Terry Smith is the chief executive of Tullett Prebon and chairman of Collins Stewart and he has written an article for the Financial Times, published today. In the build up to this article Mr Smith was presented as being forthright, I would present him as being ridiculous. Smith's gripe is that some of his shareholders firstly don't like some of his ideas and secondly write to him and tell him so. If I were the chief executive of a public company, I would expect my shareholders to write to me from time to time to praise, to cajole and to criticise. As the head of an organisation, you are there to represent the organisation, Mr Smith, so what is your problem?
Here are a few of the things that Smith says today, in italics, with my comments following:
As we de merged Collins Stewart and Tullett Prebon last December, we have just had two annual general meetings for our companies. This has multiplied the amount of annoying trivia received from some of the proxy agencies and a few shareholders whose approach to business might be described as Tree huggers do corporate governance.
The most frequent complaint was that our executive bonuses are uncapped. Most of our staff are rational and, if you cap their rewards, when they reach the cap they stop work.
>> I find that astonishing. It is a fundamental principle of remuneration that it is first and foremost transparent, everyone knows how to calculate their pay; and secondly that people are rewarded fairly. In return, there has to be a link between reward and effort. I would go on to say, if someone earns a large amount of money then they must put in a large amount of effort. The suggestion is that people at Smith's business are the kind of people who are being paid £x and if they think that they should be paid more than they stop working. I would sack them: I wouldn't want such people working for me.
It has been a principle of Collins Stewart from its foundation to ensure that as much of our employees' pay as possible is variable. In a cyclical business (and financial markets are still cyclical, despite rumours to the contrary put about by the new generation of Masters of the Universe) making a company's main costs truly variable is one of the few protections that management can put in place. Just one of the proxy agencies (ISS) who wrote to us grasped the reality, saying: the bonus scheme is uncapped . . . We recognise that this is standard practice in the financial sector. Hallelujah!
>> whilst I agree with the main sentiments of that paragraph, it ends in a nonsense way: simply being standard practice in the financial sector doesn't mean that that's financial sector understands everything and has got it right!
In some cases, the objection was simply that the remuneration was too large. Compared with what? Profits? Pay in similar organisations? No, the combined analytical might of the proxy agencies and those shareholders has alighted upon the view that bonuses are large in comparison with salaries. It does not seem to have occurred to them that this is a consequence of keeping basic salaries low to protect against a downturn in revenues.
>> given that comment about comparison with profits and I don't know how Smith's business calculates its bonuses, I would be interested to learn if their bonuses are linked to profit. Remember, I wrote about Marks & Spencer a few months ago and how their chief executive and some senior directors' salaries are tied to profits. Those profits were inflated purely as a result of accounting changes arising from moving to international financial reporting standards. Stuart Rose and others were rewarded for having to do nothing to earn that part of their bonus relating to the accounting change.
Even more annoying are those shareholders such as the Cooperative Insurance, Universities Superannuation Scheme and the Churches, Charities and Local Authorities (spot a trend here?) who complain year after year.
>> the Cooperative insurance Society has responded by saying that they only asked questions when they don't understand or don't agree. Freedom of speech Mr Smith?
If there is one thing more annoying than this focus on uncapped pay, it is the insistence on getting companies to produce a litany of platitudes on environmental and social matters. The Institutional Voting Information Service of the Association of British Insurers produces guidelines that include such banal questions as whether directors' training includes environmental, social and governance matters, or whether the annual report publishes key performance indicators on material ESG risks. Most directors find running a business difficult enough without having to pay lip-service to this tosh.
>> I generally agree that a lot of what passes for environmental and social reporting really is tosh. However, it is well known that companies that genuinely take the environment and corporate social responsibility seriously perform much better than companies which don't: in terms of their stock market performance and in terms of the profitability. If you believe, Mr Smith, that you are producing platitudes on the environment and social responsibility, why not change it and publish something better? Why not be a leader, Mr Smith, rather than a bleater?
>> my final point is that we have had the fatcat debate several times and the fat cats are still licking the cream. For some reason, Mr Smith is still engaged in this debate and if so it may be with good reason. Some people, they seem to be shareholders of Mr Smith's companies, are asking him to consider his policies. If I were a shareholder in his companies now I would give him a hard time. In the same way, I would give Stuart Rose at Marks & Spencer a hard time: in this latter case let me remind you that one of the questions that a shareholder wanted to ask at the last Marks & Spencer annual general meeting about bonuses based on profits was ignored… they ran out of time to answer it!
By the way, there is Terry Smith who was famous in the accounting world from I'll when he wrote the excellent book, Accounting for Growth: that book was one of the first to reveal much of what we now know about window dressing, off balance sheet finance and other shenanigans that is accountants and managers get up to. I hope the Terry Smith who wrote in the financial Times today is not the same Terry Smith who wrote that book ... UPDATE: I just went to the Tullett Prebon web site and found that it IS the same Terry Smith. How the Leopard changes its spots!
Duncan Williamson
