IR Weekly – Monday 17th August
Welcome to FTI Consulting’s IR Weekly newsletter.
This week, we start by looking at how UK chief executives’ renumeration was in decline far in advance of the pandemic, before a deep dive into what the Business Roundtable really says about its member CEOs. We then turn to the rise in popularity of SPACS, followed by an analysis of which companies may be next in line to reinstate their dividend. We also look at whether there are any lessons to be learnt from the McDonald’s CEO severance saga, before ending with a sombre question: is the City really dead?
This week’s news
CEO pay cuts preceded pandemic
According to Financial Times, chief executives’ remuneration at the 30 largest companies in the UK fell almost a tenth last year, dropping more than 7% on average. The annual executive remuneration report by Deloitte also revealed that the pay of chief financial officers in the FTSE 100 dropped about 12 per cent to £1.9m, ahead of the coronavirus crisis. These figures, which mark a five-year low for investor pay revolts, underscore the impact of tighter monitoring of top wages, as well as growing appetite for FTSE 100 annual pay reports amongst shareholders. A significant issue which confronted investors in 2019 was “excessive executive pension payments”, to which four-fifths of companies have now pledged remedies by means of reducing current pensions in a move to align executive and workforce rates by the end of 2022. However, a key prediction identified in the report is the expectation of notable changes to this year’s pay plans. As Stephen Cahill, vice-chairman at Deloitte, comments: “In the year ahead, executive pay will be under intense scrutiny to ensure that executives are not insulated from the wider economic and social impact of COVID-19.”
Stakeholders and CEOs
Bloomberg’s Matt Levine took to Money Stuff last week to reflect on what the Business Roundtable really says about its member group of corporate CEOs. Levine highlighted a statement from the Business Roundtable last year which said that the purpose of a corporation is no longer to maximise “shareholder value”, but rather to take into account “all stakeholders”, and suggested that the goal of the statement was to increase CEO power by providing a neat get-out clause for choosing not to listen to shareholder demands. A report on the statement showed that the vast majority of CEOs did not receive board approval for signing the statement, leading Levine to conclude that the type of CEO to sign the statement does not value director approval nor the input of their shareholders, whatever the statement may say.
The SPAC phenomenon
A record number of SPACs (Special Purpose Acquisition Companies) have already listed this year, IR Magazine reported, with 62 IPOs so far in the US market compared to a total of 59 for 2019. The article cites the seemingly low-risk model of the SPAC as a perceived upside in the current volatile markets, with investors guaranteed to get their money back if the shell company is unable to buy a private listed company to take public. With SPAC listings growing not just in numbers but also in value, the Financial Times’ Big Read labelled the investment vehicles “the hottest asset class” in American equity markets, and pointed to high profile investors such as hedge fund billionaire Bill Ackman who have jumped on the bandwagon as a way to skip over the expensive and time-consuming IPO process. However, the FT’s analysis of the track record of these US blank cheque companies shows limited success to date for ordinary investors, and warns investors to remain wary both of these shiny new investment products and the financiers who are selling them.
The return of dividends?
Following a succession of deferrals, cancellations or suspensions of dividends so far this year, the tide may be turning and more companies could return to the dividend register in the third and fourth quarter, according to Forbes. Last week began with BP halving its dividend, but Aviva confirmed that it would reinstate in Q3. Elsewhere, Standard Life Aberdeen explained that it would continue with the pay-out, whereas Rightmove declined to give an exact date upon which these payments would resume. Russ Mould, investment director at wealth manager AJ Bell, comments that: “After the carnage of March and April, the going has got a little easier for those investors who have been seeking income from U.K. equities”. Notably, despite diminishing pay-outs from oil companies and several retailers, Mr Mould cites housebuilders as strong candidates to resume dividends, given the noticeable resurgence in the residential property market.
McDonald’s and morality
Every company’s legal team should be looking at their pay and severance policies following the McDonald’s saga with former CEO Steve Easterbrook, wrote the Dealbook Newsletter of the New York Times last week. The piece noted that McDonald’s is seeking to recover Mr. Easterbrook’s severance package of over $40 million, with the company claiming that the terms of separation were based on fraudulent statements. Whether the true purpose of the lawsuit is to recoup the package or defend the public reputation of McDonald’s, the piece suggests that this is a wake-up call for companies to consider whether contracts should extend clawback provisions beyond financial matters to include reputation harm and adverse publicity.
And finally … The City is dead, long live the City: the future of the Square Mile
The Evening Standard laments the ‘death’ of London’s financial district, proclaiming that “by fairly common consent the City of London has had it.” However, it’s not just the emptiness of the high-rises and the darkness of reception spaces which haunt the Square Mile, it’s the alarming silence of bars and restaurants which once housed the true magic of City culture. For many, these spaces are more than just places to mingle for Thursday-night drinks, they’re quasi trading floors and open forums for creative discussions which transcend the confines of the office. Nonetheless, veterans of the City have faith in the resilience of London’s financial hub. City boys and girls are resourceful people – “The City will reinvent itself if needed and thrive as it always has”.
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