South Africa’s largest pharmaceutical manufacturer, Aspen Pharmacare, may have announced a relatively tepid set of annual results for the year ended 30 June 2019, but the anticipation of a reduced debt load freeing up cash flows pushed its share price up 12% the day after its results announcement.
Shareholders challenge Naspers’ executive pay structure
The annual general meeting of global internet group Naspers once again threw the spotlight on the relative lack of maturity in South Africa’s executive pay structures.
On Friday 23 August in Cape Town, one of South Africa’s largest asset managers declared publicly before the Naspers AGM that it would vote against at least one of the three resolutions regarding executive pay.
- In short, Old Mutual objected to the continued alignment of share incentive schemes with the Naspers share price performance, instead of specific executive performance targets.
At the centre of the long-running shareholder disgruntlement with Naspers’s executive pay setup is a share price almost entirely driven by the performance of Tencent, the Chinese internet giant in which Naspers holds just more than 31%.
- While management has acceded to shareholder demands to unlock value by spinning off several businesses, which make up the undervalued rump of the company, such as MultiChoice and its internet assets in Prosus, due to be listed on the Euronext Amsterdam exchange in September, the majority of shares awarded in Naspers’ executive management incentive scheme will still be based on share price performance, at least through 2020.
Aside from attempting to close the value gap between its underlying asset value and market capitalisation, the listing of Prosus will reduce Naspers’s weight on the Johannesburg Stock Exchange (JSE), over which the internet giant has exerted a gravitational force for years.
At the AGM, the Naspers management team alluded to its status as a top-10 global internet company via its R1.5trn market capitalisation, “with around a fifth of the people on the planet using our products and services”.
Shareholders, however, remained unmoved, voting squarely against endorsement of the company’s remuneration policy and its implementation.
- To see the policy through, the company’s controlling A shares – each of which carries 100 votes compared with a Naspers (NPN) ordinary shares with one vote each – were deployed in defence.
Naspers’s dual share structure, which has been in place since its listing on the JSE in 1994, has been a point of contention for ordinary shareholders, especially since the company’s meteoric rise on the back of its Tencent stake.
- The company defends its control structure, which sees voting control retained by unlisted A shares held by management structures, by saying it provides a moat against takeovers as well as continuity for regulators in the various jurisdictions in which it does business.
But complicated control structures are also well known for lacking shareholder oversight. In its July report on South African executive remuneration practices and trends, PwC says from its most recent discussions with institutional investors, “It is clear that the depth of expertise required from remuneration committees to set and monitor performance conditions, and critically assess the suitability of variable pay structures, remains lacking.”
Anelisa Keke, editor of the report, added, “Furthermore, a CEO who claims to be worth a king’s ransom must be prepared to back up that claim by accepting a suitably challenging set of key performance indicators.”
- She says it is clear that remuneration packages cannot be set by a company’s board alone – a finding that is adverse to the situation at Naspers and elsewhere in South Africa.
In proposing new ways to structure particularly long-term incentives, PwC suggests that an Economic Value Added (EVA) approach could be a more suitable performance metric.
“A question that is increasingly being asked is whether prospective performance conditions can be effectively set in an objective manner, and further, the extent to which remuneration committees are subject to executive pressure or bullying when setting performance targets.
In addition, performance against specific accounting metrics, such as earnings per share or return on equity or share price metrics on the one hand, and the performance of the company on the other hand, has been questioned by some commentators,” the report says.
- Proponents of EVA argue that it creates “a simpler and more factual alignment with ‘real’ or ‘economic’ value added, and is not confused by accounting technicalities,” the report says. “In addition, the factors influencing EVA are considered to be less manipulatable by ‘creative accounting’ and more controllable, as well as taking into account the ‘psychology’ of pay.”
- While the basic calculation of EVA is determined through blending net operating profit after tax with the weighted average cost of capital and invested capital, the report finds that a balanced scorecard including these factors and adding other environmental, social, and governance elements could be the most workable format for maintaining control over executive pay.
Bottom Line: Even if Naspers has managed to force through its own executive pay schemes, expect the pressure to be slowly ratcheted up as ideas around shareholder value take hold in South Africa.