Yesterday was the start of many people’s holidays. But two company chief executives are going to be taking longer holidays than they expected.
The Executive Chairman of the AA Plc (AA.) Bob Mackenzie has gone. The announcement from the company said he “has been removed by the board….for gross misconduct, with immediate effect”. According to press reports, this arose from a fracas in a bar, although there is also a suggestion that he may be suffering from a mental illness. Some newspapers just suggested it was a “Jeremy Clarkson moment”.
The share price of the AA dropped 14% on the day, which probably reflects the problems that can arise when you have an Executive Chairman dominating a business. It’s not recommended corporate governance practice and personally I tend to avoid companies who have them.
The AA is an interesting organisation which provides breakdown cover and other services for many motorists. Back in 1905, it was formed to warn drivers about speed traps. It later transmogrified into a commercial organisation when the members sold out. Now it is one of the largest operators of driver education programmes such as speed awareness courses. That has become a booming industry and more than a million drivers are now attending speed awareness courses each year. This has resulted in the funding not just of commercial organisations such as the AA but more than £40 million per year goes to the police and local authorities.
The other departure yesterday was of founder and CEO of Blur Group (BLUR) Philip Letts. This was a company that listed on AIM more than 5 years ago and in 2014 traded at a price as high as 665p. It’s now 3p.
This was a company that was a typical “concept” stock. It was going to revolutionise the commissioning by SMEs of services which is still very much an informal market by introducing an internet market. Mr Letts must be a very persuasive person to keep the business alive this long by repeated fund raisings. But it’s a typical example of how unproven business models are very risky investments. Most companies would have changed the business focus and the CEO long ago, or simply wound up, but Mr Letts persisted.
Yesterday the temporary suspension on AIM was lifted as they finally published some accounts. The results were slightly improved in that losses were reduced, but it still looks an unviable business unless the new management can make substantial changes. Mr Letts was removed from the board effective on the same day.
Incidentally I do hold a few Blur shares – market value now £6 so I hope that has not prejudiced my comments. If you get enthused by the hype surrounding some early stage companies, and the persuasiveness of the management, there is one simple thing to do. That is to only invest a very small amount until the company proves its business model and actually shows that the business is likely to be profitable. Revenue alone is not enough, because anyone can generate revenue by spending lots of your money.
The other protection is when the company fails to achieve its stated business plan, to simply sell and move on. Ignore the tendency to “loss aversion” where you hold the dogs in case of recovery. Or if you fear missing out on a big recovery, simply reduce your holding to a nominal level as I did on Blur and saved myself even more money.
So I invested a very small amount initially and then reduced it later to a miniscule level.
Just one point to note is that the company actually spells its name “blur” rather than “Blur” as I have used above, thus ignoring the rules of English grammar. Such affectations in companies to be “different” are always a bad sign in my experience.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
One point about the activities of AA and their subsidiary AA DriveTech who run speed awareness courses is that for the first time in English law, it is now allegedly legal to pay the police to drop prosecutions – all you have to do is promise to attend such a course. There is no evidence that it has any benefit in road safety. More information on this dubious practice is present here: http://www.speed-awareness.org (a campaign run by the ABD against it).
More views from ShareSoc directors on the situation at the AA have been covered in The Standard here: http://www.standard.co.uk/business/aa-governance-attacked-after-chief-bob-mackenzie-is-fired-a3602356.html
Mental illness is a sad problem and employees with such problems at all levels in the company should be treated fairly and sympathetically. The CEO role of a quoted plc is enormously challenging. There are huge demands on personal time and pressure to deliver results. A combined Chairman and CEO role only adds to these pressures. That is one reason why corporate governance experts think the combined role is bad. The other directors should have foreseen this problem much earlier. It is probably no co-incidence that they have only acted after poor results and what The Sun has reported as “lashing out at a colleague in bar”.
At the 2017 AGM, just 3.6% of investors voted against the re-election of Bob MacKenzie as combined Chairman and CEO. The 96.4% who voted for the combined role should be ashamed and apologise.
My take on the company saying it is gross misconduct, is that this is a breach of contract and so they will not have to pay a termination payment (which tend to be 12 months pay for CEOs). My take on his family saying that he resigned and he has mental health issues, is that his legal advisers have told him/them to say this and to seek to pursue a claim for unfair dismissal and/or constructive dismissal. An industrial tribunal can recommend the claimant is paid damages and reinstated into job. In practice this claims take some time to get to tribunal and tend to be settled out of court.
Prima facie, there seems to have been a bit of a bullying culture and now the Board is seeming to have adopted a very aggressive (legal negotiating) stance in dealing with an employee who may be ill.
The IPO was at 400p and the share price is now 212p. About £200 million of market cap has been lost this week, although arguably the value might already have been destroyed but the information was only available to the market place when the Board announcement about Mr Mackenzie was made. Should one sell AA or should one buy? It looks like it’s a dog. I shall wait and see if they manage to recruit a credible CEO (on a modest salary but with lots of equity incentives if he/she delivers) and can elucidate a credible business model and business strategy before I buy any AA shares.
My blog response above may have hit the nail on the head. The Telegraph today is reporting that The former executive chairman of the Automobile Association who was sacked after a Jeremy Clarkson-style bust-up with a colleague faces losing share options worth nearly £100 million.
Bob Mackenzie, 64, was in line for a massive payout if the company hit a series of annual targets.
But, his dismissal for gross misconduct on Tuesday means the AA can now strip him of the 33 million performance related shares he was given when he floated the company on the stock exchange two years ago. Those shares could have been worth up to £95 million if the AA’s stock market value reached set levels over the next few years.
According to the Telegraph – “For Mr Mackenzie to have been eligible for the payout, he and the other executives were required to generate a 12 per cent annual return for investors over five years. However, a clause in the contract dealing with these special options refers to how the AA can “acquire all of his management value participation shares” if they become “bad leavers” who are dismissed.”
By coincidence there was another announcement this week on a company who have an Exec Chairman who is also CEO – The Real Good Food Company. They disclosed that illegal payments of £1.2m were made to Peter Tiotte, their Exec Chairman who is also their CEO, in undisclosed Consultancy fees. They also made illegal consultancy payments to Peter Salter one of their Non Execs who has now resigned. Peter Tiotte has not resigned but he should. I went to their AGM a couple of years ago with David Stredder and we tackled Peter Tiotte about the lack of diversity on his Board and also no Independent Non Execs; he basically said he couldn’t care less what we thought. It is another example of poor Governance resulting from a Board who have an Exec Chairman and no independent Non Execs to challenge him/her. It also raises, yet again, the role of shareholders in ensuring Good Governance in the companies they invest. Institutional shareholders usually don’t attend AGMs (they have small teams and many shareholdings) so they don’t engage enough with the Directors of companies they invest in. Retail shareholders are often disenfranchised by having their shares in ISAs which means they are held in Nominee accounts and so usually don’t get told about AGMs, and they don’t get copies of Annual Reports. It is retail shareholders who could help improve Governance in UK companies if they were always put on the shareholder registers (instead of being invisible in Nominee Accounts) as they tend to be more engaged with the Directors of the companies they invest in.