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.

Latest Industry News, Views & Information

Ubisoft’s sexual misconduct scandal reveals governance gaps

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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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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?

 

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Tesco’s Shareholders Vote Against the Approval of Directors’ Remuneration Report

At Tesco’s AGM on Friday June 26, 2020, two-thirds of the shareholders voted against the resolution to approve the Directors’ remuneration report. Find out why

Tesco’s Shareholders Vote Against the Approval of Directors’ Remuneration Report

At Tesco’s AGM on Friday June 26, 2020, two-thirds of the shareholders voted against the resolution to approve the Directors’ remuneration report. Find out why

06.30.2020

At Tesco’s annual general meeting (AGM) on Friday June 26, 2020, two-thirds of the shareholders voted against the resolution to approve the Directors’ 2019 remuneration report. As mentioned in the previous article published by CGLytics earlier this month, this decision was mainly due to Tesco’s remuneration committee inflating executive bonuses by removing Ocado’s stock price from the peer group used to estimate its performance. In addition to this, Glass Lewis’ decision to advise investors to vote against Tesco’s remuneration report had substantial influence over the final results.

For the record, the exclusion of Ocado from Tesco’s peer group, whose stock has increased dramatically in the recent years, led to an outperformance by 3.3% of Tesco’s Total Shareholder Return (TSR) against its peer group instead of an underperformance by 4.2% in the case of Tesco keeping Ocado in the peer group.

If Tesco’s TSR was below its peer group index, the TSR metric, which is weighted at 0.5 of the 2017 Performance Share Plan (PSP), would have been zero. As a result, this boosted the payments to the CEO and CFO by approximately GBP 1.6 million and GBP 0.87 million, respectively.

Click here for more details about Tesco’s shareholder revolt prior to their AGM.

Tesco announced its AGM results[1] stating that:

“we recognise, however, that a significant number of shareholders had concerns with the principle of the Committee’s adjustment to the TSR comparator group”.

Moreover Tesco added that:

“following recent engagement on our Remuneration Report with a number of our larger shareholders, we have been reassured that the majority agree that the overall outcome of the 2017 PSP award is proportionate given the outstanding turnaround delivered by management”.

For now, the vote on directors’ remuneration report was not legally binding, meaning it is only advisory. Bonuses paid to the executives will still be paid out. On the other hand, the huge percentage of votes against the directors’ remuneration report (67.29%) is the largest pay revolt in Tesco’s history in the last decade.

We have seen that shareholder activism was used through Say on Pay at Tesco’s latest AGM, which means that in the future if the company is not transparent with its investors, investors will not hesitate to raise their voice against any decision they consider inappropriate or gullible.

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

If Tesco understood how they were perceived by proxy advisor Glass Lewis prior to the proxy season and their AGM, they could have prepared adequately and avoided negative votes.

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

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

 

Reference

[1] https://www.londonstockexchange.com/news-article/TSCO/result-of-agm/14593658

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Bennett and the Ashford Companies: Corporate Governance Pitfalls and Lessons

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

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

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

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

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

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

Pay for Performance analysis of Ashford Inc.’s CEO

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

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

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

Pay for Performance Ashford
Source: CGLytics Data and Analytics

Understanding the skill set of the Board

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

Ashford Inc.’s Board Expertise and Skills Matrix

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

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

Ashford Hospitality Trust’s Board Expertise and Skills Matrix

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

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

Braemar Hotels & Resorts’ Board Expertise and Skills Matrix

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

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

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

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

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

 

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Refererences

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

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

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

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

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

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

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

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NMC Scandal and its Corporate Governance

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

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

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

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

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

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

Corporate Governance practices come into question

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

NMC’s Board Expertise and Skill Matrix (2018)

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

Understanding the skills set of NMC’s previous Board

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

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

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

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

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

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What could have been the problem then?

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

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

Nationality of directors during 2018-2019

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

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

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

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

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

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

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

 

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

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

 

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Can Tesco Escape a Revolt on their Remuneration Report?

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

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

The removal of Ocado from Tesco’s peer index

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

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

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

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

Historical remuneration report outcome

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

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

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

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

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

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

Figure 1

Source: CGLytics Data and Analytics

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

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

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

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

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

Figure 2

Source: CGLytics Data and Analytics

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

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

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

Figure 3

Source: CGLytics Data and Analytics

Where does Tesco’s CEO Pay for Performance rank?

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

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

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

Source: CGLytics Data and Analytics

Upcoming Tesco AGM

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

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References

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

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

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

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

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

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

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

 

Background and Timeline

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

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

Review Uncovers Improper Activity

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

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

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

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

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

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

Undisclosed Entities were used to Personally Enrich ProPetro Leadership

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

Redman Steps Down

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

A Reformed ProPetro?

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

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

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

Source: CGLytics Data and Analytics

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

ProPetro - Board Effectiveness Scores

Source: CGLytics Data and Analytics

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

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

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

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

References

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

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

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

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

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

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

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

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

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

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