Cheques and the City: contracts that reward failure have had their day

Pile Of Coins

It was back in 1993 that the reforming fund manager Alastair Ross Goobey wrote to the chairmen of FTSE 100 companies to tell them that three-year rolling contracts for executives, guaranteeing huge payouts in the event of failure, had had their day.

Two years later, the Greenbury review of governance said notice periods should be a maximum of one year and, with a few dishonourable exceptions, that became the norm. These days it seems astonishing that the bosses got away with their three-year rollers for so long.

Now fund manager Old Mutual reckons one-year rollers are an anachronism. It wants notice periods to be “substantially shorter,” thus reducing the value of directors’ pay-offs.

Old Mutual is right. Boardroom salaries have soared since 1996, outstripping almost every measure of inflation, especially general wages. Thus the value of a notice period worth 12 months has also risen skywards.

Tesco’s case has provoked Old Mutual’s fury. Deposed chief executive Philip Clarke bagged £1.2m and finance director Laurie McIlwee collected £970,000. That’s what the contracts dictated but there is only one way to view such sums: they are extraordinary rewards for failure. Under a three-month contract, Clarke would have got £300,000, which still seems generous if you’ve exhausted the patience of your board and shareholders.

It’s not to hard to predict the knee-jerk response in boardrooms to Old Mutual’s plan to vote against offending contracts. The top of the greasy pole is a slippery place, it will be said, and individuals require some financial security. How will we recruit and retain our talent?

Similar arguments were heard in 1995 and they turned out to be nonsense. Directors’ contracts have been decorated with so many non-salary baubles – annual bonuses, medium-term incentives, long-term incentives – that recruitment and retention will never be a problem. Old Mutual’s idea merely chips away at rewards for failure, which is a responsible position for a fund manager to adopt (and, for the record, its own fund managers already have contracts of less than 12 months).

Other investment houses should join a cause that has a reasonable chance of succeeding. The principle is both fair and simple to understand: if the rest of the world has to live with less than 12 months’ job security, so can directors of public companies.

Tesco chooses its chairman

So John Allan, not ex-Asda superman Archie Norman, will be the next chairman of Tesco. The board of directors thinks Allan is the “right” choice, which doesn’t necessarily mean he was the first choice.

In truth, the vibe around Norman was always less than convincing. He seems happy as chairman of ITV and may not have been enthused by another tour around the supermarket block. A volunteer is worth two pressed men, they say, so Allan is a reasonable pick.

He doesn’t have frontline supermarket experience, unless you count eight years at Fine Fare a long time ago. But he is strong on logistics, having run Exel and then sold it to Deutsche Post for a pretty price in 2005. And Dixons, where he was chairman, was a turnaround story that not everybody predicted.

Yet Allan is not volunteering to drop all his many jobs to help the Tesco fightback. He will leave the boards of Royal Mail and now-merged Dixons Carphone. But he will remain chairman of housebuilder Barratt Developments and Worldpay, a card processor.

Barratt, note, is a FTSE 100 company, so that’s hardly a piddling post; he is also new to it. At Tesco, Allan will be paid £650,000 a year. For that money, you’d think he would explain to shareholders how he’ll divide his time. He didn’t – but he should have done.

Canadians buy Brit

Goodbye Brit, we hardly had time to get to know you again. The Lloyd’s of London insurer, whose private equity backers brought it back to the stock market less than a year ago, is being bought for £1.2bn by Fairfax Financial, a muscular Canadian outfit.

The takeover premium is not much to shout about. Brit was floated at 240p a share last March and will depart at 280p plus the expected 25p dividend. But one can understand why Apollo and CVC, who still own 73% of Brit between them, have jumped at the opportunity.

The reinsurance market looks a dangerous place to be. Capital has flooded in, encouraged by several years of low claims. Premiums on many lines of business look too low if history is a guide. Selling up is sensible for Apollo and CVC. If floating Brit was a convoluted way to flush out a buyer, the tactic has worked.

Powered by article was written by Nils Pratley, for on Tuesday 17th February 2015 20.22 Europe/ © Guardian News and Media Limited 2010


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