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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The increasing popularity of linking equity compensation to socially responsible practices

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.

Click here to experience Glass Lewis’ new application.

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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

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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

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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Glass Lewis takes a look at the recent proposed amendment to the Shutterfly equity compensation program and the response from shareholders.

Tailoring Executive Remuneration Analysis Using CGLytics: Persimmon plc

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 Persimmon plc, using CGLytics’ analytical tools.

FirstGroup Take Another Ride on the Activist Train

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

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

Where this activist ride began

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

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

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

The board’s expertise

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

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

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

Pay for Performance

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

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

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

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

 

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

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

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

Source: CGLytics Executive Compensation Models

Before, During and After the EGM

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

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

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

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

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

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

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

Aftermath: Searching for a New Chairman

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

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

Latest Industry News, Views & Information

The increasing trend of shareholder opposition to executive pay

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

Shutterfly: A Glass Lewis Use Case

Glass Lewis takes a look at the recent proposed amendment to the Shutterfly equity compensation program and the response from shareholders.

Tailoring Executive Remuneration Analysis Using CGLytics: Persimmon plc

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 Persimmon plc, using CGLytics’ analytical tools.

Bed Bath & Beyond: Cleaning House

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

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

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

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

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

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

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

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

 

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

bedbath&beyond2
Source: CGLytics Data and Analytics

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

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

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

bedbath&beyond3
bedbath&beyond4
Source: CGLytics Data

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

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

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

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

Sources

CGYLTICS DATA AND ANALYTICS

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

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

Latest Industry News, Views & Information

The increasing trend of shareholder opposition to executive pay

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

Shutterfly: A Glass Lewis Use Case

Glass Lewis takes a look at the recent proposed amendment to the Shutterfly equity compensation program and the response from shareholders.

Tailoring Executive Remuneration Analysis Using CGLytics: Persimmon plc

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 Persimmon plc, using CGLytics’ analytical tools.