Justification?
What’s Mr Cowgill done to deserve this extra £6m? The reasoning is somewhat thin. First, is that he’s gone for three years without a long-term incentive plan (LTIP) award and for six years without any pension contribution payments. This would just be dismissed as tough luck for anybody else. And anyway, the rest of his pay went up by over 10 per cent last year, presumably to compensate him.
The other reason given is JD’s exceptional performance. It beat its stretch target for earnings last year. Andrew Leslie, who chairs the remuneration committee, also points to Mr Cowgill’s success in expanding the UK business (where 45 per cent of JD’s profits are generated); acquiring Finish Line in the US, expanding JD there and in other new territories; managing to keep other parts of the business in profit despite challenging external conditions; and in finding a new chief financial officer from within the organisation.
A good performance, then, that entitles Mr Cowgill to his maximum bonus. That’s 100 per cent of his salary. Now double it (if that’s not a contradiction of the term ‘maximum’). The directors doubled his ‘maximum’ bonus last year too. And in 2017. And also in 2016. In total, over the past four years, Mr Cowgill has received £10.4m. And now, out of the blue, they want to lob him another £6m.
He’s received these bumper annual bonuses despite a Channel 4 programme in 2016 unearthing harsh working practices at JD’s Kingsway distribution centre. And then again, in May this year, the Independent likened JD’s warehouse in Rochdale to “a dark satanic mill” after (so it claimed) ambulances had on average had to be called to emergencies in the warehouse almost every week in 2018. There are also growing environmental concerns about the manufacturing processes involved in the sort of products that JD sells. In fairness, JD carries reasoned explanations in its annual report, but there seems to be somewhat of a disconnect between what goes on in practice, what the executive directors believe is happening, and what they are being paid.
A costly way of going about it
Quite frankly, awarding that £6m bonus is naïve. It’s not conditional on future performance, so it can’t even command the fig leaf of acting as a so-called incentive. The directors say that “the Remuneration Committee can obtain independent advice at the company’s expense where they consider it appropriate and in order to perform their duties. No such advice was obtained during 2018/2019”. So the three non-executives on the committee must have reviewed Mr Cowgill’s pay themselves. It shows. The bonus conflicts with JD’s pay policy, so shareholders’ approval will be sought at its AGM on 3 July.
In comparing Mr Cowgill’s pay with others, the published “single figure of total remuneration” could have misled them. Why? Because most companies have employee share plans and, when share prices rise, much of the amount reported in the single figure is due to investment gains. JD’s executives don’t risk their pay in this way because it has no share plan. It just pays in cash. And that includes its LTIP, which is run only for its chief financial officer.
Let’s suppose that JD did have a share plan and had awarded Mr Cowgill a million shares five years ago, when the share price was 81p. If JD had followed the normal practice, it would have bought shares in the market and held them in a trust until the maturity date. The share price now is over £6. Mr Cowgill would have received his £6m. But it would have cost JD just £0.8m – and saved shareholders over £5m (if you’re wondering who would have made up the difference, the answer is: the market).
Performance conditions that come with LTIPs (but not Mr Cowgill’s special bonus) are another safeguard. If the conditions aren’t met, the executives receive only some, or maybe none, of the bought shares. The company saves by reallocating the residual shares in the trust towards new awards.
Now for the irony. In their annual report, the directors say that “remuneration arrangements are determined throughout the group based on the same principle that reward should be achieved for delivery of our core business strategy and should be sufficient to attract and retain high calibre talent…” and it qualifies this by adding: “…without paying more than necessary”. Lean and mean, then. Except for those at the top.
Overboarded
It’s not as though running JD takes up all of Mr Cowgill’s time, for he chairs three other companies: United Carpets (UCG) (which also sells beds), Quiz (QUIZ) (the troubled clothing retailer) and privately-owned Roxor Group Limited (which retails bathrooms). He acknowledges that he’s far from the only one responsible for how well JD performs. “The commitment of our employees is crucial to our success,” he says in its annual report. “I would like to thank everyone in our businesses for their support in delivering another set of excellent results.” To achieve these results, JD keeps a tight grip on its store managers. Some burn out. They, in turn, keep a tight grip on their staff. Many are on low pay. Mr Cowgill says: “We are committed to giving them the quality of employment that reflects the significant contribution that they make to the group.” You’d think, then, that the remuneration committee would realise that if Mr Cowgill deserves a special bonus, so too do the people who are more directly responsible for those “excellent results”. Paying the management team partly in shares would give them a financial stake in the business. And had there been an all-employee share plan, that share price rise could have transformed the lives of some of JD’s 50,000 people and would have lifted morale no end.
Controlling shareholder
The reason JD cites for not having employee share plans is because of “its current shareholder structure” and “its lack of a large free float”. This sits oddly when about a million shares change hands daily in a £6bn company that’s about to enter the FTSE 100. Mr Cowgill himself has bought 247,000 shares over the past four years (no problem with the free float there) and owns 0.87 per cent of the company. His shares have gained on average about £10m a year since 2015 and are now worth over £50m, a gain that dwarfs his proposed £6m special bonus.
That “shareholder structure” refers to the 57 per cent of JD shares owned by the Pentland Group. Once publicly quoted, Pentland was taken into private ownership in 1999 by Stephen Rubin, who is now reputed to be a billionaire. His son, Andy, runs the operational side, and joined the JD board in 2016, ostensibly to advise on brand development outside Europe. He’s the only non-executive director who’s not on JD’s remuneration committee. But he could have headed off Mr Cowgill’s bonus, especially since he sits on the main board with the Pentland shares in his pocket.
Mr Leslie, who chairs JD’s remuneration committee, has a connection too. He used to be a Pentland director. He’s been a JD director for over nine years and so, although JD claims the contrary, governance guidelines no longer categorise him as independent.
New blood needed
Sound corporate governance can make a vital difference because it’s all about how companies conduct themselves. In the past, shareholders tolerated poor governance as long as companies produced impressive results. They then found out the hard way that if the businesses later hit a rough patch, that poor governance had many undesirable consequences. What, then, are the concerns about JD?
- A large bonus is being paid to the top executive for less than convincing reasons. Its scale seems neither proportionate nor is it contingent on his future long-term performance.
- Mr Cowgill has chaired JD for 15 years and he’s combined this with the top executive role since 2014. Investors expect these roles to be carried out by two different people.
- Non-executive directors are expected to resign after a maximum of nine years to ensure their independence of mind. Mr Leslie has served longer than that.
- JD has only four non-executive directors, of which only two are independent. Companies normally have more. Admiral (LSE:ADM), for example, which has a similar market cap, has two executive and eight non-executive directors.
- The three non-executives that form the remuneration committee have exhibited only a limited understanding of pay and admit that they have failed to seek outside help.
- Pay in JG costs more because it lacks employee share plans. Its people have missed out on sharing in its financial success.
Tough on Brexit; tough on the causes of Brexit
There are wider implications here. Brexit has intensified the backlash (from all political directions) againstanything perceived to be crony capitalism. Mr Cowgill’s £6m bonus adds fuel to the flames. Proxy voting agencies will condemn it, but unless the proposal is withdrawn before 3 July, Pentland’s vote at JD’s AGM will decide its outcome.
Pentland needs to consider how JD is run very seriously. One reason Mr Rubin (senior) gave for taking Pentland private in 1999 was to escape the bureaucracy imposed on public listed companies. But if our elected politicians perceive private owners to be promoting executive greed, the storm clouds of change are likely to gather for them as well.
