WeWork’s initial public offering

WeWork has had a tumultuous build-up to their IPO. Many investors were hesitant to back the company as their corporate governance policies did not meet their standards. CGLytics looks at some of the key factors that created controversy.

Preparing for an initial public offering (IPO) is often a strenuous undertaking. Companies strive to ensure that all their affairs are in order before they submit their S-1 filing to the SEC. This is done primarily to make sure that the initial public offering IPO is well received by investors.

WeWork

WeWork first filed its prospectus on August 14th 2019. Two main components of the filing prompted investor backlash. First and foremost, investors were alarmed at WeWork’s consecutive and increasing financial losses over the past three years. Secondly, investors took note of the company’s unusual governance practices. Although a justification could be provided for the financial losses, namely that they were essential to their growth strategy, no justification could be provided for the latter. With lazy governance practices increasingly linked to poor company performance, WeWork responded by making sweeping changes to assuage concerns.

Women on Boards

Gender diversity on boards has become a prominent issue in recent years. Some major investors, such as Blackrock, have even updated their voting guidelines to try and work towards a more equal representation. In light of this, investors were surprised and disappointed when WeWork’s initial filing included seven board members, all of which were male. In response, WeWork quickly recruited renowned culture coach Frances Frei to their board.

Frei earned her reputation when she was hired by Uber to help fix their “Bro Culture”. Although this a step in the right direction, WeWork might benefit from adding more women to their portfolio of directors. Using CGLytics data and intelligence a trendline can be made, in the S&P 500 real estate industry, between the percentage of women on boards and a company’s Average 1-year Total Shareholder Return (TSR).

Women on boards versus average TSR

Source: CGLytics Data and Analytics

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

 

Voting Rights

Also included in WeWorks initial filing were plans to award the company’s founders and early investors 20 votes for each share of Class Stock. This would grant unchecked power to the CEO. Moreover, in the event that the Chief Executive Officer, Adam Neumann, would become incapacitated, then his wife, Rebekah Neumann, and two directors would decide who the successor would be.

This plan has subsequently been scrapped and been replaced by a more contemporary policy where the Board of Directors holds the power to pick a successor. In regard to the voting rights, the number of votes for each share of Class A stock will now only account for 10 votes each.

WeWork has had a tumultuous build-up to their IPO. Many investors were hesitant to back the company as their corporate governance policies did not meet their standards. WeWork is just one example of many where Corporate Governance plays an integral role in the health and viability of a company, especially when third parties are involved.

For more information regarding how CGLytics’ deep, global data set and unparalleled analytical screening tools can potentially help you make better decisions, click here.

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Deutsche Bank: How CGLytics Tools Inform Glass Lewis’ Pay and Governance Analysis

Glass Lewis’ assessment of executive remuneration reflects a balance of quantitative and qualitative considerations, with CGLytics’ suite of tools underpinning the quantitative component. In the following discussion, we review the quantitative assessment with respect to Deutsche Bank, using CGLytics’ analytical tools.

Shutterfly: A Glass Lewis Use Case

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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.

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Deutsche Bank: How CGLytics Tools Inform Glass Lewis’ Pay and Governance Analysis

Glass Lewis’ assessment of executive remuneration reflects a balance of quantitative and qualitative considerations, with CGLytics’ suite of tools underpinning the quantitative component. In the following discussion, we review the quantitative assessment with respect to Deutsche Bank, using CGLytics’ analytical tools.

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CGLytics supports responsible investing with NN Investment Partners

CGLytics supports responsible investing with NN Investment Partners (NN IP) helping investors to deliver attractive returns and build a sustainable future.

NN Investment Partners (NN IP) is helping investors to realise their responsible investing goals, deliver attractive returns and helps build a sustainable future.

NN IP is a leader in responsible investing, monitoring assets for a diverse group of clients worldwide. NN IP sees responsible investing as the best way to enhance risk-adjusted returns and to contribute to society as a whole. With a founding belief that companies with sustainable business practices and high standards of corporate governance will become the success stories of the future, they produce their annual Responsible Investing Report.

In their latest report NN IP highlight their responsible investing approach, show how they help their clients achieve their financial and sustainable goals, and what they can look forward to in the future.

CGLytics is proud to support NN IP with governance data and analytics for the ESG research and reporting in their 2018 report.

Download NN Investment Partners Responsible Investing Report 2018 here.

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The increasing trend of shareholder opposition to executive pay

Votes against executive remuneration are growing. In this article we look at this change in the European indices and the S&P500.

Deutsche Bank: How CGLytics Tools Inform Glass Lewis’ Pay and Governance Analysis

Glass Lewis’ assessment of executive remuneration reflects a balance of quantitative and qualitative considerations, with CGLytics’ suite of tools underpinning the quantitative component. In the following discussion, we review the quantitative assessment with respect to Deutsche Bank, using CGLytics’ analytical tools.

Shutterfly: A Glass Lewis Use Case

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Interlocking Directorates: Looking for signs of collusion, conflict of interest and overboarding

Conflicts of interest, collusion and the overboarding of directors have been known to grab the attention of the biggest media outlets. As many companies are unfortunately aware. How can this be avoided right from the start?

Conflicts of interest, collusion and the overboarding of directors on publicly listed companies have been known to grab the attention of the biggest media outlets. As many companies are unfortunately aware, this unwanted attention raises questions, creates risk to a company’s reputation, gains attention from activist investors, and can ultimately affect the value of company shares. However, there is a way that all of this can be avoided right from the start.

Interlocking directorates are nothing new. It occurs when two firms share a common director, and the tie or connections that he/she creates is also referred to as a board interlock.

Although lawful and not illegal, it does raise questions about the independence of decisions made in the boardroom and can be seen by the U.S. Federal Trade Commission (FTC) as an anti-competitive practice prompting an investigation.

As stated by the FTC it is their responsibility to, “take(s) action to stop and prevent unfair business practices that are likely to reduce competition and lead to higher prices, reduced quality or levels of service, or less innovation”.

WHEN INTERLOCKS BECOME A CONCERN

An example of where interlocks became a concern for the FTC was during 2009. During this year Apple’s director Arthur Levinson abruptly resigned his seat on Google board following pressure from regulators. Following the announcement FTC’s chairman praised Google and Levinson “for their willingness to resolve our concerns without the need for litigation”.

That same year also saw Google’s Eric Schmidt resign from Apple’s board, three years after accepting a seat.

Eric Schmidt
Eric Schmidt resigns from Apple’s board in 2009

It’s important to mention that prior to these resignations, the FTC had been looking into whether interlocking directorates between Google and Apple raised competitive issues. These competitive issues may have violated U.S. antitrust laws.

The only safe way for companies to avoid situations of interlocking directorates that prompt investigation is by having oversight of every board members’ seats on other companies. By gaining this oversight companies can instantly see any risks or red flags, which are likely already on the radar of investors with governance issues coming under greater scrutiny of late.

This is also hugely important when a company makes new appointments to their board, or an existing director takes on additional responsibilities. Without oversight, companies might be opening themselves up to governance risk and wider liability.

 

CGLytics online solution provides instant information about a company’s board composition, director skills and expertise, as well as interlocking directorates for corporations, investors and advisors.

 

Interlocking directorates are common. It is not new. Most directors will have other board positions across one or more industry, however with highly confidential information that they are privy to, it is vital to identify potential conflicts of interest.

That being said, interlocking directorates can be indicators of the following:

– Collusion: Two or more members of the board holding appointments on another board and using this connection to influence the decision-making away from the best interests of either company.

– Conflict of interest: Directors with specific industry experience will often sit on boards that could be in competition. This can lead to questions from investors on if these board members are performing their duties in the best interests of the company.

– Overboarding: Directors must have the adequate time to devote to their duties of providing oversight for a company. US Proxy Advisory standards state that a director is considered to be overboarded when he/she is a non-executive director and sits on more than five boards, or he/she is an executive director and sits on more than three boards.

– Chairmen of the board are expected to spend double the amount of time as a NED and are considered overboarded with one chair and three other NED roles.

By identifying whether a board member is also on the board of a potential competitor (sometimes inevitably in niche markets where experience is necessary), or if two or more members of the board sit on the same board of another company, is vital for the nomination and governance committees to be aware and ensure that they have the correct policies and procedures in place, as regulators, investors and activists are constantly monitoring.

THINK LIKE AN ACTIVIST

Activist investor campaigns are continuing to show a year-on-year increase with more focus being placed on the composition of the board and the board members existing commitments. Leading investors are voting against the re-appointment of directors who are perceived to be overboarded. In addition, never before has there been as much scrutiny on the skills that a director brings to the board.

Activist investors are using CGLytics’ data and analytics for assessing the board effectiveness of listed companies worldwide.

 

With deep insights into how boards are composed in the CGLytics platform, and a skills matrix applied consistently across all companies in its universe, activist investors easily benchmark a board and assess if its compliant with regulatory and stewardship codes, hence see if there is any reputational risk.

Companies can access these very same insights in the CGLytics platform.

Corporate issuers, their boards and stakeholders can see exactly how they are perceived by activist investors. CGLytics is helping to promote good governance through transparency to the market. View director interlocks, see how board composition compares to competitors and raise concerns of any red flags. Identify any potential skills gaps and be proactive in succession planning, with access to a database of 125,000+ executive profiles draw from 5,500+ publicly listed companies across 40 indexes and 24 countries.

Curious to see how companies are viewed through the eyes of an activist investors? Click here

 

RESOURCES

https://www.ftc.gov/enforcement/anticompetitive-practices

https://www.reuters.com/article/us-google/arthur-levinson-quits-google-board-appeasing-ftc-idUSTRE59B2R120091012

https://techcrunch.com/2009/08/03/google-ceo-eric-schmidt-resigns-from-apple-board-surprised/

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Barrick Gold Corp, Acacia Mining and Turbulence in Tanzania

Issues involving the mining industry and corporate governance practices are nothing new. And Barrick Gold’s recently deal with Acacia Mining is no exception. After multiple negotiations and tradeoffs in the past, Acacia Mining has agreed to Barrick, the majority shareholder, buying out the remaining minority shareholders.

Barrick Gold Corporation, based in Canada, is one of the largest gold mining companies in the world. It currently holds 262,246,950 shares of Acacia Mining (64% stake in share capital). To gain the remaining 36%, Barrick has proposed a 24.2% premium on the closing price of Acacia shares on July 18. The deal comes in at USD 430 million and will take the company private.

The Acacia CEO, after finally reaching an agreement, stated: “Given all the circumstances, this is possibly the best outcome.”

Perhaps more importantly, is that the deal aims to resolve many of the longstanding public issues between the Tanzanian government and Acacia that have plagued the mining company’s operations.

Two years ago, the Tanzanian government banned the export of mineral concentrates. This movement was due in part because the government believed they had not received a fair share of profits from mining in the country. Two of Acacia’s units came under fire, being handed a USD 190 billion tax bill from the government. This tax bill has since been reduced to USD 300 million.

Additionally, Tanzania recently demanded that Acacia cease use of a waste-storage facility at a core gold mine. These disruptions have crippled operations and caused Acacia’s shares to fall 50% since 2017.

After facing external pressures and at the insistence of minority shareholders, Barrick CEO, Mark Bristow, proposed a higher offer than what was initially proposed to Acacia in May. This was recently accepted.

Shareholder awareness proved a worthy factor here; Acacia shares rallied 20% on the deal and a positive response was received from the Tanzanian government. This is a fine example of shareholders prioritizing the survival of a company.

Delving into Acacia Mining’s board composition, by utilizing CGLytics’ board effectiveness tools in the online platform, provides insights into why the company may not have managed issues as effectively as possible.

Acacia Mining plc’s Board Expertise

Source: CGLytics Data and Analytics

The board expertise and skills matrix from CGLytics show that experience in the area of governance severely lacks, however industry and sector, and financial expertise is heavily present. This may provide an explanation to the problematic relations they experienced with the Tanzanian governance. It generates a question of if more governance experience was present on the board, would the situation have been different? While the survival of the company and acceptance of the “best-we-can-get” deal could be attributed to the strong presence of industry and financial expertise.

The recent movements have rekindled, if only just, a better relationship with the government. Because of Barrick’s increased involvement, the Tanzanian government agreed to receive USD 300 million for the tax debt as a gesture of goodwill. The company was also given the option to pay in installments, with an upfront cost of USD 100 million to be paid out in addition.

Furthermore, Barrick was able to negotiate an agreement in which payment to the Tanzanian government is dependent on the export ban being lifted from Acacia and its subsidiaries in the country. In a “give and take” action, the Tanzanian government also claimed a 16% stake in Acacia in the form of Class B shares.

The complex strategy devised is a clear manifestation of the board leveraging its expertise and abilities to secure a better position. Had there been more Governance oversight, perhaps the company would not have encountered such trifles. The devastating government backlash will certainly continue to have an effect for years to come. Nonetheless the Board can rest easy knowing that it has found the best outcome to a longstanding battle, one that could’ve left Acacia and Barrick incapable of recovering.

CGLytics offers the broadest, up to date global data set and powerful benchmarking tools to conduct comprehensive analysis for executive compensation decisions and risk oversight. CGLytics is Glass Lewis’ source for global compensation data and analytics. These analytics power Glass Lewis’ voting recommendations in both their proxy papers and their custom policy engine service. To find out more click here.

About the Author

Rollin Buffington

US Research Analyst

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FirstGroup Take Another Ride on the Activist Train

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

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

Where this activist ride began

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

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

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

The board’s expertise

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

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

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

Pay for Performance

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

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

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

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

 

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

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

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

Source: CGLytics Executive Compensation Models

Before, During and After the EGM

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

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

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

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

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

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

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

Aftermath: Searching for a New Chairman

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

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

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A glance into Slack’s CEO pay

Slack Technologies recently started trading on the NYSE. In the company’s S-1 statement, the company does not disclose precisely what the pay structure will be for the coming year. Utilizing CGLytics’ Peer Composer tool, a hypothetical peer group from a data universe coverage of over 5,500 global companies was constructed for Slack, to determine the possible pay structure.

Slack Technologies recently started trading on the NYSE on June 20th, 2019. In the company’s S-1 statement, the company does not disclose precisely what the pay structure will be for the coming year, as this responsibility will be held by the incoming board of directors. However, it is expected that all such information will be disclosed at the company’s first AGM.

In Slack’s S-1 report, they make it clear that they intend to prioritize pay for performance as stated:

“Although we do not have a formal policy with respect to the grant of equity incentive awards to our executive officers, we believe that equity grants provide our executives with a strong link to our long-term performance, create an ownership culture, and help to align the interests of our executives and our stockholders”.

Slack’s S-1 does not disclose their own selected peer group for compensation. Utilizing CGLytics’ Peer Composer tool, a hypothetical peer group from a data universe coverage of over 5,500 global companies was constructed for Slack.

As the company is regarded as an enterprise technology company, parameters were defined to select comparable companies’ as reference points, namely 8×8 Inc. Using this approach, the following peer group of 20 companies was constructed:

Selected Peer Group for Slack:

Pegasus Systems, Inc. Nutanix, Inc.
Brightcove, inc. Blackline, Inc.
8×8, Inc. PROS Holdings, Inc.
Agilysys, Inc. Benefitfocus, Inc.
LivePerson, Inc. Instructure, Inc.
Synchronos Technologies, Inc. MobileIron, Inc.
Yext, Inc. Telenav, Inc
Cloudera, Inc. Varonis Systems, Inc.
FourScout Technologies, Inc. Q2 Holdings, Inc.
FireEye, Inc. Model N, Inc
Box, Inc. Carbon Black, Inc.
FireEye, Inc. Model N, Inc.
A10 Networks, Inc.

Source: CGLytics’ Peer Composer

Although Slack’s product can be regarded as novel, 8×8 is regarded as a suitable peer due to both companies specializing in providing communication solutions to corporates.

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

 

As displayed in the chart below, this hypothetical peer group was used to gain insights into the average CEO remuneration breakdown, benchmarked against key performance indicator such as TSR, EBITDA and free cash flow.

Source: CGLytics Data and Analytics

The groups free cash flow and EBITDA appear somewhat of a divergent relationship where as TSR has remained relatively constant. The stacked bar chart above breaks down the average CEO group remuneration for each year and identifies LTI as the biggest contributor to CEO pay. Moreover, as the above bar chart illustrates, there exists in total seven components of pay which Slack may consider taking into consideration.

The components are:

– Base Salary; generally cash compensation levels for executives will increase after the IPO in somewhat of a “re-balancing act” to account for the equity offered up in the IPO. This is particularly true for venture backed start-ups where the majority of cash at hand will be spent on the operations of the business. Slack listed their 2018 fiscal salary compensation for their CEO as USD 356,952, comparatively, the average base salary for the peer group was USD 437,130.

– STIs; short-term incentives are typically benchmarked using operationally based performance measures and are subject to annual change. The compensation committee will need to take into consideration the specific company strategy as well as market conditions when determining what these will be.

– LTIs; these are most commonly equity-based incentives which take the form of stock options, restricted shares/RSUs and performance share plans. Both before and following an IPO, most companies rely on stock options as a means to incentivize the executives to drive the company share price above the exercise price. After a few years when companies have established themselves in the marketplace they tend to introduce a cyclical executive LTI plan. Slack has already detailed a “2019 Stock Option and Incentive Plan” which will allow the company the authority to grant equity to their executives.

Since Slack commenced trading, its share price has failed to gain momentum. It remains to be seen precisely how Slack’s pay structure for its executives will evolve post-IPO, and if future changes to the company’s executive incentive plan will push towards share-price based KPIs in order to swing the company’s low momentum out of its current doldrums.

CGLytics offers the broadest, up to date global data set and powerful benchmarking tools to conduct comprehensive analysis for executive compensation decisions and risk oversight. CGLytics is Glass Lewis’ source for global compensation data and analytics. These analytics power Glass Lewis’ voting recommendations in both their proxy papers and their custom policy engine service. To find out more click here.

Sources:

CGLYTICS DATA AND ANALYTICS   SLACK TECHNOLOGIES S-1  

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CSR Limited: Strike One on Remuneration Report

At the CSR Limited AGM in June 2019, the remuneration report received 34% of votes cast against which constitutes a first strike for the purposes of the corporations ACT 2001. CGLytics looks at the alignment of pay against performance and some of the key drivers behind the investor response.

CSR Limited, a major Australian industrial company held its Annual General Meeting on June 26, 2019. The board presented three ordinary resolutions and one special resolution to its shareholders. Included in the ordinary business proposal was to consider the re-election of non-executive director, Matthew Quinn, this year. The company also sought to receive shareholders’ support for the financial report, the director’s report and the auditor’s report for the financial year. Another ordinary resolution that was proposed by the board was to approve and adopt the remuneration report for the financial year ended March 31, 2019.

For the special resolution, the board advised shareholders to consider the granting of long-term incentives for Julie Coates, who will be taking up the position of managing director this September 2019.

The board’s expertise ahead of the AGM

CSR’s corporate governance states that the company seeks to maintain a board composed of directors that have a range of collective skills and experience to ensure corporate development. CSR also elaborates that it considers individuals that are highly-experienced in manufacturing, finance, law and other sectors that the company seeks to pursue in the future.

CSR Board Skills Matrix
Source: CGLytics Data and Analytics

Using the Board Expertise functionality of CGLytics’ platform, we were able to gain insight on the current skills of the members of the board. The Skills Matrix functionality also aids companies to identify any skills gaps in its current matrix. For CSR, of the six directors currently sitting on the board, the graph shows that CSR’s strongest expertise is Finance. The second strongest suits of expertise include Corporate Development, Operations, Project Management and Sales. One area where the company is missing a director with specific expertise is in Governance. The company also lacks directors that have any relevant company Industry and Sector experience. However, the upcoming appointment of a new managing director on September 2019, Julie Coates, may be able to alleviate this missing element to the board’s skill set.

Julie Coates’ Expertise from the CGLytics platform

Board Expertise

Pay for Performance

Another board resolution the company was seeking approval on was the remuneration report and financial report. CSR promotes consistency in the remuneration of senior executives by ensuring that the company and individual performance are aligned with their incentives. The company focuses on compensation that generates long-term value for senior executives. The company only uses two performance criteria in the determination of executive compensation: Total Shareholder Return (TSR) and Earnings Per Share (EPS) for the long-term incentive plan in which both have equal weight of 50 percent.

The board states that absolute TSR instead of relative TSR helps align shareholder interests by keeping senior executives focused on increasing earnings and share price. On the other hand, the EPS helps measure the continued growth in earnings of the company and is parallel to the interests of the shareholders.

The CGlytics Absolute Positioning tool allows insight into the relationship between the two performance conditions and the Managing Director’s granted compensation from 2013 to 2018. As indicated in the graph below, there exists significant volatility in the movements of all performance criteria used in the determination of executive pay: TSR and EPS. From 2015 to 2016, CEO pay, EPS and TSR increased. The latter especially increased by 91.6%. From 2017 to 2018, CEO pay increased by 48% and TSR fell by 46.5%.

CSR CEO pay vs EPS and TSR
Source: CGLytics Data and Analytics

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

The CGLytics Relative Positioning Pay for Performance Evaluation tool compares CSR’s CEO compensation with that of the company’s own peer group against the peer group’s three-year TSR. The Pay for Performance evaluation demonstrates that CSR’s Total Realized Compensation appears misaligned compared to its peers. The company’s Total Realized Pay ranks above median at 69th percentile while three-year TSR ranks in the 15th percentile.

Source: CGLytics Data and Analytics

Granting of Rights

In the Annual report for the financial year ended March 31, 2019, CSR disclosed that it developed a performance-related pay which includes both the Short-Term Incentive (STI) and Long-Term Incentive (LTI) plans, both of which are measured against performance conditions.

The plan would utilize the same performance criteria as mentioned above: TSR and Earning Per Share (EPS) over a three-year performance period (April 1, 2019- March 31, 2022) in financial year-end 2020. The two performance conditions will be weighted at 50 per cent of the overall grant.

The board uses an annual growth rate of 14 percent for 75 percent vesting and an 18 percent stretch for a full vesting of rights for the TSR condition. The board also uses a compound growth rate of 5 percent target for a 50 percent vesting and 10 percent stretch for a 100 percent vesting for EPS condition. There was no change in the hurdles applied in 2017, 2018 and 2019.

The board is seeking for the granting of 360,241 performance rights for Julie Coates, the newly appointed managing director. The amount is pro-rata of her one-year long-term incentive remuneration based on her date of appointment on September 2, 2019. The board also proposes that Ms. Coates is entitled to a maximum LTI award of up to 120 percent of her total fixed remuneration.

Highlights of the AGM

At the AGM which took place on June 26, 2019, all the resolutions were passed as ordinary resolutions. However, as suggest in the potential Pay For Performance misalignment demonstrated above, the remuneration report received 34% of votes cast against which constitutes a first strike for the purposes of the corporations ACT 2001.

CGLytics offers the broadest, up to date global data set and powerful benchmarking tools to conduct comprehensive analysis for executive compensation decisions and risk oversight. CGLytics is Glass Lewis’ source for global compensation data and analytics. These analytics power Glass Lewis’ voting recommendations in both their proxy papers and their custom policy engine service.

For more information on how CGLytics’ can support modern governance decision-making and potentially identify any areas of risk, click here.

 

Sources:

CGLYTICS DATA AND ANALYTICS

CSR LTD 2019 NOTICE OF MEETING

CSR LIMITED ANNUAL REPORT

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Bed Bath & Beyond: Cleaning House

New Jersey-based company Bed Bath & Beyond has recently become the target of an activist campaign. CGLytics examines the drivers, the response and the outcomes of this campaign.

New Jersey-based company Bed Bath & Beyond operates 1,533 retail stores as of March 2, 2019. The company has recently become the target of an activist campaign initiative led by a trio of activist investors: Legion Partners Asset Management LLC, Macellum Advisors GP LLC and Ancora Advisors LLC. Jointly, this group of investors owns about 5.2% of the company.

After initially filing for a potential proxy fight, in late April 2019, the activist campaign at Bed Bath & Beyond kicked off with a lengthy presentation from the above entities to the company’s investor base. This presentation criticized almost every facet of the company’s management; from executive pay to individual store design.  The presentation focused particularly on their CEO Steven Temares’ compensation package, which totaled USD 14,605,042 in 2018, while the remaining Named Executive Officers collectively made USD 30,271,726. Temares, who had served in the role since 2003, resigned shortly thereafter.

In response to this campaign, the company’s board has recently seen a significant reshuffle. In May 2019 alone, nine new directors joined the board, five being appointed on May 1, 2019 : Harriet Edelman, Harsha Ramalingam, Andrea Weiss, Mary A. Winston and Ann Yerger. In addition to these new members, another four were appointed to the board effective May 29, 2019, pursuant to an agreement with the activist group: John E. Fleming, Sue E. Gove, Jeffrey A. Kirwan and Joshua E. Schechter. The addition of these new members results in an almost complete board turnover during the past two years, with 12 of the 13 members having joined within that timeframe. Moreover, former directors and co-founders, Warren Eisenberg and Leonard Feinstein were displaced from their positions as co-Chairmen of the board, and granted the status of co-Chairmen Emeriti, with no entitlement to attend board meetings and no voting powers at such meetings.

While the activist campaign calling for an increase in value creation is not new in the field of corporate governance, conflicting ideas about how to best create that value has been a core issue between boards, executive teams, and investors across the business world for years. So why, in this particular case, was the activist campaign successful?

We do note that the company reported its first decrease in sales in conjunction with its first net loss for the FY 2019. However, the company has been lagging behind the median of its own disclosed peer group in several key financial performance indicators such as net income, enterprise value, three-year TSR, and economic profit since at least 2016. Moreover, the CEO’s compensation has outpaced that of the median of the company’s peer group, as displayed in the graph below:

Bed Bath and Beyond’s Disclosed Compensation Peer Group (2018)
Dillard’s, Inc. AutoZone, Inc.
Burlington Stores, Inc. Williams-Sonoma, Inc.
Dick’s Sporting Goods, Inc. Nordstrom, Inc.
Big Lots, Inc. Macy’s, Inc.
Advance Auto Parts, Inc. L Brands, Inc.
Tractor Supply Company Kohl’s Corporation
Ross Stores, Inc. The Gap, Inc.
O’Reilly Automotive, Inc. Foot Locker, Inc.
Dollar Tree Dollar General Corporation
Office Depot, Inc.
Source: CGLytics Data and Analytics

Moreover, we find that the activists’ criticisms of the CEO’s remuneration may have gained traction when comparing the company CEO’s Total Realized Pay versus its own disclosed peer group for FY 2018. Bed, Bath and Beyond’s Total Realised Pay appears to be out of alignment with the company’s performance.

 

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

bedbath&beyond2
Source: CGLytics Data and Analytics

The CGLytics research team has also taken a deeper look to evaluate the current board. Utilizing CGLytics’ governance and data analytics platform we find that after all changes recently undergone to the board, Bed Bath & Beyond scores extremely well in nearly every category, except for the Director Interlocks and Nationality Dispersion metrics. The board does have several director interlocks, and diversity of nationality also appears low, as 92% of the board is local to the US.

All other effectiveness attributes score high, with most of them having a score of 100, driving the overall health score of the company at 85 points (Excellent), 10 points above the sector average.

These metrics show that the board contains an age gender diverse group of directors with experience and expertise in all areas measured by the CGLytics platform.

bedbath&beyond3
bedbath&beyond4
Source: CGLytics Data

The effectiveness attributes in the chart above are based on the company in question’s governance practices compared to the corporate governance code of the market in which it is primarily based (in this instance, the NYSE Governance Guidelines). The thresholds above are set by empirical research performed by CGLytics. Each attribute receives a score from 0 to 100, with a score of 100 reflecting the best governance practices

In summary, as Bed Bath & Beyond’s stock price has fallen approximately 80% over a five-year span due to potential mismanagement, ineffective business strategy, and a lack of innovation, the recent changes within the structure of the management and advisory team provide a potential clean slate for the company. Interim Chief Executive Officer, Mary Winston will be at the helm looking to captain the ship as the company searches for stability after an intense period of significant upheaval.

Corporate boards and executive teams increasingly require a broader range of analytical tools to identify potential areas of reputational risk, even for controlled companies, which could make them the target for activist campaigns. For more information regarding how CGLytics’ deep, global data set and unparalleled analytical screening tools can potentially help you identify these areas of risk, click here.

CGLytics offers the broadest, up to date global data set and powerful benchmarking tools to conduct comprehensive analysis for executive compensation decisions and risk oversight. CGLytics is Glass Lewis’ source for global compensation data and analytics. These analytics power Glass Lewis’ voting recommendations in both their proxy papers and their custom policy engine service.

Sources

CGYLTICS DATA AND ANALYTICS

Proxy 2018       Proxy 2017       Fox Business       Business Insider       Wall Street journal      Motley Fool

Header Image: Bed Bath and Beyond store by Anthony92931  licensed under the Creative Commons license.

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In this article, CGLytics examines the increasing pressure on Facebook to split the roles of Chair and CEO from founder Mark Zuckerberg and the implications on the company’s future.

Mark Zuckerberg has been Chief Executive Officer of Facebook, Inc. since he founded the company in 2004 and has held the combined position of CEO/Chair since the Company’s IPO in 2012. Shareholders have increasingly voiced their concerns regarding the combination of both roles. Those opposing the combined CEO/Chair position state that it gives Zuckerberg too much control over the company, where minority shareholders already have very little influence. Founder Mark Zuckerberg controls over 51% of the vote although he owns only 13% of the economic value of the firm. Additionally, headlines surround the billionaire founder, as Zuckerberg again failed to address a committee of international lawmakers who are amid an investigation into Facebook’s disinformation, antitrust, and privacy scandals.

Shareholders Try to Force Zuckerberg’s Hand…Again

In light of the above, several investors have banded together and filed multiple shareholder proposals for consideration at the company’s 2019 AGM, which took place on May 30th, 2019, aimed to alleviate their concerns over Zuckerberg’s influence and lack of oversight of the company. Of interest were proposal five and six filed.

Proposal Five: Proposed primarily by NorthStar Asset Management, in conjunction with other groups of shareholders, requesting that each share be given an equal vote. Currently, Class B shares (controlled by Zuckerberg and a small group of others) have 10 times the voting power of Class A shares. They continued in their supporting statement noting “since July 2018, Facebook value dropped as much as 40% due to Management and Board decisions that have not protected shareholder value. By allowing unequal voting power, our company takes public shareholder money but does not provide us an equal voice in our company’s governance…”

Proposal Six: Recommended that the Chair of the Board of Directors operates as an Independent Member of the Board. The supporting statement offers that there exists no form of checks and balances in order to limit Mr. Zuckerberg’s power. The statement continues, “we believe this weakens Facebook’s governance and oversight of management. Selecting an independent Chair would free the CEO to focus on managing the Company and enable the Chairperson to focus on oversight and strategic guidance.” It’s of importance to note that nearly 60% of the S&P 1500 has separated the roles of Chief Executive Officer and Chairperson as of April 2018. This proposal received the public support of both the Council of Institutional Investors (CII), as well as Trillium Asset Management.

Unsurprisingly, the Board of Directors has concluded with a recommendation to vote against all stockholder proposals mentioned above. However, the requests made through these proposals heavily resemble several that have been proposed in past years.

CGLytics has taken a deeper look into Facebook’s board composition and effectiveness when compared to all other companies in the US market. Utilizing CGLytics’ governance data and analytics in the specialized platform it was discovered that the key area where the company is underperforming, compared to the sector average, lies primarily in the combination of the role of CEO and Chairman.

Facebook Effectiveness Attributes
Source: CGLytics’ board effectiveness data and analysis

The zero score for the CEO/Chair criterion is in sync with the concerns of the shareholders who are seeking the dissolution of the combined position. This is also supported from the NYSE Stewardship guidelines, where the separation of the CEO/Chair position is required. However, taking all other factors into consideration, Facebook’s board composition and effectiveness is rated ‘Very Good’ and higher than the sector average. Even though the CEO/Chair combination has a score of 0, the majority of the other effectiveness attributes rank above the sector average.

The effectiveness attributes in the chart above are based on the company in question’s governance practices compared to the corporate governance code of the market in which it is primarily based (in this instance, the NYSE stewardship guidelines). The thresholds above are set by empirical research performed by CGLytics. Each attribute receives a score from 0 to 100, with a score of 100 reflecting the best governance practices.

The health score of Facebook and of the market is calculated as the average scoring of all of the effectiveness attributes, respectively. Facebook has an average score of 76, with three effectiveness attributes (Nationality Dispersion, Board Independence and CEO/Chair combined) falling under 60, two effectiveness attribute (Gender Equality, Director Interlocks) at 60 points, and the rest of the effectiveness attributes at 100 points.

Source: CGLytics’

Given the repeated failure of such proposals at the company’s most recent AGM, the future of Facebook seems to remain in the hands of Mark Zuckerberg. It comes as no surprise that these proposals would have similar results as those at previous AGMs, given Zuckerberg’s voting power at the firm. However, the increasing regularity of these types of proposals have been making headlines around the company’s governance structure and posing serious questions to the general public regarding Zuckerberg’s current and future role at the company.

Corporate boards and executive teams increasingly require a broader range of analytical tools to identify potential areas of reputational risk, even for controlled companies, which could make them the object of activist campaigns. For more information regarding how CGLytics’ deep, global data set and unparalleled analytical screening tools can potentially help you identify these areas of risk, click here.

CGLytics offers the broadest, up to date global data set and powerful benchmarking tools to conduct comprehensive analysis for executive compensation decisions and risk oversight. CGLytics is Glass Lewis’ source for global compensation data and analytics. These analytics power Glass Lewis’ voting recommendations in both their proxy papers and their custom policy engine service.

Sources

Latest Industry News, Views & Information

The increasing trend of shareholder opposition to executive pay

Votes against executive remuneration are growing. In this article we look at this change in the European indices and the S&P500.

Deutsche Bank: How CGLytics Tools Inform Glass Lewis’ Pay and Governance Analysis

Glass Lewis’ assessment of executive remuneration reflects a balance of quantitative and qualitative considerations, with CGLytics’ suite of tools underpinning the quantitative component. In the following discussion, we review the quantitative assessment with respect to Deutsche Bank, using CGLytics’ analytical tools.

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