Brait: Giving the chairman stick over some sticky issues
Plenty of ire for its decision to wind up an executive incentive scheme at a massive cost to the company
Brait has drawn plenty of ire for its decision to wind up an executive incentive scheme at a massive cost to the company. Brait chairman Chris Seabrooke explains why, in the face of public opprobrium, they’re working on another executive incentive plan.
We’ve obviously got a team that have competitive offerings from time to time, who we need to retain in the interest of shareholders. So there’s no question that we need to design a suitable scheme, the key is the word suitable.
It would be hard to call the last scheme a retention scheme, as only four of the original nine-member investment team are left.
The scheme was designed with best intentions and put to shareholders, 94% of whom voted in favour. The outcome of the scheme, obviously relative to the share price, was not where anybody would have liked it to be.
There’s no scheme that can say: we’re locking you in for 10 years, you can’t go anywhere else, you can’t do what you want to do. We want to design something that attracts people to stay but it’s always difficult, when a scheme goes underwater, you’re sitting with a situation where you can’t re-base the scheme because that’s not fair – but you’ve suddenly got no long term meaningful incentives for people.
That’s why the design has to be done carefully and again one does the design on various assumptions but sometimes they don’t turn out as expected, as with New Look.
It’s said that Brait’s assumptions were too aggressive ...
I think there are two levels of assumptions: the one is the market’s assumption and [that] was evident in the material premium that the share price was for a period to net asset value (NAV) which is highly unusual for an investment company. As far as the management was concerned, they came in at NAV originally with a 10% annual hurdle rate, that they had to get over. And 10% is normally a very acceptable rate in SA where customarily it’s CPI plus either 2% or 4%. So the structure was not wrong. It just didn’t turn out correctly. If it had and the share was R200, nobody would begrudge the executives what they made.
Why re-incentivise members of the team who are still there? Aren’t these the guys who got Brait in trouble in the first place?
The team, supported by the board, made an investment which didn’t work out. It’s not unusual, nobody has a 100% track record. So our assessment then has to be: are these the people to take Brait forward and our view is yes they are. We have already added members to the team to replace some who’ve left and no doubt we’ll add further going forward.
Again, you’ve just got to look at long-term schemes across the country. I can’t think of one where an executive’s downside is more than working for 10 years and getting nothing, okay. This one, in fact they lost money because they had to write their own cheque out upfront. So in this case there was actual cash, physical pain. But if you look at all the schemes across the country you’re not going to find one that I’m aware of, anyway, and I sit on quite a few boards, where at the end of the day something goes wrong you take the executive’s house away – they don’t exist.
That upfront cost was only a fifth of the value of shares they were entitled to?
It was a lot of money for the average employee, in some cases it was a couple of hundred million. But the guys wanted the upside and this was part of the change for Brait [from a] private equity model, it was a very unusual situation in 2011.
Brait puts its NAV at R55. Given where the share is trading, doesn’t that imply that assumptions about its asset values are wildly optimistic?
If you look at the SA market and you take 12 of the investment companies and you calculate the discounts to NAV, the average is just under 40%. So now, as Brait should it be higher or lower than what is currently in the market?
In my view we should have a much narrower discount because leaving aside New Look, we do have hard currency, well-established assets. But when Brait does its valuations, Brait has the ability to cause a sale of any assets in time because it has control. The disclosures are there and people may agree or disagree but they’ve got the ability to do their own calculations.
Maybe one of the issues is that the people who got Brait into its New Look mess are still there, like CEO John Gnodde.
If you look at the other assets, they are generally performing fine. At the time New Look was bought, UK retail was fine: here was a well-established chain, growing comfortably, management at the time was fine. The UK market is appalling at the moment, everybody knows that and it’s not like New Look is performing poorly and the rest of the sector is performing well. In my view you learn from the mistakes and you carry on. John has the board’s support.