Naspers executive pay logic still dodgy
More than 17 years ago, then Naspers CEO Koos Bekker ventured to China and made what is now acknowledged as one of the best investment bets in history.
Bekker’s gamble of buying into Tencent happened at the tail end of the dotcom boom that left so many investors aggrieved about technology stocks. However, the Tencent investment has steadily delivered spectacular returns to the Naspers stable. Such returns have predictably courted controversy and concern among various stakeholders.
The Naspers group is a conglomeration of businesses in the media, internet and technology space. The internet business, which is where Naspers classifies Tencent, has managed to remain profitable and cover up for losses sustained in other parts of the business. More disturbingly, the value of the Tencent investment on its own supersedes the value of the Naspers business at large. This bizarre state of affairs means that investors allocate no value to the rest of the Naspers business portfolios. This leads one to wonder whether the other businesses should indeed form part of the group.
In the past financial year, Naspers has reduced its stake in Tencent from 37% to 31%. That partial sale generated more than $9-billion (about R119-billion) in cash for Naspers. At 31%, Naspers still has a significant and profitable stake in Tencent. This will keep generating healthy dividends for Naspers. But given the volatility in markets that’s always one misstep away, the question of whether Naspers should remain so exposed to one single stock is important.
Take Facebook, for example. This week, the Facebook share price suffered the biggest intraday loss in the history of capitalism — $120billion — after it announced its latest trading report. This was on the back of data privacy scandals and slowing customer growth underpinned by the fact that, at the end of the day, a limited number of people can sign up for the social network.
Similarly, Tencent’s rapid rise is also dependent on an ever-growing user base for its range of products. At some point it will also reach saturation.
The role of executives in such companies is to plan ahead of the inevitable slowdown in the consumer base and still find a way to generate good returns for investors. In that case, it becomes important for them to be able to control the various parameters that affect profitability. Indeed, in cases where executives are able to generate superior returns, their compensation should reflect this. A remuneration philosophy that strikes a balance between shareholder value and executive reward is regarded as fair. But even in that case, there is a need to remain cognisant of the excesses that might be derived by executives under this model.
The Naspers remuneration model is a case in point. Over the past year there has been tension between institutional investors and the board regarding remuneration. The matter reached a deadlock in 2017, when more than 70% of ordinary shareholders voted against the remuneration policy.
The basis for the revolt was the suspicion that the incentive component of the remuneration philosophy allowed executives to enjoy the upside linked to the Naspers share price, driven primarily by the growth of Tencent.
Given that Naspers is nothing more than a passive shareholder in Tencent, with little direct influence on the decisions that underpin its growth, it seemed perverse that the current executives were being handsomely rewarded for nothing more than simply keeping the investment in Tencent.
It also didn’t help that the Naspers remuneration report left shareholders none the wiser on how executive compensation worked and, in particular, how it accounts for the fact that the executives have no direct contribution to Tencent’s performance.
On the back of the 2017 revolt, Naspers has gone all out to be more transparent and accessible in its latest remuneration report.
In particular, it has clarified that the executive compensation structure does indeed acknowledge that Naspers has two discrete businesses: one with Tencent and the other without Tencent. Consequently, the report implies that the executives are not on a runaway gravy train where Tencent’s growth guarantees a big payday. In addition, new clawback provisions allow Naspers to get back money paid to executives if it turns out that gross misconduct occurred under their watch. Additionally, the CEO is now required to maintain a shareholding in Naspers stock that is at least 10 times his basic annual salary.
Whether investors will adopt this remuneration report remains to be seen. We do know that the CEO stands to cash in more than R1.6-billion. This might still leave investors wondering if there is a line to be drawn between justifiable compensation and objectionably excessive reward.
Investors may continue to wonder about valid pay and excessive reward