QUALIPORT
Exposing The Fat Cats

By Maynard Paton (TMFMayn)
July 25, 2005

Many FTSE bosses have been lambasted as corporate 'fat cats' in recent times. Though too much director pay alongside too little corporate progress has rarely done shareholders many favours, how can investors tell whether a boardroom is creaming off more than it should?

Like most things to do with the stock market, there's no clear-cut answer. Remuneration disclosures within annual reports typically outline a vast array of payments, bonuses and option schemes, which in turn are based on a variety of share price and financial performance hurdles. 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, a fat cat usually sports the following three characteristics:

* Basic pay: Too much basic pay when compared to the company's profits and size.
* Shareholdings: A small personal share holding and swathes of (cheap and dilutive) options.
* Bonuses: A big pay rise and large bonus when the recent corporate performance has been average or worse.

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

Basic pay versus size of company

This table summarises the last reported basic pay of the fourteen watch list bosses:

Company	Boss	Year to	Underlying earnings (£m)	Basic pay (£000)
Vodafone (LSE: VOD)	Arun Sarin	Mar 2005	6,892	1,175
GlaxoSmithKline (LSE: GSK)	Jean-Pierre Garnier	Dec 2004	4,302	831
Imperial Tobacco (LSE: IMT)	Gareth Davis	Sep 2004	736	660
Gallaher (LSE: GLH)	Nigel Northridge	Dec 2004	384	650
Emap (LSE: EMA)	Tom Moloney	Mar 2005	148	536
Johnston Press (LSE: JPR)	Tim Bowdler	Dec 2004	108	450
Associated British Ports (LSE: ABP)	Bo Lerenius	Dec 2004	97	465
London Stock Exchange (LSE: LSE)	Clara Furse	Mar 2005	63	374
Halma (LSE: HLMA)	Stephen O'Shea	Mar 2005	35	345
Rotork (LSE: ROR)	Bll Whiteley	Dec 2004	21	235
Capital Radio	David Mansfield	Sep 2004	17	415
Renishaw (LSE: RSW)	Sir David McMurtry	Jun 2004	16	370
Ulster Television (LSE: UTV)	John McCann	Dec 2004	13	297
Games Workshop (LSE: GAW)	Tom Kirby	May 2005	9	350

(*now retired)

On this basis, David Mansfield, former boss of Capital Radio, Sir David McMurtry of Renishaw and Tom Kirby of Games Workshop are three that stand out as possible fat cats.

(Following Capital Radio's merger with GWR earlier this year, Mansfield is now the chief executive of GCAP Media (LSE: GCAP). GCAP's first annual report has yet to be published, though it will be a very interesting read remuneration-wise. Ralph Bernard, GCAP's executive chairman and to whom Mansfield now reports, was paid £400,000 as ex-boss of GWR in 2004 -- £15,000 less than Mansfield.)

Certainly Bill Whiteley of Rotork appears be a 'thin cat' though, while Clara Furse of the London Stock Exchange does not seem to be relatively overpaid.

Shares versus options

This table shows the year-end value of each boardroom's holding and compares the number of ordinary shares held to the number of options:

Company	Year end	Ordinary shares held	Value of ordinary shares (£)	Options held*
Renishaw	Jun 2004	38,791,543	300,828,416	0
Johnston Press	Dec 2004	25,300,332	120,872,336	918,141
Vodafone	Mar 2005	10,688,721	15,525,367	115,055,130
Imperial Tobacco	Sep 2004	1,051,149	15,399,333	718,741
GlaxoSmithKline	Dec 2004	860,501	11,487,688	13,589,671
Games Workshop	May 2005	2,540,009	9,226,583	41,598
Gallaher	Dec 2004	651,223	5,278,162	1,303,567
Emap	Dec 2004	300,544	2,514,051	824,438
London Stock Exchange	Mar 2005	422,401	2,109,897	1,466,190
Halma	Mar 2005	919,273	1,321,455	3,892,750
Ulster Television	Dec 2004	456,194	1,412,393	671,748
Rotork	Dec 2004	167,803	825,591	458,133
Capital Radio	Sep 2004	234,019	662,274	1,633,947
Associated British Ports	Dec 2004	96,466	451,943	1,028,640

(*Represents potential interests in all option, share match, long-term
investment, SAYE and other share schemes.)

Renishaw is a textbook example on this particular score, with its directors owning a big stake in the firm (53% in fact) and finding it unnecessary to put an option scheme in place. Johnston Press, Imperial Tobacco and Games Workshop feature well, with all three having significant boardroom stakes and minimal options outstanding.

Vodafone and GlaxoSmithKline provide a bit of a dilemma though. The boards at both companies own ordinary shares worth millions, but these holdings are dwarfed by some potentially massive option payouts. Associated British Ports and (what was) Capital Radio are a little easier to judge, with their ordinary holdings among the smallest in value and outnumbered significantly by options.

Performance versus bonus

There's no end of performance yardsticks for remuneration committees to use to set bonuses, with pre-tax profits, earnings per share, share price performance and comparator groups among the most popular. However, though used by few firms and still liable for some board manipulation, the dividend perhaps is one of the best measures of judging long-term progress. Importantly, dividends are not subject to an accountant's opinion.

This last table summarises the income rises enjoyed by the bosses and shareholders of the watch-list constituents:

Company	Boss	Period*	Basic pay increase (%)	Dividend increase (%)	Basic pay less dividend (%)	Accumulated cash bonus (£000)
Imperial Tobacco	Gareth Davis	Five years to Sep 2004	79	117	38	1,923
Vodafone	Arun Sarin	One year to Mar 2005	7	100	94	1,148
Johnston Press	Tim Bowdler	Five years to Dec 2004	65	100	35	961
Halma	Stephen O'Shea**	Five years to Mar 2005	64	95	31	288
London Stock Exchange	Clara Furse	Three years to Mar 2005	17	94	77	1,161
Games Workshop	Tom Kirby	Four years to May 2005	78	80	2	2,357
Renishaw	Sir David McMurtry	Five years to Jun 2004	47	57	10	642
Gallaher	Nigel Northridge	Four years to Dec 2004	59	33	(26)	960
Ulster Television	John McCann	Four years to Dec 2004	117	32	(85)	781
Emap	Tom Moloney	Three years to Mar 2005	19	28	9	459
Associated British Ports	Bo Lerenius	Four years to Dec 2004	28	25	(3)	425
Rotork	Bill Whiteley	Five years to Dec 2004	52	23	(28)	134
GlaxoSmithKline	Jean-Pierre Garnier	Five years to Dec 2004	8	14	6	7,634
Capital Radio	David Mansfield	Five years to Sep 2004	48	12	(36)	612

(*Starts from the earlier of current boss' first full year in role, or five years prior to latest results.
**Now retired)

Jean-Pierre Garnier of GlaxoSmithKline fails badly on this test. Despite overseeing a 14% dividend increase -- the second worst on the list -- he's pocketed by far the biggest bonus. His seemingly muted 8% basic pay rise has if fact more to do with a weakening US dollar than the GSK remuneration committee getting tough.

The pay of David Mansfield (again) and John McCann of Ulster Television are also suspect. Although both have enjoyed substantial salary hikes of late, their shareholders have lagged in the income payout stakes. Indeed, quite why Mansfield received a £168,000 bonus in 2004 when Capital Radio's dividend remained unchanged for the fifth year running remains a mystery.

Halma probably has the most shareholder-friendly pay and performance record, with ex-boss Stephen O'Shea collecting the second smallest bonus from the fourth largest dividend improvement. (An honorary mention should go to Rotork, which is similarly muted with its extra payouts.) And given the sizeable dividend improvements, shareholders of Imperial Tobacco, Johnston Press, London Stock Exchange and Games Workshop perhaps shouldn't begrudge the bumper bonuses paid to their bosses.

Conclusion

This is not a perfect study. It involves a small sample of businesses, which vary widely in size and commercial activity. Furthermore, it does not evaluate bonus/option performance hurdles and pension contributions, while one-off dividend improvements flatter some of the company achievments. Even so, the study has thrown up a few interesting discoveries. It's safe to say the board formerly at Capital Radio had fat cat tendencies (it remains to be seen whether these will continue at GCAP Media) while plump feline characteristics are also in evidence at Ulster Television and GlaxoSmithKline. Interestingly, mergers and acquisitions have been a prominent feature at these three firms in recent years.

Nevertheless, boardroom remuneration is just one part of the company evaluation jigsaw. There are many other factors to consider, not least assessing the quality of the firm's competitive advantage. A greedy boss may be at the helm, but if he runs an unregulated monopoly, long-term shareholders could still do very well. However, exactly what buy price discount prospective investors should apply to companies with over-generous board remuneration is difficult to say. Thankfully, none of the watch list members has seen their finances deteriorate simply because the directors are siphoning off vast sums every year.

Of course, investors can offset the risks of fat cattery entirely by focusing on quality operations where the directors appear to have the owner's eye. Encouragingly, a handful of watch list boardrooms score generally well in this review, with Halma, Imperial Tobacco, Johnston Press and Rotork in particular standing out.

Maynard owns shares in Associated British Ports, Games Workshop, GlaxoSmithKline, Halma, Johnston Press and London Stock Exchange.

Portfolio value

Holding	Number of shares	Closing price 25/07/05 (p)	Value (£)
Associated British Ports	681	468.5	3,190.49
Emap	372	836.5	3,111.78
Halma	1,920	143.75	2,760.00
Johnston Press	1,608	477.75	7,682.22
London Stock Exchange	2,018	503	10,150.54
Cash			345.54
Total			27,240.57