As the dust settles from FirstGroup plc’s latest engagement from activist investor Coast Capital, CGlytics looks at the timeline and the reasons why the company was a target of shareholder activism. This was not FirstGroup’s first experience as a target of activism. In 2013, Sandell, which owned a little over three percent of FirstGroup, wrote to the directors urging them to spin off and list the U.S. business unit separately on the stock market. Sandell, at the time said the break-up would enable the company to fund a much-needed investment program in its British bus business. FirstGroup fended off the proposal, with the notion that it contained structural flaws and inaccuracies.

Where this activist ride began

Over the past nine months, FirstGroup has been the target of activism from New York-based hedge fund, Coast Capital. The back and forth between the issuer and the investor date back to November 2018 when the Non-Executive Chairman of FirstGroup’s board, Dr. Wolfhart Hauser, responded in a letter written to the latter. The letter from Coast Capital included demands for management change and included criticism over the company’s failure to pay a dividend.

On May 17, 2019, FirstGroup received a letter from Coast Capital requesting an EGM to remove six of the current directors, increase the size of the board by one seat, and elect Coast Capital’s seven nominees. Coast Capital criticized the board saying that its directors lacked sector and industry expertise with reference to the CEO, Matthew Gregory, and Chairman of the Board, Hauser. Again, the activist investor pushed for a separation of the US and UK businesses, having declared FirstGroup’s strategy – and particularly its UK rail investment – as “extraordinarily destructive of capital”.

In June 2019, FirstGroup seemed to be taking heed to the investor pressure and announced that it will be selling off its bus division and possibly withdrawing from UK rail operations. The company also announced that it will focus on the US, although stating that it plans to sell off the famous Greyhound coach line.

The board’s expertise

One of the main critiques by Coast Capital was regarding the governance structure, specifically the composition of the board. Utilizing the Board Expertise functionality in CGlytics’ platform, insights are revealed as to the current board’s skills and expertise makeup. In particular, the Skills Matrix functionality in CGLytics’ solution aids companies to identify any skills gaps within their current board.

For FirstGroup, of the 11 directors currently sitting on the board, the graph shows that the strongest levels of expertise present on the board are International, Leadership and Executive. According to the Skills Matrix, it appears that the company lacks directors with expertise in the areas of Finance and Technology.

FirstGroup plc's Board Expertise and Skills Matrix
FirstGroup's Board Expertise and Skills Matrix
Source: CGLytics Executive Compensation Models

Pay for Performance

According to the pay policy of FirstGroup, the company aims to align its pay with performance and also with best corporate governance global practice. The company currently uses three performance criteria in the determination of its long-term incentive plans:

– Total Shareholder Return (TSR),
– Earnings Per Share (EPS), and
– ROCE.

Of which, the first two are equally weighted at 40% and the latter accounts for the remaining 20%.  The CGlytics Absolute Positioning tool sheds light on the relationship between the EPS performance component and the CEO’s realized compensation from 2013 to 2018.

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

 

As indicated in the graph below, there exists significant volatility in the movements of EPS and CEO pay. From 2016 to 2018, although both indicators fell, there seems to suggest that EPS had a much steeper fall compared to that of the CEO pay.

Specifically, while CEO pay reduced by 20% over the period, EPS fell by 43%. The CGlytics Relative Positioning Pay for Performance Evaluation tool compares FirstGroup’s CEO Realized Compensation with that of the company’s own peer group disclosed in the 2019 annual report against the peer group’s one year TSR.

The Pay for Performance evaluation reveals that the CEO’s Total Realized Compensation appears aligned with its performance indicator relative to its peers. The company’s Total Realized Pay ranks at lower decile at 18th percentile while TSR ranks in the 32nd percentile. It is also worth noting that the low pay stems from the fact that the company failed to meet its performance measures, and so the LTI part of the Total Compensation vested at only 12.5%.

Source: CGLytics Executive Compensation Models

Before, During and After the EGM

With Coast Capital’s request for an EGM, FirstGroup published a notice for the shareholders’ meeting to vote on the removal of six directors of the current board (including the Chairman, CEO and four other independent Directors). Additionally, appoint seven directors who are nominees of Coast Capital. Expectedly, in the EGM notice of meeting, the board recommended to vote against all the resolutions, believing that they the right strategy to take the company forward.

They added that Coast Capital’s director nominees do not have current relevant experience and also put forward plans that will leave the group with higher debts.

Interestingly, the movement and arguments garnered support from other leading shareholders.

Columbia Threadneedle, with a 10% stake, said it will join in voting against the reappointment of Wolfhart Hauser, the FirstGroup chairman since 2015. Schroders, with a 9% holding, was also seen to have taken sides with Coast Capital.

In a rather unexpected turn of events, one of the director nominees by Coast Capital, David Martin, missed the nomination affirmation deadline and was withdrawn ahead of the general meeting. Speculations suggested that David Martin, who is the former boss of Arriva, a transport company rival and one of the fund’s key nominees, decided not to run for a board seat because he had other projects under consideration.

At the general meeting which was held on June 25, 2019, the shareholders (on average) voted more than 20% in favor of the resolutions. The resolution to remove the Chairman Wolfhalt Hauser was supported by 29.33%, the resolution to remove the CEO was also approved by 25.15%. The resolutions to remove independent directors Imelda Mary, Stephen William Lawrence Gunning, James Frank Winestock and Martha Cecilia Poulter received votes of 31%, 25%, 46% and 25% respectively.

Not one of the directors put forward by the activist investor received the requisite votes to be appointed to the board.

Aftermath: Searching for a New Chairman

Despite receiving enough support to stay on the board, Wolfhart Hauser announced that he will not be seeking re-election to the board during the AGM, which is expected to come off on July 25, 2019. According to the company, senior independent director David Robbie will take on the role of chairman on an interim basis with effect from July 25, overseeing the search for a new chair.

To learn how companies can become proactive and support modern governance decision-making, with access to the same insights as activist investors and proxy advisors, click here.

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