How to Design your Annual Incentive Plan During a Pandemic

annual incentive plan

How to design your annual incentive plan during a pandemic

 

The novel COVID-19 pandemic has impacted many areas of the current landscape, including the socio-economic landscape and macroeconomic environment. Initially it was difficult to predict how long the pandemic was likely to last, however it has certainly continued longer than initial indications led us to believe. This has necessitated a refocus and directional change in executive compensation, among which is the annual incentive plan. Remuneration Committees (RemCos) have been reassessing and are discussing calculating bonuses by taking all stakeholders concerns into account.

Despite the pandemic, we witness several companies that are experiencing either a neutral or even a positive impact. Therefore, for some of these companies, executives may still get their Executive pay puts including their annual bonuses, as incentives plans are likely to be above target (even if not achieved at maximum). What must be noted, however, is that Chairs of Remuneration Committees (RemCos) should exercise discretion to reduce incentives to avoid ‘over-rewarding’ during a pandemic. With regards to companies that have experienced a moderate to negative impact, there are some issuers where we have witnessed a fight for survival as variable incentives have been cancelled. We expect that for many of these companies, pay negotiations will be focused on the future of a post-pandemic world.

 

Issuers issue cancellations to Annual incentives in the face of the plan

In the Russell 3000, our analysis showed that FedEx disclosed that it will not have an annual incentive plan for executive officers in FY21. Capri Holdings has also proceeded to changes, where it suspended its annual incentive plan for FY21 and will re-evaluate in order to determine whether any additional payments are necessary based on the performance for FY21 (the company actually also proceeded to change its KPI matrix and disclosed the performance metrics and goal-setting process that will be implemented when the plan is re-established post-FY21)

In Australia, four companies in the ASX 300 (Flight center, Auckland Airport, Vicinity center, IOOF Holdings) cancelled or suspended their 2020 Annual incentives. However, News Corp announced a 75% reduction in their annual incentive for the CEO.

For the TSX 250, we found that Ivanhoe Mines Ltd suspended short-term incentives for the year 2020 after cutting CEO pay up to 35%.

In the DAX, we saw that Adidas’ CEO also surrendered his bonus for the year 2020.

 

Current state of play to STI plans

Our data suggests that profitability measures (Cash Flow, EBITDA) remain the most used metrics by companies with specific disclosed plans, or followed by revenue, sales measures. Also, quite prevalent are returns/growth measures, such as ROCE, ROIC and ROE.

% of companies

top 5 financial STI KPIs used

 

Changes to KPIs observed

Market findings suggests that a significant number of companies have reduced target or max payout opportunities for Annual incentive plans.

One of the most common changes to the annual incentive plan by issuers has been to add new non-financial strategic metrics. Profitability measures and revenue KPIs are likely to be less used post-pandemic.

Some issuers have been forced to reset performance goals based on updated forecasts, while others have also delayed goal setting for their Annual incentive plans.

One size may not fit all for annual incentive plans

Though we appreciate that the key to designing annual incentive plans may not necessarily be standard across all issuers, for industries such as tourism and airlines (that have been impacted the most by the pandemic) the 2020 annual plan is essentially not redeemable at this point.  Executives would have to strive to work hard to operate the business and respond to an unusually difficult atmosphere. The Boards, of course, need to maintain the focus of its Executives and create incentives for them that will align their interests with that of the stakeholders of the companies. With the financial plans being affected (and being subject to many unknown factors soon) the Boards need to decide what the best approach is in order create the incentives for the year.

More than Seven months into the pandemic, there is still a degree of vagueness and uncertainty around Executive pay and annual incentives remains high for many companies and industries across various jurisdictions. In line with expectations, adjustments to executive pay plans and short-term incentives, will be subject to challenges. For some issuers, there may be no opportunity to pay bonuses in 2020 because of their inability to meet KPIs. However, we recommend that it may be prudent for RemCos to reset new objectives and/or KPIs for the year 2021.  As 2020 is almost complete, it may not be feasible for Boards to adjust goals for the remaining part of the year. Despite this, management and their boards should be able to preserve the entities’ ability to survive during this pandemic and into the foreseeable future.

Per our assessment, incorporating KPIs around some of these measures may be useful for 2020/2021 financial years respectively:

Benchmarking

One measure that we recommend is for issuers to incorporate relative performance to their closest peers in their annual incentive plan designs. Prior to the pandemic, peer benchmarking was mostly limited to the long-term incentive plans of the companies. It can be shown that including similar benchmarks to the annual incentive plans might be useful and serve the purpose of avoiding over-compensating the executive, while at the same time still incentivizing them. Across our universe, we have found that only nine companies had peer benchmarking in their annual incentives for the year 2019.  Additionally, benchmarking company performance to pre-crisis levels may also be beneficial to all stakeholders.

Measures to help safeguard investor interest

Perhaps one of the roads to recovery is to incorporate stock price performance relative to pre-crisis levels. Another KPI, which may be useful and appealing to shareholders, is how soon issuers are able to bounce back to dividend payments and share buybacks. This is centered around cash back to investors, which signifies a strong liquidity.

Emphasis on display of Crisis management in leadership

For all other stakeholders such as employees, it will be useful to see how executives apply more agility in decision making, retain jobs for employees and restore broad-based reductions.

Conclusion

For many companies, the current uncertainty seems likely to continue until the end of 2020 and possibly into 2021. It has therefore become necessary that RemCos consider all stakeholder interests in designing short term plans (Annual Bonus). This should be geared at incentivizing executives to steer recovery plans for companies to safeguard all stakeholders’ (investors, employees, government) welfares.

Learn about the impact of COVID-19 on executive pay

Download our latest report to learn how Russell 3000 companies have adjusted their executive pay due to COVID-19 to ensure your company’s pay practices are aligned to market standards.

How the SEC’s new proxy voting rules will impact executive compensation

There are many software applications and tools now available to support compensation decisions, but what should be taken into consideration before purchasing? This 5-minute guide details what Compensation Committees, Heads of Reward and Compensation Professionals should take into account when selecting software and tools for Say-on-Pay decisions.

How the SEC’s new proxy voting rules will impact executive compensation

 

In July of 2020, the Securities and Exchange Commission (SEC), under pressure from public companies (Issuers) and their lobbyists voted to tighten regulations affecting proxy advisory firms, like Institutional Shareholder Services (ISS) and Glass Lewis & Co., who provide proxy research services and voting recommendations to investor groups large and small.  The new proxy voting rule changes were justified based on allegations, mostly made by corporate managers, that proxy advisor recommendations are error prone, rife with conflicts of interests and that proxy advisors wield outsized influence over the shareholder voting process.  In response, Advisors claim that the allegations are not only false, but that they represent an effort on the part of Issuers to reign in what is seen as troublesome shareholder activism. That is attempts by shareholders to insert environmental, social and governance initiatives into the corporate voting agenda.  The new regulations came as amendments to section 14a of the 1934 Securities Exchange Act and are the latest development in a long running controversy over the role of Proxy Advisors and the future of corporate accountability.

 

The New SEC Proxy Voting Rules

 

The SEC has stated that the new regulations are needed in order to “ensure that clients of proxy voting advice businesses receive more transparent, accurate and complete information on which to make voting decisions”. Although the new changes to the law appear to be providing public companies with a greater means of challenging the advice of Proxy Advisors.  Highlights include:

 

Redefinition of “Solicitation”

 

Rule 14a-1(l) has been amended to expand the definition of solicitation specifically to include proxy advice.  Solicitation, usually taken to mean an act of enticement or inducement, is now defined as any communication to shareholders “… reasonably calculated to result in the procurement, withholding or revocation of a proxy”.

 

Changes to Filing Exemptions

 

Rules 14a-2(b)(1) and 14a-2(b)(3) have been altered to place new requirements on solicitor exemptions.  To avoid the information and filing requirements the SEC places on solicitors, Proxy Advisors have historically relied on two exemption provisions.  To be eligible for those exemptions they must now meet new disclosure and policy requirements:

  1. Proxy Advisors must provide specified conflicts of interest disclosure in their recommendations to shareholders. And …

 

  1. They must adopt policies and procedures to ensure that voting recommendations are made available to Issuers at the same time that they are provided to shareholders, at no cost. They must also …

 

  1. Provide shareholders with a means to be made aware of any written statements from Issuers regarding the recommendations of Proxy Advisors.

 

Anti-Fraud Provisions

 

Rule 14a-9 has been modified to include examples of compliance failure.  Should Proxy Advisors fail to disclose certain material information, e.g. business methodology, information sources and conflicts of interest, their recommendation may be considered misleading under the Rule.

The new regulations are effective 60 days after publication in the Federal Register. However, the new disclosure requirements will not be in effect until December 1, 2021, making the 2022 Proxy season the first regulated under these laws.

 

Implications of New Proxy Voting Rules

 

The new SEC proxy voting rules have implications for all parties involved.

Implications for Issuers

 

The new SEC rules certainly offer public companies a greater opportunity to dispute the recommendations of proxy advisors.  However, the ultimate impact on the accuracy of proxy advisor reports and the overall effect on shareholder behavior is likely to be negligible.   Whereas shareholders will ostensibly become “better informed” by being provided greater access to counter arguments, they are not in any way guaranteed to a heed this information or to take additional time to deliberate. Not to mention they may very often simply disagree with management’s position.  Such is the nature of the franchise.   For Issuers, the opportunity to have a better window into proxy advisor methodology will be instructive and perhaps lead to more effective shareholder relations. In the end however, the realities of the investment business and evolving sensibilities on governance will guide voting behavior.  That said, significant concessions have been won and public companies can count the July decision as a victory.

 

Implications for Proxy Advisors

 

The new policy requirements on solicitor exemptions, specifically to include Issuer messaging into proxy reports will likely increase the strain on publication timelines and voting operations. Thus, it may not be unreasonable to expect complications during the 2022 proxy season as the industry adjusts to the new rules. However, the full implications for proxy advisors remain to be seen and will probably only become fully understood after the implementation.

 

Implications for Shareholders

 

The SEC’s July decision, because of the disruptions it will create by placing added requirements on proxy advisors, could potentially add costs and delays to the proxy voting process.  Should Institutional Investors wish to avoid any added expenses or complications it is unlikely proxy research will move to an in-house model.  This is due to the very large diversification of Institutional portfolios, which are prohibitively expensive to research to the level needed and in the timeframe required.  This is partly the reason why Institutional Investors outsource this work to proxy advisory firms that can take advantage of economies of scale.  Without a proxy advisor Investor groups will either abstain from voting entirely or vote in accordance with management’s recommendations, known as the Wall Street Rule—as was the case before the rise of the proxy advisor business.  The overall impact on shareholders is that voting has become more costly and more difficult.  And it may be worth considering whether this effect is the intention? As well as what this means from a governance standpoint?

 

Summary of New Proxy Voting Rules

 

The actions taken by the SEC to increase regulation of Proxy Advisors has come primarily at the prompting of corporate leadership and lobbyist firms such as the Business Roundtable (BRT) and the American Council for Capital Formation (ACCF) that have cited concerns over accuracy and excessive reliance.  In an ACCF study that was cited in the Harvard Law School Forum on Corporate Governance, researchers found that “175 asset managers managing over $5.0 trillion in assets have historically voted consistently with ISS recommendations 95% of the time” illustrating that the biggest asset managers vote with proxy advisors 100% of the time, seeming to show evidence of over reliance.  Another report cited in the same article found that numerous errors were reported by public companies.

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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.

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Latest Industry News, Views & Information

How to Design your Annual Incentive Plan During a Pandemic

How to design your annual incentive plan during a pandemic   The novel COVID-19 pandemic has impacted many areas of the current landscape, including the socio-economic landscape and macroeconomic environment. Initially it was difficult to predict how long the pandemic was likely to last, however it has certainly continued longer than initial indications led us … Continue reading "How to Design your Annual Incentive Plan During a Pandemic"

The Energy Industry and Covid-19: Chesapeake Energy as a case study

  The Energy Industry and Covid-19: Chesapeake Energy as a case study   On June 28, 2020, Fracking pioneer Chesapeake Energy Corporation filed for Chapter 11 bankruptcy, becoming the largest oil-and-gas company to file for bankruptcy protection during the coronavirus pandemic. The oil and gas industry is currently undergoing an unprecedented price collapse that many have cited as … Continue reading “The Energy Industry and Covid-19: Chesapeake Energy as a case study”

Shareholders file numerous class action lawsuits against pro wrestling titan WWE

WWE’s lawsuits claim executives took actions without the best interest of shareholders in mind. CGLytics has analyzed the board of directors of WWE, using tools found in the CGLytics software platform. Insights reveal a lack of finance, governance, and technology experience on the board.

The Energy Industry and Covid-19: Chesapeake Energy as a case study

 

The Energy Industry and Covid-19: Chesapeake Energy as a case study

 

On June 28, 2020, Fracking pioneer Chesapeake Energy Corporation filed for Chapter 11 bankruptcy, becoming the largest oil-and-gas company to file for bankruptcy protection during the coronavirus pandemic.

The oil and gas industry is currently undergoing an unprecedented price collapse that many have cited as seemingly impossible to rebound from. There has been a shock to supply as well as an aberrant drop in demand. The industry was already suffering due to falling natural-gas and crude oil prices and then collapsed even further following the Coronavirus pandemic. Excess supply, specifically from Russia and Saudi Arabia, gauged a price war which led to the price per barrel to drop to under $40. In March of 2020, the severity of the pandemic became obvious and there was a sudden halt in air travel. This, accompanied with widespread lock down measures, led to the United States citing its lowest energy consumption in 30 years in the spring of 2020.

To navigate the unfortunate industry circumstances numerous energy companies have been prompted to slash shareholder distributions, rack up increasing levels of debt, and sell or write-down the value of their assets. This steered many companies towards filing for bankruptcy. As of May 31, 2020, there were approximately 225 bankruptcy cases in the energy sector pending in federal bankruptcy courts. There was a total of 12 in 2017, 18 in 2018, and 18 in 2019. So far, in 2020, 19 energy companies filed for bankruptcies.

 

Chesapeake Energy: The Rise and Fall

 

Chesapeake Energy was a pioneer in the energy industry due to its early adoption of fracking extraction mechanisms. In the early 2010s, Chesapeake Energy was the second largest natural gas producer in the United States. However, as time went by Chesapeake Energy began making headlines for several disreputable occurrences. Chesapeake’s share price has dropped more than 93% from trading over $180 in January 2020 to under $5 in July 2020.

Since 2014, the Company’s stock has steadily plummeted albeit experiencing a few spikes. At its peak, post the 2008 Financial Crisis, Chesapeake stock traded for above $7000 per share. The stock is currently trading at around $4 per share.

The Company’s stock crashed so low in March that on April 13, 2020 it announced a suspension of dividend payments on preferred stock, and a 1 for 200 reverse stock-split to comply with exchange listing requirements. Taking the reverse stock split into consideration indicates that the above mentioned $4 share price is close to $0.02 per share.

Experts had warned that bankruptcy was inevitable, however optimistic investors continued trading and holding the stock. The company is roughly 8 billion USD in debt. This is a steep increase, considering that when it declared bankruptcy in June it was 7 billion USD in debt. For the first quarter of 2020 Chesapeake Energy declared an $8.3 billion net loss.

 

Chesapeake Proceeds to Make Pay Cuts in the Face of COVID

 

In May, the Company announced that it would be cutting bonuses for senior executives while creating new quarterly bonus incentive programs for non-executive and non-managerial employees. Additionally, it announced decreases in the target variable compensation of the four highest paid named executive officers (target variable compensation was cut by 34% to Chief Executive Officer Doug Lawler and Chief Financial Officer Domenic J. Dell’Osso; by 33% to Frank J. Patterson, its executive vice president for exploration and production; and by 28% for James R. Webb, its general counsel).

The Company also reduced non-employee director compensation by around 15% on an aggregate basis and announced that all non-employee director compensation would be paid in cash on a quarterly basis. Furthermore, in terms of payment to senior executives and named executive officers, the company released a statement affirming that target variable compensation received by those employees would be prepaid with an obligation to refund up to 100% of the compensation on an after-tax basis (50%  based on their continued employment for a period of up to 12 months and 50% based on achieving certain specified incentive metrics).

These individuals were also required to waive participation in the Company’s 2020 annual bonus plan and waive their rights to all equity compensation awards with respect to 2020.  The Company proceeded to cancel all outstanding equity compensation awards held by its named executive officers and vice presidents.

 

Internal Influences: The Necessity of Diversity

 

While many of Chesapeake’s issues can be attributed to external factors, one must not overlook or undervalue how ill-advised decisions made by the Company’s executive leadership may have aggravated existing difficulties.

 

The Energy Industry and Covid-19Source: CGLytics August 2020

 

The Company’s Board of Directors is lacking in several areas of expertise that are crucial to the success of a Company. In an eight-person Board, only two members possess Industry and Sector expertise, while only one member has Financial expertise.

Chesapeake’s leadership was not equipped to navigate the financial pressures troubling the oil industry. The acceleration of Chesapeake’s demise was largely due to the accumulation of excessive amounts of debt. In addition, the Company was not diverse in its investments and allocated much of its funding towards horizontal drilling and hydraulic fracturing.

Recent studies have proven that diversity leads to more profitability. Gender, cultural, and generational representation in a Company’s executive leadership are necessary for innovation in both growth and problem solving. Chesapeake’s board of directors has no cultural representation and little diversity with regards to gender and age.

 

 

 Plans Moving Forward

 

Chesapeake announced that filing for Chapter 11 bankruptcy protection will enable the Company to obtain a more sustainable capital structure and a healthier balance sheet. Chesapeake has secured $925 million in DIP financing and has reached agreements with the majority of its creditors to eliminate approximately $7 billion in debt. The company also secured a $600 million commitment of new equity. The Company will continue with business as usual throughout the restructuring process. Doug Lawler, President and Chief Executive officer of the Company proclaimed that “Chesapeake will be uniquely positioned to emerge from the Chapter 11 process as a stronger and more competitive enterprise.”[/vc_column_text][/vc_column][/vc_row]

The Impact of COVID-19 on Executive Pay

Download our latest report to learn how Russell 3000 companies have adjusted their executive pay due to COVID-19 to ensure your company’s pay practices are aligned to market standards.

Shareholders file numerous class action lawsuits against pro wrestling titan WWE

WWE’s lawsuits claim executives took actions without the best interest of shareholders in mind. CGLytics has analyzed the board of directors of WWE, using tools found in the CGLytics software platform. Insights reveal a lack of finance, governance, and technology experience on the board.

08.18.2020

World Wrestling Entertainment, Inc. (WWE) is currently facing lawsuits filed by shareholders alleging that the company intentionally made misleading statements to investors and omitted material information causing shareholders to buy the company’s Class A common stock at inflated prices. This article examines the corporate governance practices of WWE in the wake of its crisis and how governance risks could have been reduced.

A Revealing Lawsuit

Named in the WWE lawsuit are Chairman and Chief Executive Officer, Vincent K. McMahon, Chief Brand Officer, Stephanie McMahon (McMahon’s daughter), and former wrestler and current Executive Vice President of Global Talent Strategy and Development, Paul “Triple H” Levesque (Ms. McMahon’s husband).

Shareholders allege that WWE’s executives intentionally misled investors about the success to secure media rights deals in the MENA region, and that the company failed to disclose the true reasons behind declining merchandise sales and subscriptions to its streaming service, WWE Network.

Unlike typical incidents that Vince McMahon and WWE have to deal with, this lawsuit is not part of an on-camera storyline and raises serious concerns about the company’s financial condition and governance practices.  Additionally, this lawsuit raises an interesting opportunity to explore the inner workings of the leading company in an industry that has traditionally operated as a closed society.

World Wrestling Entertainment, Incorporated

Corporate governance has its own definition within WWE.  WWE, characterized by many as a “one-man operation”, has been centered around its Chairman and Chief Executive Officer Vince McMahon since McMahon took over the promotion (then known as the World-Wide Wrestling Federation) from his father, promoter Vincent J. McMahon, in 1982.  True, the company has an independent board of directors, much the same as any other publicly-traded company, yet those who have worked under McMahon have never shown any hesitancy in claiming that Vince McMahon runs the show, both literally and figuratively.  For context, longtime wrestling manager, promoter, and commentator Jim Cornette recently commented in an interview with Vice News that “to this day, they run the lunch schedule by Vince McMahon.”

Whether it be a company-wide restructuring or designing the minute details of a particular wrestler’s “gimmick”(on-screen character), anecdotal stories of McMahon’s micromanagement of the WWE number in the dozens and illustrate the depth of his involvement at nearly every level of the company’s operations.  While this approach may have led to the WWE becoming the undisputed champion of the wrestling industry, McMahon’s dominance over the company may present a problem as it enters its third decade on the stock market.

WWE’s Board Expertise and Skills Matrix

WWE's Board expertise
Source: CGLytics Data and Analytics

An analysis using the CGLytics Board Effectiveness software tools illustrates how WWE’s board lacks financial expertise and has no governance expertise among its members.  Considering the nature of the class-action lawsuits filed against the company, the lack of financial and governance expertise presents both a significant problem and also a valuable opportunity for the company to strengthen its board in these fields.  What remains to be seen, however, is if and/or how the famously iron-fisted McMahon will proceed as the lawsuits work their way through the legal system.

Mr. McMahon

WWE’s entry into the stock market revolutionized the professional wrestling industry.  Never had a “booker” become the Chairman and CEO of a publicly traded company, much less a wrestling promotion into the stock market.  Due to Vince McMahon’s reputation for never “breaking kayfabe”, countless current and former personalities in the industry have questioned where the line ends between Vince McMahon and his “Heel” on-screen character, the cartoonishly-evil-billionaire-boss, Mr. McMahon.

WWE Goes Public

Interestingly, it was not the wrestling itself that allowed the WWE to go public in 1999.  That particular part of WWE’s success can be traced back to the 1997 King of the Ring pay-per-view when “Stone Cold” Steve Austin cut a promo on Jake “The Snake” Roberts after winning their match and uttered the now immortal (and quite lucrative) line “Austin 3:16 says I just whooped your [rear end].” What followed was a virtual avalanche of sales of “Austin 3:16” emblazoned merchandise that dwarfed the profits previously drawn by 1980’s industry icon and former WWE staple, Hulk Hogan, and led to a dramatic shift in WWE’s business strategy.  In 1999 alone, WWE reported over $400 million in revenues from its various merchandise lines. By contrast, WWE’s live events, TV shows, and pay-per-view specials combined had drawn $170 million in revenue that same year.

No longer purely a wrestling promotion, WWE transformed its entire business around the merchandise sales of its top stars.  From Dwyane “The Rock” Johnson to John Cena to Phil “CM Punk” Brooks, WWE has raked in hundreds of millions in profits off the sales of t-shirts, hats, and an endless list of wrestler-themed accessories.

McMahon is noted to have pressured Steve Austin to remain with the company after the latter suffered a career-shortening spinal injury in 1997 due to the weight that his name carried and the unprecedented success of his merchandise line.  Austin, after all, would be an integral part of McMahon’s initial pitch to investors.  Indeed, his name can be found alongside those of The Rock, The Undertaker, and several other prominent wrestlers in the company’s S-1 registration statement.

Flash forward twenty years and WWE has again adjusted its business model to not only include merchandise lines, but also other forms of entertainment, including WWE-produced feature-films and reality tv shows starring WWE talent.  The company’s most recent success appears to be linked to the 2014 launch of the WWE Network, an online streaming service and digital TV network that offers access to WWE live events, TV shows, WWE-produced films and documentaries, and the company’s expansive digital library (known to be the world’s largest collection of professional wrestling video content).

WWE’s Financial Evolution

WWE's financial evolution
Source: CGLytics Data and Analytics

Shareholders “Take the Book”

These class action lawsuits present a new dilemma for the WWE. Historically, it has taken relatively earth-shattering events to cause WWE to respond to shareholders in a meaningful and lasting manner.  The first prominent event to occur after WWE’s IPO was the tragic and sudden death of wrestler Eddie Guerrero in 2005.  Guerrero died of heart failure that was believed to have been a result of previous steroid abuse.  The circumstances surrounding Guerrero’s death led WWE to reimplement its current strict drug testing policy that had previously been suspended in 1996.

The second and more tragic event that caused a dramatic change within WWE was the Chris Benoit double murder-suicide in 2006.  Benoit’s actions had reverberations across the entire wrestling industry and caused WWE to relaunch its programming under a new “TV-PG” rating in a very public attempt to decrease the violence shown on WWE shows.  The entire tone of WWE programming shifted to a more “family-friendly” atmosphere, placing an emphasis on more comedic storylines and wrestler gimmicks, and heavily restricting the wrestling portions of its shows.

For example, one of the more controversial restrictions (among wrestlers and large swaths of fans) was the banning of the decades-old practice of “blading”.  In order to bleed for dramatic effect during a match without actually being hit over the head with a blunt object, wrestlers would use small, hidden razor blades to make shallow cuts in their foreheads that bled profusely but rarely caused actual injuries.  Under WWE’s PG policy, blood has almost vanished entirely from its programming, apart from accidents that draw blood (wrestlers term this bleeding “the hard way”).  In these instances, WWE TV shows will only broadcast those portions of the show in black-and-white to deemphasize the appearance of blood.  Former wrestler and Guardians of the Galaxy actor, Dave Batista, was fined $100,000 by the company after he “bladed” during a match in 2008.  The size of the fine was to no-doubt send a message to both the public and shareholders that WWE has taken its new turn seriously.

The Impact on Share Prices

The lawsuits appear to have already begun to cause damage to WWE’s share prices.  Forbes reported a 13% drop in the company’s share price on April 25th, 2019, after the initial news of WWE’s troubles in the MENA region began to leak.  This trend continued as the company underperformed in Q3 of 2019, leading a number of investors to openly question whether WWE leadership was being truthful about the nature of its relationships in the MENA region, most importantly with the Kingdom of Saudi Arabia.  The final straw appears to have come in a January 2020 disclosure when the company again underperformed due primarily to its failure to secure a favorable deal with Saudi Arabia and ceased to include the deal in financial forecasts.  By February 6th, 2020, WWE stock closed at USD 40.24, representing a 60% decline in share price from its previous year’s high of USD 100.  WWE filed a motion to dismiss the lawsuits in late June and the case is still winding its way through the legal system, however, it is safe to say that the company faces a new challenge the likes of which it has yet to encounter.

To navigate through difficult times, such as a lawsuit, it is of utmost importance for a company to show governance oversight and understand how their company is perceived by shareholders, investors, proxy advisors and the media. Deficiencies in board expertise such as finance, technology and governance can be clearly seen in the CGLytics platform and reveal governance risks to stakeholders and activist investors. Software tools, such as CGLytics, highlight governance red flags allow companies such as WWE to gain control through proactive insights and make smart data-based decisions.

CGLytics provides access to 5,900 globally listed company profiles and their governance practices, including their CEO Pay for Performance, board composition, diversity, expertise and skills.

Latest Industry News, Views & Information

How to Design your Annual Incentive Plan During a Pandemic

How to design your annual incentive plan during a pandemic   The novel COVID-19 pandemic has impacted many areas of the current landscape, including the socio-economic landscape and macroeconomic environment. Initially it was difficult to predict how long the pandemic was likely to last, however it has certainly continued longer than initial indications led us … Continue reading "How to Design your Annual Incentive Plan During a Pandemic"

The Energy Industry and Covid-19: Chesapeake Energy as a case study

  The Energy Industry and Covid-19: Chesapeake Energy as a case study   On June 28, 2020, Fracking pioneer Chesapeake Energy Corporation filed for Chapter 11 bankruptcy, becoming the largest oil-and-gas company to file for bankruptcy protection during the coronavirus pandemic. The oil and gas industry is currently undergoing an unprecedented price collapse that many have cited as … Continue reading “The Energy Industry and Covid-19: Chesapeake Energy as a case study”

Activist Investor Focus in 2020

View the facts and figures of activist investor campaigns in 2020. What have been the key target areas and how can companies be better prepared?

Activist Investor Focus in 2020

View the facts and figures of activist investor campaigns in 2020. What have been the key target areas and how can companies be better prepared?

08.13.2020

Activist investor campaigns have increased, and activist numbers are growing. In 2020 campaigns have almost doubled compared to four years prior with majority of activist campaigns targeting specific areas of corporate governance.

Click below to see the facts and review the key target areas.

CGLytics provides access to 5,900 globally listed company profiles and their governance practices, including their CEO Pay for Performance, board composition, diversity, expertise and skills.

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.

Latest Industry News, Views & Information

How to Design your Annual Incentive Plan During a Pandemic

How to design your annual incentive plan during a pandemic   The novel COVID-19 pandemic has impacted many areas of the current landscape, including the socio-economic landscape and macroeconomic environment. Initially it was difficult to predict how long the pandemic was likely to last, however it has certainly continued longer than initial indications led us … Continue reading "How to Design your Annual Incentive Plan During a Pandemic"

The Energy Industry and Covid-19: Chesapeake Energy as a case study

  The Energy Industry and Covid-19: Chesapeake Energy as a case study   On June 28, 2020, Fracking pioneer Chesapeake Energy Corporation filed for Chapter 11 bankruptcy, becoming the largest oil-and-gas company to file for bankruptcy protection during the coronavirus pandemic. The oil and gas industry is currently undergoing an unprecedented price collapse that many have cited as … Continue reading “The Energy Industry and Covid-19: Chesapeake Energy as a case study”

S&P 500 Banking Industry’s Response to COVID-19

CGLytics examines how S&P 500 banks responded to the volatility of the pandemic prior to the Fed’s announcement to cap bank dividends and prohibit share repurchases until Q4 following its annual stress test of banks.

S&P 500 Banking Industry’s Response to COVID-19

CGLytics examines how S&P 500 banks responded to the volatility of the pandemic prior to the Fed’s announcement to cap bank dividends and prohibit share repurchases until Q4 following its annual stress test of banks.

08.13.2020

On June 25, 2020, the US Federal Reserve Bank issued a statement following its annual stress test of banks, saying that it would cap Q3 dividends for banks and prohibit share repurchases until Q4.  COVID-19 has created a tumultuous economic environment for many companies.  This has prompted many to respond with executive pay cuts and dividend reductions, and suspensions of share buyback programs.

In the wake of this economic situation and announcement by the FED, it is worth looking at how the banking sector responded to the COVID-19 crisis and its corporate governance implications.  This article analyzes the S&P 500 Banks Industry Group Index which is broken up into two sub-indexes; S&P 500 Regional Bank Index and S&P 500 Diversified Bank Index.

Looking at the banking sector’s performance during the COVID-19 pandemic, when comparing the S&P 500 Bank Industry Group Index to the S&P 500, Year to Date (YTD) change in value as of July 22, 2020; the S&P 500 Banks decreased in value by 34.31% while the S&P 500 increased  by 0.82%.  When breaking the S&P 500 Bank Industry Group down further into its two sub-indexes, the S&P 500 Regional Bank Index decreased in value by 32.66% while the S&P 500 Diversified Bank Index decreased by 34.74%.

While the S&P 500 has rebounded significantly since its steep decline following the COVID-19 outbreak. The banking industry has yet to see the same recovery.

Source: CGLytics Data and Analytics

Prior to the FED’s announcement, not one of the banks in the S&P 500 Diversified Banks Index announced a suspension, reduction, or change in their dividend.  Also, during this time, none of these banks recorded any changes to executive compensation due to COVID-19.  All five of these banks (JPMorgan Chase, U.S. Bancorp, Citi Group, Wells Fargo, and Bank of America) announced on March 15, a suspension of share repurchases.

Examining the S&P 500 Regional Banks Index prior to the FED’s announcement in June 2020, seven banks (Region Financial Corp, Citizens Financial Group, Fifth Third Bancorp, KeyCorp, PNC Financial Services Group,. Trust Financial Corp, Comerica) all announced plans to temporarily suspend their share repurchase plans in the middle of March 2020. Hunting Bancshares however announced that it planned to continue its share buyback program during this same period.  First Republic Bank, M&T Bank Corporation, People’s United Financial, Zion Bancshares, and SVB Financial Group all did not comment regarding share buyback programs during this time period.  Concerning dividends, no bank in the Regional Bank Index suspended or changed their dividend during this period.

Source: CGLytics Data and Analytics

However, when analyzing Russel 3000 companies during the time period from March 15th through to April 17th, at least 105 companies reduced or adjusted executive and director compensation in response to the COVID-19 according to research by CGLytics’s.  In addition, over the same period at least 47 companies reduced or suspended their dividend and at least three companies suspended share buyback programs.

When analyzing Diversified Banks in the S&P 500 and their response to the FED’s announcement at the end of June to cut dividends, only Wells Fargo announced a reduction in its dividend, with all five companies (JPMorgan Chase, Citigroup, Bank of America, US Bancorp, and Bank of America) announcing that they would maintain their current dividend.

Regional Banks provided a similar response as Diversified Banks following the FED’s June 25 stress test.  Out of the 13 banks labeled as Regional banks, six provided responses to the FED’s stress test (Truist Financial Corp., Region Financial Corp., Huntington Bancshares Incorporated, Fifth Third Bancorp., KeyCorp, Citizens Financial Group).  All six stated that the company would maintain its dividend.  The other seven companies (Zion Bancshares, SVB Financial Group, PNC Financial Services Group, M&T Bank Corporation, People’s United Financial, Comerica, First Republic Bank) did not provide a statement regarding the results of the FED’s stress test.

Ultimately, COVID-19 has exposed the vulnerability of the banking industry to external shocks and their readiness for market developments. The pandemic has generated significant uncertainty and high volatility in global capital markets and the banking industry is of no exception. While the full impact is yet to be determined, it’s predicted that the adverse effects are expected to linger from the virus’ knock-on effects and are likely to affect liquidity, profitability and valuation of these issuers eventually affecting returns to investors.

To understand how companies are adapting their executive pay practices and adhering to regulations during the pandemic, institutional investors and proxy advisors use CGLytics data and analytics software tools.

CGLytics offers the broadest and deepest global compensation data set in the market for reviewing corporate executive compensation plans, assessing Say on Pay vote proposals and performing benchmarking analysis.

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.

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Azimut: Underlying issues result in shareholder revolt

Azimut is an asset management company that currently trades on the Italian stock market and is part of the blue-chip index of the Italian market (FTSE MIB).
Azimut’s remuneration planning and practices have not impressed their shareholders for some years now. This article examines why.

Azimut: Underlying issues result in shareholder revolt

Azimut is an asset management company that currently trades on the Italian stock market and is part of the blue-chip index of the Italian market (FTSE MIB).
Azimut’s remuneration planning and practices have not impressed their shareholders for some years now. This article examines why.

08.07.2020

Azimut is an asset management company  that currently trades on the Italian stock market and is part of the blue-chip index of the Italian market (FTSE MIB). The company offers investment management services and manages open-end mutual and pension funds, as well as offers investment advice and insurance. Azimut distributes its products through financial consultants in northern and central Italy. Azimut’s Remuneration practices have not impressed their shareholders for some years now. This article reviews why.

The company’s corporate governance and remuneration practice has long been criticized by proxy advisors, investors and other stakeholders.  At their 2019 and 2018 Annual General Meetings (AGMs), 31.5% and 22.6% of shareholders voted against the remuneration policy (corresponding to 41% and 46% of minority shareholders).

Interestingly, the company did not acknowledge or propose any changes to the remuneration policy for 2020.

Azimut’s disclosure of the remuneration policy largely lags their FTSE MIB peers.

Under the current plan, the company does not have any long-term incentive plan, meaning that their remuneration policy is very short-term focused. Executives can earn up to 200% of their base salary under the current plan. However, this may be acceptable as it is controlled by a shareholder agreement.

Per the Corporate Governance code of Italy, given that the remuneration policy failed to secure the requisite approval, Azimut must apply the previous year’s policy. It is worth noting that the old policy is the same as the new one that was proposed, as there were not any changes.

 

In 2015, Azimut’s remuneration report was approved by 96.93%. The remuneration report was however defeated in 2016, garnering only 35.61% of approval from shareholders. Though the company improved their remuneration voting outcomes from 2017 to 2019, the resolution could not secure more than 90% of support from shareholders. In 2020, the remuneration report was again defeated; securing only 42.38% of approval from shareholders.

Azimut’s Remuneration Voting Outcomes

Azimut’s Remuneration Voting Outcomes
Source: CGLytics Data and Analytics

Understanding the shareholding structure of the company

Azimut's Shareholder Structure
Source: CGLytics Data and Analytics

Governance snapshot reveals gaps

Data from CGLytics suggests that the Azimut’s board effectiveness score is 52%, which also lags its sector’s average score. Contributing to the score are gaps in their diversity. The company currently has only 25% of its members being independent which contradicts the recommendation of Italy’s Corporate Governance Code. The Italian Code recommends that Independent Directors should form at least half of the board for  large companies (blue chip companies). The board of Azimut also currently has no foreigner on it which is quite interesting given their global presence.

Azimut's board composition and effectiveness

Board diversity
Azimut board effectiveness
Source: CGLytics Data and Analytics

Pay for performance alignment of Azimut

Using CGLytics pay for performance tool, we were able to construct a bespoke peer group for Azimut to identify trends using year end performance indicators, ROE, ROA, ROIC and EPS to benchmark CEO compensation. The data suggests that Azimut’s CEO Total Realized Compensation (TRC) was consistently higher than the median of its peer group. The highest we see is in financial year 2017 where the CEO’s realized compensation was over EUR 5M while their median TRC of their peers was only just under EUR 1.5M. However, from 2017 to 2019, Azimut’s CEO TRC fell to EUR 3.5M while the median CEO TRC of their peers also increased to EUR 1.7M. It is worth mentioning that included in the 2017 CEO TRC is the severance pay of EUR 2.25M that was paid to outgoing CEO Marco Malcontenti. The company also outperformed their peers on most of their performance indicators across the years.

Azimut's Peer Group Analysis

Azimut peer group analysis
Azimut's peer group

CGLytics has done a relative positioning of the CEO pay against 3-year TSR using the pay for performance tool. The analysis suggest that that Azimut displays a misalignment among their country and sector peers. The CEO’s TRC ranks top decile at the 93rd percentile while the 3-year TSR ranks below median at the  36th percentile.

Azimut's Pay for Performance (3-year)

Azimut's P4P
Source: CGLytics pay for performance analysis tool

Although Azimut is yet to make any changes to their pay structure despite minority shareholders grievances, it must be noted that consistent revolts result in issuers being an activist investor target. The lack of long-term remuneration planning in their remuneration policy send signals that the board is short-term focused. This does not promote shareholder long-term growth. Utilizing CGLytics pay for performance tools, the company could gain insights into how their peers are constructing their remuneration policies to align with performance and increase shareholders value.

CGLytics provides access to 5,900 globally listed company profiles and their governance practices, including their CEO Pay for Performance, board composition, diversity, expertise and skills.

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How to independently and efficiently benchmark executive compensation for Say-on-Pay

There are many software applications and tools now available to support compensation decisions, but what should be taken into consideration before purchasing? This 5-minute guide details what Compensation Committees, Heads of Reward and Compensation Professionals should take into account when selecting software and tools for Say-on-Pay decisions.

How to independently and efficiently benchmark executive compensation for Say-on-Pay

There are many software applications and tools now available to support compensation decisions, but what should be taken into consideration before purchasing? This 5-minute guide details what Compensation Committees, Heads of Reward and Compensation Professionals should take into account when selecting software and tools for Say-on-Pay decisions.

08.04.2020

A 5-minute guide to support Compensation Committees, Heads of Reward and Compensation Professionals when selecting software and tools for compensation decisions. Read and learn about the four considerations that should be taken into account before purchasing.

1. Look for tools that support peer group modeling functionality

2. Access the same peer groups as leading proxy advisor Glass Lewis

3. Ensure Pay-for-Performance alignment and benchmarking tools are included

4. Check the quality of data available in the software platform you choose

We live in a digital age where access to information has never been easier. No longer having to scroll through complex and endless spreadsheets and obtain an analytical degree to understand trends – insights and information is at our fingertips.

For Compensation Committees, Heads of Rewards and Benefits, and Compensation Professionals it is no different.

Ensuring executive compensation, bonuses, and incentives are in line with market standards, has never been so important.

Activist activity has increased in 2020, with traditional investors changing their position from passive to active engagement and focusing on executive pay. In a recent article by the Financial Times, it was reported that misalignment of incentives and negative say-on-pay votes at annual meetings increase the likelihood of a company suffering share price underperformance.

Software that provides flexibility for assessing compensation in comparison to peers, and supports say-on-pay resolutions, is available and increasingly implemented by companies, activist investors, and proxy advisors.

When a user begins searching for compensation software there are questions typically asked:

  • – Does it contain information on the executive pay practices of my peers and competitors?
  • – How does is support benchmarking my company’s executive compensation practices?
  • – Does it show me how my company’s compensation practices are perceived in the market?
  • – Can I find tailored insights in seconds to be sure my company’s CEO, NEO and Director pay is aligned to market standard and company performance?

 

Sustainable and justifiable decisions surrounding executive compensation has kept rewards and benefits professionals up at night, with additional key questions that should be asked:

  • – How can I access high-quality, reliable executive compensation information that I do not need to maintain?
  • – Where can I find standardized compensation information for efficient comparison and instant benchmarking?
  • – What software and tools are available in the market that other compensation professionals, activist investors, proxy advisors and compensation consultants currently use?

 

How to utilize software and tools for fast, efficient, and flexible executive compensation and rewards benchmarking.

 

Greater scrutiny calls for companies and their boards to be one step ahead

Transparency encourages market confidence. With the current pandemic causing havoc on stock prices and resulting in employee layoffs, salary and bonuses paid to executives has again been pushed to the front and center.

Compensation policies and reporting are continuing to come under scrutiny from investors, shareholders, employees and the media. Boards must have clear and transparent compensation processes in place that allow for investors to see a fair comparison has been made of executive payouts and promised rewards, against peers and taking into account the broader market context.

How peer companies are adapting their executive compensation practices and adopting new measures needs to be clearly understood for socially responsible decisions about executive pay – continuing to be highlighted again by the events and happenings of 2020.

Decisions made need to be based on fact, not fiction, with easy to understand explanations for investors to digest. Granted, no one wants to become a media headline or attract attention from activist investors.

 

How can Compensation Committees, Heads of Reward and Compensation Professionals model different scenarios with software tools, and benchmark against their companies’ peers?

 

1. Look for tools that support peer group modeling functionality

 

Generating your own peer groups allows for benchmarking and comparison on a like for like basis. Companies that have very few similar peers in their region, index and sector might need to look further afield to design an appropriate group to justify the competitiveness of pay plans. Modeling against different peers can significantly change the scenario and perception of pay. Using CGLytics platform, fit-for-purpose peer groups can be created in seconds with access to 5,900+ globally listed companies, for instant comparison of compensation practices.

2. Access the same peer groups as leading proxy advisor Glass Lewis

 

Do you know how your compensation is viewed by activist investors and proxy advisors? As Glass Lewis and large activist investors are already using data and software provided by CGLytics, Compensation Committees should be doing the same. This allows Compensation Committees and Heads of Reward to proactively plan for, and justify, any compensation decisions that may attract unwanted attention.

Glass Lewis CEO and Executive Compensation analysis (used in their proxy papers globally) is found in the CGLytics platform ready for companies use.

As stated in the recent webinar by Glass Lewis’ SVP & Global Head, Research & Engagement, Aaron Bertinetti:

“All the data that we now use, whether it’s compensation data, peer data, or other types of governance data that we may need…we exclusively source from CGLytics. Not just within the United States but globally. The only other firm outside of Glass Lewis that has access to our methodology is CGLytics.”

Using the same data set, peer modeling and analytical tools as Glass Lewis, and leading institutional investors, for reviewing public company CEO compensation and Say on Pay proposals, results in Compensation Committees being market intelligent and one step ahead. This fosters better dialogue with stakeholders and data-based decisions justified with relevant and real-time information.

Learn how Glass Lewis Europe improved their executive compensation analysis with governance data from CGLytics

3. Ensure Pay-for-Performance alignment and benchmarking tools are included

 

Compensation Committees and HR Professionals are empowered by modeling scenarios against different KPIs and measurements using software tools. With the recent volatility in market performance, justifying indictors used to design compensation plans mitigates risk. Boards need to be equipped with in-depth analysis of their company’s pay practice and compare against their peers to preempt say on pay risk.

As mentioned by Ronald Kliphuis, Global Head of Rewards at Randstad (a large market leading global HR company):

“In the past only consultants had access to the information that CGLytics provides. We can now play with data and information and make fair comparisons. We understand the potential risks and vulnerabilities a lot better.”

Learn more about Randstad’s Head of Rewards making data-based decisions going into the AGM

Powerful pay-for-performance benchmarking tools allow for efficient comparison and automated output of CEO and executive compensation against competitors and peers.

4. Check the quality of data available in the software platform you choose

 

Where the data is sourced from and how often it is updated should be a concern when deciding on insights to trust for effective engagement. In addition to how many years of compensation data is recorded in the software platform. A wealth of global and structured data for meaningful comparison of executive compensation practices across industries and borders, should be a large consideration of tools purchased to support compensation decisions.

Compensation Committees, Head of Rewards and Benefits, and other HR Professionals can ensure reliability when using CGLytics software with executive compensation data sourced from millions of publicly listed company filings, proxy materials and social networks, which undergoes rigorous checks by a dedicated team of equity market research analysts 24/7. More than 10 years of historical compensation data is standardized for efficient comparison of 5,900+ companies’ pay and rewards across different regions, industries, and sectors.

Downloadable data and insights in an array of formats (such as excel) allow compensation professionals to model and easily transport charts directly into their board decks and presentations, for the ultimate time and cost savings.

 

CGLytics offers the broadest and deepest global compensation data set in the market for reviewing corporate executive compensation plans, assessing Say on Pay vote proposals and performing benchmarking analysis.

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.

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Ubisoft’s sexual misconduct scandal reveals governance gaps

CGLytics reviews Ubisoft’s board and corporate governance practices after accusations of widespread, systemic sexual misconduct. How does Ubisoft’s board diversity, board effectiveness and director expertise measure up?

Ubisoft’s sexual misconduct scandal reveals governance gaps

CGLytics reviews Ubisoft’s board and corporate governance practices after accusations of widespread, systemic sexual misconduct. How does Ubisoft’s board diversity, board effectiveness and director expertise measure up?

08.03.2020

Following recent accusations of widespread, systemic sexual misconduct at the family-run video game company Ubisoft, CGLytics has assessed the company’s financial performance and corporate governance practices. With reports of a toxic culture and sexism, how does Ubisoft’s board diversity (including gender diversity), board effectiveness and director expertise measure up?

Ubisoft, best known for the Assassin’s Creed franchise, has been shaken by allegations of serious misconduct. Reported cases include ‘subtle forms of sexism’ and ‘sexual assault’ and were apparently mishandled by the company’s human resources department. These reports come as the video gaming industry faces its own #Metoo movement.

Serge Hascoët (chief creative officer and considered number two at Ubisoft), Yannis Mallat (managing director of Ubisoft’s Canadian studios) and Cécile Cornet (global head of human resources) have resigned; the latter only having left her position, not the company.

Chief executive (CEO) of the family business, Yves Guillemot, made a speech via video distributed to all employees on July 21, 2020. In the video, an apology was made, and he announce several new measures being put in place. These included the creation of a “Support and Recovery Centre” in order to put victims in contact with specialized psychologists, trainings for the prevention of harassment and discrimination, and the overhaul of HR services. Mr. Guillemot insisted on improving diversity stating, “We have started the process to recruit three new VPs. The profiles belonging to under-represented and diverse groups will be privileged”.

Further testimonies shone the light on how female characters have been discarded or relegated to second place in the firm’s video games, notably in the Assassin’s Creed franchise. According to Bloomberg, developers attested that both the marketing department and Serge Hascoët suggested that they “would not sell”.

Ubisoft’s board gender diversity does not meet French corporate governance code recommendations

On reviewing the diversity of Ubisoft’s board, it is revealed that there are deficiencies and improvements needed. Only recently appointed John Parkes is a non-French member, meaning that only 8% of the board are non-local. More importantly, Ubisoft has not met the French corporate governance code recommendation of at least 40% gender diversity representation on the board. The company currently has four female board members, which constitutes 33% of the board. Moreover, the Ubisoft shows an independence ratio of less than half (42%), which also seems to contradict the code’s recommendations. Perhaps contributing to the poor diversity and independence score is the fact that in July 2020, the Ubisoft board appointed Mr Parkes; a dependent director to replace female independent director, Frédérique Dame.

Ubisoft Board Diversity Overview

Board diversity
Source: CGLytics diversity snapshot

CGLytics data also suggests that the company has a relatively unsound board compared to most of their peers. Specifically, as certain Board members Yves Guillemot, Michel Guillemot, Claude Guillemot, Christian Guillemot and Gerard Guillemot – all of whom are executives – have spent over three decades on the board since their respective appointments in 1988, affecting the average tenure on the board.

A scandal likely to hit the company’s financial results

Nonetheless, Ubisoft reported a successful first quarter of its 2020-2021 fiscal year. People having been quarantined due to the coronavirus pandemic undoubtedly helped achieve a 17.6% rise in sales (to EUR 427.3 million). The video games maker also saw its net bookings amounting to EUR 410 million between April and June (an increase of 30.5%), beating the target (EUR 335 million). For the current quarter, however, net bookings are expected to be around EUR 290 million, a decrease of 16% compared to the high performance of the same period during the previous fiscal year.

In the light of the fruitful quarter, we undertook a historical study of some key financial indicators to identify trends and perhaps understand what lies ahead for the company.

Although Ubisoft’s share price continues to rise, we found that all other indicators such as EPS, ROE and TSR fell quite heavily from 2018 to 2019 and are even expected to fall much steeper considering their YTD performance on these indicators. These are indications that, despite the rather glossy first quarter results published earlier this month, the company may suffer some deeper performance issues which could be a result of their recent scandal.

Ubisoft’s Financial Results (2015-YTD)

Ubisoft financial results
Source: CGLytics Data and Analytics

Understanding Ubisoft’s board effectiveness and expertise

Using CGLytics’s board effectiveness tool, it is found that Ubisoft’s board attains an effectiveness score of 55%. This score is derived from 13 key board effectiveness attributes, benchmarked against corporate governance codes and standards. This mark shows that the issuer trails behind the average score of their sector peers (at 71%), and their unique peer group average.

One key metric that contributes to the score is the separation of Chair and CEO position. Considering that Ubisoft have the combined position of Chair and CEO, this is not in the company’s favor. The French corporate governance code gives issuers the choice to separate the positions or to combine. In the latter case, they must appoint a lead independent director. Ubisoft has a presence of a lead director on the board.

Ubisoft’s Board Composition and Effectiveness Score

Ubisoft board composition and effectiveness
Source: CGLytics board effectivess tool

Gaps revealed on Ubisoft’s board

Utilizing the board expertise and skills set tool found on the CGLytics platform, the analytics suggests gaps in the skills on the board. Specifically, not one of the independent directors has ‘Industry’ expertise, depicting their lack of ability to stay up to date with the market and trends compared to their peers. The board also has no representation of directors with governance expertise, questioning again their ability to apprehend the governance reforms promised by the company to address diversity.

Ubisoft’s Board Expertise and Skills

Board expertise and skills matrix
Source: CGLytics board expertise and skills marix

What’s to come for Ubisoft

Although reforms are expected for Ubisoft, and both changes in its governance and in its executive team have been promised, the company currently shows gaps of diversity among its senior leaders. Diversity does not only refer to the gender imbalance revealed, but also the decades-long tenure of its executive directors, plus the low ratio of foreign nationals. Not to forget the independence among its board members. Using CGLytics data and tools, it reveals Ubisoft’s board poses a serious governance risk. When comparing Ubisoft’s corporate governance practices to their peers’, they are not meeting market standards. As Ubisoft continues to navigate through the public scandal and implement changes to corporate culture, what remains to be seen is the impact on the financials of the video games specialist.

 

References:

https://www.bloomberg.com/

https://www.numerama.com/

https://www.journaldemontreal.com/

CGLytics provides access to 5,900 globally listed company profiles and their governance practices, including their CEO Pay for Performance, board composition, diversity, expertise and skills.

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Ontex Group’s remuneration report voted down for the fourth consecutive year

With shareholders voting against the Ontex Group’s remuneration report for four consecutive years, CGLytics has conducted a review of the company’s CEO pay for performance against peers.

Ontex Group’s remuneration report voted down for the fourth consecutive year

With shareholders voting against the Ontex Group’s remuneration report for four consecutive years, CGLytics has conducted a review of the company’s CEO pay for performance against peers.

07.27.2020

Ontex Group’s remuneration report has been voted down by its shareholders for the fourth consecutive year. So, what is it about Ontex’s CEO compensation strategy that rubs shareholders up the wrong way?

Ontex trades on the Belgium stock market and operates in the sector of disposable personal hygiene solutions for baby, feminine and adult care. It manufactures and sells its products throughout Western Europe, Eastern Europe, the Americas, and has a general global presence.

Since Ontex’s introduction on the stock market in 2014, shareholders have been unconvinced about the company’s remuneration practices. In 2015 at the company’s first Annual General Meeting since being listed, 10 % of its shareholders voted against the remuneration report.

The following year would see the number increase to a 12% disapproval. By their 2017 Annual General Meeting, the majority (51%) of its shareholders voted against the report and the numbers have not dropped since. The highest number of votes against the remuneration report came at the recent 2020 general shareholders meeting with a resounding 64% of shareholders voting against, which is a 7% increase relative to their 2019 proxy season.

Ontex’s Chairman and Member of the Remuneration Committee, Mr. Luc Missorten, resigned at the 2020 AGM and stated that:

“The company acknowledged the disapproval of the remuneration report and has taken the signals by shareholders seriously and as a consequence, going forward, will increase transparency within the report and intensify the dialogue with shareholders about the remuneration principles”[1]

CGLytics has taken Ontex’s remuneration report voting outcomes from its governance data base, accessible in the market-leading platform, and analyzed the results from the past six years. The below graphical representation reveals how the voting outcomes have evolved.

Ontex Group's Remuneration Report Voting Outcomes

Remuneration voting outcomes
Source: CGLytics Data and Analytics

The remuneration (through the lens of CEO pay)

Up until 2018, Ontex’s CEO remuneration consisted of base salary, Short-Term Incentives (STIs), and Long-Term Incentives (LTIs) in the form of restricted share units and performance stock options. A third element, in the form of performance shares, was added to the LTI plan in 2019 to increase the performance aspect of the plan and link remuneration to the company’s performance.

Base salary surged to EUR 1 million in 2019. Previous years saw the fixed portion of CEO remuneration hover between the EUR 800K and 900K mark. This is despite a significant drop (62%) in the company’s net income in 2019, and other Belgium company CEO’s only seeing their base salary hover between EUR 700 and EUR 830K over the same period.

 

The updated remuneration plan also provided Ontex’s CEO with the opportunity to earn an STI (annual bonus) pay-out of 150% of base salary. Both Ontex’s CEO and country peer group average was relatively the same, fluctuating between EUR 550K and EUR 1.1 million over the period.

Our analysis revealed that Ontex’s STI is not subject to any claw-back provision. The absence of such a provision prevents the company from retrieving funds already paid in the event of misconduct, poor performance, or a drop in company profits. The claw-back provision clause is widely used by other Belgium companies.

 

A review of Ontex’s LTIs tells a rather different story. Where CEOs of Belgium listed companies earn, on average, EUR 650K to 1.4 million in long-term incentives, the LTI component of the Ontex’s CEO, on the other hand, has not surpassed EUR 275K in pay-outs and is an indication of the company performance not being up to par relative to their peers on the BEL 20.

Further analysis revealed that Ontex has been underperforming on the BEL 20 Index over one, two, three and five-year periods, and since its initial listing in 2014. The poor performance has led to Euronext demoting Ontex from the BEL 20 (Large Cap) and including the company in the BEL Mid (Mid Cap), in addition, their second largest investor (ENA Investment Capital) called on the Board to take immediate action to create shareholder value[2][3].

According to our analysis, using CGLytics Executive Compensation tools found in the software solution, below is how Ontex CEO realized pay stacks up against its country peers.

CEO pay country peers
Source: CGLytics Pay for Performance Analytics

Upon analyzing the relative position of Ontex’s CEO pay compared to performance (over three years), it was noticed that Ontex displays a misalignment in its remuneration practice relative to its Belgian peers. Specifically, our analysis indicates that Ontex has been overcompensating its CEO. The company performance (measured in TSR) ranks among the lowest, whereas its compensation (total realized pay) ranks at the 50th percentile.

Pay for performance - Ontex
Source: CGLytics Pay for Performance Analytics

The persistent disapproval of Ontex’s remuneration report by shareholders has prompted the company to take steps to enhance its remuneration policy, by making remuneration clearer and even more closely correlated with performance, according to the company Board of Directors. As to how the Board is planning on doing this, is yet to be known and seen.

 

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.

 

CGLytics provides access to 5,900 globally listed company profiles and their governance practices, including their CEO Pay for Performance, board composition, diversity, expertise, and skills.

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