Lombard

February 21, 2012 10:32 pm

Dominant shareholders create case for danger money

Old-time economists sometimes equated pay to recompense for inconvenience suffered

Poor Bob Ivell. The Mitchells & Butlers chairman appears to be struggling to attract a high-calibre chief executive to the boardroom of the pubs group. It could be for the same reason that package holidays to Honduras have not taken off. The destination is too dangerous. The hands-on style of dominant shareholder Joe Lewis has elevated the body count at the Brummie taverns chain to levels Quentin Tarantino would blench at. Mr Ivell is himself M&B’s sixth chairman in two years.

To add to the uncertainty, Mr Lewis, who abortively offered to buy M&B on the cheap last autumn, can come back with a second bid in April, albeit that the shares are now 17 per cent higher. The market solution is for Mr Ivell to proffer more money to good candidates. Chin-whiskered old-time economists sometimes equated pay to recompense for inconvenience suffered. That does not apply to modern chief executives, many of whom are having a blast. The exceptions are bosses at companies with interventionist investors such as Mr Lewis. Their careers, like the life of primordial man, can be nasty, brutish and short.

Mr Ivell may have to offer total pay higher than the £1.1m received by M&B’s last chief executive, Adam Fowle, in 2010. This was itself around £100,000 ahead of the median for a FTSE 250 caudillo.

Squinting through the same prism, the “fat cat bonuses” that Sir Stelios Haji-Ioannou claims EasyJet chairman Mike Rake hands out to executives just look like compensation for the regular broadsides of the Greek Cypriot entrepreneur. Maybe the frequency of these outbursts should be a metric for cash bonuses, replacing the discredited benchmark of return on capital?

Not so Dotty

Dorothy Thompson, unlike Saint Augustine, would like to become virtuous sharpish. Drax, which she runs, has the grubby distinction of being western Europe’s biggest coal-fired power station. That means the quoted business is hugely polluting. So, while selling electricity during peaks in demand is lucrative – underlying profits were £334m on sales of £1.8bn in 2011 – returns cannot be taken for granted. The government plans to jack up the floor price of carbon, eroding the competitiveness of the Yorkshire group.

The path of profits and green morality lie on the same bearing for the determined Ms Thompson. She plans to raise the proportion of energy that Drax generates from biomass – wood waste and crops – from 9 per cent to 20 per cent this year at a cost of £50m. But new herbage burns less efficiently than the fossilised sort. So she is hoping that the government will shortly increase the subsidy for dual-fuelled power stations, worth around £45 per megawatt hour.

Drax could then ramp up to burning a 50/50 mix of biomass and coal in coming years at a £500m cost likely to involve debt issuance. That, you might argue, would leave the business perilously exposed to Westminster fashions for subsidising different brands of green energy – or not. But Drax would have greater political leverage as a semi-virtuous biomass burner than a planet-trashing coal junkie. The strategy looks right, inevitable even. The direction of the shares, trading in line with other generators, depends on ministerial decisions, though.

The heavy mob

How d’ya like that? Antitrust guy Roger Witcomb sez the joint venture between Anglo American and Lafarge “could damage competition in certain markets”. Like a £1.8bn joint venture combining Anglo and Lafarge’s heavy building materials businesses in the UK could be some kinda racket that would put the squeeze on our valued customers!

The Competition Commission sez the peace treaty between the two families could “enhance the external sustainability of co-ordination”. This is partly on account of heavy building materials weighing a lot, so there’s no percentage in hauling them far. If Anglo’s Braintree depot, which I am running, settles its beef with Lafarge’s mob at Saffron Walden, they reckon we could fix prices by “signalling”. Though personally I’d rather do it over meatballs.

So I calls The Boss and sez: “Cynthia, you want I should reason with this wise guy? I have a grade of cement very suitable for overshoes.” She sez: “Lenny, you gotta remember building materials are kinda non-core. And Witcomb is probably like all UK antitrust blowhards: talks tough but a pussycat underneath. All we gotta do is divest a few depots so he feels like he busted our balls. Then we do the deal anyhow.”

So now it’s me feels like he’s being measured for overshoes. Or at least a P45, when Anglo sells the Braintree plant.

jonathan.guthrie@ft.com

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