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

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

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

 

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

 

The New SEC Proxy Voting Rules

 

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

 

Redefinition of “Solicitation”

 

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

 

Changes to Filing Exemptions

 

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

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

 

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

 

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

 

Anti-Fraud Provisions

 

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

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

 

Implications of New Proxy Voting Rules

 

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

Implications for Issuers

 

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

 

Implications for Proxy Advisors

 

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

 

Implications for Shareholders

 

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

 

Summary of New Proxy Voting Rules

 

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

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

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Shareholders file numerous class action lawsuits against pro wrestling titan WWE

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

08.18.2020

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

A Revealing Lawsuit

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

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

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

World Wrestling Entertainment, Incorporated

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

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

WWE’s Board Expertise and Skills Matrix

WWE's Board expertise
Source: CGLytics Data and Analytics

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

Mr. McMahon

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

WWE Goes Public

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

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

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

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

WWE’s Financial Evolution

WWE's financial evolution
Source: CGLytics Data and Analytics

Shareholders “Take the Book”

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

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

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

The Impact on Share Prices

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

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

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

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

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

08.13.2020

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

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

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

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

Source: CGLytics Data and Analytics

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

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

Source: CGLytics Data and Analytics

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

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

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

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

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

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

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

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Azimut: Underlying issues result in shareholder revolt

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

08.07.2020

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

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

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

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

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

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

 

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

Azimut’s Remuneration Voting Outcomes

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

Understanding the shareholding structure of the company

Azimut's Shareholder Structure
Source: CGLytics Data and Analytics

Governance snapshot reveals gaps

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

Azimut's board composition and effectiveness

Board diversity
Azimut board effectiveness
Source: CGLytics Data and Analytics

Pay for performance alignment of Azimut

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

Azimut's Peer Group Analysis

Azimut peer group analysis
Azimut's peer group

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

Azimut's Pay for Performance (3-year)

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

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

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

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

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

08.04.2020

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

1. Look for tools that support peer group modeling functionality

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

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

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

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

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

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

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

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

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

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

 

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

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

 

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

 

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

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

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

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

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

 

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

 

1. Look for tools that support peer group modeling functionality

 

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

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

 

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

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

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

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

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

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

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

 

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

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

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

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

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

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

 

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

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

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

 

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

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

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Ubisoft’s sexual misconduct scandal reveals governance gaps

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

08.03.2020

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

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

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

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

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

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

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

Ubisoft Board Diversity Overview

Board diversity
Source: CGLytics diversity snapshot

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

A scandal likely to hit the company’s financial results

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

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

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

Ubisoft’s Financial Results (2015-YTD)

Ubisoft financial results
Source: CGLytics Data and Analytics

Understanding Ubisoft’s board effectiveness and expertise

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

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

Ubisoft’s Board Composition and Effectiveness Score

Ubisoft board composition and effectiveness
Source: CGLytics board effectivess tool

Gaps revealed on Ubisoft’s board

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

Ubisoft’s Board Expertise and Skills

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

What’s to come for Ubisoft

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

 

References:

https://www.bloomberg.com/

https://www.numerama.com/

https://www.journaldemontreal.com/

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

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

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

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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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.

07.20.2020

CGLytics CEO, Aniel Mahabier, discusses the increase in activist investor activity with CNBC Street Signs. New research from CGLytics reveals the growth in the number of activist campaigns and how activist investors are broadening their focus.

Increase in activism

The CGLytics report Activist Investors Broaden their Focus analyzes the number of activist campaigns carried out over the previous four years and deep dives into the increasing areas that are attracting activism.

During the interview with CNBC, Aniel notes that shareholders are beginning to focus on areas such as diversity and performance. And, even though there has been an overall increase in the number of activist campaigns this year, not all of them have been successful.

The changes we are seeing during the pandemic, are that activists are focused on improving corporate performance. Having the right board composition and board diversity are the areas activists have been focusing on. Culture is another area where we have seen activists putting more focus on to improve corporate performance. – Aniel Mahabier, CEO of CGLytics

Regional shift in activism

The research report notes that now activist investors are finding a lot of opportunity in APAC, but not so much in continental Europe. The question is, do we expect this trend to change, and if so, when?

Social, cultural, and economic factors play a big role, along with the European market being highly regulated. This doesn’t provide a lot of opportunity for activists to play a role. I expect to see a marginal change taking place over time. – Aniel Mahabier, CEO of CGLytics

Executive pay

On this topic of executive pay, CNBC recalls that there has been a lot of focus from activists. Shareholder have objected to senior salaries in the past, even so companies have continued to pay out. During the pandemic, these senior salaries have been cut, and in some cases, granted in stock options. What are activists going to do with compensation?

A focus area of activists is to make sure executive pay is in line with the company performance. The median of CEO pay has risen, regardless of companies’ CEOs and Directors taking a pay cut. This is on both the S&P 500 and FTSE 100. We expect to see more focus on CEO pay in the upcoming proxy season. When it comes time for the AGMs in 2021, reflecting the 2020 performance year. – Aniel Mahabier, CEO of CGLytics

Source: CNBC Street Signs Europe

Board diversity

CNBC mentions about the motivation to change the makeup of boards, and that the representation of women on boards on the FTSE, is abysmal (still remaining below 30%). Will boards be motivated to improve diversity, due to the pandemic and the Black Lives Matter campaign?

The activist landscape is changing. We used to have the traditional activists playing a big role. Now you have passive institutional investment managers changing their style and becoming more active.

If you look at the BlackRocks and the Vanguards of the world, they are focusing on boards being composed with the right mix. Diversity plays a big role. Not only from a gender perspective, or a race perspective, but making sure you have the right skill set in place, the right tenure, and the right age diversity. It’s a number of things that make a board very effective, and I expect diversity to continue to be a focus going forward. – Aniel Mahabier, CEO of CGLytics

Companies need to be prepared for activist investors and engage with shareholders on a more timely basis. Proactive engagement between investors and companies will prevent activist campaigns going forward. Companies need the right information and tools to ensure their corporate governance risks are reduced and any deficiencies are quickly resolved.

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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