British telecom : It’s time for shareholders to shake-up BT’ Corporate Governance

In May 2018, BT (former British Telecom) announced that it would be cutting 13,000 jobs over the next three years, representing about 12% of its workforce. This decision is being taken as a measure to help reduce the Company¶s costs by £1.5bn following the accounting scandal last year which forced the firm to write down £530m on the value of the Italian portion of its Global Services.

While his CEO, Gavin Patterson, will leave the group this year, BT Plc (former british Telecom) holds its annual general meeting on the 11st of July. Expert Corporate Governance Service (ECGS) recommends its clients to oppose four proposals.

  • Opposition to the re-election of the Chairman, Jan du Plessis, due to lack of gender diversity at Board level

Jan du Plessis is not only chairman of the Board but also chairman of the nomination committee. The Board level of gender diversity is too low (22%) and in our view the chairman of the nomination committee failed to appropriately promote gender diversity.

  • Opposition to the re-election of Tim Hoettges, due to an excessive number of time committments

The director is not independent as he is the CEO of Deutsche Telekom AG, a shareholder of the Company, and his appointment letter reflects the terms of the Relationship Agreement between the Company and Deutsche Telekom. ECGS has concerns over his potential aggregate time commitments. Indeed, He serves as Chairman of T-Mobile US Inc, Chief Executive of Deutsche Telekom AG, Director of FC Bayern München AG, and member of Supervisory Board of Henkel AG & CO KGaA.

  • Opposition to special general meetings convened with a 14 day notice period

While this is a routine item in British AGMs,  non-British shareholders knows that it is very difficult to cast an informed vote when the notice period is shortened. British companies should stop asking for that and respect the minimum 21 day period in any circumstances.

  • Opposition to the remuneration report due to unchallenging performance targets and non-alignment with performance 

ECGS has many concerns about CEO’s remuneration.

The maximum annual bonus of 240% is above our limit of 150% of base salary and highlights the short-termism bias of the executive remuneration policy which led to poor results since Gavin Patterson took the leadership of the group. The Company used the following performance criteria: EPS (25%), Normalised free cash flow (25%), Revenue (10%), Customer experience (20%) and Personal objectives (20%). Normalized free cash flow increased from £2,782.0m to £2,973.0m during the fiscal year. Adjusted EPS fell from £0.289 to £0.279. Both the free cash flow target of £2,759m and the adjusted EPS target of £0.279 were below the level of actual performance in the previous year and, therefore, these targets are not considered challenging by ECGS.

For the Long-Term Incentive Plan, the Company used the following performance criteria: TSR (40%), Free cash flow (40%) and Underlying revenue (20%). Incentive pay is highly reliant on Free Cash Flow and underlying revenue, which are used to determine 35% of the 2017 and 2018 annual bonus as well as 40% and 20% of the LTI respectively. We are concerned that the FCF and revenue growth target level for grants made during the new 2018/2019 FY have decreased with respect to previous targets.

The quantum during the year is excessive. It may be broken down as follows:
Base Salary £997,000
Short-term Incentives (STI) – bonus £1,292,000
Long-term Incentives (LTI) – awarded fair value at grant date £2,460,736
Other £356,000
Total £5,105,736

The annual bonus is far too high in comparison to the efforts of the employees (reduction in workforce) and with the huge drop in stock price. There is a lack of leadership and a failure of the remuneration committee to align CEO’s pay with the stakeholders interest (employees, shareholders).

It’s time for shareholders to shake-up BT’ Corporate Governance!

Proxinvest, August 2018

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