News Column

Nils Pratley on Saturday Model boss may be worth it- but shareholders need respect

July 12, 2014

Nils Pratley



=The adoration of Christopher Bailey has limits. About 53% of Burberry's shareholders voted against the company's pay report yesterday, another embarrassment on the remuneration front for the chairman, Sir John Peace, fresh from a 41% revolt at Standard Chartered where he does the same job.

There is a theme here: the refusal to make a case, in advance, for giving executives huge pay packets. Too late in the day, Peace yesterday attempted to explain why Bailey is worth it. The chief creative officer, now doubling up as chief executive, was handed 1m shares, worth about pounds 15m, last summer because there were "competing job offers for Christopher which were much more than his existing package".

The top end of the fashion industry, he said, is full of such mega-deals we just don't see because most of Burberry's rivals are not public companies.

It's an argument, but it breezily ignores the fact that Burberry is a public company and thus is obliged to be up-front on boardroom pay and provide clear justifications. The remuneration report failed that test. The pounds 15m share award (making pounds 20m once a 2010 award is included) was noted in half a sentence at the end as something that happened in Bailey's "previous role". Having persuaded him to stay, Burberry then handed Bailey a pounds 7.5m golden hello a few months later when promoting him to chief executive; pounds 22.5m in a single year deserved a full explanation.

In similar style, Burberry insists on saying Bailey has a pounds 440,000 "allowance" on top of his pounds 1.1m salary. It's not an allowance - it's a second, non-pensionable, salary. The verbal gymnastics are silly.

Peace says he was "disappointed" by the vote and will consult shareholders again. If he had done so properly in the first place, he might have been able to scrape a narrow majority. A few waverers might have been won over if Peace had been able to demonstrate that Bailey is paid in line with peers; merely asserting the fact, when the proxy votes are already cast, looks arrogant.

Bailey, below with Cara Delevingne, and Jourdan Dunn, is said to be a model of politeness, so he may be too shy to say so: the board did him no favours by allowing the revolt to grow. No performance conditions are attached to the pounds 20m shares - Bailey is just required to stay "over three, four and five years from the date of grant" - and retention bungs always go down badly. Burberry claimed a few weeks ago that shareholders were supportive and that it was only the Guardian making a fuss. Yeah, right.

The board won the forward-looking binding vote on pay - the 53% thumbs-down was on the advisory vote on the remuneration report itself - so Burberry can dig in its heels in theory. That would be a mistake. Peace should invite Bailey to accept some performance conditions.

After that, Peace, with 12 years on the clock as chairman, might ask himself whether it's time to let somebody else have a go. Burberry's shares have performed wonders in that time, but this row could have been avoided. Maybe Bailey is worth the money - former colleagues and rivals agree he is a design genius - but it is a bad error for the chairman of a FTSE 100 company to take shareholders for granted.

=A canary in the eurozone debt-mine? Or just an everyday tale of a local crisis at a family-dominated group with too many cross-shareholdings?

On the face of it, the numbers in the Espirito Santo affair in Portugal look too small to indicate deeper problems. Banco Espirito Santo (BES), the bank exposed to troubles within a family group of companies, did its best to quell the panic. Portugal's third largest bank put its exposure at euros 1.18bn (pounds 938m) and said it had a more than adequate capital cushion of euros 2.1bn at the end of March, a figure that excludes euros 1bn subsequently raised via a rights issue.

If that level of exposures stands the test of time, or even the next fortnight, the story may be forgotten quickly. That assumes BES has no horrors to unveil from its Angolan operation. All the same, the big reaction to seemingly small news is intriguing.

Why the worry? Two reasons. First, Portugal has just emerged from a three-year bailout programme. Investors assumed that included a get-tough approach to bad debts on the part of regulators. Yet the concerns about Espirito Santo Financial Group and Luxembourg-based Espirito Santo International have been allowed to bubble away for months. Where was the urgency?

Second, the strong suspicion remains that eurozone banks are still woefully under-capitalised and tethered to their sovereign states. As Gary Jenkins of LNG Capital says: "European politicians who so famously said that they would break the link between banks and sovereigns have failed to do so." The BES troubles may pass, but the real moral of the tale is that confidence in the eurozone banking system looks dangerously weak.

=Cigarettes kill but investing in tobacco companies is good for your long-term wealth. Imperial Tobacco's shares have travelled from 400p to pounds 27.40 since the turn of the century with barely a cough along the way. The appeal is obvious. Cash flows are still excellent in the western world, where smoking is in retreat, and the share price can be made to sing if you fund the business with heavy helpings of debt. In the developing world, where they still love their gaspers, the game is about weaning punters off the counterfeits.

Now comes another opportunity for Imperial - a chance to pick up a few stubs from the planned $56bn (pounds 33bn) Reynolds/Lorillard merger in the US. Competition regulators will insist a few brands are sold because the new combo would have a local market share of about 40%, almost as much as Altria, the Marlboro folk. Imperial has a US market share of 3%, but it's the only obvious buyer and might grab a bargain.

Price is everything, of course, yet Imperial's apparent enthusiasm to become a national player in the US looks odd. Yes, the US is a big place but even an overnight 10% share wouldn't alter the fact that Imperial would be up against a virtual duopoly. That rarely offers a comfortable life.



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Source: Guardian (UK)


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