NZX proposes a ridiculous increase to the director's fee pool
Or: Buffett on compensation misalignment
NZX Limited — Compensation Misalignment — a +38% proposed increase to the director’s fee pool!
I would rather throw a viper down my shirtfront than hire a compensation consultant - Charlie Munger
We were taken aback to read a release from the NZX today - nestled amongst their annual shareholder’s meeting documents — a proposed resolution to increase their total director’s fee pool by a whopping +38.00%
What is worse is they hired consultants - PWC - to provide an independent benchmarking report. To paraphrase Buffett — “I’ve never seen a compensation consultant suggest fees should be lower”. To the surprise of nobody — absolutely nobody — PWC conducted a study which suggested the compensation the Board of NZX receives is around ~78% of the market median1. Nowhere in PWC’s report do I see the word “performance”, whilst performance is written just once (count ‘em) in the NZX’s annual meeting papers. This seems amiss — surely board compensation should be linked to stock performance? We’ve made a chart below which shows the stock performance of NZX Ltd versus the proposed increase in the director’s fee pool.
Any board that needs to hire consultants (at the shareholder’s expense) to justify a grossly oversized pay increase is doing something wrong — especially when stock performance has sat at ~0% since 20162. We think there is no grounds for an increase of the compensation pool — PWC should’ve compared stock performance of comparable companies and board compensation relative to this.
Here’s Buffett on compensation again:
And – surprise, surprise – director compensation has soared in recent years, pushed up by recommendations from corporate America’s favorite consultant, Ratchet, Ratchet and Bingo. (The name may be phony, but the action it conveys is not.)
NZX writes:
To attract and retain talent for the Board and ensure strong governance of New Zealand’s stock exchange, the Board considers that it is essential that NZX pays market rates for fees.
I will leave you with the question what kind of talent NZX has retained given its muted stock price performance. Here is Buffett, again, with what he considers to make a good director — Buffett is eminently more qualified than myself to suggest what makes a good director. Take it away, Warren:
Charlie and I believe our four criteria are essential if directors are to do their job – which, by law, is to faithfully represent owners. Yet these criteria are usually ignored. Instead, consultants and CEOs seeking board candidates will often say, “We’re looking for a woman,” or “a Hispanic,” or “someone from abroad,” or what have you. It sometimes sounds as if the mission is to stock Noah’s ark. Over the years I’ve been queried many times about potential directors and have yet to hear anyone ask, “Does he think like an intelligent owner?” The questions I instead get would sound ridiculous to someone seeking candidates for, say, a football team, or an arbitration panel or a military command. In those cases, the selectors would look for people who had the specific talents and attitudes that were required for a specialized job. At Berkshire, we are in the specialized activity of running a business well, and therefore we seek business judgment.
We encourage NZX stockholders and our clients to vote against this heinous proposal at the AGM. I will be there. Look for the short person with hair resembling that of Alex Karp.
A small favour
At present this newsletter is free — about 8,500 of you read it and it makes my heart soar whenever one of you emails me. I have a favour to ask — and you know I never ask for anything from you. I’ve got some questions about a theoretical fund that would invest in the stocks we talk about here a lot. If you took the time to respond to the following questions it would mean a lot to me — thank you in advance. I’ll shout you a beer.
Briefly noted
Nice to see DGL move back toward the 70c mark — it was oversold after results and appears to be on the ‘up and up’.
Rakon — paging Lorraine again. Where is the board’s accountability to the market on this?
Hong Kong & Shanghai Hotels Ltd — I wrote a little bit about this oddball investment here and it’s been a weird one in the model portfolio for a while. They own The Peninsula Hotels, as well as some luxury real estate that hedge fund billionaires have bought in London, some office buildings in Hong Kong, a golf club, etc — it’s a collection of high-value assets and arguably one of the world’s best hotel brands (Peninsula over Aman any day, IMO). It’s owned by the Kadoorie family, one of the oldest Hong Kong families (think Rothschilds who went East) — Sir Michael, the patriarch, has a centuries-long view for the company — worth reading this piece in the FT.
“This is a company that looks 100 years ahead,” Kadoorie says; but it’s also one that knows to trade, in ways tangible and more ephemeral, on its near 100-year history. I ask him if Marino – the flamboyant New York architect known for directional retail spaces for Louis Vuitton, Chanel and Fendi (and for Cheval Blanc Paris, the LVMH-owned hotel that is Peninsula’s prime competition there) – appreciated the need to interpret those signifiers. “What Peter brought was what we requested, and that was a lightness that is not necessarily traditional in London,” he replies. “He brought in, for an international guest, a certain levity. We did not want to be another [traditional] London hotel.”
We like LVMH and we like Kadoorie — as we have often said, luxury has unique pricing power that is hard to replicate (add into that the value of Hong Kong Shanghai’s real estate across the globe, and you’ve got a very valuable asset).
Anyway, nice to see the stock has appreciated +10% over the past month. The stock has net assets of 21.93 HKD per share and trades at 6.00 HKD. It’s a family owned company trading at a significant discount to its NAV with very valuable brand and real estate — of course I like it.
You can read it here — it’s a whole hodgepodge of companies; some which have down abysmally — Synlait — and others which trudge along — Napier Port Ltd.
Of course, NZX pays a good dividend — I take the view that if you only want a good dividend with 0% stock price appreciation, you might as well buy a high yielding bond, put it in a TD, or do something else with the money.