In the last post, I had promised to make a post on how to look for negative companies, that is, companies that are not worth to invest in. Generally, it takes some time to know the management and learn their management style. But one pragmatic way is to decide if the company executive remuneration policy is in line with the minority shareholders’ expectation. Obviously, the quickest way is to zoom in the executive chairman’s remuneration components. In most corporate governance reports, they generally assure shareholders that executives do not decide their own remuneration package. This means that this responsibility is in the hands of the remuneration committee, which comprises the independent directors. This obviously provides us an idea of how independent the independent directors are. Are they erring on the side of the executive directors or are they on the side of the minority shareholders or are they totally independent?
The table shows two generally well-regarded companies. They are Yangzijiang (YZJ) and Venture Corporation. These companies are run by the executive chairman doubled up as a CEO. From the latest FY 2015 annual report, the chairmen-cum-CEOs draw a fixed salary of 18% and 27% respectively. The bonus component made a large proportion, being 82% and 73% respectively of the total remuneration package. Obviously, if the company is not doing well, a large part or even the whole variable bonus component got wiped out and this will heavily hit the total remuneration package of the executive chairman. Of course, when a company is not doing well, it is also likely that the share price and shareholder’s dividend are both at risk. By breaking down the remuneration package into a low fixed salary component and high bonus component, it is a signal to the minority shareholders that the management are with them. Certainly, this will be more in line with minority shareholders’ expectation. The two mentioned companies have market capitalisation of above S$2 billion, and this generally means these executive chairmen are shouldering a heavy responsibility despite their low fixed salary base in terms of percentage.
Unfortunately for the minority shareholders, that cannot be said of many other companies. Several companies have remuneration packages comprising a fixed salary component of more than 80%, a very small percentage for bonus and a sizeable percentage in other benefits. The components obviously reflect as if it is their entitlement to have a high salary. In fact several of these companies actually reported to incur losses year after year. This obviously means that the minority shareholders are not entitled to dividends, while the top executives are paid a package of between $250k and $500k. Certainly, as an investor, I will strike off these companies without having the need to go into further details. In fact, a number of these companies have market capitalisation of less than $20 million, and certainly we do not expect the share price to be very high. Just by investing say $20,000 to $30,000, one could be easily be among the top 20 shareholders of the company. However, is it worth to invest in them unless we have the veto power to remove the whole board? Obviously, the remuneration package of the executives is not in line with shareholders’ expectations. One of the purposes of public-listing a company is to get minority shareholders to share out the risk, especially in corporate actions such as issuing of rights and selling of bonds and perpetuals. Under such a circumstance, the existing minority shareholders are likely to be the first to be called upon to share out the risks, but yet top executives are paid highly without the need to commensurate their remuneration with their performances. This is certainly not equitable and it does not spell well for minority shareholders. And, certainly it is also unlikely that an executive chairman of a less than $20 million company works harder than his counterpart in the more than $2 billion company, yet draws a higher remuneration than the executive chairman of a $2 billion company. Certainly, I cannot justify myself to invest in these companies.
Now the next question is how independent are the independent directors? They are generally the team members for the remuneration committee. Usually, companies engage the minimum required independent directors to satisfy the minimum statutory requirements. The first reason is by keeping the team of independent directors small, the total director fee can be shared by less directors and each enjoys a higher distribution. And the second reason is, of course, to have less independent say in the company matters, which could otherwise thwart the decision making process within the board. Consequently, the remuneration committee, the audit committee and the nominating committee are run by the same few independent directors. Of course, in situations when the remuneration of the fixed salary component is set extremely high, perhaps, we have to question and to scrutinise the background of these independent directors. They may have perhaps served too long as independent directors in the company such that they are no longer independent. Or, they could have thought that they owe it to the board of which 100% of their director fee is decided. Well, if they are not independent, it is obvious that the minority shareholders’ interest is not protected.
Disclaimer – This post is not a recommendation or an advice to buy or sell the stocks mentioned here-in. The numbers are past data taken from the annual reports. The past data cannot be used to reflect future data or future performances.
Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.