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OPINION

Cocking a snook at Foxtons

Cocking a snook at Foxtons
April 28, 2021
Cocking a snook at Foxtons

Until this year, Nic Budden had the distinction of never having received anything from his long-term share awards since becoming the chief executive of Foxtons (FOXT). Since taking the reins in July 2014, his performance tests have failed to trigger any allocation of shares.

Foxtons “has been significantly influenced by the prolonged sector downturn over the last 6 years which is due to external factors largely outside of management’s control”, according to its directors, which sits oddly with the better performance by its competitors in sales, lettings and mortgage broking. And “this does not reflect the strong performance and success of the CEO in maintaining the Company in a strong position throughout the downturn and progress with the Group’s strategy.” Five-star ratings on Trustpilot from customers appear to support this, but they conflict with reports elsewhere of aggressive sales practices, rudeness and lack of communication by its workforce.

“A weakness of the current remuneration policy was the difficulty in accurately setting meaningful long-term targets due to significant uncertainty and cyclicality challenges in the external environment in which Foxtons operates,” Alan Giles, who chairs the remuneration committee, wrote in the 2019 annual report. This “makes the timing of such awards more relevant than the actual performance of the Company and in practice does not encourage a longer-term focus for the Executive Directors because of the challenge of setting realistic targets three years in advance.”

 

Money for Nothing

The solution? To scrap the long-term performance conditions by introducing a Restricted Share Plan (RSP). It’s restricted because participants have to wait for three years before they receive the shares, and then another two before they can be sold. But what Foxtons introduced was not a share plan but a 10-year nil-cost option, under which Mr Budden will have a further five years to choose when to have the shares transferred into his name and when to sell them. By increasing flexibility and reducing the risk, this grace period makes a nil-cost option worth more than straightforward shares.

The remuneration committee says that this will enable Foxtons’ executive directors to build up “significant shareholdings” to align their vested interest more closely with shareholders. This should “ensure a long-term focus over the business cycle and focus [them] on the longer-term sustainability for the Company”. Most shareholders fell for it – the dissenting vote was only 21 per cent at last year’s AGM.

Few realised that the low share ownership by executives was a problem of the directors’ own making. Like many companies, Foxtons requires its top executives to own a minimum amount of its shares – not easy when its annual bonuses were paid solely in cash, and its share awards failed to pay out. Yet when Mr Budden became chief executive, he owned 1.3m Foxtons shares worth 290p each, worth over four times his salary. By the end of 2017, the share price had fallen to 82p, reducing this ratio to 1.9. But instead of topping them up to reach the required 2x threshold, he sold a million in April 2018.

By the end of 2020, the share price had slumped to 55p and the ratio had fallen to just 0.44. But by then he had also received his first nil-cost option RSP award over shares to the value of his salary. If these were included, the windfall gain from the subsequent rise in the share price would have helped lift his shares/salary ratio to a notional 1.8.

 

ESG defiance

Like other estate agents, Foxtons closed all its branches in the Spring of 2020. The government subsidised it with £4.4m wages for its furloughed staff and another £2.5m, mainly as business rates relief. With cash draining away, Foxtons placed (ie created and sold) £21m shares at 40p each. Yet this year, when it made windfall profits from the stamp duty holiday, instead of paying back the £6.9m, it announced a buyback of up to £3m of its shares, paying about 50 per cent more than it had sold them for a year earlier.

Mr Budden was rewarded with a bumper £1.6m pay package. In 2020, he was handed an RSP award with a notional value of £569,400; he also received a pension payment of 10 per cent of his salary (when other employees received 3 per cent) as well as a bonus. At this year’s AGM on 22 April, shareholders were advised to vote against his pay, but a 58 per cent vote cocked a snook at governance and supported it. The table contrasts the growth in Mr Budden’s remuneration with the destruction of shareholder value during his tenure.

 

 

2014

2015

2016

2017

2018

2019

2020

Chief executive pay (£000's)

         841

         856

         982

         914

       910

       1,257

      1,605

Foxtons market cap £m

         500

         530

         290

         228

       148

         227

       181

Chief executive shares owned (000’s)

       1,305

       1,305

       1,305

       1,305

       305

         305

       455