A Strong Case for M&A

The appetite for acquisitions among corporates and private equity-backed businesses continues to grow. This is driven by a combination of mounting pressure from shareholders and investors, who want to see tangible signs of growth, and the availability of cheap money. It’s created a seller’s market and, therefore, buyers need to thoroughly analyse a company’s compatibility, while also being careful not to overpay.

Richard Madden, Chief Executive of corporate finance house DC Advisory, says: “There’s an awful lot of money chasing a small number of good opportunities. As a vendor, it means that good businesses are going for full prices, which may not work so well for buyers – but only time will tell.”

According to research from professional services firm EY, which surveyed 1,600 executives in 54 countries, 56 per cent of companies intend to pursue acquisitions in the next 12 months (up from 31 per cent in 2014).

In such a competitive market, management teams have to build a strong case for an acquisition and be rigorous when assessing how it’s going to deliver value. Pam Powell, Non-executive Director of Premier Foods and soft drinks manufacturer A.G. Barr, comments: “You’ve got to start with your strategy… Any [proposal for] an acquisition has to be considered against… what’s needed in the future in terms of growth, the sector that you’re in, and the capabilities and resources that the business needs.”

It will also be necessary to define the advocates of a deal. Paul Budge, Managing Director for the UK and Ireland at distribution and outsourcing group Bunzl, says: “The operating company leader, who is going to take this acquisition on, is the person who [needs to be] accountable for its success.

“They are charged with, as I describe it, falling in love with the acquisition or not. You can’t hold somebody accountable if they weren’t part of signing up to it in the first place.”

Andrew Minton, Executive Director at Criticaleye, comments: “If an acquisition is to deliver long-term value it needs to be led from the outset by the executives who will ultimately be responsible for its success. It demonstrates to everyone within the acquired business that you’re serious about their future as part of the combined company, and that you’re not just looking for a quick win.”

All in the planning

A well-considered approach to identifying and prioritising targets will be needed. “If you’re entirely opportunistic you risk having a business or a set of businesses that don’t really fit together,” says Joe Garrood, Investment Director at private equity firm ECI Partners. “[It’s why you need to] have a framework that accounts for acquisitions.”

At standards and training provider BSI Group, country and sector managers are expected to analyse relevant target businesses and propose them to the Group Executive Team. Howard Kerr, CEO of the company, comments: “We have a current list of more than 200 companies that we have identified as fitting our criteria for acquisition. It doesn’t mean they’re for sale and it doesn’t mean we’re interested in them.

“It’s just a large number of companies we can work from because, in my experience, if you don’t have a healthy M&A pipeline, how do you know you’re actually buying the right company at the right time? The danger is that you [take the first opportunity] and reduce your ability to acquire a much better target afterwards [because] capital and management have already been deployed.”

Andrew Hosty, COO of manufacturing concern Morgan Advanced Materials, says: “The only reason I would acquire a business is to accelerate our strategy. They have to be doing something that clearly works alongside our company.”

In theory, this approach should make the deal quicker, although time and effort must be spent on due diligence. “Don’t compromise,” he adds. “You need to explain upfront: ‘This is what we’re going to do and this is how we’re going to go and do it.’”

Mark Brockway, Executive Director for Corporate Finance at EY, warns that the process shouldn’t become a box-ticking exercise. He says: “You need to prioritise what’s really important for the situation, such as the retention of a CEO. We helped a listed client incentivise the management of an acquisition target with new roles and equity-like incentives.

“The business had great clients, but the perceived risk was entrepreneurial management losing interest without a fresh challenge. They spent a lot of time just making sure they were happy before concluding due diligence.”

Managing the merger

Absolute clarity about why an asset has been acquired will make it far easier to implement an integration plan. “If the reason for buying is the cross-sell opportunity, that’s where you need to start. If it’s about efficiency of systems, then begin there,” says Joe.

For John Allan, Non-executive Chairman of retail concern Tesco, the trick is to start early and at the very top. He was Chairman of Dixons when it merged with Carphone Warehouse in August 2014 and says one of the key considerations before the deal went through was how the merged business was going to be run.

“We had a very intensive period of negotiation about board structure and the key management positions. We felt strongly that to get major benefits out of the merger, we needed to run it with an integrated management team,” he says.

“I think sorting those issues out before the deal transacted, while quite difficult at times, was the right thing to do. It meant that from the get-go we’d agreed the key principles of integration and people could then just start to get on with it.”

Rob Crossland, CEO of employment services group Optionis, comments: “It’s really important to quickly work out strengths, weaknesses, character fits, and which organisational disciplines that you need around the board table, and to make sure that people are comfortable with their new roles.”

The majority of acquisitions will carry an element of risk, especially when they’re dependent on people adjusting to a new organisation. It’s up to boards to smoke out lazily planned attempts to build market share, without any real thoughts about integration.

As Mark from EY says: “The main board has to sponsor the deal and be accountable. When issues come up, deals lose momentum or fall over quickly without that key individual [who is] prepared to put their reputation on the line.”

I hope to see you soon.

Matthew

https://twitter.com/criticaleyeuk

Making it as a First-Time CEO

Comm update_29 October1All eyes are on you as a first-time CEO. No matter how experienced you think you are, there will be aspects of the role that take you by surprise. It’s why many new CEOs take the opportunity to assess the business, looking to build an accurate picture of performance by meeting different stakeholders. Once you’ve got to grips with the various realities, the pressure will be on to act decisively.

“On my first day, I was very conscious that when I walked into the office everybody was looking at me thinking, ‘Well, who is this guy?’” comments Howard Kerr, Chief Executive of standards and training provider BSI Group. “They were saying, ‘We’ve seen the company announcement and we’ve seen his CV, yet, from what we can tell, he’s got no obvious credentials for this job.’”

Mike Turner, Chairman of engineering concern GKN and former Group CEO of BAE Systems, comments: “What was new to me and surprised me the most was the rigour of the external communications with the shareholders. I thought you just went along with your finance director and that the focus would be on your earnings.

“Frankly, they’re not that interested in the past, they want to know about the future: where’s the growth coming from, do you have a clear strategy and, above all, are you delivering that strategy successfully?”

Often an adjustment period is needed to deal with the greater visibility and profile. Tony Cocker, Chief Executive of energy concern E.ON UK, says: “I’d been working for the company in Germany and it was completely out of the public spotlight. So, when I came back to the UK I was intellectually but not emotionally prepared for the pressure of dealing with the… perception of mistrust of energy companies from the media, some politicians, consumer organisations and many customers.”

Sarah Boyd, CEO of retail chain Guardian Health & Beauty, Singapore, which is owned by Asian retail group Dairy Farm, comments: “I was surprised by the sheer number of decisions that I was faced with. But it was more about the fact that the majority of those decisions were being made based on gut feel, rather than using good quality data and analytics.

“I was absolutely terrified because people were asking me to make decisions on things for which I had no frame of reference, and I found that incredibly uncomfortable for a while.”

First impressions

So, what should be on the agenda for those who are new to the role in those first 100 days? The most common pieces of advice fall into three areas:

  • Spend time assessing the business internally in order to separate fact from fiction;
  • Meet external stakeholders, such as customers, suppliers, analysts and advisors, to get an idea of how the company is perceived;
  • Once the period of assessment is over, be decisive.

A good starting point will be to sit down with the chairman. Lord Stuart Rose, Chairman of online grocer Ocado Group and former CEO and Chairman at retailer M&S, says: “The relationship between a CEO and Chairman is absolutely built on trust and mutual understanding. For example, when discussing my recovery plan for Marks & Spencer with the Chairman, he just said, ‘Right, well I’m backing you’. “It was about giving me time and keeping the board and the shareholders off my back, while I focused on getting the job done. Every chief executive must crave a hugely supportive chairman and every chief executive who is any good deserves one, until he proves [otherwise].”

Greg Morgan, Director at search firm Warren Partners, comments: “I think, crucially, you need to agree with the Chair on what your objectives for the first 100 days are going to be. [You then need to] establish, again, in consultation with the Chair and the board, what your strategic and operational priorities are… and work to define them so that everyone is [in agreement].”

What they say

Don’t underestimate the value of talking to people in the business during these early days. Sarah comments: “For a retail CEO, certainly, it’s about working in-store for a period of time and spending as much time as you can with the people on the ground who are actually delivering the results for you. After all, you can’t start adding value at a more senior level until you really understand what’s happening.

“If I’d come into this business and said, ‘Tell me how our stores are run,’ and I just sat in my office… I would have been so far from the truth of what actually happens in-store.”

Tony says: “You absolutely need to take the time… to meet and listen to colleagues at all levels, as well as customers, very early on. You’ve got to prioritise listening so you get a much better feel for the organisation in your first 30 days.”

Understanding external stakeholders is increasingly a key part of the CEO’s role. Greg comments: “Going the extra mile in terms of your due diligence is probably the distinguishing feature of people that do it well. The incoming CEO must talk to advisors to the business, people that are no longer with the company and, of course, customers, investors and analysts.”

Howard says that he did “an awful lot of travelling around” to make a concerted effort to speak with those on the frontline and to deal with customers: “In my case, because I was coming into a business and a new industry, I didn’t come with any preconceptions, so I came in being genuinely curious.”

It’s about absorbing as much information as possible and carefully choosing how to relay the messages you think will have the biggest impact. “You’ve got to prioritise listening to colleagues but then also listen to customers and other external stakeholders,” says Tony. “I remember the first newspaper I sat down with was The Sun [the UK’s most popular tabloid], which was a deliberate decision because many more of our customers read The Sun than the Financial Times.”

Lights, camera, action

Once a CEO has developed their own view on strategy, it’s time to ring the changes. Mike says: “Get your direct reports, your team right, and have your head of communications in attendance at your executive committee [meetings]. He or she has to know what’s going on in the business and [likewise] you can make sure the key messages are getting out to all employees, especially around the company strategy. It’s a real failure when employees say, ‘I don’t know what the company strategy is’.”

Howard comments: “[In my case] the executive team was, to a large extent, not really fit for purpose, so I had to replace the HRD, the legal director and the FD. I also had to move a couple of regional directors around, so there was quite a lot of change required…

“Basically, I didn’t have enough evangelists on my team to support me on the messages I wanted to convey and to help me execute the strategy.”

When speaking to former CEOs, a familiar refrain is that, in retrospect, decisions could have been made at a greater pace. Lord Rose says: “When I look back and assess the mistakes I’ve made, it’s always about not acting quickly enough. Whether that’s not firing somebody or not pushing a plan through forcefully enough, there’s always the question: could I have gone faster?”

Put simply, the spotlight will be on a new CEO to show real leadership. “You’ve really got to energise yourself, but triply energise the team who are working for you, because if you don’t [motivate] the team, you don’t get the job done,” adds Lord Rose.

I hope to see you soon

Matthew

www.twitter.com/criticaleyeuk

All Change for Executive Pay

Comm update_16 July

Seemingly lavish rewards for executives with little explanation or context will always make for good headlines. It’s up to the chairman of the remuneration committee (remco) to disclose what’s happening in a fashion which stakeholders understand, while finding a way to blend salaries with short and long-term incentives which attract and retain the best people, meet regulatory requirements and drive high performance.

Failure to disclose the rationale behind decisions adequately will see institutional investors and proxy agencies push back hard. According to research from Big Four firm EY, examples of recent red flags for shareholders include hikes in bonuses despite falling profits, granting Long Term Incentive Plans (LTIPs) above the normal maximum, which have been justified by ‘exceptional circumstances’, and the introduction of a new LTIP which increased the maximum award value to 350 per cent of salary.

There is plenty for remco chairs to juggle and scrutinise. Jeff Harris, who is Non-executive Chairman of plastic and fibres supplier Essentra and also Chairman of the Remuneration Committee at Synergy Health, welcomes the improved communication now occurring in the UK following regulatory reforms. “It’s positive because if we understand the objectives of the investors, boards can meet them better and can refer to their wishes in arguing points with company executives,” he says.

Mark Shelton, Partner and Head of Executive Compensation & Reward at EY, says: “The remco chair needs to reflect and remind themselves that they’re fundamentally there to drive business performance, and that means attracting, retaining and incentivising talent within a landscape of the new regulatory environment for shareholders. Then it’s about the public and the politicians.”

A similar point is made by Roger McDowell, who is Chairman of engineering company Avingtrans and Chairman of the Remuneration Committee at beauty and cosmetics designer Swallowfield: “Absolutely uppermost is development of shareholder value through motivation of management, I mean that is what it is about… But in terms of getting the motivation, there has to be something that is broadly acceptable to all stakeholders.”

An ongoing concern about executive pay is that regulatory changes are resulting in a box-ticking approach, which actually serves to inflate reward packages. “There is now a prescriptive way to disclose a number of matters on executive remuneration and that will increase transparency,” says Mark. “The unintended consequence, though, is it will increase pay because people will look at what’s been disclosed and move towards the common standard.

“To drive business performance, remco chairs will need to be very sensitive to what’s right for the business and not be overly led by market practice and also what is now being publically disclosed.”

Jeff comments: “The main challenge, as ever, is balancing the ‘benchmarked’ expectations of executives with the constraints of the investors who are the owners. It’s not helped by… the lemming-like rush to the upper quartile by executives.”

It’s up to remco chairs to take a tougher stance and, where necessary, educate CEOs and senior leadership teams about the new regime for executive pay. The emphasis is firmly on a fixed salary, while short and long-term incentives are linked to company performance that may in turn be related to total shareholder return, cash generation, profitability or earnings per share, among others.

Camilla Rhodes, Non-executive Director and Chairman of the Remuneration Committee at Johnston Press, explains: “As long as the communication between the executive team and the remuneration committee is right, and the talent pool is right for the business strategy, it’s a relationship that’s certainly manageable. But I don’t think the remco chair is ever going to be the best friend of the CEO, nor should they be.”

On the money

Devising acceptable packages is complex. Often the calculations involved leave those who lack expertise in this area baffled – even those who do understand it can be exasperated. Vanda Murray, Senior Independent Director at manufacturing company Fenner and Chairman of the Remuneration Committee at software company Microgen, says: “Really, you’re looking forward and trying to assess what is stretching the business on a one, two and three year horizon; how it can change over time and, if it changes dramatically, you’ll need to be able to adjust accordingly.”

Roger says: “What I always try to do is keep the big picture in mind. I’ll have a [long-term scheme] for up to three or five years… or some other form of share-based motivation scheme… If the market cap of the business doubles over a three-year timeframe, is that something that the shareholders would be pleased with?

“Would that be the business considerably outperforming its peer group and… be a feather in management’s cap? Whatever a great result is for shareholders, it should also deliver a great result for management.”

It’s a pragmatic approach, whereby remuneration is designed to focus the minds of executives on the future success of the company. If, however, performance proves to be under-par, there ought to be deferred remuneration and ‘clawbacks’ against variable compensation in place to further protect shareholders.

Mark says: “Clawbacks in executive remuneration have come to mean clawbacks of awards that are as yet unvested but shouldn’t be delivered. This is entirely enforceable as long as it’s undelivered. What is less likely to be enforceable – and there have certainly been some challenges on it – is clawing back awards that have been paid, taxed, delivered to individuals and potentially even spent.”

The position of the remco chair is set to remain controversial. Leslie Van de Walle, Chairman of construction industry suppler SIG and Chairman of the Remuneration Committee at diversified investment group DCC, says: “It is a difficult and sensitive area and it is getting worse because… remcos are torn between two objectives which are not always compatible.”

It has become a social issue, particularly in the UK – increasingly in the US too – where the sums earned by executives can seem astronomical compared to ‘ordinary people.’ Lady Barbara Judge, Chairman UCL Energy Institute, comments: “The real problem is when people make a huge amount of money that they can never spend… and other people work in the company for just as many hours [but receive a lot less]…

“I think that gap is what the problem is, not how much people make at the upper end, but the differential at the lower end.”

This can be managed if a remco chair isn’t hampered by sclerotic thinking and fully appreciates that times have changed when it comes to transparency. For the immediate future, what’s required is a period of calm so companies can devise compensation packages – free from regulatory and political interference – which minimise risks, promote clear disclosure and are rooted in the best interests of businesses.

Added to that, it helps to bear in mind that it’s impossible to keep everyone happy.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

The Plc vs Private Equity Chairman

ImagePlenty of chairmen sit in both the Plc and private equity camps. It takes an experienced individual to do it well, someone who is equally at ease in the public spotlight, with its corporate governance requirements, analysts and media coverage, as they are accomplished enough to deal with the different shareholder dynamics in PE, where a chair is often expected to delve much deeper into the nitty-gritty of a business.

Alan Thomson, Chairman of recruitment firm Hays Plc and the recently floated pipe manufacturer Polypipe, says: “With all the reporting that we have to do around audits and remuneration in particular, as well as creating a nominations committee, [being a chair in a Plc] is a lot more complex. For example, [with Polypipe] we now have a board of seven people rather than four.”

It is a testing environment and there’s no sign of the complexity diminishing. Debbie Hewitt, Chairman of clothing retailer Moss Bros Plc, comments: “Remuneration and incentives is a much more emotive subject when chairing a Plc, particularly given the new rules of institutions voting on the remuneration policy.”

While it would be wrong to say the risks are overplayed – the liabilities for any Plc director are onerous –, it shouldn’t be forgotten that there is a definite upside. John Kelly, Senior Independent Non-executive Director at betting firm Ladbrokes Plc and someone who has also had a number of PE chairmanships, says:  “In a public company, while it’s a very difficult place to be, if the chairman wants a bit of a profile and to be seen to be supporting the executive managers and strategy, he can create a difference for that company which has real visibility.

“So, in a Plc, you have the likes of Schroders, Fidelity, AXA, and so on, opining on whether you are a decent chairman or not. You’ve also got the press who are more aware of you than they ever were when you were in private equity; then there are the analysts who are… publically saying how well the board is functioning in a variety of ways… If you want to establish your credentials as a chairman, a public company chairmanship can be a very satisfying role.”

Horses for courses

None of this is to suggest that chairing a PE-backed business is an easy gig. John Allbrook, Executive Chairman of IT financiers Syscap and former CEO of AIM-listed GoIndustry, says: “The chairman of [a Plc] is going to have to spend considerable amount of time on corporate governance and making sure all of those boxes are ticked, which will mean they have less time to spend on strategy and execution.

“By contrast, in the private equity environment you’ll need to spend more time in the business, understanding the growth strategy and focusing on value creation.”

Charlie Johnstone, Origination Partner at private equity firm ECI, comments: “The type of person who is attracted to a chairman’s role in private equity is a different animal. They are more interested in getting under the skin of the business and less interested in the prestige of profile that goes with being chairman of a large Plc.

“You need to be more ‘hands-on’ but you are still a non-exec… so while you might spend more time with the executive team, it’s often done in a coaching capacity.”

The interaction with shareholders, as you might expect, is significantly different. Debbie comments: “Managing multiple shareholders in a very public way adds a complexity to the role which PE companies don’t require. The agenda for the chair in a PE business is typically simpler to manage, and usually means they can more easily focus on the business and delivering performance, as opposed to the time spent managing a more complex shareholder structure.”

John Kelly says: “In PE you’re dealing directly with your shareholders, all of whom are executives and have a significant financial interest which creates a very different relationship between the executive management team and the sponsors.”

He goes on to point out that the relationship between the management and PE firm is crucial as the business moves towards an exit, adding “the chairman must be prepared to withdraw when it’s appropriate while keeping oversight on how that relationship is developing, how sustainable it is and how logical it is and whether it’s working in the best interests of the investment”.

Paul Brennan, Chairman of cloud storage provider OnApp, comments: “You need to have a very clear insight into how the PE world works… [and] how remuneration works for the people involved, because PE houses are clearly there to make a return on investment for their equity holders.”

Many chairmen are happy to crossover from a Plc to PE board and vice versa. Success depends on them being fully aware of what is needed for each particular business and its shareholders. Perhaps perversely, they also need to be wired in such a way that they can enjoy the unique challenges each presents.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

Brand Champions on the Board

Image

The stock of the CMO is rising as boards realise that you can’t dismiss ‘brand’ as a buzzword. At a time when loyalty is hard to come by, clued-in directors fully appreciate that a strong and trusted brand is the difference between those organisations which have a bond with their customers, shareholders and employees, and those that are marginalised and mired in an identity crisis.

“There is a general awakening to the power of brands across the board level,” says Stephen Smith, Chief Marketing Officer at supermarket chain ASDA. “A transition has taken place from reputation management to brand management, stemming from the many crises of reputation which have damaged or even destroyed companies and their brands.”

Whether you’re B2B or B2C, you need brand champions in the boardroom. Catherine Green, Marketing and Communications Director at international construction and consultancy firm Mace, says: “Really understanding what makes your business different and better from the competition is all wrapped up in your brand strategy. Boards need to be much more fluent in this because employees and consumers are savvy about values and whether they are authentic… What people say about your brand through social media and third-party endorsements is now much more important.”

Nicolas Mamier, Managing Director at brand consultancy Appetite, comments: “Brand is an organising principle not an extension of the marketing department. It’s too important to be left only to the marketeers, however good they might be, because if a trusted brand means a trusted organisation, it simply must command the attention of the C-suite.”

Traditional consumer behaviour has been atomised by the financial crisis and convergence. “Brand loyalty is nowhere near as strong as it used to be because consumer promiscuity is up,” says Steve Parkin, CEO of Mayborn Group, which makes baby and child products. “Boards need to work a lot harder on getting that interface back with their consumer on a one-to-one basis, which means new techniques are needed to build a connection with your consumer and maintain it, so that loyalty is never taken for granted.”

Pam Powell, Non-executive Director at Premier Foods and formerly Group Marketing Strategy and Innovation Director at brewer SABMiller, says: “In this market, you’ve really got to earn your customer loyalty. Strong brands can communicate quality and reliability so there’s a reassurance in the value you’re getting, where as weak brands will be shown up in this respect.”

This goes beyond customers. Ian Wright, Corporate Relations Director at Diageo, which controls some of the biggest alcohol brands including Johnnie Walker and Guinness, says: “Institutional investors are more discerning about where they place their funds and apportion investment… The way you gain the confidence of investors and get them to stick with your business is by having a great brand. It represents a reason for confidence in the management of your business.”

Out with the old

If a brand has lost its allure, or has been compromised, you have to act quickly and decisively, either opting for a substantial rethink about how to establish relevance or axing it completely. Before joining ASDAStephen was tasked with replacing a range of shops called Kash n’ Karry with a new brand, Sweetbay. The former had been in steep decline and, having changed its strategy and leadership team on several occasions, had lost customer loyalty.

“Any transition starts with people offering you a new choice but finishes with taking the old choice away,” says Stephen. “We were very clear that one was gracefully retiring and that there was something brand new sprouting up in its place… 

“When you’re making dramatic changes you are quite dependent on new customers coming in and reappraising you. Of course, you’ll always have some detractors who liked the old store and didn’t want something shiny and new, but the ultimate goal is to have more people coming in than going out. You have to try and stay ahead.”

If a global rebrand is necessary, clarity on what the business stands for is paramount. “The project that we did to refresh the BBC brand was all about understanding how we could make the brand work across all of the countries,” says Peter Horrocks, Director of BBC Global News and World Service. “The challenge is: how do we make it more engaging while still maintaining the authority and trust that there is in the brand?

“When you’re talking about a global organisation with a variety of products, [the brand] needs to be something that is unifying and that hits the sweet spot for multiple countries… if you can get that right it can be tremendously powerful because you’ve got massive scale to work with.”

Companies must always be on the lookout for new ways to get their message across. “A brand is the ultimate differentiator,” says Professor Dominique Turpin, President of IMD and Criticaleye Thought Leader. “Great global brands stand out, and they make our lives easier, better and cheaper. Nobody wrote an e-mail one day to Steve Jobs saying they needed an iPhone or iPad. Very few business leaders ask themselves, ‘What are my customer’s headaches?’ But this is such a good question. Provide a product or service that solves a customer headache and you’re on the right track.”

Steve comments: “In terms of what drives our brand strategy, it’s all about consumer recommendation. If we can get mums talking to other mums positively about their experience with our brand, particularly with the onset of social media and digital, that’s the number one driver that gives us the trust in our brand.”

There is a tendency among underperforming boards to only realise how vital a brand is after a calamity has occurred, or a competitor has stolen a march on them. It takes years of investment and personnel change to try and regain former glories. Some never get it back. 

Don’t be one of those businesses. 

I hope to see you soon.

Matthew

https://twitter.com/criticaleyeuk

Mission Impossible and the Remco Chair

Faces update - 19 june 2013With shareholders and politicians on the warpath over executive pay, the chairman of the remuneration committee now has one of the hottest seats on the board. The focus is on lavish rewards for woeful performance, but the real issue lies with a lack of perceived accountability due to the complexity of compensation packages. Ask any Remco Chair and they’ll tell you that simplicity and transparency are what’s needed.

The problem lies in unravelling pay ‘structures’ that have been devised over a number of years. Philip Rowley, Non-executive Director and Remco Chair at microchip designer ARM Holdings, comments: “Openness, transparency and clarity are a good thing. I think that trying to drive to a single number is a sensible thing to do, too. Likewise, publishing policy which is voted on is good as long as one is allowed to be broad enough in drawing the policy so that you don’t feel you have to go back to shareholders every year.”

In the UK, remuneration reforms have sought to address the issue of high pay for poor performance, such as forcing companies to have binding votes on executive pay every three years, including exit payments made to dismissed directors. The disclosure requirements, which come into effect this October, were initially met with disdain but many executive and non-executive directors now recognise (outwardly, at least) that there should be a positive impact.

“If there has been an enhancement in the quality and quantity of engagement between companies and shareholders, that is all to the good for everyone concerned – better run companies which have proper and proactive relationships with their stakeholders must be welcomed,” says Anthony Fry, Chairman of Dairy Crest Group.

The increased communication with shareholders is to be encouraged. Alison Carnwath, Chairman of commercial property and investment company Land Securities, says: “Institutions are becoming more vocal and interested in the subject and some retain their own experts to question policy and practice with companies. This is welcome and will lead to fewer misunderstandings and abuses.”

According to Alison, who was the former pay boss at Barclays who refused to agree to a bonus for the ex-Chief Executive, Bob Diamond, as she felt the bank’s 2011 performance was unsatisfactory, it needs to be remembered that, in the main, companies do take considerable care when constructing remuneration schemes. “The caveat is that many schemes have evolved over the years to try to satisfy differing audiences, and the end products are not perfect,” she adds.

Devising a compensation package that pleases everybody is something of an impossible task given the competing agendas, which is why transparency and communication are crucial. Both Leslie van de Walle, Criticaleye Board Mentor and Chairman of SIG, and Andy Pomfret, CEO of investment management firm Rathbone Brothers, stress the need for a relatively straightforward approach.

“Pay structures need to be simplified,” insists Leslie. “It is too complex with salary, benefits, short-term bonuses and long-term incentives, reflecting conflicted shareholder demands on CEOs, such as short-term and long-term value creation.”

Andy says: “I would prefer to give people a salary and just a bonus, with that bonus being deferred for a period such that it could be clawed back if there’s proof that something bad was done… But I would keep it simple these days and ideally pay it in shares so people then have an ongoing interest in the company.”

Changing times

So has the investor activism of last year in Britain, dubbed the ‘shareholder spring’, led to a change in corporate behaviour? David Ellis, Head of Reward at KPMG UK, says: “Consultation between companies and shareholders has increased. We’ll see the need for consultation every year, requiring Remco Chairs to explain what’s happening in the annual report.”

Sir Robert Margetts, an experienced chair of remuneration committees and former Chairman of insurance giant Legal & General, says: “I welcomed the ‘shareholder spring’, in that it brought a measure of counterbalance to the inflationary excesses of recent years. Unfortunately, it was a little blind and random in the end but it did constitute a wake-up call, which is surely a good thing.”

For Alison, the greatest difficulty surrounds disclosure of individual, personal and other commercially sensitive targets for directors: “In some areas companies are still awaiting guidance from their shareholders. On balance, the disclosures should not cause companies problems and ought to provide better clarity for shareholders.”

For those in the financial services sector, the spotlight is a lot harsher, especially with the uncertainty from the European Union over its push for pay caps. Andy says: “We don’t know how it’s going to work and it kicks in on 1st January next year, assuming they stick to the timetable – it’s a nightmare for us.”

While Andy has no issue with the forthcoming UK requirements – “we disclose more than we have to do so far” – the lack of clarity from the EU is a source of frustration. He says: “As we understand it, the limit of the bonus is that it will be limited to 1x your salary, unless your shareholders vote in favour that it should be up to 2x… [but] at the moment we have no knowledge as to how things like long-term incentive plans (LTIPs) are treated.”

Future gains 

The golden rule for listed companies is to avoid nasty surprises. Philip comments: “At ARM, we just announced our new LTIP scheme and while we were doing that we took the opportunity to look at the overall composition of pay and to simplify our pay structure. As far as we believe, we’ve done the work necessary to [meet] the new disclosure requirements and we’ve gained the support through our AGM and the other necessary channels.”

David comments: “When a company wishes to put a new LTIP in they are getting some serious and meaningful questions from investors as to what that plan is designed to achieve and how much it might pay out… In an ideal world you will have had a dry run this year, testing your policies out with your investors so that when you disclose them next year you can be pretty confident the policy will be approved.”

According to the latest figures from KPMG, which has analysed shareholder voting at AGMs, the percentage of companies across the FTSE Index proposing new or amended share plans more than doubled from 7 per cent in 2012 to 15 per cent this year (up to 31st May). Furthermore, while the shareholder spring has been largely non-existent among FTSE 100 companies, the Big Four firm found that high levels of shareholder dissent was still observed among small caps, with one in five companies experiencing major objections to their pay plans.

David explains: “With over half of the voting season done, it seems fair to say that we’ve seen something of a resurgence of the shareholder spring among the small caps but a marked decline in dissent on pay at the larger end of the market. Where we have seen shareholders objecting, it’s been similar to last year in that the dissent relates to specific circumstances and issues. These are usually not solely pay related, but instead driven by a combination of dissatisfaction around corporate performance and the leadership of the business.”

Juggling act

Putting shareholders to one side for a moment, the Remco Chair does also have to mull over how to retain and/or attract the best executives on the market, which entails examining both how value is created and over what timeframe. Philip says: “You have the rather difficult task of deciding how you measure that and balance it appropriately between short term and long-term delivery, because you don’t want to be paying for short-term delivery at the cost of long-term results.

Sarah Murphy, who recently stepped down from her position as Group HR Director at AB Mauri and was formerly an advisor to the remuneration committee at global technology consultancy Ricardo, says: “There’s a lot of strength and courage required by the Remco Chair to think through what’s appropriate for the company and to have good and rigorous debates with shareholders as to why that’s appropriate.”

At present, the trend is toward a prescriptive, one-size-fits-all approach for remuneration, particularly when proxy agencies get involved as they seek to establish an identical set of benchmarks. Few, if any NEDs, see this as a positive development and there is an argument that the results are actually counterproductive for shareholders.

Ron Marsh, Executive Director at plastic manufacturing company RPC Group, says: “What tends to happen is that everybody is drawn towards a norm, which isn’t healthy in my book… there needs to be more encouragement for people to comply or explain rather than just conform with the consensus blindly.”

Common sense dictates that this is the right way to go. Simon Garrett, Director of Executive Rewards at consultancy Hay Group, comments: “Some shareholders – and proxy voting agencies – have strong opinions concerning executive pay; you can have major shareholders on your books with diametrically opposing views. The best remuneration committee chairs know what the business is trying to do and what pay structure is needed to support that.

“They then go through a process of early and effective engagement with shareholders to get them onside. Those companies that do this, and do it well, gain the trust and support of their shareholders, even ones that disagree; those that don’t risk a shareholder revolt.”

The task facing Remco Chairs is to remain impervious to machinations from outside and within the boardroom, while endorsing rewards based on performance. Say it quietly, but in the current climate, that’s why the good ones are worth their weight in gold.

I hope to see you soon.

Matthew

https://twitter.com/criticaleyeuk

Blood, Sweat and Turnarounds

Most reversals of fortune in business are not the result of a magic bullet. Successful turnarounds demand hard work, compromise, a razor-sharp understanding of the financials, decisive leadership and a relentlessly communicated action plan. When the pressure is on and reputations and livelihoods are on the line, that can be a tough ask, but it’s usually the difference between recovery and an accelerated decline.

Turnaround experts speaking to Criticaleye identify the following as crucial when stepping into an embattled business:

  • Steady the finances
  • Identify real sources of revenue and ways to release capital
  • Communicate – externally and internally
  • Identify the weak links in the company
  • Act quickly and be decisive

Naturally, it’s always easier said than done. Claudia Zeisberger, Criticaleye Thought Leader and Academic Co-Director of the Global Private Equity Initiative at INSEAD, says: “Even with turnaround professionals who are in that space all the time, one point is clear: however much due diligence you may be doing prior to accepting the task, it’s always worse than you expect.”

Getting the facts straight amid the chaos of a failing business is guaranteed to be a huge challenge. Steve Brown, Executive Chairman of bathroom fittings business Croydex, says: “Quite often in these situations, what you are told isn’t quite what you discover because people have been under pressure and perhaps haven’t got their eye fully on the ball.”

It’s a race against time as creditors close in. Kevin Freeguard, who has experience of turnarounds in previous roles and is now Managing Director at banknote printer De La Rue, says: “There will always be strategy documents available, but it’s important to talk to customers, key partners and industry experts. You also have to look at the sales pipeline and see where the demand is coming from. Only then can you work out reasonably quickly what is worth keeping because, in many cases, you have got to maximise what you’ve got in front of you.”

Martyn Fisher, Executive Vice-President for Industrial Europe at the resurgent Veolia Water Solutions & Technologies, adds that identifying what is dragging performance down means more than just securing cashflow and analysing the financial metrics. “I generally start by talking to customers and suppliers about the business,” he says. “There’ll be plenty of information in the financials, but you need to do your own research and get soundings from people, as that tends to catch more of the emotion of the situation.

“People tend to argue away the financials by saying: ‘It’s the economy. It’s competitors. It’s not our fault, what do you expect?’ That’s usually an indication of the changes you’ll have to make in that team, and I’ve found it’s the managers that are generally at fault… They’re either people who don’t want to change, or they need help to see a new way forward.”

Once the issues have been identified by the leader, that’s when the real work starts. Roger Bayly, Turnaround Partner at professional services firm KPMG, says: “Working out what course of action to take is approximately 20 per cent of the challenge… The big deal is then working out how you get a diverse group of stakeholders, including shareholders, lenders and management, to agree to the plan and consistently support the turnaround. The stakeholder picture, plus the challenge of funding the business, often means that you don’t take the most obvious path to value.”

Reality bites

Once a way forward has been identified, there’s the small matter of trying to get the business moving in that direction. This is where the CEO, chairman or executive chairman really start to earn their stripes.

Steve says: “I sit down with the team and create a rolling list of ten priority actions… and I run very detailed, weekly workshops, making sure they have allocated the appropriate actions and managed them accordingly. It’s very important that they understand clearly the real situation of the business, which might be better or worse than the people who [hired you] understood at the time.”

This is where you begin to see the difference between ‘people power’ and ‘people problems’. Jon Moulton, Chairman of turnaround investor Better Capital, argues that “you can rarely rely on using existing management as if they were good enough why would the company be in such a mess?” He also questions putting your faith in a miraculous revival in sales as, in his view, time is of the essence and “you can’t depend on sales growth, as it almost never happens quickly enough”.

It’s about taking emergency actions to save an organisation from going under, which is something that existing senior management can be unwilling to accept because of pride, genuine emotional attachment, plain ignorance or just denial. Mark Cole, Non-executive Director at fund management business Hamilton Capital Partners, finds that “cutting out unproductive costs and under-performing or change-resistant staff must be done if you are to demonstrate a serious commitment to change”.

Once the pieces are in place, it’s about communicating both within the business and externally to revive confidence so that people really do believe that positive changes are underway. Claudia says: “Turnaround situations require crystal clear communication to both internal and external stakeholders. Senior management and the board must be aware of any actions to be taken and upcoming changes in the performance – both good and bad. Once you reach the point where a turnaround is needed it’s time to be completely honest, as there can be no surprises.”

Rob Woodward, who has led a successful turnaround as CEO of media concern STV Group (formerly SMG), says: “One of the best things I did was set out a very clear set of KPIs that were beyond all the financial metrics. We communicated these absolutely relentlessly to rebuild trust… A key principle I have is to ensure a relentless pace of change, and just keep the momentum so that we’re constantly making progress. You need to be able to spot and celebrate winning cultures; in a business that saw itself as failing, I can’t tell you how important that is.”

There are businesses that have had their day and can’t be saved, which is exactly how it should be. However, with the right controls, insights and leadership, there are also plenty of companies that can – and are – being nursed back to health and are set to prosper again.