Lavish reward but where’s the risk?

Tuesday, 22 November 2011

We were pleased to read in today’s Financial Times about the findings of the High Pay Commission after its year-long enquiry into executive pay. Increasingly lavish and complicated remuneration packages are described by the Commission as “corrosive” to the well-being of companies and the economy. We wholeheartedly agree.

A report published by Incomes Data Services last month said that total earnings of FTSE 100 directors rose by an average of 49% year-on-year at a time when overall wages throughout the UK economy were falling in real terms. Barclays banker John Varley was reported to have earned £4.36m last year, 169 times the wage of the average British worker. In 1980, the ratio was 13 times.

Quoting the High Pay Commission’s report, the FT says;

“In 1979 the top 0.1% of earners took home 1.3% of national income, but by 2007 this had grown to 6.5%. At the current rate of increase the top 0.1% would take home 14% of income by 2035 – equivalent to that seen in Victorian Britain...Average pay of all FTSE 350 directors rose by 108% between 2000 and 2010, while earnings per share rose by 73% and year-end share prices fell by 5%.”

As is the case in Premier League football, the world of executive pay (mainly, but not exclusively, amongst FTSE 100 boards) seems to be gripped by a collective madness in which everybody is paid too much, even those doing a pretty average job. We only have to look at the recent share price performance of companies like HMV and Thomas Cook, amongst numerous others, to realise that that directors expect to share in the rewards when a company does well but leave shareholders to take the pain alone when a share price collapses. Shareholders, who are actually risking their wealth, deserve better. Risk and reward are no longer in balance and once a director is in The Overpaid Club, he (it’s usually a “he”) never leaves. Even if he does a poor job, he can expect a very generous pay off and is soon in another well-remunerated role. We cannot agree with the old argument that “we have to pay them this much, otherwise they’ll leave”; has anyone ever tested this theory?

We would like to see institutional investors and other shareholders do more to address this problem and, although we never like to advocate more regulation or legislation, perhaps the government could show some initiative here. Sensible companies should be taking action on this issue in case the government decides to get involved. But we’re not holding our breath.

Manchester United Flotation Blog

Milkstone blog entry

September 20^th 2011

Readers of both the sports pages and the business pages cannot have failed to notice that the Glazer family, controversial American owners of one of our local football teams Manchester United, are planning a partial flotation of the club. However, “partial” is the operative word. According to the Financial Times, the Glazers plan to sell about a third of the club’s equity (for which they hope to raise $1bn), valuing the entire club at $3bn.

Listing in Singapore is attractive for two main reasons; one, the club’s advisers expect to be able to get a better valuation for the club in the Far East than they might by listing in London or the US and two, the regulatory regime is probably less onerous in Singapore than in, say, Hong Kong.

Disappointingly for potential investors, two classes of shares are proposed. About a third of the new equity, or 12% of the total, will be in the form of Ordinary shares with full voting rights. However, the balance is likely to be “non-voting perpetual preference stock” with no dividend guarantees or rights to sell the shares back to the club. These shares would rank ahead of the Ordinary shares in the event of insolvency. Fans of the club familiar with the “cup scheme” will not be surprised to discover that the two types of shares come as a package, i.e. investors will not be able to buy just the Ordinary voting shares. Whilst not in line with best practice in corporate governance, such a two tier equity structure is an established form of capital raising.

For a much better, in depth financial analysis of Manchester United and other football clubs, we recommend that clients look at the “andersred” blog - http://andersred.blogspot.com

The IPO process is not proving straightforward, as the Straits Times of Singapore reported on September 17^th;

“The club received the go ahead to list on the Singapore Exchange (SGX) on Friday - as tipped by The Straits Times - but its intended debut in mid-October has been put off and no new date has been given. Bankers fear the market turmoil caused by the European debt crisis will deter investors.”

Last weekend’s British press also suggested (again) that a new bid for the Club may emerge from the Middle East.

Full details of the initial public offering have yet to emerge and we will update clients when we know more. We are able to deal in shares listed in Singapore and, if the IPO does go ahead, we plan to produce investment research on the company.

Forthcoming Events

Please contact us if you are interested in attending any of these events or would like to hear more about them.

Friday 16^th September

The Telegraph Festival of Business at Manchester Central

The conference will start at 9.15am with the Rt. Hon George Osborne MP, Chancellor of the Exchequer, giving the keynote address. The programme now includes over 50 speakers, including topical panel sessions hosted by UKTI, HSBC, IBM and the Business Growth Fund. It is gratifying to have an event of this stature, which one would normally expect to take place in London, happening in Manchester.

Thursday 13^th October

Investor Forum – Leeds

Companies presenting;

Britvic, Umeco, VP, Zetar, Ilika.

Tuesday 1^st November

Investor Forum – Manchester

Companies presenting;

Oxford Instruments, Vectura, Assura, ImmuPharma, Plant Impact.

New faces and new contacts

Last week we welcomed a new member of the team, Henry Gronning. Henry has joined us on work experience and has already impressed us all with his energy, thirst for knowledge and feel for the market.

I attended the Employee Ownership Association Summer Dinner last Thursday at the House of Commons. The Keynote Speaker was Charlie Mayfield, Chairman of the John Lewis Partnership. It was an enjoyable evening and useful contacts were made.

Many people probably feel that the “All for one and one for all” ethos of employee ownership is too warm and fluffy to survive in the current harsh economic environment but there is plenty of evidence to suggest that employee owned businesses not only survive but prosper when times get tough. There were certainly lots of real life examples of success at last week’s event. I was especially pleased to sit opposite and learn from Herman Kok, FD of Lindum Group, a Construction Services business based in Lincoln, which has had an employee share scheme since the 1980’s. See http://www.lindumgroup.com/


Disclaimer: The views expressed in our blog are those of the individual and not the firm. They do not represent investment advice and should not be construed as an offer to buy or sell any specific securities.


David Gorman - Milkstone

http://www.milkstone.co.uk/

India – powering along a bumpy road

16 June, 2011

India. Population 1.2 billion, half of whom are under 35, rising household incomes and a growing educated middle class living in a stable democracy.  Just some of the facts we picked up yesterday at a fascinating talk organised by the Chartered Institute for Securities and Investment about investing in the sub-continent. The talk was given by Deepak Lalwani OBE who is - pardon the pun - something of a guru on the Indian market.

Mr. Lalwani was at pains to point out some of the problems which still dog the country, such as 800m people living on less than $2 a day, poor infrastructure, widespread state corruption as well as geo-political risks and security issues.

Despite this, growth is extremely fast. For example, 20m new mobile phones are being registered every month. It took India over sixty years until 2008 to reach the first trillion US Dollars of GDP, $2 trillion is expected by 2015. The economic potential is huge.

The best way to invest in India is probably via collective funds from the likes of JP Morgan, HSBC or Fidelity or directly into the dozen or so Indian companies listed on AIM. There may be a few bumps in the road ahead for India but, for those investors who don’t know much about this high growth market, take a look.

Disclaimer: The views expressed in our blog are those of the individual and not the firm. They do not represent investment advice and should not be construed as an offer to buy or sell any specific securities.

David Gorman - Milkstone
http://www.milkstone.co.uk/