QUALIPORT
Exposing The Fat Cats

By Maynard Paton (TMFMayn)
February 6, 2003

Chris Gent of Vodafone (LSE: VOD)(LSE: VOD), Jean-Pierre Garnier of GlaxoSmithKline (LSE: GSK)(NYSE: GSK) and Jonathan Bloomer of Prudential (LSE: PRU); all have been lambasted as corporate 'fat cats' in recent times. Too much boardroom pay, with too little corporate progress, rarely does shareholders any favours.

But how can you tell whether a company is run by a fat cat? Like most things to do with the stock market, there's no clear-cut answer. Investors have to take a number of factors into account and make comparisons with other company boardrooms. Needless to say, a fair amount of judgement is required.

However, there are three basic points to look for:

* Shareholdings: There's no better way of identifying a shareholder-aligned director than by looking at his personal holding in the company.

* Basic Pay: Too much in the way of basic pay, when taking into account the company's profits and size, can signal management not having shareholder value in mind. Big salary increases as profits go nowhere is another bad sign.

* Bonuses: Where the recent corporate performance has been average or worse, large bonuses are another sign of a shareholder-unfriendly boardroom.

With those points in mind, how do the fifteen companies on the Qualiport's watch list square up?

Owner's eye

The table below shows the total boardroom shareholdings of the watch list fifteen:

Company          Share price    Boardroom      Boardroom
                     (p)         holding       investment
                                   (%)            (£m)

Renishaw             335          53.3           130.1
Carpetright          640          23.8           114.5
Johnston Press       338           8.8            84.1
DFS Furniture        251           8.0            29.7
Halma                113           4.0            16.3
Games Workshop       418           8.1            10.1
Lloyds TSB           408           0.0             9.1
Imperial Tobacco     939           0.1             7.5
Scottish Radio       650           1.6             3.5
Gallaher             571           0.1             2.2
Emap                 710           0.1             1.6
London Stock Exch    336           0.1             1.4
Ulster Television    279           0.7             1.0
Metal Bulletin       117           1.1             0.7
Assoc Brit Ports     386           0.0             0.3

There are some quite disappointing holdings here, especially the five boardrooms that hold under £2m of ordinary shares. One reason for the low investment could be a few recent boardroom shake-ups; London Stock Exchange (LSE: LSE) and Associated British Ports (LSE: ABP) for instance have all installed fresh external management in recent times.

The next table compares each boss' basic pay against the profitability of his firm:

Company              Boss               Year to  Basic   Pre-tax
                                                  pay     profit
                                                  (£k)    (£m)

Lloyds TSB           Peter Ellwood       Dec 01   600   3,827.0
Imperial Tobacco     Gareth Davis        Sep 02   550     642.0
Gallaher             Nigel Northridge    Dec 01   460     383.0
Emap                 Tom Moloney         Mar 02   451     139.0
DFS Furniture        Lord Kirkham        Jul 02   383      53.6
Assoc Brit Ports     Bo Lerenius         Dec 01   380     129.5
Carpetright          Lord Harris         Apr 02   375      36.4
Johnston Press       Tim Bowdler         Dec 01   330      68.5
Renishaw             Sir David McMurtry  Jun 02   324      16.1
London Stock Exch    Clara Furse         Mar 02   319      78.8
Halma                Stephen O'Shea      Mar 02   270      48.3
Games Workshop       Tom Kirby           May 02   258      13.5
Scottish Radio       Richard Findlay     Sep 02   204      13.0
Metal Bulletin       Tom Hempenstall     Dec 01   167       8.0
Ulster Television    John McCann         Dec 01   160      13.4

Given the profitability of their companies, Bo Lerenius of Associated British Ports (LSE: ABP) and Stephen O'Shea of Halma (LSE: HLMA) look to have relatively low basic wages.

On the other hand, Sir David McMurtry of Renishaw (LSE: RSW), Lord Harris of Carpetright (LSE: CPR) and Lord Kirkham of DFS Furniture (LSE: DFS) seem to take home relatively large pay packets. Interesting to note that these three men dominate their respective businesses, all of them being joint chairmen and chief executives.

Wage inflation

Just how long does it take before shareholders can identify an under-performing, over-paid boss? Going by the average tenure of a FTSE 100 chief executive, it's about four years. Of the fifteen watch list bosses, nine have been in the top job for longer than four years (perhaps indicating that watch list managers are generally better than most).

The next table compares the salary inflation of each of the nine bosses seen over the past four years with their company's pre-tax profit growth. Bonuses accumulated over the past four years are also shown:

Boss                    Wage     Pre-tax profit    Total
                      increase       change        bonus
                        (%)           (%)          (£k)

Lord Kirkham             92           57              0
Gareth Davis             72           98          1,262
Richard Findlay          70           15             84
Tim Bowdler              53           98            302
Tom Hempenstall          52           36             33
Stephen O'Shea           48           14             32
Lord Harris              48           76              0
Sir David McMurtry        29          (38)          513
Tom Kirby                25           17             84

Of the nine, Richard Findlay of Scottish Radio (LSE: SRH) and Sir David McMurtry of Renishaw provoke the most questions.

Although 'underlying' pre-tax profits at Scottish Radio jumped 15% in the four years ending September 2002, such a performance doesn't tell the whole story. Richard Findlay oversaw a disastrous diversification into outdoor advertising during that time, which culminated in a hefty £22m exceptional write-off in the last set of accounts.

Sir David's pay and performance are a little trickier to interpret. Renishaw continues to suffer from the global economic downturn, with profits in the year to June 2002 sliced in half. Is it fair to judge Sir David at this particular point in the cycle, especially when his company hasn't endured any self-inflicted damage? Difficult to say. That said, Sir David's £95,000 'appreciation award' received during the last financial year isn't easy to ignore.

Summary

From this study, there are no obvious 'fat cat' candidates. But one point that is apparent is that such studies are by no means straightforward affairs. There are plenty of variables to consider: was the watch list sample too small? Are some company's profits temporarily depressed? Is four years too short a time to assess boardroom achievements? No easy answers.

Adding to the complexity were the bosses scoring well in some areas and badly in others. For instance, those in charge of Carpetright, DFS and Renishaw all appear to be paying themselves very well, yet all have substantial amounts of their wealth tied up in shares too. Having benefited from the experience and talent of Lord Harris et al and seen profits steadily rise over time, loyal shareholders of these companies probably have few complaints.

In the wider scheme of things, management are just one factor to consider when making an investment decision. For example, while Richard Findlay's salary hike and performance hasn't been encouraging from the shareholder perspective, he does run a business that has franchise-like media assets. To a certain extent, great management talent is not necessary at Scottish Radio to produce attractive accounts. The distinct possibility of a takeover can also offset the unappealing management.

More: How To Act On Poor Corporate Governance: Part 1 | Part 2

The author owns shares in Carpetright, DFS Furniture, Games Workshop, GlaxoSmithKline, Halma, Johnston Press and London Stock Exchange.