Proposal to simplify and control excessive compensation

We have consistently argued that all non-individual bonus and incentive schemes (as well as pensions schemes for that matter) should be made available to all employees on a pro-rata basis related to base salary. Bonus packages (including all cash and stock elements as well as a long-term incentive schemes) should not be just tailored for the benefit of a small group of top executives.

Discretionary Bonuses should continue to be based on individual performance. For example, the CEO could decide the bonus of any head of division who in turn could determine the bonus due to his staff and so on all the way down the organisational ladder.

To avoid a ratcheting up of the bonus levels, however, there will have to be strong checks on the CEO's overall compensation. This would give CEO's a strong motive to keep a keen eye on compensation levels. We think the best way to avoid excessive payments would be to (1) link CEO pay in the main to the level of bonus due to all staff (firm wide bonus), (2) to ban any long-term contractual payments after the initial contract term (set when the CEO is hired) has expired and (3) to put all additional bonus payments or perks to a shareholder vote BEFORE they are being allocated.

Bonus payments for CEO's are in any case a dubious innovation of the last management culture of the past 10 - 20 years. One would assume that a good salary package should be enough to do a good job, esp as the overall success of an organisation is due to the efforts of all the employees. Some top companies such as BP or Nestle have been around for decades and the incumbent CEO is building on the contributions of all previous employees.

Retaining his position and a not inconsiderable salary plus all the perks associated with his office should be enough reward for the CEO (as should simple pride in a job well done). The alternative is also simple - if the performance is not sufficient it will be loss of office. It is for that reason that any organisation should have a strong culture of management development so that at any point in time there are good candidates for promotion among the senior managers. This is not only a Macchiavellian requirement but simple common sense as a CEO could be victim of an accident or medical condition at any time or decide to jump ship to another position.

Stork hoists the white flag

As the management will stay in place after the proposed takeover by Candover Investments, one has to ask why the buyout should be necessary in the first place.
Will the shareholders get full value and is it not a conflict of interest when existing management is involved in buyout or merger discussions?
The campaign by 'activist' shareholders Centaurus and Paulson has not succeeded in the stated aim of breaking up the company to 'realise shareholder value'. But it has driven management into the arms of a white knight and resulted in a sizeable short-term profit to the two funds.
It is questionable that these two funds - which together controlled 33% of the outstanding shares - should be allowed to have such a large role in the future of a company. While the company has been built up over a long period and should plan with a time horizon of years funds such as Centaurus or Paulson can be in and out of the stock at the push of a button and have no responsibility to employees, customers or the other shareholders.

Tax regime should be neutral

Politicians never stop tinkering with the tax code. Has this ever been designated a form of obsessive behaviour by the medical community?
A case in point are the latest proposals for the taxation of investment income and capital gains in Germany.
We do not want to go into technical details but suffice it to say that the proposals are the result of a non-participatory form of democracy that is prevalent in Western Europe.
So-called political elites and technocrats representing the lobbies with an interest in the matter have produced legislation that will be far from neutral in its effects on business and the way the citizen invests his money.
As matters stand, investment in pooled vehicles of various kinds will be at an advantage and investors that hold shares in individual companies and want to manage their portfolio will be penalised.
This is contrary to the interests of wider share ownership and shareholder democracy.

Boots - another fire sale?

Press comment today argues that 'there seems to be little choose but to accept £10.40' (the level of the likely bid for Alliance Boots).

If this is accurately reflecting prevailing sentiment in investment community there is little hope for the future of public share ownership. The existing mechanism for transferring ownership of a company as a whole is seriously defective if it allows insiders to bid for assets they should manage as fiduciaries or if outsiders get preferential access to information (when a company agrees to open its books to a prospective bidder). Investors that buy shares not just for a quick punt but in view of holding them for the long term or until a certain value point is reached are also unceremoniously squeezed out in a voting process that is biased in favour of auctioning off the ongoing concern to any bidder who gets a relatively narrow majority of shares.

Management should not be in the business of selling the business. It is mandated to manage a business and the stock market should decide who controls the selection of management or whether or not a company is being sold.

As we have repeatedly argued, the process of how public shareholder-owned companies are being sold short-changes the public holders of its shares. If a bidder wants to pay £10.40 for each Boots share and the majority accepts, the holders that would only have sold at higher prices are in effect forcibly separated from the asset. If the bidder is forced to buy all shares at the highest price necessary to obtain a quorum of say 95% it would mean that the takeover could only be effected at a much higher price.

As the business of takeover regulation in the UK is dominated by producer interests (stockbrokers and investment bankers) it is incumbent on public shareholders to organise a more forceful lobby to prevent the transfer of value to the promoters of buy-outs.

Spain lowers threshold

The news that Spain will lower the threshold above which buyers will have to make a mandatory bid for the remainder of the shares from 50 to 30 percent is welcome. But it leaves open the general question of what is so magical about the 30 percent limit that it has become enshrined in the takeover regulations of several countries.

It also leads to the question of who is setting these limits and how their impact is being monitored. Closely related is the question of the way the mandatory bid has to be made after the threshold gets triggered. So far, legislators, market insiders from the producer side (banks, securities firms and investment managers) dominate the discussion and there is little regard for the voice of the ultimate owners of the businesses.

Boots Deputy Chairman involved in bid for Company

It is time that the public shareholders create robust defences against conflicts of interest that exist when all or part of top management and board members are involved in bids for the company or assets that are being sold off.
These insiders have a substantial advantage over the public shareholders when assessing the intrinsic value of a company's asset and it sounds more than hypocritical when they argue that they want to make a bid because the market undervalues the shares of the company. Let them buy shares in their private investment account but do not allow them to make bids within a cooling off period of one, preferably two years after leaving the company.

Private Equity Bashing Circus?

The quality of argument about the benefits of Private Equity investment has reached a dangerously low level when a commentator in a leading British Daily Newspaper can call the discussions a 'private equity bashing circus'.
We would like to point out, however, that two crucial points hardly got mentioned so far.
One concerns the distributive effects the growing presence of private equity. A narrow group of managers in the private equity industry reaps the benefits of ever-growing buy-outs on the back on a compensation structure that has originally been designed for managers of (much smaller) venture capital funds. No one seems to know how much the numbers involved are but the combination of (over?) generous management fees of around 2 % p.a. and a profit sharing of 20 % above (unspecified?) hurdle rates let the compensation available to managers or public companies pale in comparison.
Growing concentration of company ownership in a small number of opaque management companies that are nothing but conglomerate holding companies is also contrary to the aim of a wider spread of company ownership that should be a focus in a democratic society.

No to Super-voting Shares

We reject all types of differentiated voting rights. In most cases they serve to protect the interest of a dominant owner. This does not mean, however, that we subscribe to the simplistic theory of 'one share, one vote' that is currently so popular in corporate governance circles, academia and politics. Super-voting shares are blatant discrimination and an abuse of the privilege that limited and public company status provides.

TXU - how quickly can you raise the white flag?

Towards the end of last week a bid by leveraged investment funds for the US utility company was announced and just one weekend later the board and management are already raising the white flag and agree to the terms of the buy-out offer.

It is surprising - to say the least - that a substantial business in a crucial sector of the economy can be 'taken out' in such a speedy fashion.

Should management and the board only be interested in giving shareholders access to a quick profit or should they manage the business with a longer-term perspective and leave it to the market whether or not control of the company passes to another set of shareholders?

Pro-Gov argues that in many cases the takeover terms on offer to the existing shareholders allow bidders to take control without being forced to pay an adequate premium.

The existing management is also incentivised to accede to buy-out terms too quickly as their golden parachutes and outstanding share options are crystallised in case of a transfer of control. In addition, management may be softened up by the promise of lucrative new terms of employment and share options by the new owners.

Controlling the costs of Public Sector Pensions

The introduction of a simplified Pension System would also solve the problem of skyrocketing Public Sector Pension costs.
The abolishment of pension provision by the employer (and controlled by him) would take the decision about the pension out of political control. After all, the employer does not provide us with our groceries or our housing?
If there is a political majority in favour of a certain amount of state provision the most efficient solution would be a 'Citizen Pension' payable to everyone who is above a certain age.
Additional provision would be made by each person out of his income. There could be provision to give every one an earmarked account in which he would hold his pension pot. Extra relief for hardship could be dealt with by a carefully controlled scheme that prevents abuse by those who wilfully neglect to make provision for old age.

Stop Meddling by Politicians!

That would be our main recommendation for the reform of the pension system in most countries. Most distortions are caused by the arbitrary introduction of piecemeal legislation and tax rules that were intended to favour one or the other political constituency close to the party in power at the time.
It seems to be accepted without further questioning that the citizen should rely on the state for his income in the later part of life. The more the citizen are believing this doctrine, the more the power of the politicians increases and they have little real motive to stop this trend.

One Share, One Vote?

It sounds more than reasonable to apply this formula to the realm of corporate governance. After all, what is seen as the best (or maybe least bad) system of government in the political field, should also be the most appropriate form of shareholder representation.
Never mind that even in politics this principle is only a rough guide to the reality. Various intended and unintended checks and balances exist and lead to a situation where the principle is undermined.
In our opinion, calls by the Association of British Insurers or the EC for the introduction of unified share voting rules should be scrutinised carefully. The founding fathers of the US constitution were deeply suspicious of unfettered democracy and maybe shareholders would be better served if the voting structure in public companies is designed as carefully as the constitution of the United States.
We are certainly not in favour of giving groups of shareholders (often founding families or other controlling owners) different voting rights. But more research is necessary and may well lead to the conclusion that the limitation of voting rights is well-suited to force all stakeholders to focus on the long-term well-being of the enterprise.
Some recent corporate controversies - Deutsche Boerse, Newcorp or Rentokil, to name just the most prominent ones - would have developed differently if there would have been different voting arrangements.