- November 19, 2019
Towards the wider use of deferred share plans
Study by the “Purposeful Company”
The Purposeful Company is an independent voluntary think tank set up in 2015 with the support of the Bank of England to help transform British Business by identifying with like-minded companies changes to policy and practice aimed at creating long-term value. The think-tank has published extensively on policy matters relating to Executive Pay, Corporate Governance and Investor Stewardship.
In October 2019, it published a report which considered the use of deferred share plans by British companies. Increased use of such plans was the main recommendation of the Investment Association Working Group in July 2016 (a body comprising investors and major companies, to address the future of executive remuneration which was seen by many commentators to be broken). The Working Group’s headline recommendation was to simplify pay structures and get away from existing long-term incentive plans which were recognised as not working effectively for most companies. Shareholders wanted companies proactively to consider whether alternative performance incentives may better align pay with a company’s strategy. In particular the earlier report sought to encourage the use of Deferred Share Plans, such as restricted stock plans, in preference to the ubiquitous Performance Share Plans (LTIPS). The latter were considered to be the cause of undue complexity in executive pay packages.
In the three years since this report, very few companies have taken up this recommendation. Only about 5% of FTSE 350 companies use them. This new report seeks to address this problem and re-open the initiative – to find out if there is still support for greater adoption of deferred share plans amongst investors and companies (there is), to explore further their benefits and to find what the barriers are to wider adoption. The report is in two parts – the Key Findings and Recommendations and the Full Report.
The report steering group comprises five people, mostly business school academics. They engaged with over 100 organisations (asset owners, asset managers, companies, proxy advisors and remuneration consultants) and reviewed the experience of 19 companies that are currently operating deferred shares. Three-quarters of investors and companies believe that deferred shares are the best approach in the right circumstances. Deferred shares include restricted shares (awards of shares with no further performance conditions, other than possibly a minimum performance underpin condition prior to vesting) deferred bonuses or performance-on-grant awards. For full effect the deferral should be very long-term and ideally include a period when the executive is no longer in the role.
Academic research in the UK and the US indicates that share ownership alone can provide sufficient motivation to increase share value. There is also evidence that companies using restricted stock outperform those using LTIPs. It is not necessary to have performance hurdles. However, not everyone accepts this view and there is, potentially, considerable resistance to the introduction of a deferred share plan. Whilst such a plan is simpler than an LTIP, there is likely to be a lot of work and consultation persuading shareholders and proxy agencies that it is a measure to support. The two reports provide a lot of evidence and recommendations to help companies that wish to implement a plan. They consider that IA guidelines and proxy advisor guidelines will be revised in time for the 2021 season and companies planning a deferred share plan can use this to set their timetable for change.
- October 25, 2019
MM&K has published its 2019 Survey Report on Compensation in the UK and European Private Equity and Venture Capital Fund Management industry.
Nigel Mills reflects on some of the key findings in the Report which supports the hypothesis that this sector is in boom times.
On 14th October MM&K published its 2019 European Private Equity and Venture Capital Compensation Report. The Report is derived from the Survey that we conducted in the year into pay and incentive practices in the European PE and VC fund management industries. This is the 25th consecutive year that we have conducted a survey of this kind. This year we collected data from 44 different European PE and VC fund management firms who provided us with data on 1,700 incumbents.
This is our most comprehensive survey for a number of years (since 2008) and it has provided us with another fascinating insight into the world of private equity and venture capital fund managers’ pay.
The 44 firms can be broken down as follows in terms of investment strategies:
(i) Buyout, mezzanine, growth capital and infrastructure – 23 firms;
(ii) Venture capital – 16 firms; and
(iii) Fund of funds and secondaries – 8 firms.
Three firms invested in more than one strategy.
Some of the key findings from the survey are set out below.
The headline takeaway is that the market for top quality talent in the sector remains extremely competitive. We see that the sector generally is booming with a large number of firms recruiting, either with a view to simply increasing their headcount to deal with the strength of the business pipeline or in some cases to move into the sector for the first time.
About 67% of firms across all investment strategies reported increasing their investment staff numbers (100% of Venture Capital firms) and, 56% their support staff in 2018.
Around 75% of firms are expecting to increase the number of their investment professionals in 2019, and about 58% are expecting to increase their back-office staff numbers.
The median 2017 to 2018 increase in total short term cash for investment professionals across all investment strategies ranged from 19% to 40% depending on grade, with the more junior positions seeing the largest increases in take home pay. Within these figures it was the more junior positions in the venture capital houses who fared best of all, although across the board Associates and Analysts all saw healthy increases in their take home pay. Part of these increases were the result of generous increases in base salaries (typically between 6% and 12%) but the main component was the increases in bonus levels.
The reason why the more junior roles seem to be seeing the largest increases in their bonus levels is, we believe, a recognition by their bosses that these individuals are the future lifeblood of the business, the rising stars and perhaps the most difficult to retain given the competitive market that they are in.
We are not surprised to see the venture capital investment managers having such large increases in their bonus levels for the 2018 performance year. VC generally had a great year in 2018 with venture capital funds raised in the year exceeding previous highs.
Also, in the UK, venture capital investment increased by 21%, more than double what it was in 2015. 698 companies were venture-backed: a 44% increase.
In contrast to management buyouts which seem to have had a bit of a slowdown, the venture capital industry appears still to be booming with European VCs still deploying capital at a record pace. The total amount of venture capital invested in European companies was up 61% in in the first half of 2019.
It is not surprising to see that over 40% of firms are expecting their bonuses to be paid to their investment professionals for 2019 performance to increase again over 2018. And no firms are expecting bonus levels to fall, either for partners or non-partners.
Next month we will provide some further commentary on the findings from our European Report and also from the North American Report which has also recently been published.
MM&K has had a particularly busy year advising alternative investment management firms on their pay levels and remuneration structures. Our clients this year have included family offices, buy-out and venture capital fund managers and infrastructure fund managers.
- October 25, 2019
Global Trends in Corporate Governance – new research by MM&K and our partners in the GECN Group
The global investment landscape is changing. Investors are under increasing pressure to consider carefully the long-term sustainability of their investments and to demonstrate that their engagement and investment strategies are designed and executed with the best interests of the end-beneficiaries in mind. The revised UK Stewardship Code, published on 24 October is evidence of this. Consequently, investors are making more demands from their portfolio companies particularly in the area of engagement.
MM&K, together with our partners in the GECN Group (Global Governance and Executive Compensation Group) recently interviewed 25 global investors to understand the issues which are of most concern to them, their views on the way companies engage and their thoughts about the most important future trends.
Board effectiveness is a key issue for investors and from Australia and Asia to the EU, UK and US, three high-profile issues consistently emerged in connection with environmental, social, and governance (ESG) concerns:
(1) Climate change
(2) Human capital and diversity
(3) Executive pay.
During the interviews, investors expressed deep concerns that corporations are not providing enough transparency in their disclosures to show alignment between shareholder, other stakeholder and executive interests on these issues.
The research highlights the importance of corporate responsiveness and engagement with investors and provides insights into the areas in which investors and other stakeholders are challenging corporations and governments to look beyond shareholder value and “do the right thing”.
The report on this research, which also identifies approaches companies can usefully adopt to gain most value from their investor engagement programme, will be available shortly. An executive summary is available now. To receive your free copy, please click the link below.
- October 25, 2019
FRC’s transition to ARGA sailing into in the Doldrums
In our July Newsletter, we wrote about the Financial Reporting Council’s (“FRC”) programme of transition into the Audit, Reporting and Governance Authority (“ARGA”), a statutory body with enhanced regulatory powers to address corporate governance failures and audit malpractice.
What, if anything, has happened in the meantime to demonstrate progress? This is, clearly, a question exercising Sir John Kingman, whose 2018 report was severely critical of the FRC and was the catalyst for its transition to ARGA. But the recent Queen’s Speech contained no reference to the legislation required to provide statutory underpinning for ARGA and to bestow the powers it needs to operate effectively. This has prompted Sir John to write to BEIS expressing concern that this omission will allow the FRC to drift along in a toothless, half-reformed state.
That is not to say that no progress has been made and Sir John Kingman recognises this. Former HMRC CEO, Sir Jon Thompson and former GlaxoSmithKline CFO, Simon Dingemans have taken-up their roles as CEO and Chair respectively of the FRC (ARGA), in place of Stephen Haddrill and Sir Winfried Bischoff. Simon Dingemans is also a former partner at Goldman Sachs. Both new men have strong financial and commercial credentials, augmented in Sir Jon Thompson’s case by leading roles within Government departments – an indication perhaps that ARGA’s new leadership team is unlikely to have any trouble managing relationships with company boards, auditors or Government.
The FRC’s goal is to recruit an additional 80 employees in 2019/20. Its 2018/19 Annual Report indicates that the Enforcement Team has been increased by 25% to deliver more timely and effective enforcement of audit standards. Whilst audit may grab the headlines, the FRC’s remit extends far beyond, including the UK Corporate Governance Code, to which far-reaching amendments were made in 2018 and the Stewardship Code.
On 24 October, the FRC published a “substantial” and “ambitious” revision to the Stewardship Code. The revised code, which comes into force on 1 January 2020, extends to service providers as well as asset managers, to help the investment community develop and align a consistent approach to stewardship.
Signatories’ annual reports must describe their stewardship activities across all asset classes (including alternative investments) wherever situated and the results of those activities, including engagement and their voting records. Signatories will also be expected to take ESG factors into account and will be required to explain their investment strategy and culture, and how they relate to their stewardship activities. Finally, signatories will be expected to work together with regulators and industry bodies to identify and manage systemic risks.
This signifies a move towards greater transparency, which is to be applauded. However, it also means there will be a greater workload, which will require higher resource levels. And importantly, if the FRC is to operate as an effective partner and regulator (not only for the investment community but for UK companies and audit firms, as well) it must also have the legislative underpinning as recommended by Kingman. This raises questions about the incursion of political bias into the equation and the need for adequate safeguards, but the path has been laid and the failure to include proposed legislation in the recent Queen’s Speech leaves the FRC potentially becalmed as a regulator without the teeth to deliver its remit. If that comes to pass, all the good work may count for nought.
To discuss any points arising from this article, please contact: Paul Norris.
- October 24, 2019
Getting in is easy. But are you sure you know how you are getting out?
The recent changes proposed by the FCA due to the Woodford Investments situation should be an important reminder to private companies as well as listed ones
Recently, the FCA advised that it would finally be going ahead with a rule change that it proposed last October. Under this change of rules, a new investment category of ‘funds investing in inherently illiquid assets’ (FIIA) will be created. Funds that fall into this category will be subject to additional requirements, including increased disclosure of how liquidity is managed.
Whilst these changes will not come into effect until 30 September 2020, it is worth considering whether your business – and in particular any privately held, owner led businesses – would fall into this definition of a FIIA (despite being unlisted).
Without doubt, long term incentive plans (“LTIPs”) are important in all companies and businesses as a tool to assist with both long term retention and productivity. Studies undertaken into this area show that the mere act of having some form of LTIP increases retention by about 1/3rd.
However, it is the prospect of a meaningful pay out under an LTIP which can be the motivating factor for many executives and employees.
Unfortunately, over the past few years, we have seen many LTIPs which are ultimately ineffectual because there is no practical and cost effective way for payments to be made – the most typical example of this is where a private company issues shares but there is no subsequent sale of the business to third parties. The individual is left holding a share which will not have any value unless the existing shareholders (directly or via the company or an EBT) purchase the shares – methods which may not be popular due to the increased costs involved.
Should you consider that your LTIP might have fallen into this category, there are incentive structures that could still deliver your key commercial aims.
For further information or to discuss any questions you may have, please contact Stuart James.
- October 24, 2019
New UK Stewardship Code comes into force on 1 January 2020
The Financial Reporting Council (FRC) has made significant changes to the UK Stewardship Code which will come into effect in January 2020. The Code will then require Investment Companies to report annually on their “stewardship activity”.
Changes to the code include:
• Extending the Code to include asset owners (pension funds and insurance companies) service provides and asset managers
• Annual reporting on stewardship activity (including voting records in their investee companies)
• Particular emphasis on environmental, social and governance factors during decision making
• Asset owners laying out their stewardship across different asset classes (including investments outside of the UK)
• Setting out stewardship practice within the organisation including how they have demonstrated this in the previous year
The full code can be downloaded from the FRC here
Nigel Mills will be giving his views on how this may effect asset owners including in particular Private Equity Fund Managers in our November newsletter. To sign up for our newsletters please click here.
- September 30, 2019
Board Effectiveness: the next lever of value creation
Increasingly investors look into how organisations are governed and how effective the top decision-making bodies of organisations really are. In this white paper, Dr Sabine Dembkowski of better Boards Ltd, sheds light on research findings and reveal the seven hallmarks of effective boards. The seven hallmarks are proven to create more effective boards and are set to be the next lever in the value creation process. Read more or contact Paul Norris for further information.
- September 27, 2019
Issues which are of most concern to investors and how they are dealing with them
MM&K is the UK member firm of the Global Governance and Executive Compensation Group (GECN), a consortium of independent advisory firms specialising in executive compensation and corporate governance and jointly serving clients in more than 30 countries.
As investors are demanding more today than ever before from the companies in which they invest their capital, successful engagement between corporates and investors is an essential element of good corporate governance. GECN is about to publish a report on Global Trends in Corporate Governance: Investor Expectations in Corporate Governance and Executive Compensation, which examines investors’ perspective on these and other issues that are important to them, and how they are raising these issues as part of their engagement with their portfolio companies.
The report’s contents are based on feedback obtained from 25 comprehensive interviews with some of the largest asset owners and managers, including both active and index investors, as well as organisations which advise them.
In addition to direct quotes from participants, the report also includes an analysis of quantitative data relating to corporate governance practices and the differing approaches investors take when they feel management and the board fail to address their concerns.
Using the interview feedback, the report identifies seven approaches companies can adopt to help ensure that their investor engagement is both constructive and successful.
This research provides a global and regional perspective on the issues of greatest importance to investors and suggests how corporates can anticipate these issues and respond to them in the most effective manner.
To obtain a copy of the report or to discuss corporate governance and investor engagement in general, please contact Paul Norris.
- September 24, 2019
The World of Private Equity and Remuneration Therein
The private equity world continues to come up with ever more impressive and somewhat surprising stories.
In the last few days EQT, the Swedish private equity fund management group has IPO’d on the Swedish Stock Exchange, valuing the business at an astonishing €7bn. The shares made an impressive debut, gaining more than 30% in their first day of trading. The offering, more than 10 times oversubscribed and priced at the high end of its range, is one of the largest—and most successful—involving a private equity firm in years. The firm raised close to €1.3bn from the public listing.
EQT manages around €40bn of assets on the behalf of investors, and reported €295m of revenue for the last six months to end of June.
In another story, the word on the private equity street is that Blackstone’s eighth flagship buyout vehicle has raised a record $26 billion – yes $26billion!
And in another story that came out this month, US private equity firm Advent International has won their takeover bid to acquire the FTSE 250 defence and aerospace group Cobham for $5bn (£4bn) after months of negotiations.
There certainly seems to be no slowing down of private equity activity, whatever the doom-mongers are saying about the world economy. The same can be said also for the world’s venture capital community which is also thriving, with record numbers of deals being done and fund raising too.
And to add even more excitement to the alternatives fund management space, a recent headline in an alternative assets’ news publication stated that “A ‘Golden Age’ of infrastructure fundraising is upon us”.
In our minds, all this activity in the PE, VC and Infra space can mean only one thing for remuneration levels in these industries. They are going up and quite a bit faster than the average rate of wage inflation.
With the raising of more and more and larger and larger funds, the fund managers themselves will be receiving greater revenues from management fees. No doubt they will also be looking to recruit more investment professionals.
But perhaps more importantly, these entities will also be in a position to offer larger amounts of carry at work to their partners and managers.
So there is likely to be a dual impact on pay and incentive levels in the industry. Many firms will have more to spend on remuneration. But there will be a scarcity in the supply of talent, especially at the junior partner and investment director levels.
MM&K will be publishing the findings from our PE and VC compensation survey in October. We are pleased to report that we have had the largest number of firms participating that we have had since 2008. We are sure that this is in some part to do with the fact that firms are concerned about their pay levels, particularly for their senior and mid ranking investment professionals.
We look forward to summarising some of our findings from this survey in our next newsletter.
For further information contact Nigel Mills.
- September 24, 2019
“Diversity is not just a female issue”. Are you missing easy opportunities to improve performance and productivity?
In the summer, as part of its wider remit on governance, the Financial Reporting Council (“FRC”) launched the Female FTSE Board Report, created in conjunction with Cranfield University. The central theme was the advantages of diversity for everyone.
As the Director-General of the CBI, Carolyn Fairbairn states in the Report:
“The case for workplace equality is watertight: companies with diverse boards perform better. Embracing diversity is one of the greatest opportunities available to businesses today”.
However, obtaining diversity needs to be more than just having an underrepresented group on the short list for a particular role. All too often, there are wider structural considerations which make hiring on a diverse basis more difficult and expensive.
Areas which are often overlooked can include:
– Recruitment policies. Has the need for “ease” or “efficiency” in the recruitment process meant that the talent pool you are choosing from is less diverse from the outset?
– Working practices. Rigid working structures, focused on “being present” may stop people (both men and women) applying for roles as they require more flexibility to meet their wider commitments.
– Performance reviews. Are you measuring for diversity?
Changes made within an organisation that encourage a more diverse workforce will assist greatly in creating a diverse leadership team in the future.
For further information or to discuss any questions you may have, please contact Stuart James.