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

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

07.27.2020

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

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

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

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

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

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

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

Ontex Group's Remuneration Report Voting Outcomes

Remuneration voting outcomes
Source: CGLytics Data and Analytics

The remuneration (through the lens of CEO pay)

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

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

 

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

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

 

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

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

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

CEO pay country peers
Source: CGLytics Pay for Performance Analytics

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

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

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

 

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

 

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

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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.

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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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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Can Tesco Escape a Revolt on their Remuneration Report?

Will Tesco be confronted with shareholder revolt after its remuneration committee decided to remove Ocado from its custom peer index? Only time will tell with the Annual General Meeting scheduled for June 26, 2020.

Tesco PLC is currently confronted with a shareholder revolt after the Company’s remuneration committee inflated executive bonuses by removing Ocado from the peer group used to estimate its performance. The Annual General Meeting (AGM) of Tesco is scheduled for June 26, 2020, and is set to expect a higher percentage of negative votes against the directors’ remuneration report, particularly following Glass Lewis’ advice to investors to vote against Tesco’s remuneration report.

The removal of Ocado from Tesco’s peer index

Tesco’s remuneration committee decided to remove Ocado from the custom peer index[1] used to measure its relative Total Shareholder Return (TSR) for the 2017 Performance Share Plan (PSP) after May 16, 2018. The argument behind this action, according to Tesco’s report:

“Ocado has experienced significant share price growth which analysis shows is directly correlated to the sales of its technology platform as opposed to its food business. This was when Ocado signed its third major technology deal, establishing a clear pattern of pursuing a technology strategy. As a result of Ocado’s divergence from the retail market (and hence as a direct comparator for Tesco)[2]”.

As a result, the impact of the removal of Ocado from the peer group contributed to changing the actual performance from underperforming the custom index by 4.2% to over-perform the custom index by 3.3%. If Tesco’s TSR was below the custom index as it was before removing Ocado, the TSR metric, which is weighted at 0.5 of the PSP, would have been zero.

However, omitting Ocado resulted to a share vesting equal to 33.4% of the maximum PSP. The long-term incentive payments to the CEO and CFO were approximately boosted by GBP 1.6 million and GBP 0.87 million, respectively.

Historical remuneration report outcome

Figure 1 below illustrates the outcomes of voting of historical director remuneration reports at the AGMs of Tesco between 2010-2019. The three largest negative outcomes against the directors’ remuneration report took place in 2010, 2015 and 2017.

In 2010, the remuneration report received the most negative votes with more than one-third of the total votes against. The cause which led to this shareholder revolt against the directors’ remuneration report in 2010 was the director’s excessive pay in relation to poor company performance in the US.

Sir Terry Leahy, the CEO at the time, received GBP 10 million and Tim Mason, who was responsible for the US market, received about GBP 7 million.

Five years later, in 2015, almost 11% failed to back Tesco’s remuneration report. This was due to a huge payment of GBP 4.13 million to the newly arrived CEO for just six months’ work at Tesco and a slightly more that GBP 1 million to the former CEO, who oversaw negative sales and profits.

Finally, in 2017, 9.4% voted against the directors’ remuneration report due to excessive relocation costs to the current CEO, which is not considered appropriate.

Fast-forwarding to 2020 and the upcoming AGM, it is expected that another big shareholder revolt will be recorded after the company’s remuneration committee inflated executive bonuses by approximately GBP 1.6 million by removing Ocado from the peer group. According to the Sunday Times, Glass Lewis, the proxy advisor, expressed their “severe reservations” with regards to the exclusion of the online grocer from its calculations. Moreover, Glass Lewis advised investors to vote against Tesco’s remuneration report at Tescos’ upcoming 2020 AGM, arguing that such “discretionary” actions “undermined the idea of transparent, target-based pay”.

Figure 1

Source: CGLytics Data and Analytics

Tesco’s descriptive statistic of 2019 compared to the past 10 years

The table below (Table 1) presents the average remuneration of Tesco’s CEO and performance measures from 2010-2019. The average realized pay to Tesco’s CEO is slightly more than GBP 6 million, of which 21% is base salary, 39% STI and 55% LTI. The average Return on Assets (ROA) and the average Return on Equity (ROE) have positive results over time. However, the average three-year TSR is negative. Tesco’s CEO total realized pay in 2019 is GBP 6.8 million, which is 11.6% higher than the average total realized pay over the past 10 years. Comparing the performance measures in 2019 to the past 10 years combined, ROA (2.8%) underperform the average values and ROE (10.4%) and TSR (3Y) (29.7%) overperform the average.

Table 1. Average remuneration of Tesco’s CEO and performance measures (2010-2019)

Tesco’s CEO compensations against its peer group (including Ocado)

Figure 2 shows Tesco’s CEO total realized pay and Tesco’s change in TSR (3Y) [3] against its peer group[4]. Between 2010-2019, Tesco overpaid its CEO compared to its industry peers, particularly in 2010 and 2019 when Tesco awarded the highest total realized pay to its CEO. Moreover, the first five years it is observed that the peer group has higher change in TSR (3Y) when compared to Tesco. However from 2015 Tesco overperformed the peer group until 2018. Again, in 2019, the change in TSR (3Y) of Tesco’s peer group is higher. Therefore, Tesco’s higher payments to its CEO did not guaranty better performance.

Figure 2

Source: CGLytics Data and Analytics

Comparing Tesco’s CEO pay and change in TSR (3Y) against peer group with and without Ocado

This section describes the impact of omitting Ocado from Tesco’s peer group. Figure 3 illustrates Tesco’s CEO total realized pay and Tesco’s change TSR (3Y) against its peer group with and without Ocado. It is clear from the figure that the change in TSR (3Y) is higher in the peer group that includes Ocado, compared to the peer group without Ocado, with a difference of 4.3%.

Therefore, the omission of Ocado from the peer group provides lower change TSR (3Y) value, which in its turn lowers the threshold. Thus, as a result of this omission, Tesco’s executive payments based on TSR – a total payment of approximately GBP 2.47 million – could be justified, whilst otherwise would have ended up with zero.

Figure 3

Source: CGLytics Data and Analytics

Where does Tesco’s CEO Pay for Performance rank?

The Long-Term Incentive Plan of Tesco in 2017 was weighted as TSR equal to 0.5, cumulative cash generation equal to 0.3, and key stakeholder measures equal to 0.2 over a three-year performance period. Comparing Tesco’s CEO pay practice in relation to its peer group (including Ocado) using CGLytics’ Pay for Performance model, we observe a misalignment between the CEO’s total realized pay and TSR (3Y).

Hence, Tesco’s CEO 2019 total realized pay ranks slightly lower than the upper quartile at the 73rd percentile, while its TSR (3Y) ranks slightly higher than the median at the 55th percentile. Thus, the results of the test we conducted, using CGLytics Pay for Performance modeler, in Figure 4 suggest that Tesco is over-paying its CEO relative to its peer group.

Three-year Pay for Performance of Tesco PLC (2019)

Source: CGLytics Data and Analytics

Upcoming Tesco AGM

Looking back at Tesco’s history, shareholder revolts may not be a new incident and they may also be expected during the upcoming AGM, especially given the observations that Ocado’s omission from the peer group led to an inflation of the executive payments. The real question now is to see whether the shareholders will consider Ocado as a direct competitor or not, and as to whether they will follow Glass Lewis’ advice to vote against Tesco’s remuneration report. Moreover, this analysis brings to the front that Tesco’s pay practices were much higher over the recent years compared to its peer group, recording its 2nd highest payment in 2019, when looking at the period between 2010 and 2019. Evidently, this may be a signal that Tesco’s remuneration policy must be reviewed, re-evaluated and perhaps change soon.

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

Click here to learn more about the Glass Lewis CEO compensation analysis and peer group modeling for Say on Pay engagement, available exclusively via CGLytics. Make data-driven decisions this proxy season with CGLytics.

 

References

[1] “Benchmark index made up of FTSE 350 Food and Drug Retailers and FTSE 350 General Retailers weighted 85% and 15%, respectively”. Tesco’s Annual Report 2019 [https://www.tescoplc.com/media/755761/tes006_ar2020_web_updated_200505.pdf].

[2] Reference: Tesco’s Annual Report 2019 [https://www.tescoplc.com/media/755761/tes006_ar2020_web_updated_200505.pdf].

[3] Change TSR (3Y) refers to one-year growth of the three-year TSR.

[4] This analysis attempts to simulate Tesco’s custom peer group, which includes 34 UK companies in the same industry as Tesco from the FTSE-100 and FTSE-250.

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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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Concern over Wesfarmers’ executive pay?

Wesfarmers, which owns some of Australia’s most recognizable brands, sees concerns from shareholders and proxy advisors regarding its CEO and executive pay during the last proxy season

Wesfarmers, one of the biggest conglomerates in Australia, saw concern from its shareholders with a negative response during the recent 2019 Annual General Meeting (AGM) that was held last November 14, 2019.

Although all resolutions were passed, there was a large number of shareholders that voted against the adoption of the remuneration report, resulting in a 21.45 percent disapproval. One of the biggest causes of the pessimistic response from shareholders was due to proxy advisor ISS advising investors to go against the remuneration report because of an “excessive” compensation plan.

Although Wesfarmers’ demerger from Coles supermarket resulted in a 360 percent increase in after-tax profit to AUD 5.5 billion, the company will neither give incentive nor penalize its executives [1].

Shareholders were concerned over the pay for both Chief Executive Officer (CEO) Robert Scott and Independent Chairman Michael Chaney [2]. Mr. Scott has received over AUD 4 million in total realized pay and Mr. Chaney has received AUD 780,000 in total compensation, which ISS claims is higher than its industry peers.

CGLytics Pay for Performance Analysis

According to our CGLytics analysis, Wesfarmers has a higher CEO total realized pay over three years than its three-year increase in total shareholder return (TSR), when compared against its country and industry peers.

This misalignment of the CEO pay compared to company performance may have been the cause of the company almost undergoing a first-strike. A first-strike occurs when 25 percent of shareholders vote against the adoption of the remuneration report and the company would need to either amend or justify its remuneration policies before the next AGM [3].

Wesfarmers Limited's CEO Pay for Performance

wesfarmers CEO pay
Source: CGLytics Data and Analytics

Not only was there concern over the CEO pay for Wesfarmers, but the ambiguous changes in awards policies [4]. This was also seen as an issue for other proxy firms such as Glass Lewis and the Australian Shareholders’ Association (ASA).

What is the KEEPP bonus scheme?

The 2016 and 2017 Key Executive Equity Performance Plan (KEEPP) bonus had been cancelled following the demerger of Coles supermarket, but a bonus will be rewarded with the same principles as KEEPP, however with different performance conditions.

The 2017 KEEPP Allocation for the CEO and the Chief Financial Officer (CFO) had the following performance metrics: 50 percent weighting on Wesfarmers relative to the TSR of the ASX 100 Index, 20 percent weighting on absolute Return on Equity (ROE) and 30 percent weighting on strategic measures.

Because of the demerger in 2018, the company has removed the performance condition on absolute ROE as it may have an impact on the targets of executives. The 2018 KEEPP allocation for the CEO and CFO is as follows: 60 percent weighting on the Wesfarmers’ relative TSR against the S&P/ASX100 Index, 20 percent weighting on Wesfarmers’ portfolio management and investment outcomes and 20 percent weighting on strategic measures. However, the company was not able to be fully transparent and clear in its disclosure of strategic measures and investment outcomes, only stating the improvement of data analytics and better progress in gender balance.

Wesfarmers underpays due to complications in payroll

After the release of the 2019 AGM results, another scandal arose when it came to light that Wesfarmers had underpaid up to 6,000 current and former employees of its industrial division, resulting in AUD 15 million or more in underpayments [5]. The company stated that its cause was due to a defect in a payroll system. The company plans to expedite the sending of payments into the banks of underpaid current and former employees before the end of 2019, but is hindered by the complication of its payroll system [6][7].

Linking director pay to competency and expertise

Companies not only link executive pay to performance, but more often than not, companies also link director pay to competency and expertise [8]. With the current events that Wesfarmers has experienced, it is suggested that the company would benefit from a board that can guide it towards its strategic direction, mitigate risk and oversee company performance.

According to our analysis (performend using the CGLytics application), Wesfarmers’ board has strengths in the areas of ‘advisory’ and ‘finance’. Wesfarmers recent acquisition of the Catch Group in 2019 (an e-commerce company that runs Catch.com.au, Mumgo, Grocery Run and Brands Exclusive), should see greater skills and expertise added in the area of ‘technology’, which is currently very low. ‘Governance’ experience, to spot and mitigate risks, is also worth looking at to ensure issues are resolved smoothly in the future.

Wesfarmers board's expertise and skills

Wesfarmers skills and expertise
Source: CGLytics Data and Analytics

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The DOs and DON’Ts when rethinking incentive plans

Why have 75% of first-time say-on-pay votes failed in 2019? A large number of negative votes can be attributed to incentives. Companies need to rethink their incentive plans and make sure metrics truly benchmark performance.

Seventy-five percent of first-time say-on-pay (SoP) votes failed in 2019, and a large number of these negative votes focused on incentives.

There is an increasing need for companies to fully rethink their incentive plans, as the CGlytics whitepaper “How to take the testing of equity-based compensation plans into your own hands” points out.

“It is imperative that companies design their equity pay plans to ensure they receive shareholder approval first time, every time. In order to meet investor expectations, companies need to understand how they, and the proxy advisors they rely on, evaluate equity plans and make voting decisions.”

Marc Ullman, a partner with Meridian Compensation Partners explains what to do and what not to do in rethinking incentive plans.

First of all, companies need to fully rethink their compensation plans, and not to just tweak them. Making just a few cosmetic changes will not suffice to ensure that incentives are effective. At least every two years, a real restructuring is needed.

Often shareholder pushback will incite a rethink, but even with shareholder support, benchmarking for effectiveness is critical as priorities change and the business climate evolves. The plan must reflect the new realities the business faces.

Or the incentive plan may simply become too complicated to be useful, as continually including more metrics and other add-ons makes application confusing. This often happens as businesses try to simply tweak the plan instead of really rethinking it.

 

Here are the do’s and don’ts to achieve as near optimal alignment between pay and performance as possible:

– If you need a full-scale rethink, don’t settle for a mere tweak. Make sure that what you do matters, don’t nibble around the edges. Make sure the metrics truly benchmark performance.

– But don’t overdo it. Pick out the key metrics and focus on that; don’t try to transform the whole structure unless you really feel that you have to.

– As the rethinking process is underway, take note of the solid rationale that stems from the business model. This will be something to communicate at the end of the process, and one that can be used for grounding the basis of your thinking.

– Make sure you include all the right people: Finance, HR, Corporate leadership, corporate leadership and the business unit. Everyone should buy in to the metrics and the targets that are being set.

– Make sure your plan pays something in year one. After a big rollout you need to make sure that design provides results. Otherwise it could hurt your credibility.

– Take advantage of feedback from shareholder outreach. More and more companies are actively talking to shareholders, and their points of view should at least be considered as the design is taking shape. Consider investor relations and investor perspective and proxy advisors like ISS and Glass Lewis.

– Communicate internally and externally. You have multiple audiences internally.

 

Predict Shareholder Approval with Glass Lewis’ Equity Compensation Model

 

The Glass Lewis Equity Compensation Model (ECM) allows you to instantly test and review your incentives plan using the same key criteria and scoring system as leading proxy advisor Glass Lewis. The ECM supports testing of 4,300+ publicly-traded U.S. firms including the Russell 3000 and exclusively available via CGLytics.

With the ECM you can confidently engage, knowing the strengths and weaknesses of your current and future equity plans. Ensure you get the votes to legally grant equity compensation to your executives, board members and staff.

Click here to learn more about the ECM application or request a no-obligation demonstration.

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Boeing: What has been done? And will that be enough?

Will changes to Boeing’s board be enough to sharpen focus on product and safety going forward? This article examines Boeing’s corporate governance practices and current board expertise, bringing to light some interesting findings.

This article examines Boeing’s corporate governance practices and current expertise on the board. This raises the question if recent changes will really be enough to sharpen Boeing’s focus on product and safety going forward.

Disaster strikes

Following the horrific plane crashes of Lion Air Flight 610 and Ethiopian Airlines Flight 302 in October 2018 and March 2019, a mounting crisis faces Boeing. As a result, Boeing has recently received a fair share of negative publicity, been the subject of investigations and named in lawsuits. Beyond the general public, shareholders and corporate governance experts are infuriated. They collectively question the effectiveness and transparency of the board and leadership—with good reason.

Various recent studies have shown Boeing’s quality of corporate governance.  Findings reveal Beoing ranks near the bottom of all S&P 500 company boards[1]. Even more interesting is the board’s compensation data.

CGLytics data reveals that of all S&P 500 companies, Boeing ranked 91st out of the 500 with the highest paid non-executive directors; receiving an average of $345,000 per director in 2018.

In addition, new developments at congressional hearings held in October 2019 have revealed that many concerns were warranted.  Boeing executives admitted to flaws in the design of its 737 Max. Pilot error was originally thought to be the main cause of the plane crashes, however that sentiment has changed and a “pattern of deliberate concealment”[2] is now suspected. Instead of pilot error, it is now alleged that insufficient information provided to the pilots regarding the new changes to the plane caused these unfortunate results. The Boeing CEO stated at the congressional hearings that, until recently, he was unaware of the apparent issues. It seems greater oversight and communication was, and is, needed within Boeing, its executives, and the Board.

Board takes steps to increase safety

We note that Boeing has taken various actions to ensure the future safety of its aircrafts. In August 2019, the board established a permanent Aerospace Safety Committee to assist the board in “the oversight of the safe design, development, manufacture, production, operations, maintenance, and delivery of the aerospace products and services of the Company.” Along with the establishment of the committee, the company also formed a Product and Services Safety organization, which is responsible for monitoring safety related events within the company’s major businesses.  These additional layers of oversight will hopefully strengthen Boeing’s safety focus and minimize unfortunate future safety issues on the consumer end.

The board also “amended the company’s Governance Principles to include safety-related experience as one of the criteria it will consider in choosing future directors.”[3] Following this amendment, the board appointed former Chief of Naval Operations John Richardson, whose prior positions included significant safety experience, as a director. Admiral Richardson,  along with Admiral Edmund Giambastiani,  appear to be the only director on Boeing’s 14-member board that has safety experience in aviation.  It also does not appear that the board currently contains directors with technical experience in aviation, except for CEO Dennis Muilenburg who was an engineer for Boeing. This could raise the question whether the board has enough expertise to address, both technical and safety issues, to challenge Muilenburg, who previously held a dual role as Chairman and CEO of Boeing for over three years.

Skills and expertise on Boeing's board

Changes for CEO Muilenburg

In October 2019, Boeing’s board decided to remove CEO Muilenburg from his role as Chairman. This action was taken to “enable Muilenburg to focus full time on running the company as it works to return the 737 Max safely to service, ensure full support to Boeing’s customers around the world, and implement changes to sharpen Boeing’s focus on product and services safety” and to “strengthen the company’s governance and safety management processes.”[4] It is still unclear, however, whether Muilenburg will receive any pay cut or even resign following his failure to address the 737 Max issues. When asked at the Congressional hearings about whether he would take any pay cut following this mistake, the CEO said: “Our Board will make those determinations.”

How Boeing could increase board oversight

Board oversight and transparency is a significant issue in corporate governance. It is important to be aware of board composition, executives, and the information that entails when viewing any company. CGLytics provides necessary data analytics that could lend a useful hand in analyzing boards, their efficacy, and transparency. In this case, a quick look at the board expertise, committee overview and individual profile of each director on the Boeing’s board on CGLytics would have drawn attention into the Board’s lack of safety committees and technical and safety experience and expertise.

Would you like to learn more about how, you too, can have instant insights into more than 5,500 globally listed companies’ board composition, diversity, expertise and skills? Click here to find out about CGLytics’ boardroom intelligence capabilities and obtain the same insights used by institutional investors and advisors.

About the Author

Thao Nguyen: U.S. Research Analyst

Thao completed her Bachelor of Science in International Business Management at Erasmus University in Rotterdam and spent a semester abroad at the University of Washington, Foster School of Business. She gained work experience as a Research Analyst in previous internships.

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The Effect of Executive Departures on Company Performance

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

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

Executive Turnover and Performance

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

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

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

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

Source: CGLytics Data and Analytics

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

 

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

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

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

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

About the Author

Jaco Fourie: U.S. Research Analyst

Jaco holds a Bachelor of Science degree in Accounting and Finance from the University of Reading. He has gained experience as a research analyst from his enrollment at the Henley Business School and the International Capital Market Association Centre.

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