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Fri 12th Sep 2014 - JDW's Tim Martin launches attack on corporate governance rules in results
JDW’s Tim Martin launches attack on corporate governance rules in results: JD Wetherspoon has reported that its like-for-like sales have risen 6.3% in the six weeks to 7 September, up from 5.5% for its full year. Total sales for the year climbed 10% to £1.409bn. Profit before tax was up 3.1% to £79.4m before exceptional items. Founder Tim Martin has also updated shareholders on the company’s property litigation, including an article he wrote for Propel Info – and also launched a scathing attack on corporate governance rules. Martin said: “I am pleased to report another year of progress, with record sales, profit and earnings per share. The company generated £600.2 million in taxes, an increase of £48.7 million, compared with the previous year, equivalent to £662,000 per pub. We now employ over 34,000 people, an increase of over 3,000 in the last year. In addition, £29.2 million in bonuses and free shares was paid to employees, 82% to those working in our pubs. The biggest danger to the pub industry is the VAT disparity between supermarkets and pubs. Wetherspoon, along with many pub and restaurant companies, is supporting Jacques Borel’s VAT Club on Tax Equality Day (Wednesday 24 September 2014) to publicise this inequality. A similar danger relates to the general tone of corporate governance advice and practice which has helped to create unstable board rooms, often preoccupied by the wrong considerations. For example, many do not even recognise the danger from the VAT disparity, despite the high weekly level of pub closures which has lasted for many years. In the six weeks to 7 September 2014, like-for-like sales increased by 6.3%, with total sales increasing by 11.4%. The company is aiming for a reasonable outcome in the current financial year.” Martin added: “The company opened 46 pubs during the year, with five pubs sold or closed, resulting in a total estate of 927 pubs at the financial year end. The average development cost for a new pub (excluding the cost of freeholds) was £1.64 million, compared with £1.55 million a year ago, as we continue to increase expenditure on kitchens, customer areas and beer gardens. The full-year depreciation charge was £58.1 million (2013: £53.1 million). We currently intend to open around 30-40 pubs in the year ending July 2015.”

Property litigation:
On property litigation, Martin said: “As reported at the interim results in March 2013, Wetherspoon agreed on an out-of-court settlement with developer Anthony Lyons, formerly of property leisure agent Davis Coffer Lyons, and has received approximately £1.25 million from Mr Lyons. The payment relates to litigation in which Wetherspoon claimed that Mr Lyons had been an accessory to frauds committed by Wetherspoon’s former retained agent Van de Berg and its directors Christian Braun, George Aldridge and Richard Harvey. Mr Lyons denied the claim - and the litigation was contested. The claim related to properties in Portsmouth, Leytonstone and Newbury. The Portsmouth property was involved in the 2008/9 Van de Berg case itself. In that case, Mr Justice Peter Smith found that Van de Berg, but not Mr Lyons (who was not a party to the case), fraudulently diverted the freehold from Wetherspoon to Moorstown Properties Limited, a company owned by Simon Conway. Moorstown leased the premises to Wetherspoon. Wetherspoon is still a leaseholder of this property - a pub called The Isambard Kingdom Brunel. The properties in Leytonstone and Newbury (the other properties in the case against Mr Lyons) were not pleaded in the 2008/9 Van de Berg case. Leytonstone was leased to Wetherspoon and trades today as The Walnut Tree public house. Newbury was leased to Pelican plc and became Café Rouge. As we have also reported, the company agreed to settle its final claim in this series of cases and accepted £400,000 from property investor Jason Harris, formerly of First London and now of First Urban Group. Wetherspoon alleged that Harris was an accessory to frauds committed by Van de Berg. Harris contested the claim and has not admitted liability. Before the conclusion of the above cases, Wetherspoon also agreed on a settlement with Paul Ferrari of London estate agent Ferrari Dewe & Co, in respect of properties referred to as the ‘Ferrari Five’ by Mr Justice Peter Smith. Further shareholder information about these cases is available in a short article which I wrote for the trade publication Propel.”

Corporate governance:
Martin also opened up a new campaigning front with an attack on current corporate governance. He said: “Last year, I expressed scepticism about aspects of corporate governance ‘best practice’, based on the observation that, in recent years, compliant pub companies had often fared disastrously in comparison with non-compliant ones. In particular, pub companies in which the CEO became chairman and which had a majority of executives and ‘non-independent’ non-executives, usually with previous experience in the pub trade, avoided making the catastrophic errors to which compliant companies seemed prone. Compliant companies, with a so-called independent non-executive chairman and dominated by non-executive directors, often with a very small number of executive directors, tended to be excessively influenced by City fashions, creating instability and poor performance as a result. In addition, I expressed the view that performance-based pay was, in effect, a double-edged sword, since setting targets for achievement often resulted in, for example, excessive debt as a means of enhancing earnings, as well as other distortions in behaviour. It was noted that banks in the credit crunch were also compliant, but this had not prevented disaster. These views, clearly set out in last year’s chairman’s statement, have not been contradicted by any party in the interim. No questions have been raised about this aspect of the chairman’s statement in meetings between the company and our shareholders. Indeed, corporate governance issues have almost never been raised by shareholders in all of our meetings with them in the 22 years since our flotation on the stock market. This year, several Wetherspoon executives and I have considered the UK Corporate Governance Code (2012), to try to throw light on this divergence in performance, bearing in mind the problems in recent times at companies like Marks and Spencer, Tesco and Morrisons, with ever-changing compliant boards struggling to run what were previously successful and stable companies. The general view of our management team is that the UK Corporate Governance Code does not, as it purports to do, ‘facilitate effective, entrepreneurial and prudent management that can deliver the long-term success’ of companies. The main fault we see is that the code is much too ‘City centric’ and ‘board centric’, emphasising the importance of meetings between shareholders and the chairman and between various permutations of board members. These meetings may be desirable or necessary, from time to time, but are much less important than directors of a pub company, for example, visiting its pubs and making a note of the comments of staff and customers (as is the practice at Wetherspoon), for the purpose of board and other discussions. The road to hell in pub companies lies in emphasising the views of shareholders over those of employees on the ‘front line’. This point was best summed up by the legendary Sam Walton of Walmart in ‘Made in America’: ‘As companies get larger … it becomes … tempting to … go to New York and speak to the … people that own your stock … I feel our time is best spent with our own people in the stores … Not that we don’t go out of our way to keep Wall Street up to date on what’s going on with the company.’ He further stated: ‘What’s really worried me over the years is not our stock price, but that we might someday fail to take care of our customers or that our managers might fail to motivate and take care of our (employees)…. Those challenges are more real than somebody’s theory that we’re heading down the wrong path…. As business leaders, we absolutely cannot afford to get all caught up in trying to meet the goals that some … institution … sets for us. If we do that, we take our eye off the ball…. If we fail to live up to somebody’s hypothetical projection for what we should be doing, I don’t care. We couldn’t care less about what is forecast or what the market says we ought to do.’ As Sam Walton indicated, it is clearly a vital priority for pub and retail company directors, for example, to keep in touch with employees and customers’ views, yet the code does not mention these aspects at all. In this respect, the theoretical separation of the running of a board and a company, as advanced by the code, is a highly dangerous concept. In order to run a business well, the directors need to appear regularly on the ‘front line’. This excessive emphasis on City/shareholders’ views is likely to stem from the nature of the FRC board itself, whose membership is dominated by individuals, no doubt well intentioned, with finance and City backgrounds, with few or no representatives from other spheres. Recent reports have stated that the average institutional fund manager turns over his share portfolio about twice a year. Inevitably, in these circumstances, advice from an average fund manager may tend to be based on short-term considerations and of no, or limited, use to directors. Sensible institutional shareholders recognise these parameters and will offer an opinion, if asked, and mostly restrict themselves to asking questions, enabling them to form an investment view. Anyone who has read the works of Benjamin Graham or Warren Buffett will be aware of their views that markets often suffer from deep and serious mental instability, so the idea of consulting ‘Mr Market’ as a regular source of wisdom is unrealistic and potentially dangerous. On the other hand, by concentrating on listening to the views of employees who understand best the challenges facing the business, directors will make a positive contribution to their companies. As an illustration of this imbalance, a word search indicates 65 references in the code to shareholders, three to employees and none to customers - a reversal of this ratio would indicate a better sense of priorities. Emphasising the pitfalls, the only serious approach from a shareholder, regarding Wetherspoon’s corporate strategy since our 1992 flotation, concerned the desire of one large shareholder, Hermes, in 2005, which urged Wetherspoon to start converting its pubs to tenancies, in order to take advantage of the higher share valuation which applied to Punch Taverns and Enterprise Inns at that time. This was not helpful advice then and appeared to us to be focused on short-term share performance at the expense of any other considerations and was advice which the board chose not to follow. The current advice that non-executives should remain on boards for a maximum of nine years, combined with the normal short tenure of chief executive officers of four to five years, has created boardrooms in which inexperience and short-term City considerations dominate and in which there is a demoralising instability for employees. As one sage has stated, ‘when experience is not retained, infancy is perpetual’. The code should also, we believe, be franker in admitting to the shortcomings of current and previous guidance. Remuneration committees, for example, which were introduced to control pay which was perceived to be excessive, have overseen an explosion in the levels of remuneration. The ‘pay for performance’ mantra has meant, in effect, the setting of complex targets for bonuses which have greatly lengthened and complicated reports and accounts, but have exacerbated, not alleviated, the basic problem. As a general observation, far too much financial reporting is couched in financial jargon and ‘business speak’, making corporate documents difficult to understand and being contrary to the stated approach of making reporting more transparent. In conclusion, it is our view that corporate governance, as reflected in the code and in common practice is, in many respects, deeply flawed as regards pub companies and probably many other types of company as well. The boards of many PLCs are often highly unstable owing to their domination by non-executive directors on relatively short-term contracts. A greater percentage of executive representation on the board, greater emphasis on all directors liaising with staff on the front line, rather than shareholders, and less emphasis on pay for performance are the key elements which need to be modified.”

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