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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Aston Martin: Speeding Towards 8th Bankruptcy or Revitalization?

A skill-deficient board led to the overestimation of Aston Martin’s market appeal. How does the introduction of new CEO Tobias Moers impact Aston Martin’s board composition, skillset, and expertise?

07.09.2020

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

Background 

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

Second Century & IPO

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

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

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

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

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

Underwhelming IPO

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

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

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

Something amiss in the skills and diversity matrix?

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

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

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

The 11th Provision states that:

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

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

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

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

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

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

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

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

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

New Voices, Same Results?

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

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

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

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

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

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

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

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

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

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

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

 

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

References:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Wirecard Pre- and Post-Scandal: A Board Effectiveness Analysis

This article examines Wirecard’s corporate governance practices, board effectiveness score compared to their DAX and sector peers, and shortfalls in board expertise pre- and post-scandal.

07.06.2020

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

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

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

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

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

Gaps in board expertise

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

Wirecard’s Board Expertise and Skills Matrix

Wirecard Board Expertise
Source: CGLytics Expertise Diagram and Skills Matrix

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

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

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

Board effectiveness analysis

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

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

Board Effectiveness Score of DAX Index (2019)

Wirecard board effectiveness on DAX
Source: CGLytics Board Effectiveness Score

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

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

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

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

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

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

Board Effectiveness of Wirecard Pre- and Post-Scandal

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

Destruction of Shareholders’ Value

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

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

What’s next for Wirecard?

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

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Takeaway.com is on a mission

Takeaway.com is on a mission to assert its dominance as one of the world’s leading online food delivery service providers. Mergers and acquisitions have resulted in an increase in bonuses for the CEO and the board, plus an improvement in board structure.

07.01.2020

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

The Merger:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Acquisitions:

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

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

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

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

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

Impact on CEO Compensation:

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

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

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

CEO earnings
Source: CGLytics Data and Analytics

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

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

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

 

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

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Bennett and the Ashford Companies: Corporate Governance Pitfalls and Lessons

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

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

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

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

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

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

Pay for Performance analysis of Ashford Inc.’s CEO

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

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

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

Pay for Performance Ashford
Source: CGLytics Data and Analytics

Understanding the skill set of the Board

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

Ashford Inc.’s Board Expertise and Skills Matrix

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

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

Ashford Hospitality Trust’s Board Expertise and Skills Matrix

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

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

Braemar Hotels & Resorts’ Board Expertise and Skills Matrix

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

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

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

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

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

 

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

Refererences

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

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

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

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

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

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

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

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AMP Receives Second “First Strike” Within Three Years

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

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

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

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

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

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

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

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

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

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

AMP Limited’s Pay for Performance analysis

AMP Relative Positioning
Source: CGLytics Data and Analytics

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

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

AMP Limited’s Board Expertise and Skills Matrix

AMP Board
Source: CGLytics Data and Analytics

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

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

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

Reference

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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NMC Scandal and its Corporate Governance

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

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

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

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

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

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

Corporate Governance practices come into question

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

NMC’s Board Expertise and Skill Matrix (2018)

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

Understanding the skills set of NMC’s previous Board

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

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

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

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

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

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What could have been the problem then?

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

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

Nationality of directors during 2018-2019

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

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

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

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

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

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

Interested to see how your company stacks up against 5,900 globally listed companies’ board composition, diversity, expertise and skills? Click here to find out about CGLytics’ boardroom intelligence capabilities and obtain the same insights used by institutional investors, activist investors and leading proxy advisor Glass Lewis.

 

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

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

 

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ProPetro: The Intricacy of Related Party Transactions and Effective Board Supervision

A review of ProPetro’s Board Effectiveness and corporate governance practices in the wake of their scandal. Is there a way their governance issues could have been detected earlier?

On March 13, 2020, Dale Redman resigned his position as Chief Executive Officer of ProPetro Holding Corporation with immediate effect. His departure marked the end of a seven month-long inquiry into violations of SEC regulations and company policy.  By the time the facts came to light, ProPetro’s stock had fallen 86% and the Company found itself embroiled in investor lawsuits and a federal investigation. This article examines the corporate governance deficiencies that have been uncovered.

 

Background and Timeline

ProPetro Holding Corporation is a hydraulic fracturing equipment and services company at the heart of the 21st century U.S. oil boom.  Founded in 2007 and operating in the Permian Basin oil field of west Texas, the company has seen healthy growth over the years and was in the process of bringing new hydrofracking technology to market when problems surfaced with the company’s management.

In August of 2019, ProPetro initiated an internal review that originally focused on the disclosure of contracts it signed with AFGlobal Corporation to purchase a number of fleets of its Durastim® fracking pumps.  The review, which included outside counsel and advisors, then expanded to include expense reimbursements made to ProPetro executives, related party transactions and potential conflicts of interest.

Review Uncovers Improper Activity

The preliminary findings of the internal review, which was conducted by management, found that due to inadequade documentation ProPetro was improperly expensed $370,000 by senior management but did not find any evidence of improperly disclosed related party transactions.  However, the company did annouce that the review would likely find material weaknesses among its internal controls.

Nevertheless this prompted a class action lawsuit by investors filed in Septemeber.

In October, 62 days later, ProPetro announced substantive completion of its review and a round of management changes took place, although none of the executives under review actually left the company. The company also announced that it had confirmed the existence of accounting deficiencies and the review would need additional time to investigate previously undisclosed related transactions that had come to light.

Among the senior managers that were reshuffled included Chief Executive Officer Dale Redman, who retained his title, although was removed from day to day duties.  Phillip Gobe, ProPetro’s Chairman was appointed as Executive Chairman and became the Company’s Principal Executive Officer.  Jeffrey Smith, the Chief Financial Officer, filled the newly created role as Chief Administrative Officer and was replaced by Darin Holderness as Interim Chief Financial Officer.  Chief Accouting Officer Ian Denholm resigned.

Following the announcement of this “improved organizational struture”, ProPetro’s shares rallied +19% appearing to quell market concerns and reassure investors that any governane issues were well in hand.  Though this reassurance was shortlived.

Later that Month on October 24, 2019, the Securities and Exchange Commision (SEC) announced it had opened an investigation into ProPetro.  And on Novemeber 13 more details were revealed about ProPetro executive’s undisclosed transactions as the company announced that its former Chief Accounting Officer, Ian Denholm, had loaned money to a business partner for the development of real estate which was in turn sold or leased to ProPetro.  In total, ProPetro paid out $3.6 million to Denholm’s business partner.

Undisclosed Entities were used to Personally Enrich ProPetro Leadership

Eventually it came to light that members of ProPetro’s board and senior executives were named as leaders (or involved parties) of several companies with whom ProPetro was doing business.  FloCap Injection Services, LLC,  a company that had named Chief Executive Officer Dale Redman, who later resigned, as a managing member along with ProPetro Finance Chief Jeffrey Smith.  ProPetro board member and Audit Committee member Alan Douglas was also found to be Redman’s personal accountant and and involved party to outside entitites in which Dale Redman was named as a managing member: Red Hogg, LLC and Energy Entreprenuer Fund 1, LLC.  In fact, ProPetro employees had been in involved with a number of other undisclosed companies (Clarabby Development LLC, Conquistador Capital LLC, Dahlia Development LLC, Ener-Coil LLC, HR Double S LLC, South of the Border Materials LLC and others) to whom the ProPetro had eventually awarded business.  And at least four deals, it was discovered, were awarded to private ventures owned by Redman.  These undisclosed connections personally enriched Redman to the tune of hundreds of thousands of dollars.

Redman Steps Down

On March 16, 2020, ProPetro announced that Dale Redman resigned his position as Chief Executive.  In that announcement it was also disclosed that, “… the company discovered that its former Chief Executive Officer entered into a pledge agreement covering all of the company’s common stock owned by him at that time as collateral for a personal loan in January 2017, in violation of the shareholders agreement then in place …”  Redman put up 35% of his holdings in ProPetro worth $8 million, around 601,200 shares in all.

A Reformed ProPetro?

Clearly, over the past several years, ProPetro has been suffering a number of governance deficiencies. An era of improper personal enrichment on the part of executives, lack of board independence, weak interal controls, violations of SEC regulations and poor disclosure practices, should have come to end with the resrtucturing announced in October of last year and the resignation of CEO Dale Redman.

An analysis of ProPetro’s Board Effectiveness should help investors find out if the company is well positioned to resume healthy operation going forward.  Board Effectiveness is calculated by averaging the scores of a company on a number of underlying attributes outlined by the NYSE and other US guidelines. The CGLytics Risk Rating tool, of which Board Effectiveness is one the of main pillars, enables Corporate Boards to stand back and assess their strengths and areas for development through an independent lens and identify gaps and changes that will enable them to achieve their full potential.

Board Effectiveness percentile rank within S&P Small Cap 600 - Energy Sector

Source: CGLytics Data and Analytics

ProPetro’s Board Effectiveness score has improved slightly from 73 to 75 since the internal review was first announced in August of 2019 and since the company’s leadership underwent restructuring.  Even though the changes made at ProPetro have improved effectiveness in a couple of areas, the company’s percentile rank did fall from 43% to 38%, placing it below median when compared to other companies listed on the S&P Small Cap 600 in its sector.  However, this is mostly due to the improving scores of other companies comparatively.

ProPetro - Board Effectiveness Scores

Source: CGLytics Data and Analytics

Of the factors contributing to ProPetro’s improving score are gender equality due to the addition of Michele Choka to the all male board of directors in February of 2020.  ProPetro also receives a modest 7 point boost on Board Independence due to the departure of long tenured individuals.  The data suggests that the issues of Board Independence, Gender Equality and Director Interlocks may be connected to the Nationality score, which is where ProPetro is weakest.

The nationality attribute reflects variation in the nationalities of board members.  The more nationally homogenous, the lower the score.  This is likely a function of the regional character of ProPetro’s business, being so closely linked with Permian Basin and the west Texas region generally. Nevertheless, it appears evident that board diversity is the key governance challenge for ProPetro going forward.

Altogether, the company’s response in the form of its internal review and subsequent actions succeded in bringing matters to light and holding executives accountable, but not before the company’s share price collapsed.  Since the restructuing, ProPetro’s stock has made a modest recovery and confidence in leadership appears to be returning.  Long term success will depend on ensuring board diversity and Independence.

Interested to see how your company stacks up against 5,900 globally listed companies’ board composition, diversity, expertise and skills? Click here to find out about CGLytics’ boardroom intelligence capabilities and obtain the same insights used by institutional investors, activist investors and leading proxy advisor Glass Lewis.

References

Culper Research. (2019). ProPetro Holding Corp (PUMP): Friends & Family First at this Permian Cesspoolhttps://img1.wsimg.com/blobby/go/cc91fda7-4669-4d1b-81ce-a0b8d77f25ab/downloads/Culper_PUMP_10-31-2019.pdf?ver=1589202898850

Globe Newswire. (2019, December 3). Lawsuit for investors in ProPetro holding Corp. (NYSE: PUMP) shares announced by shareholders Foundation. Finance.Yahoo.com. https://finance.yahoo.com/news/lawsuit-investors-propetro-holding-corp-130010662.html

Liz Hampton. (2020, March 19). How a Texas oil CEO’s luxury land deals cost him his job. Reuters.com. https://www.reuters.com/article/us-usa-oil-propetro-investigation-insigh/how-a-texas-oil-ceos-luxury-land-deals-cost-him-his-job-idUSKBN2161FD

ProPetro holding Corp. (2019, October 9). ProPetro announces substantial completion of fact finding for previously disclosed internal review. propetroservices.com. https://ir.propetroservices.com/press-releases/detail/45/propetro-announces-substantial-completion-of-fact-finding

United States Securities and Exchange Commission. (2019, August 8). Form 8-K. SEC.gov. https://www.sec.gov/Archives/edgar/data/1680247/000110465919044899/a19-16860_18k.htm

United States Securities and Exchange Commission. (2019, October 3). Form 8-K. SEC.gov. https://www.sec.gov/Archives/edgar/data/1680247/000110465919053592/a19-19705_18k.htm

United States Securities and Exchange Commission. (2019, November 13). Form 8-K. sec.gov. https://www.sec.gov/Archives/edgar/data/1680247/000110465919063353/a19-22679_18k.htm

United States Securities and Exchange Commission. (2020, February 11). Form 8-K. sec.gov. https://www.sec.gov/Archives/edgar/data/1680247/000110465920022476/tm208021d1_8k.htm

United States Securities and Exchange Commission. (2020, March 16). Form 8-K. sec.gov. https://www.sec.gov/Archives/edgar/data/1680247/000110465920033704/tm2012779d1_8k.htm

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Blue Sky Downfall – What went wrong?

While no company wants to find itself in a state of voluntary administration, it is a stark reality faced by the Australian-based fund manager Blue Sky Alternative Investments Limited. The company is currently undergoing administration, following years of challenging circumstances starting as early as 2017.

When facing bankruptcy or insolvency, companies have the option of going into voluntary administration. This is when an independent and qualified person (a voluntary administrator) takes over a company’s assets and business operations in an attempt to salvage the company [1].

While no company wants to find itself in a state of voluntary administration, it is a stark reality faced by the Australian-based fund manager Blue Sky Alternative Investments Limited. The company is currently undergoing administration, following years of challenging circumstances starting as early as 2017. The future of a company that was once named one of Brisbane’s top companies is now uncertain [2] after US-based short-seller Glaucus reported that the company had overstated its valuation and disregarded some of its key business obligations [3].

Despite Blue Sky’s former Chief Executive Officer Robert Shand’s claims that the company had grown by 50 per cent across key performance metrics, Glaucus expressed skepticism regarding the credibility of Blue Sky’s valuations [4]. The research company’s analysis showed that Blue Sky’s real fee earning asset under management was valued at maximum AUD 1.5 billion, which was 63 per cent short of the AUD 3.9 billion that Blue Sky had reported [5]. The inflated representation of figures may have helped with boosting share prices and more access to capital. Blue Sky was also criticized for allegedly overcharging its clients with inflated management fees.

Shortly after the release of the Glaucus report, Blue Sky suspended its trading to review the claims of the short-seller hedge fund [6]. Just one week later, the company’s share prices dropped by 41 per cent by April 5, 2018 [7]. Despite its free falling share prices, Blue Sky’s response in the face of such accusations was to call on the Australian Investments and Securities Commission (ASIC) to investigate and question the integrity of Glaucus rather than to refute the latter’s claims with evidence, fostering even more pessimistic investor sentiments.

Even in the midst of battling to keep themselves afloat and avoiding more trade suspensions, Blue Sky nonetheless remained optimistic. This was until September 2018, when it confirmed that a US-based investment firm, Oaktree Capital, would be providing the Australian company with a seven-year-loan facility of AUD 50 million to facilitate the recovery of the company [8].  However, not long after the loan agreement, Blue Sky announced it will fail to meet its obligations to Oaktree [9], breaching its financial covenant as it reported an after tax net loss of AUD 25.7 million for the first half of 2019. Blue Sky Alternative Access Fund, Blue Sky Alternative Investment’s fund management subsidiary, also decided to withdraw from its parent company until ongoing legal actions were concluded [10].

After many failed deals and breaches of financial obligations, Blue Sky was suspended from the ASX 300 on May 2019. The company has also announced that the advisory and investment firm, KordaMentha, has been selected as its receiver and manager, and is currently still in administration [11].

What went wrong?

Not only did Blue Sky fail to display transparency during the short-seller report, but it also failed to comply with the 3rd edition of the ASX’s Corporate Governance Principles and Recommendations, where a listed entity must maintain a majority of independent directors in their board [12]. In early 2017, John Kain, who served as the Chairman of Blue Sky, was the only independent member of the board, the other six being Executive Directors. This pushed Blue Sky to appoint two more independent directors in February 2017 but still failed to compose a board with an independent majority board of directors [13]. The Australian Institute of Company Directors states that Non-Executive Directors provide independence and objectivity to the board. An objective and outside perspective supports the idea of acting in the best interest of the company and monitoring the Chief Executive Officer and senior executives without partiality [14]. Independent directors also act as expert advisors in areas where the company aims to grow and develop [15].

Board diversity Blue Sky

As of February 2017, the board of Blue Sky was composed of: John Kain (Independent Chairman), Michael Gordon (Independent Non-Executive Director), Philip Hennessy (Independent Non-Executive Director), Alexander McNab (Executive Director), Kim Morison (Executive Director), Timothy Wilson (Executive Director) and Mark Sowerby (Founder and Executive Director). Based on the CGLytics analysis, only 43 per cent of the board in 2017 were independent non-executive directors, even after the appointment of two additional independent directors. In addition, the analysis also shows that there are no female members, resulting in a less diverse board [16].

Board expertise Blue Sky

The board expertise tool of CGLytics that provides insight of the board skills matrix shows that the company lacked an expertise in risk. Although Blue Sky’s Board is strong in the finance expertise due to its company sector, independent directors experienced in risk management could facilitate in monitoring and assuring the reliability of the financial information provided by the company. However, both independent members and risk expertise were lacking.

There was also a high turnover of board members and senior executives during the whole debacle. The first to depart the company in 2016 was founder Mark Sowerby. This raised concerns due to his sale of approximately AUD 27 million worth of company shares and may have started the downfall and speculation of Blue Sky’s future [17]. In April 2018, Robert Shand, the supposed optimistic managing director of Blue Sky has also stepped down from the board [18]. Moreover, the company had to appoint three different Chief Financial Officers in a span of seven months [19]. Mr. Joel Cann was appointed as Chief Executive Officer as he had extensive experience in rebuilding Aspen, where he was also appointed as CEO in 2016 [20]. After just two months, Blue Sky announces that it no longer required a CEO, forcing Joel Cann to depart the board [21]. The high rate of departures could have led to an inefficiency in productivity [22]. A recent analysis performed by CGLytics on executive departures from S&P 500 companies reveals that having more than one executive resignation in a year may cause the company’s Total Shareholder Return to decline [23].

exec departures

A significant number of departures may potentially lead to a lack of confidence for the future and can slow down the growth of shareholder investments.

Conclusion

Although no one would have expected the drastic plunge of Blue Sky, it could have been minimized or mitigated with good governance practices and decisions throughout the volatile season of the company. Appointing competent and independent directors that have the right skills to oversee executive management can effectively and ultimately add value to the company and avoid risks of uncertainty in businesses.

Click here to learn more about CGLytics’ boardroom intelligence capabilities and executive remuneration analytics, used by institutional investors, activist investors and advisors.

[1] https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-employees/voluntary-administration-a-guide-for-employees/

[2] https://www.businessnewsaus.com.au/articles/2017-brisbane-top-companies-21-30.html

[3] https://www.bonitasresearch.com/company/blue-sky-alternative-investments-ltd-asx-bla/

[4] https://www.asx.com.au/asxpdf/20161006/pdf/43brx5pyfghn67.pdf

[5] https://www.bonitasresearch.com/company/blue-sky-alternative-investments-ltd-asx-bla/

[6] https://www.businessnewsaus.com.au/articles/short-seller-hits-blue-sky–sends-shares-tumbling.html

[7] https://www.businessnewsaus.com.au/articles/blue-sky-shares-take-another-big-hit-on-glaucus-stoush.html

[8] https://www.businessnewsaus.com.au/articles/oaktree-saves-blue-sky-with–50m-investment.html

[9] https://www.businessnewsaus.com.au/articles/blue-sky-fails-to-meet-oaktree-loan-conditions.html

[10] https://www.businessnewsaus.com.au/articles/blue-sky-s-alternative-access-fund-cuts-supply-to-mothership.html

[11] https://www.businessnewsaus.com.au/articles/blue-sky-calls-in-receivers.html

[12] https://www.businessnewsaus.com.au/articles/critics-call-for-more-independent-directors-on-blue-sky-board.html

[13] https://www.asx.com.au/asxpdf/20170220/pdf/43g3njpm12fzft.pdf

[14] https://aicd.companydirectors.com.au/-/media/cd2/resources/director-resources/director-tools/pdf/05446-1-11-mem-director-tools-bc-non-executive-directors_a4_web.ashx

[15] https://medium.com/@theBoardlist/five-reasons-you-need-an-independent-director-on-your-board-dc300f668a41

[16] https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf

[17] https://www.businessnewsaus.com.au/articles/blue-sky-in-freefall–calling-for-asic-intervention.html

[18] https://www.businessnewsaus.com.au/articles/blue-sky-md-and-executives-resign-in-the-wake-of-glaucus-saga.html

[19] https://www.businessnewsaus.com.au/articles/blue-sky-appoints-third-cfo-in-seven-months.html

[20] https://www.businessnewsaus.com.au/articles/joel-cann-takes-the-reins-at-blue-sky.html

[21] https://www.businessnewsaus.com.au/articles/blue-sky-ceo-no-longer-required.html

[22] https://boardmember.com/sudden-ceo-departures-can-upend-an-unprepared-board/

[23] https://cglytics.com/the-effect-of-executive-departures-on-company-performance/

About the author

Alex Co: APAC Research Analyst

Alex graduated from the S P Jain School of Global Management in Sydney with a degree in finance and entrepreneurship. She previously worked in the compliance division at a large financial institution and gained her experience as a research analyst.

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Harvey Norman AGM; Strike 2 in the making?

Harvey Norman’s Annual General Meeting is to be held this Wednesday November 27, 2019. With leading independent proxy advisor CGI Glass Lewis advising to vote against the reappointment of the company’s chief executive, Katie Page, and the remuneration report, the gloves are off.

Shareholders have braced themselves for the upcoming Harvey Norman Annual General Meeting (AGM) to be held on November 27, 2019. The meeting will not be taken lightly following the shocking results of the 2018 AGM. Here we take a look at the controversial corporate governance practices that has investors and proxy advisors concerned.

Votes against remuneration report in 2018

What happened in 2018? Majority of the shareholders voted against the adoption of the remuneration report, resulting in 50.63 per cent of shareholders disapproving the resolution earning the company a first strike. Not only did a large percentage of shareholders vote against the remuneration report, but an average of 27.76 per cent opposed the re-election of the following directors: Non-Executive Director Mr. Michael John Harvey, Non-Executive Director Mr. Christopher Herbert Brown, and Executive Director and Chief Operating Officer (COO) Mr. John Slack-Smith. An average of 17.5 per cent of shareholders also voted against the grant of performance rights under the Harvey Norman 2016 Long-term Incentive Plan to the following Executive Directors: Executive Chairman Mr. Gerald Harvey, Chief Executive Officer Ms. Kay Lesley Page, Executive Director and COO Mr. John Slack-Smith, Executive Director David Ackery, and Executive Director and Chief Financial Officer and Company Secretary Chris Mentis.

Questions over what will happen at 2019’s AGM

Harvey Norman is now in hot waters, especially if majority of the shareholders continue to vote against the adoption of the remuneration report in the 2019 AGM, leading to a spill resolution. The Corporations Act 2001 has been amended to include a “two-strike” rule [1]. A company will be given a first strike if 25 per cent or more vote against the remuneration report. Until the next AGM, the company is required to review and respond to the shareholders’ growing concerns regarding executive pay. The next AGM will determine whether a company gets a second strike [2]. This occurs when 25 per cent or more shareholders still vote against it. During the same AGM, shareholders will establish whether directors need to stand for re-election. If 50 per cent or more shareholders vote for to pass a “spill” resolution, a “spill” meeting will be held within 90 days. Proxy advisors Ownership Matters and CGI Glass Lewis have advised investors to vote against the remuneration report and face a spill resolution to effectively improve its corporate governance [3].

ASX’s Corporate Governance Principles comes into question

Minority shareholders are dissatisfied with the number of independent directors present in the board. The board is currently composed of: Executive Chairman Gerald Harvey, Chief Executive Officer Katie Page, Executive Director and Chief Financial Officer/ Company Secretary Chris Mentis, Executive Director and Chief Operating Officer John Slack-Smith, Executive Director David Ackery, Non-Executive Director Christopher Brown, Non-Executive Director Michael Harvey, Independent Non-Executive Director Maurice Craven, Independent Non-Executive Director Kenneth Gunderson-Briggs and Senior Independent Non-Executive Director Graham Paton.

There are 10 board members and only three of which are independent. The company disregards the 4th edition of ASX’s Corporate Governance Principles and Recommendation that states majority of board members must be independent [5].

Data from CGLytics suggests that only 30% of the Harvey Norman board members are independent. Independent directors are vital members of the board because they provide more transparency to shareholders and fill the gap of skills required by the company [6]. The lack of independent directors poses a huge problem for minority shareholders especially when the board of directors have a total of 56.9 per cent stake in the company, making them the majority shareholders. This gives a disadvantage to minority shareholders that want to voice concerns regarding re-election of directors and the adoption of the remuneration report.

HN Board

Proxy advisory firm Ownership Matters even goes so far to propose the voting against the re-election of non-Independent Directors to force the company to make board changes [7]. In the Harvey Norman 2019 Annual Report, the company responded to the reason behind appointing fewer independent directors, stating that each executive director (including non-executive directors that are not independent) still provide quality independent judgment to the issues that arise.

Tenure reveals a stale board

The board also appears to be stale. The average tenure of the board directors is 20 years. For some time now, corporate governance stakeholders; governance experts and shareholders alike have paid substantial attention to the issue of board refreshment or entrenched boards. Usually, when a board is stale, there is the concern that they may lack new perspectives, become complacent which may affect the long-term performance of the company as well as provision of effective oversight and management.

One more independent director added to the board

In March 2019, the company added John Craven who was an independent director to the board. This was the first time in 14 years that the board had appointed an independent director to its fold since Graham Paton joined the board in 2005.

Data from CGlytics shows that although there are 10 board members, most of their skills are concentrated on three areas: finance, advisory and technology. This shows that the composition of the skills matrix is not balanced between the members and is not aligned with the skills that the company requires. Having a skill such as risk is a vital key competency a board needs, especially in turbulent times that may make or break the company.

Harvey Norman's board expertise

What are the proxy advisors’ view?

Because of the criticism and frustration of stakeholders, proxy advisors such as ISS Governance and Ownership Matters  encourage investors to vote for the appointment of self-elected Mr. Stephen Mayne as a director. Mr. Stephen Mayne is a journalist and a shareholder activist that constantly offers himself up for election on boards. Executive Chairman Gerald Harvey has urged Australian regulators to question the credibility of the proxy advisors that advise shareholders to appoint someone who has no experience in the retail industry [8].

Different proxy advisory firms Ownership Matters and CGI Glass Lewis are also recommending against the re-election of Chief Executive Officer Katie Page [9].  The company is being questioned by the Australian Securities and Investment Commission regarding the high increase in pay for Ms. Page despite the decrease in the Total Shareholder Return (TSR) of the company [10].

Where does Harvey Norman’s CEO Pay for Performance rank?

The CGLytics Relative Positioning Pay for Performance tool compares Harvey Norman’s CEO pay with that of the industry peer group’s three year TSR. The performance evaluation shows that it is misaligned. The company’s total realized pay is in the 45th percentile while the three-year TSR ranks in the 15th percentile and shows that the CEO is compensated more than the increase in TSR.

HN P4P analysis

Changes in remuneration was included in its 2019 Annual Report, changing the short-term incentive financial metric from return on net assets to earnings per share adjusted for the after tax effect of property increments decrements. The short-term incentives will be measured 50 per cent on earnings per share adjusted for the after tax effect of property and 50 per cent as non-financial conditions. Short-term incentives will still be given in cash except when the executive directors have shares lower than the benchmark level. The STI pool will also be increased to the maximum level at 120%.

As to whether, these changes have the potential to avert a potential revolt at the upcoming AGM, it remains to be seen.

Would you like to gain instant insights into more than 5,500 globally listed companies’ board composition, diversity, expertise and skills? Or access the same CEO pay for performance insights used by Glass Lewis in their proxy papers?

Click here to learn more about CGLytics’ boardroom intelligence capabilities and executive remuneration analytics, used by institutional investors, activist investors and advisors.

About the Author

Alex Co: APAC Research Analyst

Alex graduated from the S P Jain School of Global Management in Sydney with a degree in finance and entrepreneurship. She previously worked in the compliance division at a large financial institution and gained her experience as a research analyst.

Latest Industry News, Views & Information

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.

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.

CNBC Report: More activist investors to focus on corporate governance and executive pay

This week CGLytics CEO discussed the increase in activist investor activity with CNBC Street Signs. New research from CGLytics reveals that activist investors are broadening their focus.