Pay freeze hits FTSE 100 CEOs

BY Fraser Tennant

Pay restraint continues to hit senior executives with over a third of FTSE 100 CEOs experiencing a salary freeze this year, up from a quarter in 2014, according to new analysis by PwC. 

The ‘Taking stock – Review of 2015 AGM season’ report reveals that while almost all CEOs still receive a significant bonus each year, pay rose by a median 3 percent (meaning a CEO median base salary of £891,000 for 2015).

The PwC analysis also shows that organisations are improving their bonus disclosure policies and making pay more of a challenge to earn by requiring senior executives to hold onto shares for longer as well substantially beefing up clawback conditions.

“Remuneration Committees have again exercised pay restraint," says Tom Gosling, executive pay partner at PwC. “This continues the trend of largely static executive pay levels in real terms since the financial crisis. But with the average FTSE 100 CEO earning in a year what several ordinary people might earn in a working lifetime, remuneration committees need to make sure that pay-outs are fully justified by performance to help rebuild trust in business.”

Furthermore, the report states that: (i) bonus outcomes are also largely unchanged from the previous year; (ii) the maximum bonus FTSE 100 CEOs can receive as a percentage of salary has not changed since 2011; (iii) median bonus pay-outs have been unchanged for the past three years at 72 percent of the maximum award available; and (iv) CEOs at four out of five companies were paid more than half the maximum bonus and just 4 percent of companies paid zero bonus. 

Mr Gosling continues: “The consistency in bonus pay-outs is raising questions about how well variable pay is living up to its name. To build trust in the system, remuneration committees must continue to improve the quality of disclosure about how bonus targets are set and whether they are sufficiently stretching. This is likely to be where shareholders’ focus will shift next.

“There’s been growing dissatisfaction with long-term incentives, which are often seen as a lottery and too complicated. In response companies are looking for performance measures that more closely link to company strategy. At the same time they’re satisfying shareholder demands by increasing the length of time that shares must be held.”

The PwC report is based on analysis of FTSE 100 annual reports in the 12 months to 31 May 2015.

Report: Taking stock – Review of 2015 AGM season

Google to become Alphabet following reorganisation

BY Richard Summerfield

Over the course of the last decade or so, Google has played a pivotal role in the lives of billions of people. Though the company began as a mere search engine, today Google has become a global conglomerate offering everything from video hosting to high speed fibre broadband, restaurant reviews to ‘smart’ home heating systems, and self driving cars to venture capital investments.

However, going forward this is all going to change, as Google will soon become a wholly owned subsidiary of a new holding company, Alphabet. “Our company is operating well today, but we think we can make it cleaner and more accountable. So we are creating a new company called Alphabet,” said Google chief executive Larry Page in a blog post on the company’s website.

In creating Alphabet, the company caught many analysts and investors off guard. But it is important to note that there will be no material change for consumers or investors going forward. Google’s fundamental businesses – and its experimental ‘Google X’ division – will remain the same under the Alphabet banner.

Indeed, Google's core units – search, YouTube, Android and maps – which account for almost all of the company’s annual revenue of around $66bn and its $460bn stock market capitalisation – will remain within the Google subsidiary. However, Google itself will have a new chief executive, Sundar Pichai, who had been senior vice president in charge of products. Mr Page and Google co-founder Sergey Brin will run Alphabet, Google’s new parent company. Other subsidiary  companies including Nest and Calico will sit alongside Google.

Though the move was unexpected, it has been heralded as a positive step. The reorganisation of the sprawling and diffuse Google business marks the first time that any of the major Silicon Valley powerhouses has attempted to streamline their units. Companies such as Amazon and Facebook, which themselves have acquired a litany of tech start ups in recent years, will surely watch Google's reorganisation with interest.

Investors have almost universally supported the realignment of Google's business. Shares of Google Class C stock rose more than 4 percent on Tuesday morning, the day after the announcement was made. The move is expected to bring greater balance-sheet accountability and reduce Google's spending on speculative endeavours. As Mr Page noted, “We plan to implement segment reporting for our Q4 results, where Google financials will be provided separately than those for the rest of Alphabet businesses as a whole.”

How the reorganisation will affect Google’s antitrust battles in Europe remains to be seen, however.

News: Google morphs into Alphabet; investors cheer clarity

Divestments key to capital strategy, growth

BY Richard Summerfield

In 2014 divestments became one of the most important weapons in the arsenal of corporates. By getting smaller, many firms gave themselves the room, and the financial muscle, to grow.

Increasingly, leading companies are utilising divestments to further their capital strategy and facilitate growth. According to EY’s latest Global Corporate Divestment Study, many more companies are waking up to the benefits of divestitures, with more than half of those firms surveyed - some 71 percent - expected to join the swelling ranks of strategic sellers over the next 12 months.

Much of the renewed interest in divestments as a corporate strategy has been predicated on the return of M&A to the corporate agenda. 2014 saw the level of M&A activity across the global economy achieve pre-financial crisis levels as firms adapt to the shifting sands of modern corporate life, with its complex compliance obligations and rising costs.

Activist investors are also having a significant impact on corporates and their willingness to divest assets. Forty-five percent of executives noted that shareholder activism influenced their decision to divest some of their assets. A unit’s weak performance, position in the market can also trigger a divestment, as can a unit no longer being part of a company’s core business or a need to generate cash.

For those companies that have decided to take the plunge and divest a unit, the process represents an excellent opportunity for growth. Seventy-four percent of respondents said they are using divestitures to fund corporate growth, while 66 percent said they saw an increased valuation multiple in the remaining business after their last divestment.

When undertaking a divestiture, organisation and planning can play a pivotal role in increasing shareholder value. Fifty percent of respondents noted that by starting the preparatory work behind the deal at an early stage, they were able to complete their transaction on time. Taking shortcuts in deal preparation only elongates diligence work, and delays closure times. For divesting firms, speed is the key.

Report: Global Corporate Divestment Study 2015

No ‘silver bullet’ in battle for board effectiveness

BY Richard Summerfield

Board effectiveness has been a hot topic in recent years, following the catalyst of the financial crisis. However, for companies operating in today’s business environment, there is no catch-all solution to improving board performance, according to a new report from the Investment Association and EY.

The report, entitled 'Board Effectiveness: Continuing the Journey',  attempts to bring the notion of improving board efficacy into sharper focus. It suggests there is no ‘silver bullet’ to board effectiveness, and that companies must do all they can to improve their own boards on an individual basis. One of the key findings concerns the benefits of having regular discussions about the tenure of the company’s chief executive. This, according to the report, should be carried out not only when the firm is experiencing difficulties but also when the company’s outlook is more positive.

According to Andrew Hobbs, a partner at EY in the corporate governance and public policy space, noted that “Uncertainty is a new normal for businesses as they operate in an increasingly global and competitive environment. They are also facing closer shareholder, political and regulatory scrutiny. Given this context it has never been more important to discuss board effectiveness.“ However, making a board more effective is a journey without a destination. Issues such as board succession, CEO tenure and diversity require constant focus and attention, rather than being set tasks with an end date.

Respondents to the report’s questionnaire imparted their belief that companies and their CEOs should establish expectations on a CEO’s length of tenure at the time of appointment. Furthermore, companies should endeavour to develop a strong pipeline of potential boardroom talent further down the organisation. Board readiness is a key feature to future board effectiveness.

Helena Morrissey, chair of the Investment Association, commented that “investors have a pivotal role in working with companies to improve board effectiveness. Effective boards are essential to the long-term success and sustainability of companies and ultimately of the economy as a whole. This report provides practical discussion points to companies and investors to help them enhance their capacity to ensure that boards are effective and always open to improvement.”

Report: Board effectiveness – continuing the journey

SEC - companies cannot silence whistleblowers

BY Richard Summerfield

On 1 April, the Securities and Exchange Commission (SEC) announced its first ‘enforcement action’ regarding the use of what it deemed to be restrictive language in a confidentiality agreement.

The decision handed down by the SEC found that technology and engineering firm KBR Inc had violated whistleblower protection rule 21F-17, enacted under the Dodd-Frank Act. “By requiring its employees and former employees to sign confidentiality agreements imposing prenotification requirements before contacting the SEC, KBR potentially discouraged employees from reporting securities violations to us,” said Andrew Ceresney, the SEC’s enforcement director, in a statement announcing the enforcement action.

The confidentiality agreements KBR’s employees were required to sign were discovered as a result of a lawsuit brought against the firm. In the suit, Harry Barko, a former employee of the company, accused KBR and Halliburton of inflating the cost of a military supply contract for US bases in Iraq.

As a result of the enforcement action against it, KBR agreed to pay a fine of around $130,000 to settle the SEC’S investigation and has also agreed to amend its confidentiality agreements, a step which has been welcomed by the SEC. However KBR did not admit any wrongdoing as part of the settlement. Furthermore, the company was not found to have specifically prevented an employee from reporting fraud. Indeed the firm’s use of confidentiality agreements pre-dated the enactment of the SEC’s whistleblower protection rules.

In a statement, KBR’s chief executive officer, Stuart Bradie, noted that the “SEC’s order acknowledges that it is not aware of KBR having ever prevented anyone from reporting to the SEC, nor has the company taken any action to enforce the agreement, and that is because we have never done so.” Mr Bradie added, “We are pleased to have amicably resolved this matter and look forward to putting it behind us.”

Yet with this action, and with a number of other enforcement actions imminent, the SEC has once again reiterated that it is willing to diligently implement the whistleblower protections it has at its disposal.

News: SEC: Companies Cannot Stifle Whistleblowers in Confidentiality Agreements