Long-term incentive plan performance metrics are currently weighted as; 50% on Revenue, 25% each on Adjusted Profit before Tax and Adjusted Retail Return on Invested Capital (ROIC).

When comparing Burberry’s CEO pay practice relative to its disclosed peer group, using CGlytics’ pay for performance modeler, it shows a pay for performance misalignment between Revenue and compensation.

Burberry’s CEO 2018 total realised pay ranks below median at the 46th percentile whiles its revenue ranks bottom quartile at the 23rd percentile.

­­Comparing Burberry to its FTSE 100 industry peers, the company again shows a pay for performance misalignment. The CEO’s total realized pay ranks 71st percentile (upper quartile) while revenue ranks in the 29th percentile (bottom quartile).

The analysis performed by CGLytics, may suggest that the company is over-compensating their CEO relative to its peers and the industry.

Source: CGLytics Data and Analytics

CGLytics offers the broadest, up to date global data set and powerful benchmarking tools to conduct comprehensive analysis for executive compensation decisions and risk oversight. CGLytics is Glass Lewis’ source for global compensation data and analytics. These analytics power Glass Lewis’ voting recommendations in both their proxy papers and their custom policy engine service.

For more information regarding how CGLytics’ deep, global data set and unparalleled analytical screening tools can potentially help you make better decisions, click here.

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This article first appeared in Dutch in Mgmt. Scope on 27th May 2019: https://managementscope.nl/online/data-zet-beloning-ceo-in-perspectief

Shareholders are making themselves heard more than ever about the strategy of the company. Certainly the remuneration of directors has gained much attention. Corporate governance analytics – the specialization of CGLytics – helps to separate the facts from the opinions in regards to remuneration policies. This is also not a superfluous luxury: data shows that shareholders are quite rightly concerned.

In recent years, shareholders have been expressing themselves more and more emphatically at General Meetings of Shareholders (AGMs). In 2018, the average number of votes cast at the AGMs of AEX companies reached a record level of 72.4 percent. Never before have shareholders voted so massively on the issues that concern them. The most important topic from a distance: the remuneration of directors. The figures for 2019 are not yet complete, but the same picture emerges.

Remuneration of directors

What does the data say? The remuneration policy, and certainly the alignment of the CEO’s remuneration, keeps the minds of shareholders busy. The average percentage of votes against the remuneration policy of all Dutch listed companies rose to 16.5 percent in 2018. That is more than double the average for the combined years of 2015, 2016 and 2017. The media is also paying more and more attention to the remuneration policy of companies. These are important reasons to take any adjustments to the remuneration policy very seriously. Paying attention to remuneration fits in with the development of corporate social responsibility (ESG practices). Companies must be able to indicate how the remuneration of the CEO contributes to long-term value creation. They must also be willing to discuss their performance in this area. For example, in the amended corporate governance code, the disclosure of the relationship between the remuneration of CEOs and the average employee is already mandatory. The legislation is expected to follow soon.

Pay for performance

An important indicator for value creation in the long term is pay for performance, or the ratio between remuneration and performance. There is still a lot for companies to do in this area. Data from CGLytics shows that the financial performance of companies and the rewards of their CEOs are poorly aligned. 44 percent of the 25 AEX companies – measured over the 2017 financial year – have an imbalance between remuneration and performance. Which means the CEO’s remuneration is higher than expected based on the company’s performance. Over a three-year period, 2015-2017, this is 38 percent. There is also good news. Over the past five years, AEX companies have found a better mix between fixed, short-term and long-term bonuses in their remuneration policy for directors. The average basic salary and the long-term bonuses increased, while the size of the short-term bonuses decreased. It is generally accepted that a fixed compensation and long-term bonuses do more for long-term value creation for stakeholders.

Data provides insight

Data therefore offers important insights; not just for shareholders. It is not for nothing that an increasing number of directors, supervisors, remuneration committees and investors use corporate governance data to test the remuneration policy. Data helps determine an adequate remuneration structure and makes it possible to distinguish the facts from the opinions.

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EQT Corp AGM

As proxy season in the United States is winding down, only a handful of companies are still left to host their Annual General Meeting (AGM).  EQT Corporation, the largest natural-gas producer in the US, will host its AGM on July 10 and has subsequently invited its shareholders to attend and vote on four resolutions. Namely:

  1. The election to the Company’s Board of Directors of the 12 directors nominated by the Board to serve for one-year terms
  2. The approval of a non-binding resolution regarding the compensation of the Company’s named executive officers for 2018
  3. The approval of the EQT Corporation 2019 Long-Term Incentive Plan
  4. The ratification of Ernst & Young LLP as the Company’s independent registered public accounting firm for 2019

Contested Election

With twelve incumbent management nominees, “Rice Group” has also put forward six nominees for election utilizing the universal proxy card, which the board adopted in 2019. Toby Rice, partner of Rice Investment Group, elaborated on individual nominations by saying “We believe a comprehensive solution is required to effect the fundamental course correction needed to deliver full value to shareholders”. In response the leadership team at EQT has urged voters to disregard the plea from the Rice Group by arguing that the nominations would “immediately jeopardize the value of [the] investment by installing their friends”.

CGLytics’ Board expertise analytics shows that, given the current board’s composition, the board currently lacks expertise in the following sectors: Technology, Financial, Governance, International, and Industry/Sector.

Source: CGLytics Data and Analytics

EQT Corporation proposes the election of the following three individuals: Janet L. Carrig, James T. McManus and Valera A. Mitchell.  If elected, the areas of expertise the three nominees would bring to EQT’s Board would be Governance, Executive, Non-Executive, Leadership and International. This also means that post-election of these director nominees, the board would remain unbalanced in regard to Technology and Financial Expertise. However, when reviewing the background of just three of the six nominees from the Rice Group, Lydia I. Beebe, Lee M. Canaan and Kathryn J. Jackson, their aggregate expertise is comprised of Non-Executive, Executive, Leadership, and most notably, Governance, Financial expertise and Technology.

CGLytics does not advocate for or against the election of any of the individuals, however governance matters should entail a certain level of scrutiny. The data analytics available on the CGLytics platform provides for a new and unparalleled insight into governance issues which helps place agency back in the hands of the shareholder and helps companies to better understand their practice against market norms.

Executive Compensation

Earlier in 2018, EQT underwent several key management changes including the appointment of a new CEO and CFO. In March 2018 Steven Schlotterbeck stepped down as CEO for personal reasons and was succeeded by interim CEO David Porges. In November in the same year Robert McNally, previously CFO, was appointed as CEO and Jimmi Sue Smith took over as CFO. Several board members were also appointed to replace departing directors.

Item 2 on the agenda dictates a vote on the approval of the compensation of the company’s named executive officers. When reviewing the CEO’s compensation proposal with CGLytics’ executive compensation and pay for performance modeler, we find a potential misalignment between CEO remuneration and one-year total shareholder return.

CGLytics’ data and analytics are trusted and used worldwide by Glass Lewis, the leading independent proxy advisor, as a basis for their research on companies.

Like most U.S. corporations, EQT Corporations proxy statement describes their compensation packages as “weighted in favor of performance-based, at-risk compensation through annual and long-term performance-based incentive programs”. Delving further into the pay-structure of the CEO, this philosophy seems to hold true as most of the remuneration is derived from Long term and short-term incentives (LTIs and STIs). Stock awards account for the majority of the LTIs for the CEO where the largest contributor in dollar amount is the Incentive PSU program, with TSR being the highest weighted performance criterion. In particular, considering EQT’s emphasis on TSR, it is important to note the long-term diverging trend between the company’s one-year TSR and CEO remuneration. More specifically, executive pay from 2016 and onwards has been on the rise while TSR has been declining and currently sits at its lowest point over the last 10 years.

Source: CGLytics P4P Modeler

Moreover, when comparing EQT’s CEO pay practise relative to its disclosed peer group, as disclosed in the graphs below, we see a pay for performance misalignment between TSR and compensation over both a one -year and five-year period.

Source: CGLytics P4P Modeler

Item 3 on the agenda entails the approval of the 2019 Long-Term Incentive Plan which enables the company to grant stock awards to its executive officers. The granting of these awards will be based on the achievement of certain performance measures, namely relative TSR (50% weight), operating efficiency (25% weight), and development efficiency (25% weight). Moreover, the ultimate payout under the award plan is subject to a modifier based on achieved ROCE, which could push executives’ payout as high as 1.1 times higher than based on achievement of the three preceding performance criteria alone.

CGLytics offers the broadest, up to date global data set and powerful benchmarking tools to conduct comprehensive analysis for executive compensation decisions and risk oversight. CGLytics is Glass Lewis’ source for global compensation data and analytics. These analytics power Glass Lewis’ voting recommendations in both their proxy papers and their custom policy engine service.

For more information regarding how CGLytics’ deep, global data set and unparalleled analytical screening tools can potentially help you make better decisions, click here.

Sources:

CGLYTICS DATA AND ANALYTICS   EQT 2019 PROXY STATEMENT

Latest Industry News, Views & Information

Debenhams: The Fall of a High Street Chain

Following the entry into administration of Debenhams, CGLytics takes a look at some of the key governance analytics, and how they could have been indicators that change was needed

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Drug distribution companies are experiencing significant reputational and financial risks as a result of the Opioid Crisis in the US. In this article we take a look at how a lack of regulatory and risk experience may have impacted the McKesson Corporation.

Barclays, Bramson, and Lessons Learned

Barclays, one of the UK’s largest banks recently has recently come under attack by activist investor Edward Bramson. CGLytics takes a look at the drivers behind the attack and how Barclay’s responded.

Debenhams: The Fall of a High Street Chain

Following the entry into administration of Debenhams, CGLytics takes a look at some of the key governance analytics, and how they could have been indicators that change was needed

Debenhams is a well-known British multinational retailer which operates primarily through its numerous department stores in the United Kingdom and Ireland with franchise stores in other countries. The company was founded in the eighteenth century as a single store in London. On April 9, 2019, Debenhams went into a pre-pack administration deal in which the company was handed over to hedge fund lenders. As a result, equity holders like SportsDirect, the company’s biggest shareholder, saw their value wiped out.

Timeline of a Potential Takeover

In January 2014, Mike Ashley surprised the market by acquiring a 4.63% stake in the then struggling retailer. Despite the value of his equity dropping by 8% in January 2015, Ashley increased his stake in the company to 21% in August 2017. Two months later in October Debenhams announced that their profit dropped 44%. This decrease was largely due to the costs incurred from the implementation of a new turnaround strategy. In January 2018, the woes of the company continued when they issued a shock profit warning after weak Christmas sales and a failure to entice shoppers with cut-price goods. The market responded, and the company’s share price decreased by as much as 20%, wiping almost GBP 70m off its market value. In March 2018, Mike Ashley increased his stake to 29.7%. The move sparked takeover conjecture as a stake of more than 30% requires the launch a formal takeover bid.

Debenhams announced another profit warning in June 2018 (the third in a row for the year 2018) and then announced plans to shut down up to 50 of its of its under-performing stores over the next three to five years, putting around 4,000 jobs at risk.

With this turn of events, then-CEO Sergio Bucher and Chairman Ian Cheshire would be forced to step down from their respective offices following an activist campaign led by Michael Ashley. At the company’s AGM on December 10, 2018, the CEO had only 44.15% of support for his re-election, while the re-election of the Chairman received a similarly low level of support at 43%. The Board however asked Sergio to stay on as CEO but not as a director, serving as a blow to shareholders expectations.  In response Ashley launched a formal takeover bid which was designed to install himself as Debenham’s CEO. Most interestingly, his efforts were warded off by bondholders who handed the firm a GBP 40m lifeline. The overdraft facility from its banks and bondholders proved useful to pay its onerous quarterly rent bill and give it some much needed breathing space.

Financials sourced from CGLytics performance data

The company and its directors went into advanced talks with its lenders over a GBP 150m bailout, as a move to fend off Ashley’s offers. SportsDirect offered Debenhams an alternate GBP 150m deal if the fashion house would issue five percent of new shares to the company and appoint Mr. Ashley as director and CEO.

The company however rejected the deal, putting itself into administration on April 9, 2019.

Possible reasons for entry into administration

Lack of a clear strategy: Debenhams had about 165 stores in the United Kingdom, a seemingly large number at a time when its sales were falling and costs were rising. The company had previously outlined plans to close 10 loss-making stores within five years as its finances continued to deteriorate. Increasing consumer preference for online shopping also dealt a huge blow to the company’s overall strategy.

Aging Product Line: The retailer is best known for the Designers at Debenhams collections created over the past two decades by designers including Jasper Conran and Julien Macdonald. Some brands, including Betty Jackson, have been discontinued because they had become dated; however, replacement fashion ranges have so far lacked pulling power as shoppers take a cautious approach to spending as the uncertainty created by Brexit continued. Other factors that led to the Company’s demise include being outsmarted by more agile competitors, failure to embrace change, and their tarnished brand image. This naturally raises the questions of how and why the company’s business strategy was allowed to deteriorate to such a detrimental degree.

Conflicts of Interest on Board: Utilizing CGlytics interlocks tool, it can be noted that before the shareholder rebellion at the 2018 AGM that witnessed significant opposition against the CEO and Chairman, there were two independent directors who sat on the boards of companies in competition with Debenhams. These individuals included Ian Cheshire and David Adams. Cheshire serves as the current chairman of Maisons Du Monde while David Adams also remains the current Senior Independent Director of Halfords Group Plc.

Source: CGLytics Data and Analytics

Using the skills matrix functionality available on the CGLytics platform, we see that in December 2018, the majority of company directors lacked Technology expertise. Only one member of the Board out of nine members held technology expertise. This reaffirms the previous notion that the company has failed to catch up with market trends, especially when tracking changes in consumer preference has become so heavily reliant on technology. Moreover, board members with key positions such as the Chairman, CEO, and the Senior Independent Director all lacked financial expertise, potentially suggesting that the company’s top leadership were unable to provide sufficient oversight of the company’s accounting procedures and financial health.

Source: CGLytics Data and Analytics

Lessons Learnt

The fall of Debenhams has shed light on how having the right skills set on the board can influence the strategy and ultimate direction and of a company. Corporate boards increasingly require a broader range of analytical tools to identify the skills gap of their members, potential overboarding and competing directorships. For more information regarding how CGLytics’ deep, global data set and unparalleled analytical screening tools can potentially help you identify these areas of risk, click here.

Sources:

CGLYTICS DATA AND ANALYTICS  FT  MSN

Latest Industry News, Views & Information

McKesson Versus the State of West Virginia

Drug distribution companies are experiencing significant reputational and financial risks as a result of the Opioid Crisis in the US. In this article we take a look at how a lack of regulatory and risk experience may have impacted the McKesson Corporation.

Barclays, Bramson, and Lessons Learned

Barclays, one of the UK’s largest banks recently has recently come under attack by activist investor Edward Bramson. CGLytics takes a look at the drivers behind the attack and how Barclay’s responded.

Growing Expectations of Director Responsibilities and Evolving Attitudes Towards Overboarding

CGLytics takes a look at how the role of the board is changing, and how directors are having to rapidly become experts in a range of topics in which they have little to no previous experience.

McKesson Versus the State of West Virginia

Drug distribution companies are experiencing significant reputational and financial risks as a result of the Opioid Crisis in the US. In this article we take a look at how a lack of regulatory and risk experience may have impacted the McKesson Corporation.

Opioid overdoses accounted for more than 42,000 deaths in 2016 (more than any previous year on record), prompting the United States Department of Health to declare a public health emergency. An estimated 40% of the reported overdose deaths involved prescription opioids.[i] While there are multiple socio-economic factors at play in such a wide-spread public health crisis, the role of pharmaceutical manufacturers and distributors has repeatedly come into question.

The Opioid Crisis has created significant reputational and financial risks for drug distribution companies; with McKesson Corporation currently in the eye of the storm. The company recently reached a USD 14.5 million settlement with the state of West Virginia, with an additional USD 4.5 million per year to be paid over the next five years. The funds will be used in support of state initiatives to combat the opioid epidemic, including rehabilitation, job training, mental health and other important public health efforts. In addition, a USD 150 million civil penalty was imposed on the company for alleged violations of the Controlled Substances Act regarding the distribution of opioids. The company was also ordered to suspend sales of controlled substances from four distribution centers. However, this is not new litigatory territory for McKesson, as the U.S. Department of Justice imposed a USD 13.25 million civil penalty in 2008 for similar violations.

The most recent settlement however did lead to a call for governance changes at the company, as the International Brotherhood of Teamsters General Fund proposed a shareholder resolution at the company’s 2017 annual general meeting requesting an Independent Board Chair.[ii] As the proposal received approximately 40% of shareholder support, in response the board set up an independent Special Review Committee in 2018. The Board disclosed that the Committee in its findings revealed a strong company culture that encouraged ethical and compliant conduct, as led by management and reinforced by the Board.[iii]

Potential Red Flags

However, given the substantial reputational risk and significant fines imposed on the company, the question is raised if there were any red flags that could have warned both management and the board, as well as investors, to the potential for such regulatory breaches. Specifically, was the board appropriately equipped to sufficiently perform its risk and compliance oversight function, particularly with regards to regulatory and legal matters within the pharmaceutical industry?

Source: CGLytics Data and Analytics

Utilizing CGLytics’ board skills matrix assessment analytical tool, we see that McKesson’s Board is currently composed of nine members in total, with six individuals having sector experience. However, the relevant sector/industry experience for these six individuals has been primarily garnered through operations and executive roles in the healthcare sector. Most interestingly, we find only one board member, Bradley Lerman, with actual experience in regulatory and risk compliance within the pharmaceutical industry, in which McKesson does play a significant role. Mr. Lerman’s previously held positions include Senior Vice President, Corporate Secretary of Medtronic Plc until 2014 and Senior Vice Price, Associate General Counsel and Chief Litigation Counsel of Pfizer Inc until 2012. The lack of a broader base of directors with significant experience in regulatory matters should have served as a bullhorn to investors, the board as a whole, and the company’s executive team regarding the potential for legal issues to arise.

Aftermath and Lessons Learned

During its most recent quarterly earnings call, McKesson reported that it expects to spend USD 150 million defending itself in state and national opioids lawsuits into FY 2021, up from more than USD 100 million this year. This however is just an estimate, as the total amount may go up into the billions as several states have already stated that they currently intend to file similar suits against the company. The recent settlement that the company has been engaged in only highlights the need to actively and vigorously evaluate board composition and skill set in the face of significant risks that the company faces, or otherwise pay the reputational and financial price.

Would you like to learn more about how, you too, can have instant insights into more than 5,500 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 and advisors.

[i] https://www.hhs.gov/opioids/about-the-epidemic/index.html

[ii] 2017 Proxy Statement

[iii] 2018 Proxy Statement

Latest Industry News, Views & Information

Barclays, Bramson, and Lessons Learned

Barclays, one of the UK’s largest banks recently has recently come under attack by activist investor Edward Bramson. CGLytics takes a look at the drivers behind the attack and how Barclay’s responded.

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CGLytics takes a look at the recent IPO of Uber and how negative stories and scandals led to lower than expected interest

Barclays, Bramson, and Lessons Learned

Barclays, one of the UK’s largest banks recently has recently come under attack by activist investor Edward Bramson. CGLytics takes a look at the drivers behind the attack and how Barclay’s responded.

Barclays, one of the UK’s largest banks recently has recently come under attack by activist investor Edward Bramson. Bramson threatened major changes in the boardroom after announcing plans for a shareholder vote on the company’s leadership and strategy. In order to push his agenda forward, Mr. Bramson spent approximately GBP 900m building a 5.5% stake in Barclays through his investment vehicle Sherborne Investors. After acquiring this stake, he told his own shareholders that such vote was necessary at Barclay’s, given that “consistent engagement” with the bank had failed to yield results. At the time, Bramson’s argument touched on the classic activist stance of reorganizing a company’s capital allocation and growth strategy in this instance by pushing the company to scale back its investment banking business, which he said has “strategic weaknesses”. Instead, he argued that resources should instead be funneled towards the bank’s “attractive” consumer retail operations.

Bramson’s attempt to ascend to the board

In a letter to shareholders, Edward Bramson, submitted a resolution to ask shareholders to appoint him to the board at the company’s annual general meeting, which was scheduled to be held May 2, 2019.

This move represented the first formal attempt by Bramson to win shareholder support for his campaign, after Barclays rejected his previous request to become a non-executive director in September 2018. In a letter to Sherbrooke investors in December, Bramson indicated that he would seek board changes at the meeting in May or call a special meeting of shareholders.

Barclays counters attack with improved financial results

In February 2019, Barclays announced its full year results for the financial year ended December 31, 2018. The financial year results disclosed the following key highlights:

  • Excluding litigation and conduct charges, Group profit before tax increased 20% to GBP 5.7bn despite the adverse effect of the 3% depreciation of average USD against GBP.
  • Barclays UK profit before tax increased to GBP 2.0bn (2017: GBP 1.7bn).
  • Barclays International profit before tax increased to GBP 3.8bn (2017: GBP 3.3bn).
  • Attributable profit was GBP 1.4bn (2017: loss of GBP 1.9bn)

When Barclays released the full year results for 2018, market watchers praised it as a victory for the company in its fight against Bramson. Aviva Investors, formerly a staunch supporter of Edward Bramson as a candidate, said it will support the Bank and vote against Edward’s election to the Board.  The announcement from Aviva came as Barclays’ markets division reported fourth-quarter results that were better than European peers. This strong performance punched a hole in Mr Bramson’s theory that the unit should be scaled back.

Barclays board composition and company performance, Classic Activist Red Flags?

A key feature in the consideration of the initial launch of Bramson’s campaign represents an almost formulaic approach for activists. Historically, lowered financial returns have motivated activist entities to seek a board seat or management change in order to influence the company’s capital allocation or business strategy. Initial research by CGLytics to be published in a forthcoming article on the red flags for investor activism indicates that lowered financial returns often allows a crack in the door for activists to enter into the debate over company strategy. Once a part of the argument, the activists push change at a higher corporate level. This is often compounded by a lack of technology expertise on the board, as technology is being incorporated into the vast majority of business operations. A cursory look at the board composition of Barclays indicates that it used to fit these two criteria, with at least two of the red flags present: initial lowered financial returns and a lack technology expertise on the board.

Day of Reckoning

At the Annual General Meeting on May 2, 2019, the resolution to elect Edward Bramson to the Board only received the support of 12.79% of shareholders. Although an anticlimactic end to a six-month campaign, many found the results unsurprising. The influence of proxy advisors could not also be overlooked. Ahead of the meeting, Bramson’s attempt was dealt a heavy blow when the two largest proxy advisors, ISS and Glass Lewis, came out in support of Barclays and recommended against the election of Bramson to the board.

As indicated above, corporate boards increasingly require a broader range of analytical tools to identify the red flags that may potential make them a target for activists such as Bramson.

Learn how CGLytics helps boards identify governance risks

For more information regarding how CGLytics’ deep, global data set and unparalleled analytical screening tools can potentially help you identify these areas of risk

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Growing Expectations of Director Responsibilities and Evolving Attitudes Towards Overboarding

CGLytics takes a look at how the role of the board is changing, and how directors are having to rapidly become experts in a range of topics in which they have little to no previous experience.

Corporate directors are facing an ever-increasing set of new responsibilities for which they are expected to provide oversight. Historically, the responsibilities of board members included participation in regularly scheduled management strategy reviews, often followed by robust debate of such strategy, reviewing of financial statements, assessments of enterprise and industry-specific risks, facing the companies at which they serve, as well as legal compliance issues. However, new threats from a variety of vectors are requiring directors to rapidly become experts in a range of topics in which they have little to no previous experience. Among these new areas of potential risk that boards are increasingly expected to address, we find the most pertinent topics to be:

  1. cybersecurity risks,
  2. the impact of disruptive technologies,
  3. board members’ increasing role in investor relations,
  4. competitive intelligence, and
  5. international business experience.

The ensemble of these new responsibilities requires corporate boards to assess the skills set requisite for its own composition in order to remain competitive in an increasingly fierce global environment. The expectations of this type of board accountability, known as “supergovernance”, assumes that board members are capable of peering around every corner in order to counter all possible threats to their company.

Balancing Act

While investor-specific policies towards the maximum number of public boards on which a director should serve are not new, increasing responsibilities for board members are leading investors to re-evaluate their previous thresholds. Most prominently, Vanguard, the world’s second largest asset manager, has recently publicly disclosed that its voting policy stipulates to vote against an executive director (defined as a Named Executive Officer who serves on the board at which they hold the role of executive) at any outside board at which they serve. Moreover, their updated voting policy also states that they will vote against any non-executive director who sits on more than four boards in total at all boards on which they serve.

Blackrock has taken a similar position in its 2019 U.S. voting policy, allowing non-CEO directors to hold a maximum of four directorships in total at public companies. However, Blackrock will still allow a public company CEO to serve on a total of two public boards, and currently makes no distinction in the U.S. between executive directors (other than the CEO) and non-executive directors in the total number of boards on which they may serve.

Taking Vanguard’s holdings of 4,861 companies across the U.S., Europe, Canada, Japan and Australia, the CGLytics research team performance an exercise utilizing CGLytics’ data and analytics platform to assess the potential impact of this new overboarding policy on Vanguard’s proxy voting activities. We find that, globally, the implementation of Vanguard’s new guidelines would potentially lead to fairly high levels of opposition, upwards of 23%, for NEO director nominees, who sit on boards outside of the company at which they currently serve as an executive.

Source: CGLytics Data and Analytics

An examination of the current composition of Vanguard’s top 25 holdings also reveals that the implementation of their new guidelines will have an even sharper increase in potential votes against NEOs than during the hypothetical exercise across the full universe of Vanguard’s holdings.

Source: CGLytics Data and Analytics

Not Such a Hard Line

While such an approach may appear rather restrictive for corporate directors and many institutional investors alike, some investors mitigate the perceived severity of this approach by indicating that they will evaluate director appointees who fall outside their overboarding thresholds on a case-by-case basis. Moreover, the language included in their voting policies also makes certain exceptions should the director nominee indicate that she/he will step down from one of the outside boards on which he/she serves within a certain period after their election. Investor engagement also provides corporate directors some leeway, as the issuer-investor dialogue may allow one-off exceptions from opposition to a potentially overboarded director’s election based on the outcome of the engagement.

Finally, the question is raised as to whether these lowered thresholds might benefit corporate board members? Long gone are the days when the expectations for the role of corporate director would be to approve management’s agenda for the company, with cursory corporate oversight capacity. Due to the increasing pressure that board members face in their oversight duties, reducing the number of acceptable directorships from the investor community might provide some breathing room for directors to fully engage in their responsibilities as director. This extra breathing room could potentially allow them to better educate themselves about emerging threats facing the companies on which they serve.

Conversely, the increasing expectations and responsibilities placed on corporate boards often spring directly from the investor community itself. The growing momentum within the investor community implies and often explicitly expects directors to be fully educated on enterprise and material industry risks, as well fully focused on their responsibilities as board members in order to maximize the value of their investments.

As the balancing act between these two perspectives plays out, the issue of potential overboarding for any individual director may prove not to be black or white, but a distinction between various levels of grey. In order to help investors, corporate boards, and executive alike to distinguish between these various shades, CGLytics offers an extensive database with smart analytical tools, to easily screen for potentially overboarded directors. Being able to instantly view the board composition, and that of peers, provides insights into areas of governance practices that may pose a potential risk. In addition, CGLytics’ provides skills matrices to highlight skills and expertise strengths and shortages, director interlocks and smart relationship mapping tools to leverage networking opportunities: all in the one system.

Learn how boards use CGLytics to identify and mitigate governance red flags

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