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

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

07.20.2020

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

Increase in activism

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

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

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

Regional shift in activism

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

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

Executive pay

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

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

Source: CNBC Street Signs Europe

Board diversity

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

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

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

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

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

 

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

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How Glass Lewis improved their executive compensation analysis and Say on Pay recommendations for European markets

Andrew Gebelin from Glass Lewis talks through how he and his team of analysts have benefited from using the CGLytics data and tools to improve their executive compensation analysis and Say on Pay recommendations for European markets.

In the continuously evolving and sometimes volatile economic times, investors have to make tough decisions. To ensure they are making the best possible decisions they require greater insights into activities within portfolios. Whether it’s sustainability practices, gender and cultural diversity, or executive compensation and remuneration, Glass Lewis has experienced, first-hand, the increasing demand for additional information from their investor clients.

CHALLENGE

Glass Lewis had a vision to create the next generation version of their quantitative pay and peer analysis, which they include in their Proxy Papers for annual shareholder meetings. Their approach to proxy advising focuses on providing investor clients with independent, in-depth analysis that looks at each company on a case-by-case basis. When it comes to executive pay, regardless of the company’s size or sector, Glass Lewis’ methodology requires a contextual assessment incorporating two consistent peer comparisons: one against similarly sized peers in the same country, and the other against a wider geographic pool of companies in the same industry.

Prior to the partnership with CGLytics, Glass Lewis’ analysis of the relationship between executive pay and performance within the European market was limited by the quantitative pay and peer tools they had available. With their client investors expecting increasingly detailed evaluations of an
ever-wider pool of companies, Glass Lewis realized that achieving their vision would require tools that provide:

  • • Greater flexibility to model unique peer groups;
  • • An ability to view CEO pay comparisons over different time periods that appropriately reflect a company’s business cycle or performance period;
  • • Comparisons incorporating a larger range of key performance indicators and remuneration metrics, allowing deep-dives into individual pay practices;
  • • Flexibility to consider and make comparisons between grant-date, target and realized pay over different time periods; and
  • • The ability to model differences in pay outcomes based on any changes contemplated to the remuneration framework or metrics.
  • APPROACH

    For the 2018 proxy season Glass Lewis integrated CGLytics data and analytics into their analytical processes and Proxy Papers for the European markets.

    Working with CGLytics, Glass Lewis defined a new peer group methodology focused around two distinct comparator groups:cross-border industry groups, and in-country groups based on company size. These peer groups were proofed and refined with CGLytics’ support to ensure they provide an appropriate basis of comparison. Glass Lewis analysts then incorporated key metrics from CGLytics’ rich library of performance data, displayed against three years of realized pay to allow for a balanced assessment over the longer term.

    CGLytics’ platform allowed Glass Lewis to provide their clients with a standardized approach to pay analytics across Europe, while retaining flexibility to account for market-, company- or plan-specific features. The performance metrics included in the Proxy Paper analysis were chosen for the greatest possible consistency across all European listed companies, providing a common point of comparison regardless of market or sector. That said, not all companies (or pay plans) are alike. Where unique circumstances require bespoke pay analytics using different indicators or uniquely designed peer groups, access to the CGLytics SaaS platform allows Glass Lewis analysts to drilldown and perform a multitude of quantitative  comparisons and tests.
    With the new peer group methodology in place, CGLytics helped Glass Lewis develop a graphical layout that illustrates the relationship between pay and performance. The new Remuneration Analysis section within the Proxy Paper
    incorporates peer comparisons and a breakdown of remuneration components to present a comprehensive picture, allowing investors to assess pay outcomes on both a relative and absolute basis.

    SUCCESS

    Incorporating CGLytics compensation data and analytics into Glass Lewis’ Proxy Paper and voting recommendations has yielded overwhelmingly positive feedback from investor clients and from companies.

    By implementing a standardized display that allows every company to be compared on a like-for-like basis, while retaining the flexibility to utilize an array of customized key performance metrics, CGLytics and Glass Lewis developed the tools to produce quantitative pay analysis and peer comparisons that are second-to-none. Investors appreciate the easy access to CGLytics rich data and powerful tools, yielding valuable remuneration insights whether they are comparing the entire market or diving deep into a single pay plan. For the companies that Glass Lewis covers, the use of bespoke peer groups and the sheer range of options that can be customized provide reassurance that their company’s pay policies will be assessed appropriately.

     

    BENEFITS OF IMPLEMENTING CGLYTICS’ DATA AND ANALYTICS

    Analysts can access 10+ years of historical compensation data
    Glass Lewis analysts are able to both view historical pay practices over an extended horizon, and model the anticipated future impact of new pay policies.

    Comparison of pay practices on a like-for-like basis
    Standardized display options for every company across Europe supports greater consistency when comparing pay practices across industries and regions.

    Greater flexibility to analyze information beyond Proxy Papers
    Analysts can now use CGLytics SaaS platform to look at specific remuneration components and factors outside of the standard information displayed in Proxy Papers.

    Expanded European market coverage
    Glass Lewis expanded their European market with additional indexes and 200+ companies to cover more than 1,100 companies.

    50% time-savings when generating quantitative pay analysis
    Using graphical templates and standardized data, analysts were able to complete the
    quantatitive pay component of the Proxy Paper in half the time compared to prior years.

    Empowered investor clients to customize their own pay for performance analysis Glass Lewis clients have embraced the ability to customize their own analysis for Say on Pay in accordance with their own methodologies using CGLytics’ data.

    Leveled the playing field for corporate issuers
    With access to the same tools and underlying data as Glass Lewis, corporate issuers can now proactively understand how they are viewed in relation to their peers.

     

    USE THE SAME DATA AND TOOLS AS GLASS LEWIS

    Customers can now instantly view the Glass Lewis executive compensation analysis and peer group modeling for planning their Say on Pay agenda via CGLytics. CGLytics and Glass Lewis have established a global partnership to provide unmatched compensation data and analytics for corporates, investors and advisors.

     • Ensure effective engagement, risk oversight and modern governance practices with CGLytics.

     • Instantly view the Glass Lewis CEO and executive remuneration analysis in the CGLytics platform.

     • Use the same data set and analytical tools trusted by Glass Lewis’ global research team and featured in the reports used by its institutional investor clients.

     • Self-construct peer groups from an extensive global data set of 5,000+ public companies for benchmarking executive pay

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

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    Basic Energy Services, Inc. (BAS): Hitting the Brakes on Dilutive Granting Practices

    Basic Energy Services, Inc. could well have benefited from some foresight when plotting out the award schedule under its new 2019 Long-Term Incentive Plan. Glass Lewis use their equity compensation model to examine the shareholder opposition and how it could have been potentially avoided.

    A little foresight can go a long way. Glass Lewis’ new Equity Compensation Model (ECM) tool allows users to predict the likely Glass Lewis voting recommendation for equity plan proposals, allowing companies to modify share requests, avoid potential pitfalls, and reduce the uncertainty that surrounds securing shareholder approval.

    Simulating the eleven tests used in Glass Lewis’ equity plan analysis framework, the ECM tool predicts the proxy advisor’s recommendation for an equity plan proposal based on the size of the share request, the company’s granting history, plan terms and features, and other user-inputted datapoints. In addition, the ECM tool generates specific datapoints from the tests exactly as they would appear in Glass Lewis’ proxy paper. This data includes information that is closely monitored by the proxy advisor’s institutional clients, informing their ultimate voting decisions for both equity plan proposals and Say on Pays.

    Basic Energy Services, Inc. could well have benefited from some foresight when plotting out the award schedule under its new 2019 Long-Term Incentive Plan (2019 LTIP). Announcing its 2019 annual shareholder meeting, the company sought approval of the 2019 LTIP, which would have authorized 1.8 million new shares for future issuance. However by the time the meeting took place, investor opposition had forced last-minute amendments to the agenda, including a cancellation of the share request.

    In its analysis of the equity plan and the broader advisory vote on executive compensation, Glass Lewis raised concerns regarding massive grants made to executives after the 2018 fiscal year. In fact, much of the additional 1.8 million share request that would be voted upon at the May 2019 annual meeting was already ear-marked for April 2019 incentive awards to named executive officers, pending shareholder approval. After the plan failed a number of Glass Lewis’ tests, including measures of the company’s historic pace of grants and cost of the share request, the proxy advisor recommended that shareholders vote AGAINST the proposal.

    An AGAINST recommendation for an equity plan proposal from Glass Lewis is infrequent and typically driven by particularly egregious granting practices and/or highly shareholder-unfriendly provisions. Cost concerns drove 21.97% of the advisor’s AGAINST recommendations during the 2019 proxy season; dilution issues accounted for 13.64%; and evergreen and repricing/buyout provisions together spurred 62.12% of the negative recommendations.

    Glass Lewis’ voting recommendation contributed to growing investor momentum against the proposal. However, it appears that Basic Energy Services’ board and management had not anticipated the scope of opposition. As a result, the company, which had climbed out of Chapter 11 bankruptcy in 2016, found itself in what appeared to be another scramble — this time to revise its equity plan proposal with only eight days to go before the annual meeting.

    On May 6th, with some investors having already cast their votes, the company filed an amendment to its 2019 proxy statement announcing that it was no longer seeking an additional share request. Instead, shareholders would vote on whether to move currently available shares from prior plans into the 2019 LTIP for future issuance.

    Meanwhile, to compensate for the elimination of the 1.8 million share request, the large April 2019 grants that the company made to its named executive officers were revised to rely less on equity-settled payouts and more heavily on cash. Subsequent to the amended proposal, and in the absence of either a share request or associated problematic features (such as repricing provisions or evergreen replenishment authority), Glass Lewis revised its voting recommendation to FOR.

    Basic Energy Services’ revision of its equity plan proposal and NEO grants represented more than just a minor hiccup in front of a public audience of voting shareholders. While the equity plan was ultimately approved, it received just 75% support, relatively low for this type of proposal. Obtaining that approval required a costly last-minute engagement campaign, a series of supplementary fillings, and an outsized outlay to fund the switch of executives’ 2019 awards from equity to cash—all with the company’s shareholder meeting looming.

    Well before filing its proxy statement, the company could have understood that the rate of granting over the last three fiscal years would be an important concern—and one that would be exacerbated by the additional awards granted in April. Using the intelligence provided by CGLytics’ ECM tool, the company could have foreseen concerns regarding plan costs and granting pace under the equity analysis plan framework, designed a proposal that was more widely acceptable to investors, and avoided the costs and uncertainty associated with renegotiating proposals and compensation policies in the days before a shareholder meeting.

    Set the Agenda

    The benefits of the ECM go well beyond its predictive proposal recommendation abilities. The tool is an integral part of the executive pay decision-making process and longer-term compensation program planning with real-time calculations of cost, burn rate and overhang information.

    Well before equity awards are granted, the ECM can identify policies and practices that draw shareholders ire. For Basic Energy Services, which failed Glass Lewis’ tests on its historical pace of grants, the ECM tool could be used to evaluate the impact of potential grants, and help the company manage its available share pool to avoid excessive dilution.

    More than just an internal planning tool, the ECM provides important intel to prep directors and executives during shareholder engagement efforts. The analyses generated on the platform provide comparisons to industry benchmarks relating to cost, overhang, burn-rate and grants to named executive officers, which can help a company control and inform its messaging during its annual outreach to shareholders.

    Armed with such information, a company could not only avoid missteps such as the one experienced by Basic Energy Services. It could also use the data to more effectively formulate its message to its shareholders on matters related its executive compensation program for its annual say on pay vote.

    Another interesting insight is that Hampton is not currently sitting on any other company’s board, unlike Symonds who is currently sitting on four different boards (including HSBC Holdings plc). One could easily argue about the effectiveness of that choice when it comes to availability and focus/time dedication for the heavy incoming agenda.

    The Glass Lewis Equity Compensation Model

    Glass Lewis’ Equity Compensation Model (ECM) is now available exclusively via CGLytics. Providing unprecedented transparency to the U.S. market in one powerful online application, both companies and investors can use the same 11 key criteria as the leading proxy advisor to assess equity incentive plans.

    Click here to experience Glass Lewis’ new application.

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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.

    For public companies based in Germany, Glass Lewis’ assessment of a company’s remuneration practices balances quantitative data with a variety of qualitative considerations. Since its introduction in 2018, CGLytics’ data analysis has helped us understand the pay structure and identify both quantum-related and broader governance issues.

    CGLytics’ analysis of main profitability indicators illustrate the link between pay and performance. The tools are particularly useful when assessing a company’s remuneration in relation to local and European peers. That’s all the more important in Germany, where large companies usually include a significant number of US companies in their benchmarks, leading to a potentially skewed context for remuneration decisions and ultimate payouts.

    In the following discussion, we describe how CGLytics’ analytical tools informed Glass Lewis’ review of Deutsche Bank ahead of the 2019 AGM.

    Overview of DBK

    Annual Say-on-Pay won’t be mandatory in Germany until SRD II is implemented, allowing Deutsche Bank to omit any remuneration-related votes from its 2019 AGM agenda; the multinational last sought shareholder approval of its remuneration policy in 2017. Nonetheless, for large cap companies Glass Lewis provides a remuneration analysis comprising CGLytics graphs and tables and a write-up to summarise any material issues. Even when there is no proposal focused solely on remuneration, this analysis informs our assessment of overall governance practices and the performance of the board, its committees and directors. Beyond the Proxy Paper report and voting recommendations, the analysis helps us to shape our engagement agenda and identify areas for further research.

    Deutsche Bank’s KPIs have been consistently negative in the past years due to a number of legal disputes and organisational issues. In 2017, the Bank posted its third consecutive loss. Awards for those three years would have partially vested, mostly due to the achievement of the CET1 capital ratio and relative TSR targets. However, the management board decided to waive all variable remuneration payments and grants for fiscal years 2015 to 2017, in order to demonstrate that shareholders’ experience was reflected in the pay of top executives.

    In 2018, the Bank reported its first consolidated net profit since 2014 and resumed the payment and grant of short- and long-term awards to management board members.

    Overview of CGLytics Remuneration Analysis

    CGLytics’ relative indicators confirmed that the company’s performance was below peers, while payouts were above. Moreover, the  analysis raised concerns about an excessive use of upward discretion and costs related to executive turnover.

    Using CGLytics’ data, our analysis showed a poor alignment between pay and performance during an ongoing period of subpar results. In recent years, the management board’s waiver of variable remuneration had demonstrated a good appreciation of shareholders’ concerns – but a return to profitability in 2018 prompted an immediate return to the payment of incentives which appeared excessive and premature. While we acknowledged an improvement in performance, CGLytics showed that Deutsche’s EPS, ROA and ROE were still negative and below peers. Similarly, CGLytics’ analysis of relative TSR and realised pay showed a disconnect between above-median CEO costs and shareholder returns that remained significantly below peers.

    The awards granted last year aren’t reflected in the charts below due to their deferral structure – nonetheless, CEO remuneration was still higher than that of German and European peers, highlighting quantum concerns and a wider issue of executive succession planning and turnover costs. Last year, departed Deutsche executives, many of whom presided over a period of underperformance, received over €7 million in immediate non-compete payments, with additional severance payments totalling millions to be paid in tranches over the next few years.

    Source: CGLytics Compensation Data and Models

    Glass Lewis Perspective

    The context for this quantitative analysis centred on Deutsche’s role as a multinational bank. In the case of large  financial institutions , we recognise that the use of US and international peers is – to a certain extent – reasonable. In addition, we recognise that banks subject to CRD IV must cap variable pay at 200% of fixed, which tends to inflate fixed pay levels. We also noted that 2018 awards were subject to extensive deferral requirements.

    On balance, while cognisant of the competitive marketplace, we remained concerned by salary levels – and moreover by the high cost of severance, with some payments set to continue for years to come, along with the level of  variable pay awarded given shareholder returns.

    Conclusion

    Deutsche didn’t have any remuneration-specific proposals on its AGM agenda in 2019. Nonetheless, the executive pay, succession planning and broader governance issues raised by CGLytics’ analysis contributed to our overall assessment of the company’s governance, and our recommendation that shareholders vote against the ratification of supervisory board acts.

    Access Glass Lewis’ Say on Pay analysis – Available through CGLytics

    Glass Lewis uses CGLytics as it’s global compensation data provider. For the 2020 proxy season our data will provide the basis of Glass Lewis’ Say on Pay recommendations.

     

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    Social responsibility is an increasing priority for corporates, reflecting changing pressures from stakeholders and society. In this article CGLytics looks at the trend of linking executive equity compensation to responsible social practices.

    Historically, the primary concern of shareholders and company executives has been to deliver returns on investments and ensure that the company meets or exceeds their quarterly earnings expectations. Inevitably this led to a more short-term view with any projects that didn’t contribute to the present quarter / yearly results being at risk of cuts.

    However, as some of the leading shareholders continue to embrace their roles in ensuring that companies are held accountable for their impact on both the environment and society, a growing trend has emerged of remuneration committees coming under pressure to link equity and compensation awards to sustainable environmental and socially responsible business practices (E.g. Alphabet 2019 Proxy Statement – Proposal 13).

    A number of studies [Project ROI] have been carried out that link social and environmental impact to attracting and retaining customers, increasing revenue and building a vibrant corporate culture, whilst also having significant brand impact in a landscape where simply achieving results may become secondary to the “how” they were achieved.

    Linking social impact to executive compensation

    One of the most significant hurdles of linking the social impact of a company to the equity based compensation of senior executives and directors has been the attempt to identify  quantifiable measures for what can be a very subjective definition of success.

    As the topic has come under more scrutiny there has been a visible appetite for businesses to provide more reporting and demonstrate measures that have been taken to ensure they partake in socially responsible practices. This can include:

    • Auditing suppliers to ensure that they and their subcontractors adhere to the values that they wish to demonstrate,
    • Allocating employee time and resources to positively impact society, or
    • Specific metrics regarding health and safety at work.

    An example of this trend is Alcoa. In their 2019 proxy statement Alcoa links 30% of incentive goals to non-financial measures such as safety at work and diversity in the workforce, up from 20% in 2018.

    In addition to the individual metrics defined by organizations, there has also been a growing trend of executive compensation being linked to the performance of a company on a corporate responsibility index (e.g. Dow Jones Sustainability Index). By linking elements of incentive multipliers to performance against a wider set of peers and the index, companies are able to not only create quantifiable targets to base awards on but are also focused on ensuring that they take a long term view in order to outperform competitors.

    Gathering momentum

    By defining these criteria and linking to long term incentives, businesses are more able to demonstrate their roles in a socially responsible business world. The positive financial impact of a socially responsible business is only a relatively recent trend. However, with a growing number of large investors taking an active role in the stewardship and engagement of their assets (Blackrock letter to CEOs), it is a trend that is likely to continue to gain traction.

    Conversely, organizations that are perceived to be failing to meet their obligations to society will increasingly impact the brand, reputation, and ultimately the bottom line. Hence companies that traditionally have been focused on their financial results are exploring how they can adapt to the new criteria.

    The Glass Lewis Equity Compensation Model

    Glass Lewis’ Equity Compensation Model (ECM) is now available exclusively via CGLytics. Providing unprecedented transparency to the U.S. market in one powerful online application, both companies and investors can use the same 11 key criteria as the leading proxy advisor to assess equity incentive plans.

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    Capri Holdings – A Glass Lewis Use Case into Executive Compensation Benchmarking

    In this use case, Glass Lewis examine the “additional considerations” regarding the quantitative examination with respect to Capri Holdings, Inc. (formerly Michael Kors Holdings Ltd.) using CGLytics’ analytical tools.

    Glass Lewis’ two-pronged approach to executive compensation analysis in the North American market is delineated between the quantitative analysis and a qualitative assessment. The quantitative portion, while anchored by the pay for performance grade, incorporates additional considerations to supplement the standardized pay for performance analysis.

    CGLytics’ suite of tools is fast becoming an integral part of the quantitative analysis for the North American market. In July 2019, the Compensation Analysis section became a part of Glass Lewis’ Proxy Paper for S&P 1500 companies in the U.S. and Canada. The page illustrates total realized compensation of CEOs based on data provided by CGLytics. Covering the past three years, realized CEO pay is presented on both an absolute basis and relative to country and industry peer groups developed by Glass Lewis using CGLytics tools.

    In the following discussion, we examine the aforementioned “additional considerations” regarding the quantitative examination with respect to Capri Holdings, Inc. (formerly Michael Kors Holdings Ltd.) using CGLytics’ analytical tools.

    Review of Capri Holdings’ Compensation Program

    On August 1, shareholders gave their appraisals of executive pay practices at Capri Holdings, casting votes in favor or against the compensation packages of its named executive officers. The company is one of the few in the broader markets where multiple named executive officers receive pay at the CEO level or higher. Michael Kors as chief creative officer (CCO) and honorary chair and John Idol as CEO have received largely equivalent pay packages for most if not all of Capri Holdings’ history as a publicly traded company.

    Multiple CEO-level pay recipients at individual companies have drawn the ire of shareholders in the past and no doubt will continue to do so in the future. However, executives from the apparel industry who engaged with Glass Lewis note that the industry is distinct in that the parity between chief executive and chief creative officer pay is not uncommon, but CCO pay is rarely reported on the Summary Compensation Table as these officers are not typically considered executives. In Capri Holdings’ case, however, perhaps because of his additional title of honorary chair, Mr. Kors is thus a named executive officer whose pay is subject to scrutiny at the Company’s annual advisory say on pay vote.

    Overview of the Pay For Performance Grade and the Compensation Analysis Page:

    Despite its dual CEO pay level executives, Capri Holdings received a “C” grade under Glass Lewis’ pay for performance model in each year from fiscal years 2015 to 2018, indicating adequate alignment. But in fiscal 2019, the company received a “D” grade after a jump in equity compensation to Messrs. Kors and Idol pushed Capri Holdings’ three-year weighted average compensation levels up – a move unsupported by the company’s weighted average performance that dipped in this year’s analysis. The analysis concluded that the company paid moderately more than its peers but performed moderately worse compared to peers.

    Unique situations such as Capri Holdings’ case demonstrate the benefits that additional quantitative  analyses have had in Glass Lewis’ approach to executive compensation. One might contend that the pay for performance grade penalized Capri Holdings for common industry pay practices of chief creative officer pay, boosting total named executive officer pay above peers that do not also list their chief creative officer as a top executive.

    The CGLytics-powered Compensation Analysis page in Glass Lewis’ research provided additional perspective to help consider Capri Holdings’ executive pay situation. Its focus on CEO pay underscored concerns flagged by the pay for performance analysis. In the same year that the company granted $7.5 million in equity incentives to each of Messrs. Kors and Idol, Mr. Idol’s fiscal 2019 total realized pay increased by 210% from $22.2 million to $68.9 million. At the same time, the Compensation Analysis reported that the median CEO total realized pay among industry peers remained relatively stagnant, highlighting the stark difference in realized pay levels for the CEO position at Capri Holdings compared to peers. While many companies often cite retention concerns due to low realized or realizable pay as reasons for significant increases in equity grants, the analysis using CGLytics indicated this to not be the case, at least for realized pay to the CEO.

    Additional Perspectives Through CGLytics:

    Beyond the Compensation Analysis page, by focusing on CEO pay using the CGLytics’ broader suite of tools, Glass Lewis found evidence to suggest deeper concerns with pay-setting for the short-term incentive. While the company provided Mr. Idol with no LTIP award in 2018 and only $1 million in 2017, the company’s incentives focused on short-term performance made up for the deficiency. Using CGLytics we can observe the following short-term incentive payout comparison to the industry peer median for most of Capri Holdings’ history as a publicly traded company where 2018 represents the most recently completed fiscal year for the company:

    In our view, excessive upside opportunities under a bonus plan may unduly incentivize short-term performance and may undermine a long-term focus on company performance among executives. In fact, Mr. Idol received his maximum payout opportunity under the short-term incentive every year since 2012.

    Switching gears in 2019, the Company decided to grant Mr. Idol $7.5 million in long-term incentives. Indeed, the grant resuscitated the level of Mr. Idol’s outstanding compensation following the exercise of a significant number of stock options. Mr. Idol exercised options to acquire 906,076 shares in fiscal 2019 – a value of $58.3 million according to the company’s proxy statement. The following chart shows the change in Mr. Idol’s total outstanding awards with the 2018 data representing the company’s fiscal 2019 and showing the net effect of his exercise of options and increased levels of long-term incentive grants during that year:

    The effects of the long-term grant on total CEO pay was quite pronounced as seen in the graph below:

    Review of GL recommendation:

    In the end, an 89% year-over-year jump in Mr. Idol pay placed it at the 85th percentile of CEO compensation compared to the company’s self-disclosed peer group. The pay decisions for fiscal 2019 degraded the alignment between pay and performance in our analysis. Additional analysis into in the quantum of pay for Mr. Idol through CGLytics compounded our concerns. That Mr. Kors’ pay presented similar issues as Mr. Idol’s was also considered.

    A deeper dive beyond our initial pay for performance analysis into the CEO’s total direct compensation uncovered a history of over-focus on short-term performance. Capri Holdings’ short-term incentive payouts rose well above the industry median since 2013. Due to the equity grants made to Mr. Idol during the most recently completed fiscal year, his pay spiked 1.2 times the median industry peer level, according to CGLytics’ multiple of median analysis.

    As a result of these concerns, and following a qualitative assessment of the pay program, Glass Lewis recommended against supporting Capri Holdings’ executive compensation proposal for the 2019 annual meeting.

    Conclusion:

    Overall, the additional quantitative analysis using CGLytics underscored the concerns initially highlighted by Glass Lewis’ pay for performance grade by illustrating issues with pay regardless of the impact of Mr. Kors’ compensation on total NEO pay.

    Access Glass Lewis’ Say on Pay analysis – Available through CGLytics

    Glass Lewis uses CGLytics as it’s global compensation data provider. For the 2020 proxy season our data will provide the basis of Glass Lewis’ Say on Pay recommendations.

     

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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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    The Billionaire Battle Over Oil Part 2: The Oil Giant’s Resolve

    In the second part of The Billionaire Battle Over Oil, we look at the outcome of the proposed deal between Occidental Petroleum and Anadarko.

    After a contentious few weeks between Carl Icahn’s continuing proxy war against the Occidental Petroleum (Oxy)-Anadarko deal and the awaiting of the passing vote from shareholders in order for the acquisition to be completed, news has once again been made. Not surprisingly, the proposal passed with a 99% vote in favour of the deal that gives them $72.34 per share (based on last Wednesday’s price); Oxy and Anadarko secured the largest deal in the oil and gas industry since Royal Dutch Shell and BG Group.

    However, with big deals come big costs, and the aforementioned is no exception. It adds over USD 40 billion to Oxy’s capital structure and leaves the company “with less flexibility to confront commodity price volatility” in the future. It is no surprise that Icahn chose to launch a proxy war and call for a replacement of board members in the wake of the deal.

    Not to mention, Occidental Petroleum is selling USD 13 billion of debt to finance the acquisition after receiving more than USD 75 billion in orders for the deal at its peak. That’s the biggest demand for a debt sale since Aramco, but how will this play out?

    Occidental will carry out the bond sale in 10 parts, the longest portion being a 30-year bond that yields around 2.25%. Further, to aid in the USD 10-15 billion divestment plan, Oxy has decided to sell off Anadarko assets in Africa to Total SA of France. The company is also searching for a buyer to hold majority control in the pipeline operator Western Midstream Partners LP, which Occidental is slated to inherit after the takeover.

    The first week of August saw Occidental hedge nearly 40% of its combined oil production into 2020 as well, all in an attempt to reassure shareholders that dividend payouts will be possible while taking on an increased debt load.

    While the deal may be a win from the company’s perspective, analysts and the market have voiced otherwise. Company ratings from analysts covering Occidental shifted, with the most telling from Evercore ISI “The company’s ‘Pledge’ for greater capital discipline and enhanced corporate governance proved fleeting with ROCE to decline significantly due to the Anadarko transaction. The commensurate decline in valuation places OXY at a 10-year low in the equity market.” The deal is claimed to be value-destructive, and the market bared its teeth towards Occidental and its antics; Year to date (YTD) shares are down nearly 26%, off more than 41% from the trailing twelve-month period, and down 30% since the acquisition was announced.

    Generally, good financial stewardship hedges against overvalued, high-impact dealings. Thus, it begs the question: how could such a complex deal be so vigorously accepted internally, despite market kickback and open disagreement?

    Viewing Occidental’s board of directors and their relevant skills and expertise within CGLytics’ platform, it is apparent that financial expertise and oversight is lacking.

    Occidental Petroleum Corporation’s Board Expertise

    Source: CGLytics Data and Analytics

    It is possible that the lack of financial oversight was manifested when Occidental Petroleum decided to move forward with its acquisition and outbid Chevron for Anadarko. Increased financial responsibility may have produced different results, but the oil industry is ridden with mergers, acquisitions, and deals that walk a fine line in terms of good corporate governance practices.

    It begs the question if the oil industry is in need of a corporate governance overhaul in the near future, as the story of Oxy-Anadarko is a tell-tale sign that a lack of expertise can lead to a less-than-stellar outcome.

    Corporate boards and executive teams increasingly require insights and analytical tools to identify any potential areas of reputational risk. Without this oversight, companies may be targets of activist campaigns and cannot proactively prepare.

    To learn more about how CGLytics’ deep, global data set and unparalleled analytical screening tools can potentially help you identify these areas of risk, click here.

    Did you miss it? Read the article of The Billionaire Battle over Anadarko (Part 1) here.

    About the Author

    Rollin Buffington

    US Research Analyst

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    Proxy Season Lookback: CGG marks first binding ‘non’ on pay in France – A guest blog by Glass Lewis

    The 2019 season marked the second opportunity for French shareholders’ to cast retrospective binding votes on executive compensation. And for the first time, shareholder votes prevented the payment of a bonus award, as well as the implementation of a new pay policy.

    A guest blog by

    The 2019 season marked the second opportunity for French shareholders’ to cast retrospective binding votes on executive compensation. And for the first time, shareholder votes prevented the payment of a bonus award, as well as the implementation of a new pay policy.

    In many markets a say-on-pay vote is offered, but under Sapin II legislation, which came fully into effect in 2018, French shareholders get several “says” on remuneration arrangements. The variable payments due to each executive are subject to a series of “ex-post” binding votes (one for each executive) and there is an annual “ex-ante” binding vote on the intended remuneration policy for the current year. In addition, shareholders also get forward-looking advisory votes on severance arrangements.

    It’s the binding “ex-post” vote that has drawn the most attention — in particular, the potential implications of how a rejection could affect the organisation, with several possible scenarios. How would an executive react to such a public rebuke from shareholders? To losing the bonus they thought they had earned? Would the board take emergency measures and what could these be, or would continued service prove untenable, prompting an immediate resignation? In 2018 there were several backward-looking compensation proposals that came close to providing answers, with Teleperformance, Vinci, Renault, Technicolor and Atos coming close to failing. But it wasn’t until this year’s shareholder meeting of SBF120 listed CGG, specializing in geophysical services, that shareholders got to see the implications of voting down a CEO’s pay. Well, sort-of.

    After changing CEO early in the fiscal year, CGG had a number of proposals covering executive pay on the agenda. Shareholders received two binding, backward-looking votes, covering the FY2018 variable remuneration due to both the current and former CEOs, as well as one binding, forward looking vote, covering the proposed FY2019 remuneration policy of the current CEO, and one advisory forward looking vote on post-termination severance arrangements.

    Shareholders voiced their dissent across the board. Support for executive pay proposals ranged from a high of just 56.65% to a low of 38.63%, with two voted down. These were the ex-post, binding vote on the remuneration due to the former CEO Jean-Georges Malcor for fiscal year 2018, and the ex-ante, binding vote on the 2019 remuneration policy for the current CEO, Sophie Zurquiyah.

    Besides being historic, the ex-post rejection was somewhat surprising. Mr. Malcor’s variable package contained no surprises and only represented a small fraction of his total quantum for the year. Payment of a €75,000 extraordinary award in respect of a successful debt restructuring may have been viewed as somewhat questionable, especially after CGG decided to pursue a new strategy after his departure in order to recover from a record of poor financial performance. However, the payment was relatively modest, particularly in comparison to the total of €1,626,673, that Mr. Malcor received in respect of fixed salary and a non-competition agreement (the ex-post votes under Sapin II do not cover fixed remuneration). Also surprising was that the award was not unexpected, having been clearly disclosed as part of Mr. Malcor’s forward-looking binding remuneration proposal, which received 96.90% support at the 2018 meeting.

    With only 53.52% support, the binding proposal covering variable remuneration due to the current CEO, Sophie Zurquiyah, narrowly avoided the same fate. The binding, forward-looking proposal covering the remuneration policy intended to apply for the current fiscal year was not so fortunate, garnering just 44.3% support. The consequences of this vote are more transparent, and nowhere near as potentially far-reaching, as that of the “ex-post” vote. Instead of the policy terms that had been proposed, Ms. Zurquiyah’s remuneration will continue to be determined by the company’s existing policy, previously approved by shareholders at the 2018 AGM. That may ultimately suit shareholders – while the company had not proposed any material changes to the existing policy, specific details of the 2019 iteration were not fully disclosed.

    The company has issued a press release acknowledging the vote results and stating that the board “will consider the adjustments to be made to the Chief Executive Officer’s remuneration policy in order to obtain the shareholders’ approval at the next General Meeting.” It’s unclear if that consideration will include an engagement programme to garner feedback from investors – or what will happen if and when French shareholders reject the variable pay due to a current, rather than former, CEO.

    This article was originally published on the Glass Lewis website, 23/07/2019. You can read the article here: https://www.glasslewis.com/proxy-season-lookback-cgg-marks-first-binding-non-on-pay-in-france/ 

    About the Author

    1030648

    Iris Bucelli
    Senior Research Analyst at Glass Lewis & Co.,

    Irene joined Glass Lewis as Corporate Governance Analyst for Continental Europe in 2017. She specialises in executive compensation analysis of French blue-chip and mid-cap companies. After completing a Masters Degree at the University of Bologna, she worked on international projects in Italy, France and Spain, before landing in Ireland.

    Access Glass Lewis’ Say on Pay analysis – Available through CGLytics

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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.

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