Intercede, the leading supplier of identity and credential management software, issued an upbeat trading announcement as an existing contract in the UK healthcare industry brought in £800,000 in cash receipts. The company is also enjoying success with US government agency contracts as another US federal agency bought into the MyID system - this brings the total number of agencies using the MyID system to 13. The company reports that a number of contracts are nearing completion.
The IGP share price has declined by 14% over the last year.
Note that on the 1st December I and a number of other individual investors in Intercede met with Richard Parris (Exec Chairman) and Royston Hoggarth (head of Rem Comm) at the offices of Finncap where Intercede were presenting at a Mello Central event along with three other companies. This is a brief note on the discussions and the subsequent presentation. A much fuller and more detailed note is present on the ShareSoc Members Network.
The discussion commenced with me clarifying what the terms of the LTIP were – namely the performance target is an accumulated eps growth in excess of R.P.I. over 3 years.
Hoggarth emphasised the reason for the LTIP was to “retain and attract” senior executives. The hurdle was set low so as to encourage investment in the company, i.e. a focus not on short term profit maximisation but long term growth. I suggested some other alternative scheme might have been preferable, and both D.S. and I emphasised that we had no problem with LTIPs to other executives, but major grants to existing large shareholders such as Parris or his wife made little sense. They provided no real extra incentive.
As far as “retention” went, Parris claimed he could quit and get a much better paid job working in the USA, so one of the key reasons for the LTIP award to him was to retain him. Parris also claims he was and is underpaid in terms of base salary. The company had obtained a Remuneration Consultants report (from PWC, their auditors), and they suggested that based on comparators that he was underpaid. I think I said I thought this might not be a totally fair comparison based on the existing size and profitability of the company.
We then got on to the subject of the “Executive Chairman” situation and the merit of splitting those roles. Parris said the board were considering board composition at their next meeting already. I asked them to consider the appointment of a non-exec Chairman, and to let me know their decision.
I mentioned that Shareholder Committees were possibly a way to avoid conflicts between shareholders and boards on pay, and there was some more general discussion on pay, remuneration committees, etc. I promised to send Parris our note on Shareholder Committees.
We then joined the main meeting for presentations. Note that Richard Parris is quite a good presenter, but it is clear he is still personally dashing around the world making sales calls.
He disclosed a bit more about their competitive position. It is clear they have a few competitors for “PIV” identity products (the US Government mandated standard) but have good relationships with Microsoft and H/P. The wider “identity” software market has much more competitors though. They are working on PIV identity (which currently requires a smart-card to be carried) for mobile phones.
I have subsequently sent a note to Richard Parris, and one thing I pointed out was a comparison between the situation at Dunelm and Intercede – the former company has also recently issued an LTIP that includes an award to a director who already holds more than 30% of the company. This is part of what it said:
“Incidentally I had a very interesting conversation this morning with the head of the Remuneration Committee at Dunelm. They also have a situation where they issued some LTIP awards which appeared quite generous (although their performance conditions are quite tough), and which included an award to one of the executives (Will Adderley). She admitted that this situation had already caused the A.B.I. to issue a “red-top” warning to their members and another one was also likely. In other words, it is obviously something that responsible investors see as prejudicial. But she also said that in Dunelm (and you can see this written in their annual report) that base salary is set ‘to at or below median market salary for the individual and their role’. In other words, not only did they recognise that Mr Adderley had probably been underpaid in terms of base salary in the past, but he is likely to continue to be so going forward, and the same applies to other executives. So their policy is quite clear – generous LTIPs that depend on out-performance are OK, but only if base salaries are below median.
The big difference between the Intercede LTIP award and the one at Dunelm is the value of the awards and the relative dilution (based on total shares potentially awarded under the recent LTIP announcements). These are the comparative figures:
Intercede:
1.24m shares in total which represents 2.5% of the issued shares.
The value of those shares at the current market price is £756,000 representing 37% of the last annual pre-tax profits.
Dunelm:
0.92m shares in total which represents 0.45% of the issued shares.
The value of those shares at the current markets is £4.2m representing 5% of the last annual pre-tax profits.
Obviously the overall value in Dunelm is larger (potentially as they have high performance conditions) but it is a much larger company. But otherwise you will see there is a significant difference in the percentage dilution and proportion of profits being diverted to the directors.”
I also pointed out that the LTIP at Intercede was contrary to A.B.I. guidelines.
Roger Lawson, ShareSoc
