Thursday, July 19, 2018

That's Not The Way Share Market Works



Encik Shahril of Sapura Energy had to defend his total take-home package of around RM70m a year for the past few years. Specifically since FY 2014.

His defense was that there was a covenant. If he won't sell his shares, the company would get better interest rates on loans. Seemingly to imply that some major lenders will only lend to Sapura Energy only if he stayed.

Errr, that's not the way a share market works. The remuneration committee cannot and should not take into account whatever "covenant" with lenders intimated with the CEO. It is like saying I am the CEO and I had to sell my mother's house so that I don't have to sell my shares in the company, so that share price doesn't collapse and the lenders only wanted to deal with me as CEO. That's not the way a share market works... I think.

Are you telling me that all 1,000 banks in Asia would not lend to you unless you stay as CEO and do not sell your shares? Even if that was the case, was the RM50-80m a year from FY2014 to compensate you for "opportunity cost" and "losses"? Who compensates the minority shareholders' losses???? That's not the way sharemarket works.

The remuneration committee can choose to reward the CEO if there had been reasonable stretch targets met, or even positioning the company to meet future challenges. The bottom line is that whatever you reward the CEO must have been to the benefit of ALL SHAREHOLDERS, either in new earnings achieved or price appreciation. There has been none of that.

You can try to argue that the CEO has positioned the company to face the new market conditions and restrategize the company's direction over the last few years. Hence all shareholders will benefit from that. Again, while that is all good, IT MUST BE REFLECTED IN EARNINGS and PRICE APPRECIATION. If the positioning is so good for long term, then give la bonus WHEN these long-term strategies pan out. NOT BEFORE THAT.





The market cap of Sapura Energy has been between RM3.3bn to RM4.5bn over the last 12 months. At RM80m a year, that means the CEO gets approximately 1% to 2% of total market cap of the company a year. If the company continues to lose money, or even break even for 10 years... it means the CEO would have gotten between 10% to 20% of the market cap of the company for not doing terribly well.

Mind you Encik Shahril owns just 16%, which translates to a value of RM520m to RM720m. Now put that in perspective, RM70m-RM80m in compensation a year is a bit much.

That's certainly not how the share market works. I think.


(above is a copy of the remuneration framework of a good listed company ... in this case, it was Apple Inc.)

It is not just at Sapura Energy. Just go and examine the total board compensation, in particular to the CEO, of the following companies. The board remuneration is totally out of whack with whatever business metrics you want to use to measure good or great performance:

Genting
KNM
Salcon
Maybank
IHH Healthcare
IOI
Maxis
TA Enterprise
YTL

There are those who are owner controlled, which makes it difficult when they pay themselves an over the top amount. You already owned a controlling stake, if you perform well, your equity will rise. Be like Li Ka Shing, he pays himself HK5,000 dollar a year as compensation.

1 comment:

Andrew said...

Sure sounds like a blackmailing strategy to me. Greenmail kinda thing.

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