Small Cap Value Report (7 Aug 2015) - VLK, RGS, GTC, DIA, ESS

7th Aug '15 by Paul Scott

32 comments 30098 reads

Good morning!

It's fairly quiet for company news today, although I'll cover several results/trading updates later. So I'll use this as an opportunity to touch on a topic which crops up from time to time, and where I think a concerted effort is needed by investors to curtail the wilder excesses of the managerial class.

Director Greed

Many of us are concerned that Directors of listed companies are increasingly taking advantage of their fragmented (and often disenfranchised) shareholder base, to line their own pockets. Salaries seem to constantly rise, on a permanent ratchet, helped by external consultants to supposedly benchmark against other companies - which is of course just a fig leaf to justify greed. After all, if you pay a consultant to deliver a particular, known verdict, they will do your bidding with great enthusiasm.

How many companies admit to having third or fourth quartile management in terms of quality & ability?! None! Instead, listed companies achieve the mathematically impossible feat of virtually all Directors being first quartile, or at a push maybe second quartile, in their ability - therefore justifying ever rising salaries.

Not being happy with big salaries, generous bonuses, and in many cases plenty of share options too (sometimes on ridiculously generous terms, e.g. nil cost), a few Directors are now also pushing for even more, namely ...

Value Creation Plans

I find the whole concept of these absolutely grotesque. The idea is that Directors are handed on a plate, a significant shareholding in the company, if performance criteria are met. So it's a bit like share options, but more convoluted.

The one that really stands out is at Vislink (LON:VLK) where the staggering greed of the Chairman seems to know no bounds. He's got form too, as uproar over excessive remuneration was one of the reasons he was sacked from Anite in 2003. This is surprising, since at an investor presentation, Mr Hawkins referred to his time at Anite as being highly successful in growing the company. Indeed Vislink's Annual Report describes his track record at Anite like this;

Specialist in turnaround and growth businesses (took the Anite Group from a £68 million loss to a £30 million profit)

The chap next to me at that presentation commented to me that he'd been an Anite shareholder, and that Hawkins "had made a dog's breakfast of the company", and presided over a collapse in…

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phoenixnight

7th Aug '15

Sorry Cantab think I voted your remarks down when I meant to give it a thumbs up. I must stop reading this on a phone and return to the days of a huge screen.

grumpy5

Paul, I agree 100% with you on VLK and RGS. (One of which I still own, and one of which I sold).

doug2500

I'd like to add a 5th reason for PI's not voting:

Not really understanding the resolutions, or the implications of voting for or against.

I class myself as reasonably intelligent, but I am not an investing professional or city worker, and I struggle with the language used in AGM paperwork. Even when I understand the language I'm not sure of the implications.
For example my gut feeling is that pre-emption rights should always be applied, but then I don't really understand what the benefits of dis-applying them may be. It's taken me a long time to even understand the phrase 'to dis-apply pre-emption rights' and the gobbledegook that follows.

marben100

8th Aug '15

Hi Doug,

Here is some information about the disapplication of pre-emption rights:

Always check the proportion of shares that the board is seeking to disapply pre-emption rights over. Note that this is generally expressed as a nominal value of shares in the resolution, but explanatory notes usually state what proportion of shares this represents. If not, you need to check the nominal value of each share, and then look at the number of shares in issue to calculate what proportion of shares the stated nominal value represents.

The "pre-emption group", which represents institutional shareholders, recommends that resolutions requesting general disapplication of pre-emption rights over up to 5% of issued share capital are acceptable, but that shareholders should query resolutions requesting disapplication over a larger proportion of shares. Their recommendations are here: http://www.pre-emptiongroup.org.uk/getmedia/655a6ec5-fecc-47e4-80a0-7aea04433421/Revised-PEG-Statement-of-Principles-2015.pdf.aspx . Fully listed companies generally conform to this. Personally, I would need some persuading where a fully listed company requested a waiver over a larger number of shares and in most cases would vote against. A 5% mandate does give management some flexibility over issuing small numbers of shares (e.g. to satisfy option exercises or make small acquisitions), without needing to hold a separate general meeting, without risking shareholders being subjected to too much dilution.

It is not unreasonable that smaller AIM companies may request a waiver over a larger number of shares, and institutions generally consider 10% to be acceptable for such companies, given that fast growing companies may need to issue shares to help finance growth (either organically or by acquisition). See http://www.nortonrosefulbright.com/knowledge/publications/30967/issues-for-aim-companies-to-consider-in-relation-to-their-next-agm Again, I would generally vote against a resolution to waive pre-emption rights over a larger number than that - unless directors are able to persuade me that it is in shareholders' interests to allow them to do so.

HTH,

Mark

Johns

I am not a shareholder in Vislink but I am appalled and dismayed by this episode of corporate executive greed. Whilst this is a particularly egregious example, the ludicrous overpayment of directors is nothing new. The relentless rise in salaries and other convoluted methods of extracting ever growing lumps of cash from shareholders continues.

50 years ago CEO's were paid approx 20 times their employees, now it's over 300 times, in the US at least.

I was always lead to believe that in a capitalist system prices were set by supply and demand and excessive rewards unlikely due to competition. Are we really to suppose that over the last 50 years there's become a huge shortage CEO's, I seriously doubt it. I can only conclude this marketplace is broken.

underscored

It's a cartel and requires regulatory action.

purpleski

Hi Paul

Thank you for the write up on Vislink (LON:VLK). I have just placed a limit order to sell my entire holding and this will net me a 20% profit, having held them for an average of 15 months. I first heard about this on the Johns Investment Chronicle web site and he wrote a letter to the board but I don't think he has heard back.

One of my criteria is that I want managers who care about their shareholders and are not into playing silly buggers. Whether Vislink (LON:VLK) goes up or not I am happy to be out.

While I don't agree with some of the comments above (for example I think a lot of directors are worth more than £100K about £1,200 a week net) or inheritance, I do think that director pay should be linked to shareholder return. Buffet and his ilk set the standard and it is not rocket science.

carmensfella

Purpleski...I appreciate your concerns and they are shared by 99% of us individual shareholders and emails are totally supportive of making a challenge against these awards even if some of the investors are now ex shareholders as they decided like you that they have lost trust in the BoD and particularly Hawkins. It is all a great shame. However selling all your holding is most definitely not going to solve anything here at Vislink or at future greedy BoDs who see this as a perfect cunning plan to deliver a large part of the company into their hands at zero cost and zero risk to them !

We really need to stand up and be counted and you will see from the website that large numbers of investors are becoming new shareholders and buying a stake in the company to help the campaign aimed at the rejection and withdrawal of this VCP as it currently stands. If all the diligent and concerned shareholders sell up then it leaves behind a group of directors with nobody undertaking the checks and balances needed in the company....there is a real argument here that unless there is a proper vote on this VCP scheme as to whether it is appropriate and what scale and targets are actually required as an incentive then it will get much, much worse here at Vislink and elsewhere in the market of listed, lightly regulated, companies

Private shareholders do have a lot of clout and you will be surprised at who has read and will use the poll as a marker for investor discontent with the scheme. The larger shareholders know all about it too but have their own contact lines of communication which are probably being used as we discuss things here and elsewhere.

The large shareholders will need to look at themselves and their involvement in this but I honestly do not think they were given the full details of the scheme or were not directly consulted at all. It will all come to a much more interesting situation in early September when our report is published and the weight of ShareSoc gets behind a full Press and Media campaign. There are many questions still to be answered and board members know that we are still unhappy over the way this was done from start to finish and the bonus waiver and HMRC liability have just added insult to injury !.

We need to stay strong as a group and continue to ask the board questions so your direct correspondence is always useful and I am not sure if John Rosier has had his open letter answered but at our meeting the Remcom claimed they had only three letters of complaint and nothing from institutions which my lines of communication would totally contradict. Make sure you tell your BoD (who you employ) how you feel and what you propose is the way to solve it....selling your shares solves nothing !

I will continue to work hard on this and I have an ever growing team as this is one of the biggest, most contended issues I have seen in for private investors over the last few years and we will win through within the next six to ten weeks depending on how much the Remcom want to embarrass themselves in a very public way.

If they are reading this then they should already be embarrassed that so many shareholders have been and continue to be desperate to sell their shareholdings over this issue but if you do not withdraw this VCP scheme and agree a much more appropriate and agreed scheme then it will be on your own heads and probably quite literally !!

Roger Lawson

9th Aug '15

To follow up on Mark's comments re pre-emption rights, and cover the general issues of voting at AGMs, ShareSoc has a page which covers how one might look at common resolutions at Annual General Meetings which is here: http://www.sharesoc.org/voting%20at%20general%20meetings.html . In other words, it explains how you might vote and the issues to look at.

I would reiterate the recommendation at the end of that article, which is: "DO REMEMBER TO VOTE “NO” REGULARLY ON SOME OF THE RESOLUTIONS SO THAT SHAREHOLDER DEMOCRACY IS SELF EVIDENT AND YOU KEEP THE DIRECTORS ON THEIR TOES RATHER THAN THEM EXPECTING AUTOMATIC COMPLIANCE." But the key is to vote, whether you are in a nominee account or otherwise!

Roger

cig

Does Sharesoc maintain a list of retail brokers that allow nominees to vote? If not why not? That seems a low hanging fruit: it solves the problem for individual shareholders who want to vote (they just need to switch to one such broker) and systemically puts pressure on brokers who don't allow voting (or charge for it) to add that functionality to retain market share.

In reply to cig, we don't maintain such a list for two reasons: 1) it would be quite onerous to keep it up to date; and 2) most brokers support voting in one way or another - indeed for ISA accounts they are legally obliged to do so by the ISA regulations although many do not advertise the fact. It's more a question of those who make it simple for you to vote by providing an automated voting service instead of you having to put your specific voting requests in writing (a tedious process) and sometimes charging for it.

As it says on this page of our web site: http://www.sharesoc.org/nominee_accounts.html , "Only a few brokers offer this voting facility on an automatic basis at present (along with information provision also because unless you receive the documents issued by the company you may not know how to vote) - the ones we know of are Brewin Dolphin, Killik & Co., Natwest Stockbrokers, TD Waterhouse and The Share Centre. I personally use the Share Centre and it generally works well although it is not perfect - particularly for AIM companies which is why I still prefer to be on the share register when possible and would like to see the whole area reformed! If anyone knows of other brokers who provide an automated voting system, we would be happy to add it to that list.
Roger

AJ Bell has recently introduced "vote for/against all resolutions" forms. I find it suitable in most cases. You only need to write prose for a finer granularity vote where you want to vote differently on various resolutions.

Do they get machine readable forms from CREST? I can understand some brokers don't provide fine grained voting forms it if they have to type them in from the announcements. A regulator push would help here.

I don't think it would be that onerous to keep it up to date, just crowdsource it from your membership wiki style: add an edit/report update button (moderated if need be) on the page.

10th Aug '15

To cig: Do you mean AJ Bell YouInvest? If so I can't find the form you mention. In any case, it would be very odd to vote FOR or AGAINST all resolutions at any General Meeting.

As regards the question re machine readable forms from Crest, Personal Crest members get paper voting forms. You could in theory scan them, convert them to a pdf document and add voting boxes but it would be a bit tedious. The good thing about the Share Centre is they provide an on-line form where you can fill in your votes for each resolution separately - YES, NO or ABSTAIN. I am not aware of how they technically do this. I suspect they set up each AGM notice and the resolutions manually from seeing the AGM notice. But they only have to do it once for each of their clients as they have a database system that collates all the votes.

Cisk

The stink of such corporate greed continues this morning!

I used to own shares in a zinc miner based in China called Griffin Mining (LON:GFM). I note this morning that the board has just awarded themselves options over 20m shares vesting at 30p in three tranches, one third immediately (against a share price currently over 20% higher than the option price), one in just over a year and one contingent upon a mining licence being awarded - which it would seem is a forgone conclusion and a formality.

At current prices this option package is just over 11% of the market cap of the company! And this is a tiny company with a market cap of just over £60m.

This is on top of generous salary packages and payments to 'service companies' - another extremely useful little doge employed by CEOs to get even more money out of a company!

The whole thing is simply disgusting.

I use YouInvest but I presume all AJ Bell brokerage brands use the same backend and offer the same facility. The voting form is at the bottom of (most?) corporate action announcements that require a vote (that you get in the inbox, or via the Admin/Corporate Actions menu). Though double checking it seems it does not (yet?) cover ordinary AGMs, but only (so far) corporate actions linked votes (and associated meetings).

I don't think it's that odd to vote the same way for all resolutions, they're usually set up so that the board recommendation is "FOR" all of them, and in most business as usual cases I agree -- after all I usually like and agree with the management of companies I hold. There are also case like corporate actions where voting against all is a clear and appropriate way to say no to the corporate action being proposed.

It's very good if the Share Centre type in the form details from the prospectus, but it's systemic waste: this should be done once for all brokers by having companies submit a machine readable (something like XML, not a PDF) file to CREST who would then dispatch them to all brokers whose systems could display the voting form and process the results, with CREST forwarding them back to the registrars, all without clerical intervention. Then it's easier to have a mandate, as it wouldn't require brokers to employ all those typists doing duplicate and error prone data entry work.

Cig: now I understand. Voting on corporate actions (e.g. takeover bids) may be supported but there are many more ordinary General Meetings. On the latter I typically only vote FOR all resolutions in about one in 50 companies because I do not have the intrinsic faith in the directors that you seem to have. Often they put resolutions on the Agenda without understanding why or intending to use them - for example share buy-backs and change to 14 days notice of general meetings. And I also vote against a very large proportion of remuneration resolutions because remuneration in public companies has generally become too high. I suggest you need to think and act more like an "owner" of the business and consider each resolution specifically. Trusting the directors of some companies to give you sound recommendations is very dubious.

On the last point, Crest does of course support voting via the Crest messaging system which can be used by brokers, but the problem is retail investors cannot use it directly - even if they are Personal Crest members.

22nd Aug '15

I have been away so not sure if all of you spotted this story in the Investors Chronicle last week...

http://www.investorschronicle.co.uk/2015/08/14/comment/chron...

3rd Sep '15

Sorry it had taken so long to reply but I have been away on holiday and in catch up mode once back with my business.

As a part time PI I with an all consuming business to run I don't really have the time to get involved with shareholder campaigns but also as James Bond said in Goldfinger "the only remedy against a cheat (at golf) is not to play with him again". Additionally Warren Buffett emphasises that he only likes to invest in businesses run by management that he would happy to see his daughter bring home for dinner.

For me the simplest way to show disapproval is to sell. To take it to its extreme if all shareholders of Vislink (LON:VLK) took this course then the share price would go to zero and the management would think twice.

There are so many fish in the sea and good managements that I am afraid I am happy to leave Vislink (LON:VLK) to people who take a different point of view to me.

I do hope that this does not seem too negative but I am trying to be honest.

If I was a full time PI with a larger portfolio I might get more involved!

4th Sep '15

Purpleski....you said

'For me the simplest way to show disapproval is to sell. To take it to its extreme if all shareholders of Vislink (LON:VLK) took this course then the share price would go to zero and the management would think twice.'

Whether you feel there are better fish in the sea or have a large or small portfolio I am afraid that allowing this situation to become the norm will not serve investors well and their wider portfolios will eventually suffer as other company directors see what average directors got away with !

To suggest ' selling Vislink shares and driving the share price down to zero' is going to teach them a lesson will almost certainly have the opposite effect. If the business continues to operate as normal and profits meet expectations then the value of the company is certainly not zero or anywhere near....the directors would be able to buy large amounts of the company knowing nothing has changed except disillusioned investors selling all their shares in protest....possibly to them ! That strengthens their grip on the company and potentially they will end up with even more than the 20% or so they are looking to get almost for free under the various schemes (LTIP,VCP etc) they have created.

The way to stop all this is to help support the tens of investors that have shown strength and created an Action Group. More are welcome and this VCP will be defeated.

LongValue

14th Sep '18

Just stumbled on this excellent piece on Executive rewards by Paul Scott. There are also some very insightful comments. By the way, I thought it might be interesting to take a closer look at how Vislink now called Pebble Beach Systems has performed from the date the article was written to the present. It lost some 90% of its market value.

Unfortunately, I suspect that most of the issues surrounding Directors' remuneration are just as serious today as then. Little has changed.

Small Cap Value Report (7 Aug 2015) - VLK, RGS, GTC, DIA, ESS

Director Greed

Value Creation Plans

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Paul Scott

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