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Margaret Ewing, vice chairman of Deloitte and the former finance director of airports group BAA, has attacked institutional investors for voting down more generous remuneration packages for directors of quoted companies and for failing to back them in acquisitions.
Ms Ewing told the Financial Times that listed companies set an effective ceiling on executive pay by basing bonus schemes on upper quartile performance against a peer group. This was a deterrent to more creative, but riskier, business strategies.
“Remuneration committees set targets for executives to achieve. … But there’s nothing for you if you achieve more than what that target of upper quartile is. Whereas with private equity the world’s your oyster. … I certainly think that’s an issue that needs to be addressed over the next year or so,” she said.
Ms Ewing answers your questions on what companies should do to fight a hostile takeover bid, the drawbacks of public company remuneration structures, the lessons from the auction for BAA and the short-term time horizon of institutional investors.
What effect does management share ownership have on making their case against a hostile bid?
Craig Stupple, Doncaster, UK
Margaret Ewing: I do not believe it should have any impact at all - it is a board’s fiduciary duty to ensure that shareholder value is maximised at all times. During a bid management will ensure that the company’s true value is properly recognised and that an offer for the company is only accepted if that true value is reflected in the offer (or there is clear evidence that the majority of shareholders would accept the offer if put to them)
If BAA had happened elsewhere in Europe it may never have happened, ironically maybe not even in Spain, due to nationalistic concerns. Is it right that the UK has a reputation for a level business playing field and is there anything else that could be done by the government/regulators?
Margaret Ewing: The legislation, regulations and competition rules of the UK are not for me to comment on but for me to very much enjoy operating within.
In a hostile situation, how much is a target management’s case built on emotion/sentiment and how much on hard figures?
Gareth Kennedy, Stafford, UK
Margaret Ewing: All documents issued during a bid process (and all statements made by the company’s board or individual directors/managers) have to be very rigorously verified by the company’s advisers (particularly its lawyers and reporting accountants).
This means that a target management’s case is entirely built on hard figures and facts - not emotion and sentiment
Do you believe that the approach private equity houses undertake to secure funds is an important differentiating factor for development compared to that of a listed company?
Margaret Ewing: Investors in private equity funds normally have different objecitves, risk appetite and return expectations than investors in quoted companies. This, I would expect, influences cetain of the strategic decisions made by management.
Do you think bonuses in general should be in shares or cash? What about if the bonus were for over-achievement?
Brent Fischer, Chicago, US
Margaret Ewing: An appropriate mixture of both is, I believe, preferable - and, as far as possible, matching executives reward to that of shareholders, thereby expecting them to benefit from the future success of the company (and the sustainability of the strategy’s objectives)
Do you think executives would be prepared to accept higher bonuses if they over-achieve their targets in exchange for renouncing part of bonuses if they fail them? Could over-achieving in turn lead to more employee turnover if the executives have nothing left to prove?
Sally Evans, London, UK
Margaret Ewing: Remuneration packages are normally structured so that executives are not entitled to bonuses if they fail to achieve their targets
Employee turnover may well be more stable if a company is a high achiever, with greater security of employment. The delivery of a strategy would normally take three to five years. In today’s environment the life of many FTSE 100 and 250 CEOs and CFOs is, I believe, similar to this period - so I would not expect over-achievement to lead to an increase in executive turnover
Is there a rule of thumb that helps decide when to go hostile or not? How long will a bidder’s shareholders generally allow it to recreate value from an expensive takeover?
B. Vogel, London, UK
Margaret Ewing: The decision to go hostile is solely down to the board of the company (or members of the consortium) making the bid - it will obviously be based on their determination to acquire the target.
There is no clear answer to your second question - it is entirely dependent on the situation and who the shareholders are
Can you expand a little on why exactly you think listed companies should pay their executives even more money?
Rupert Coleman, Cirencester, UK
Margaret Ewing: I am not proposing that listed companies should pay their executives even more money. The point that I have raised is that there may be an alternative strategy that a company’s board could adopt that, if successful, could deliver significantly greater long term value for its shareholders.
However, it is highly likely, in that scenario, that there would be considerable risk attached to the outcome of the strategy. In this situation, management may be less likely to be prepared to take this risk (some of which may be personal) if they believe that their potential reward on a successful outcome is not comparable to the reward to the shareholders.
This is one of the key reasons why private equity houses have been so successful in attracting some of the UK’s most able management to run companies they have acquired and why they have been able to exit those companies at a later date realising significant profits - they have taken risks but matched management’s rewards against its own
Do you think that the Board of BAA failed to keep it as a publicly quoted company because it had the wrong strategy?
Malek Sharif, London
Margaret Ewing: Absolutely not. Indeed if you reviewed the BAA second defence document you will observe that the board did not propose to alter its strategy.
However, it was able to strongly argue that the company’s sustainable value was at least 940p per share, rather than the circa 650p at which it had been trading before the bid.
The 940p was not on the basis of any change in strategy but was supported by a much clearer articulation of the bases of value of the component parts of the group - a basis that very few commentators and investors disagreed with. During the bid process the board did re-examine the group’s strategy and concluded that the existing strategy was the one that would deliver maximum value for its shareholders.
What else in your view can quoted companies learn from private equity firms?
Giles Cummings, Reading, UK
Margaret Ewing: Following a year’s research encompassing four workstreams, Deloitte published in November 2006 a ”Corporate Fight Back” report. Based on the analysis of the research findings, the report highlighted a number of key learnings for corporates seeking to win in the increasingly competitive M&A environment, where private equity is ever more frequently offering higher prices for targets and, consequently, beating corporates to important strategic assets.
Before corporates can respond there are two key challenges they have to address: First, they have to prove their ability to satisfy growing investor demands on managing the existing portfolio of businesses they run; and second, they have to prove their ability to extract value from transactions
Analysis of private equity’s approach to transactions and subsequent management of its acquired asset, reveals that there are five key disciplines (in addition to up-grading their organsiational capabilities around M&A) that corporates should adopt as best practice if they want to ensure future success in M&A (ie adopt the approach that private equity takes):
• Clarity of purpose - corporates need to have much greater clarity around responsibilities for transactions and exhibit clarity and rigour across all phases of every transaction.
• Parent power - corporates really must demonstrate to their shareholders that they are the best owners of the portfolio of companies. Greater discipline should be exerted in exiting businesses at the right time and for the right price.
• Know your prey - corporates need to identify targets well ahead of them coming into play. Preparedness means smarter execution of appropriate deals which will allow them to compete effectively for transactions
• Incentives to execute - the biggest difference between PE houses and the corporate world is the sequence of events that follows the completion of a deal. The best run PE houses have a period of intense activity immediately after completion of a transaction and a huge focus on setting the near-term objectives that will lead to a value increase, and for them, a profitable exit
• Integration - the ability to extract maximum value from a transaction is a must for corporates. Too few treat the integration as a separate part of the overall transaction, while best practice PE firms start planning for the integration in the pre-deal phase
What did your experiences at BAA teach you about dealing with a hostile takeover bid?
Sunil Kulkarni, Leeds, UK
Margaret Ewing: My key learnings from the BAA bid were:
• boards should have an agreed and substantiated view on the basis of valuation of the business
• a very effective communication programme for ensuring shareholders really understand the key value messages and themes.
These two points, I believe, are applicable irrespective of whether a company is facing a bid or not but are critical in a bid situation and can be the determining factor in winning or losing the bid
In addition, in a bid situation, a board needs to consider the following:
• the potential conflict of any defence messages with previously published messages and targets, to ensure there is no significant conflict which could potentially result in loss of credibility for management
• the potential conflict of value creation/substantiation messages with other important stakeholder requirements
• emotions/personal views/”ownership” of existing strategy may have to be ignored during a bid situation
• the board has to clearly understand (at an early stage in the bid process, if possible) the price at which it is right to negotiate with the bidder and, subsequently, accept the offer
Once you are in a position of having to defend against a hostile bid, there ”is no going back” - life for the management of the company will not be the same as before the bid. Your shareholders will expect a change of focus, strategy etc, including gearing up your balance sheet more aggressively - something that is going to persuade shareholders that management will be able to sustain a higher share price than prior to the bid.
What is a reasonable compromise between the long and short term corporate strategies executed by the boards of directors of public companies in your view? In other words, what is a reasonable compromise between the payment of dividends strategy vs the sustainable corporate development strategy? Do you think that the immediate performance of a corporation, which may contribute to the executive pay cheque, may have some negative consequences in long term?
Viktor O. Ledenyov, Ukraine
Margaret Ewing: The critical factors to the acceptance and success of any board’s strategy are: the clear articulation of that proposed strategy to the company’s shareholders; ensuring that the shareholders understand the consequences of adoption of the proposed strategy and shareholders having an opportunity to voice their views.
From this dialogue with shareholders, a board should be able to gauge the appetite of its shareholders for a long term strategy that provides sustainable long term growth but at the cost of short term dividends. I would expect boards to reflect the feedback in the final determination of the strategy
Executive remuneration targets, set by the remuneration committee, should reflect the plan that underlies the agreed strategy, therefore removing the issue of short vs long term performance
Do you think the Competition Commission review is likely to lead to a break-up at BAA?
James Oswald, Glasgow, UK
Margaret Ewing: I am unable to comment or speculate