The Effect of Executive Departures on Company Performance

The Executive Management Team plays a pivotal role in the performance of a company. The dismissal or exit of one or more executives is often accompanied by a change in strategy. However, this isn’t always perceived as a positive change by investors.

The Executive Management Team plays a pivotal role in the performance of a company. Collectively they make strategic decisions which steer the company in a certain direction. The dismissal or exit of one or more executives is often accompanied by a change in strategy. However, this isn’t always perceived as a positive change by investors.

Executive Turnover and Performance

Using CGLytics data and intelligence it is possible to assess how executive departures may affect the Total Shareholder Return (TSR) of a company. In constructing the graph, the average TSR is taken across all years for each different number of Executive departures. The results below reveal that having more than one executive (CEO, CFO or COO) depart in a year causes a decline in TSR, whereas having just one executive depart may be seen as less of a concern.

However, when three or more executives depart there is a stark contrast, and TSR decreases significantly. Three executive departures in one year may indicate the cause for concern to investors and subsequently diminish investor confidence and with it, shareholder value.

Executive Departures from S&P 500 Companies and Average 1-year TSR (2013-2018)*

*The average 1-year TSR is calculated across six years (2013-2018) and the number of departures is calculated across all S&P500 companies during these six years.

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

 

A change in leadership inevitably means that the way a company is managed will be altered. The extent to which this alteration will permeate the company and affect its performance is contingent on the influence of the leadership position.

The most influential managerial position at a company is indisputably that of the CEO, closely followed by other executive positions such as COO or CFO. When there is a change in one of these positions it can be considered routine. Investors may not feel any apprehension over the future of the company as the majority of the executive team remains the same.

However, this is not the case when 3 or more executives depart the company. In such an event, investors may become uncertain over the future of the company. As aforementioned, this uncertainty is derived from investors losing their sense of familiarity with the management team. They may no longer feel they can comfortably predict the strategic decisions which management will undertake. This then casts doubt over the future performance of the company.

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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Correcting Founder’s Syndrome: Executive Compensation Practices at Ralph Lauren

Ahead of the Ralph Lauren AGM, CGLytics looks at how CEO pay has changed since the founder’s exit, and how the nominations change the board composition.

Ralph Lauren Corporation, a global leader of premium lifestyle products, is scheduled to hold its 2019 Annual General Meeting of Shareholders (AGM) on August 1, 2019. Shareholders attending the AGM will vote on the following resolutions:

  • The election of 4 directors to serve until the 2020 Annual General Meeting of Shareholders;
  • The ratification of the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the fiscal year ending March 28, 2020;
  • The approval, on an advisory basis, the compensation of the Company’s named executive officers and the Company’s compensation philosophy, policies, and practices;
  • The adoption of the Company’s 2019 Long-Term Stock Incentive Plan.

 

Election of Directors:

Ralph Lauren has two classes of directors, Class A and Class B. At the upcoming AGM, four Class A directors will be proposed for election: Frank A. Bennack, Joel L. Fleishman, Michael A. George, and Hubert Joly. We note that in 2018, Ralph Lauren increased the size of its Board with the appointment of three new directors, namely Michael A. George, Angela Ahrendts, and Linda Findley Kozlowski, ostensibly to expand the Board’s “diversity of skills and experiences”. These three directors bring to the Board Leadership, Executive, and Industry/Sector expertise, with Michael A. George and Linda Findley Kozlowski being active CEOs in two retail companies and Angela Ahrendts being a former executive of Apple, Burberry Group plc and Kate Spade & Company. In terms of skills, the three individuals bring about Marketing, Sales and Operations knowledge. Nevertheless, the Board still appears to lack Technology and Financial expertise.

However, in addition to the diversity of skills that the addition of the new directors has brought to the board, the company also now maintains a gender diversity level of 50%, well above the market standard for the United States.

Source: CGLytics Data and Analytics

Executive Compensation:

The third resolution in the agenda is a shareholders’ advisory vote to approve the Company’s executive compensation.

After the Founder, Ralph Lauren, stepped down from his position as CEO, Ralph Lauren has gone through two CEO changes, with Stefan Larsson serving from November 2015 to May 2017, and Patrice Louvet serving since July 2017. As can be seen from the absolute comparison chart generated by CGLytics’ Pay for Performance module, there appears to be a misalignment between CEO compensation and one-year total shareholder return between 2008 and 2015. However, it appears that this misalignment has reduced since Mr. Lauren left the position of CEO. Furthermore, we also see that the total realized compensation for the CEO thereafter has been reduced significantly.

Source: CGLytics' P4P Modeler

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

CEO Compensation Package Breakdown

Historically, the CEO’s compensation package has primarily focused on his STI opportunity (between 2009 and 2012). However, since then, the CEOs compensation package breakdown has shifted towards long-terms incentives, which now form a greater component of the CEO’s compensation package.

Additionally, in 2017 the performance measures of LTI grants shifted from 3-year Cumulative Operating Margin and Operating Margin to 3-year Cumulative Return on Invested Capital (ROIC) and 3-year Relative Total Shareholder Return (TSR) in 2018. Ralph Lauren also added Global digital revenue as a new measure for STI grants, a modifying KPI that could result in an “adjustment of bonuses upwards or downwards by 10%.”

Source: CGLytics' P4P Modeler

Relative Positioning

In comparison to Ralph Lauren’s own disclosed peer goup, the Company’s CEO pay appears now to be line with its peers. Additionally, when reviewing the company’s relative positioning among its peers, there also appears to be a pay for performance alignment between Ralph Lauren’s 3-year TSR and compensation paid to its CEO.

RalphLauren4
Source: CGLytics' P4P Modeler

Ralph Lauren also proposes adopting a 2019 Long-Term Stock Incentive Plan, under which the Company awards equity compensation to executive officers, to replace the current Ralph Lauren Corporation 2010 Amended and Restated Long-Term Stock Incentive Plan. Under the new plan, LTI awards will be determined based on 3-year Cumulative Return on Invested Capital (ROIC) and 3-year Relative Total Shareholder Return (TSR).

Overall, we find that although the company has seen shifts in executive leadership over the past few years after Mr. Lauren left the reigns of the company to his successor, we also find that the company’s executive compensation programs have fallen more in line with market norms, correcting a former pay for performance misalignment that extended under Mr. Lauren’s leadership.

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.

Sources

CGLYTICS DATA AND ANALYTICS   RALPH LAUREN 2019 PROXY STATEMENT

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FirstGroup Take Another Ride on the Activist Train

Over the past nine months, FirstGroup plc has been the target of an activist campaign from New York-based hedge fund, Coast Capital. One of the main critiques by the activist investor was regarding the governance structure, specifically the composition of the board. Utilizing CGLytics’ analytics and tools in its platform, we show how FirstGroup could have spotted governance red flags to possibly avoid this situation.

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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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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