ALLAN GRAY'S NEW PAY ACTIVISM
Investec has rubbed some investors up the wrong way by lavishing huge salaries on its top brass. Some shareholders have had enough.
Big bucks for Joburg banker,” Irish Independent. screamed the That banker is Stephen Koseff, the highly rated 36-year veteran of Investec who has stayed famously true to his Benoni roots, even after his bank listed in London in 2002. But on August 4, Koseff’s “big bucks” will come under fierce scrutiny at Investec’s AGM.
Koseff’s salary last year amounted to £4.36m — R82.7m in rand terms. This makes him, by some distance, the best-paid CEO of any JSE-listed bank.
By contrast, Barclays Africa CEO Maria Ramos took home R28.2m, FirstRand’s former boss Sizwe Nxasana got R33.4m, Standard Bank CEOs Sim Tshabalala and Ben Kruger got about R31m each, and Nedbank’s Mike Brown got R36.4m. Yet in every case, profits of these rival banks exceeded those of Investec.
Investors have noticed, too. Last year, 25% of Investec’s shareholders — including the Public Investment Corp (PIC) and Allan Gray — voted against its pay proposals. The PIC said at the time it considered the packages “to be excessive”.
Now, you might consider the hefty pay to be simply the executive dividend of having transplanted the HQ to London. A similar thing happened at Old Mutual and SABMiller, after all.
But Allan Gray, the asset manager which holds 6% of Investec, doesn’t think this fact alone justifies that sort of pay.
“We’ve applied our minds a lot with the AGM coming up, and we believe Investec’s remuneration is not only excessive, but there’s also no clear alignment with shareholders,” says Allan Gray portfolio manager Simon Raubenheimer.
Allan Gray doesn’t mind paying hefty salaries to CEOs — as long as shareholders are rewarded too.
But in recent times, Investec’s stock performance has been distinctly workmanlike. A hypothetical £100 invested in Investec in March 2009 would have been worth £224 by this year. Yet that £100 invested in London’s FTSE 350 general finance index would have more than tripled, to £335.
On Monday, Allan Gray spent an awkward few hours debating this issue with Investec chairman Fani Titi and remuneration chairman Perry Crosthwaite.
“We had a firm debate, and there were strong disagreements on certain issues, and on others, Investec said they’d go back and have a look at some of the issues we raised,” Raubenheimer said.
He won’t say yet which way Allan Gray will recommend its clients vote. But “no” is probably a safe bet.
The problem isn’t just the sheer quantum. Another issue is that Investec is also paying £1m to its top brass as a curious “fixed allowance” payment.
And the bank hasn’t exactly made it particularly hard for its bosses to hit their targets. For example, their target for return on equity (RoE) is just 12%, barely above its current 11.5%.
“We have no problem with the people,” says Raubenheimer. “Stephen Koseff is one of the most outstanding bankers ever produced in SA. But the fact is, you can hardly say a 12% RoE is a stretch target.”
PIRC, a London-based firm which advises investors how to vote, has recommended voting against Investec’s pay plan.
In its report, PIRC says the change in Koseff’s pay is “excessive and not commensurate with the change in total shareholder return”.
Of course, the vote on pay isn’t binding — but companies ignore investors at their peril.
Says Raubenheimer: “Where we feel boards have ignored the issues we’ve raised for a number of years, we’ve then voted against the re-election of the chairman and [other directors].”
It’s a surprisingly activist stance taken by the fund manager, which, it transpires, has voted against 32% of remuneration plans it has seen of late.
But it’s necessary, says Raubenheimer: “People respond to incentives, so it’s important to have the right people, correctly incentivised and aligned with shareholders. If you don’t, that's where companies start to lose their way.”