Persimmon AGM and Remuneration

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On the same day as BP held its Annual General Meeting (AGM), and got snubbed by shareholders over its Remuneration Report, house building company Persimmon held its AGM in York. One might have expected that Persimmon would also have been attacked for its remuneration scheme, for the reasons explained below, but in reality it passed with only 9% of votes against. Indeed there was more opposition to the election of a new non-executive director, Nigel Mills, who only passed with 53% approval on the grounds of his lack of independence. There were even more votes (12%) against the resolution to approve the calling of general meetings at less than 14 days notice, although I can never understand why companies need such resolutions and I regularly advise people to vote against them.

ShareSoc Director Mark Bentley attended the AGM and has produced a very extensive report for ShareSoc Members (see here), and I am glad to see he voted against the change of notice resolution. Here is a brief summary of his notes and a report produced by Cliff Weight on their remuneration scheme.

In essence the problem with the scheme is that the CEO has a potential gain of £100 million from the LTIP scheme introduced in 2012. Back then the share price was £6.40, when it is now about £20 (although falling lately – see comments below) which already implies a £48m pay out.

Why did the remuneration report vote pass so easily? It appears that investors did not understand the implications of the LTIP scheme in terms of likely future payouts. This is one problem with all the pay schemes of large listed companies. They are now so complex and confusing that investors are unlikely to understand them, even if they bother to read the many pages of the remuneration report.

Now Persimmon has been on a roll of late, as have most housebuilders, and it is always difficult to get shareholders to vote against high pay when they are making good profits themselves. BP tripped over the fact that BP’s financial figures were dire last year while the pay of the CEO rose. They seem not to have recognised the likely result of that and chose not to make concessions such as asking the CEO to give up some part of it. The Chairman of their Remuneration Committee, Dame Ann Dowling, should surely carry the can for that omission. Note for investors: if you vote against the Remuneration Resolutions, you should also vote against the re-election of the members of the Remuneration Committee, particularly the chairperson. It is after all their responsibility to get it right.

Pay certainly seems to be a hot topic this year as grossly excessive amounts continue to be paid even in those companies where profits have fallen or are non-existent. As I have said before votes on pay may help (but those schemes at BP and Persimmon were approved by shareholders), but other changes need to be made to get remuneration back to realistic and reasonable levels. For example by having remuneration committees comprise not just directors, or even better taking it out of the hands of directors and into the hands of shareholders.

We also need private shareholders to be enfranchised and encouraged to vote as they have a more personal interest in the matter than institutional fund managers – regrettably most do not or cannot vote because of the iniquitous nominee system on which ShareSoc has been campaigning.

Other changes could also be made to control pay better – such as legislating to return to simpler pay schemes. The complexity of modern schemes plays into the hands of the beneficiaries and their advisors and is one reason why total pay has gone up despite restraint on basic salaries.

Persimmon and housebuilders’ prospects

Persimmon issued a trading statement on the day of their AGM. It read positively – forward sales and legal completions this year were up 8% and prices of sold houses were up 5.8% over last year. That’s surely positive when most businesses are lucky to grow at anything like that rate. But analysts apparently saw this as a “slow-down” on previous growth rates.

In addition there was a report published by the Royal Institution of Chartered Surveyors (RICS) which suggested that the market would ease after the recent spurts (partly due to buy-to-let buyers rushing in before stamp duty changed). In particular there might be a slow down in central London where prices were getting simply unaffordable and foreign buyers might be scared off by Brexit or the threat of it. Prices might be easing in central London but they are still rising in other parts of the country which have not seen rapid growth of late.

These predictions may or may not come true of course. But the share prices of all housebuilders have been affected in the last few days – Persimmon is down as much as 15% from earlier in the year for example. Have market conditions changed so substantially to cut into the profits of housebuilders? That is a much more complex question. But the prime thing that is driving housebuilders’ profits is surely the dire shortage of housing, particularly in London and the South East, while available plots are scarce and mortgages are still available at low rates. Would it not be more likely that the market may become less “frothy” over the summer (as usually happens) while still enabling housebuilders to make good profits? But this writer might be biased as I do hold shares in some building companies. Post your comments if you have a different view.

Roger Lawson

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