To borrow a phrase from the 1980s, greed can be good – at least occasionally. Not convinced? Take a look at the example of the estate agency chain Countrywide. It is the UK’s largest house seller, controlling well known brands such as Hamptons International and Bairstow Eves along with over 50 others, and it has been in a terrible state over the last few years. Its shares have fallen from a high of over 600p back in 2014 to just 14p now. They are down 90% in the last year, and 70% in the last month. It has been forced to ask its shareholders for £140m in emergency funding to stop it collapsing.
This is, to put it mildly, a company in trouble. In the midst of all that, shareholders have strong-armed Countrywide into scrapping an executive pay scheme that would have seen its senior managers collect up to £20m. Under the plan, chairman Peter Long, who took an executive post after the CEO Alison Platt was ousted, would have received shares in the business. But the influential advisory service Institutional Shareholder Services labelled the scheme “excessive” and “unnecessarily convoluted” and it was withdrawn under pressure from the owners of the business.
A just reward for challenging work
You can argue about the finer points. Countrywide’s scheme may well have been far too complex and a bit over the top for the size of the company. Even so, it is important to remember that this was a turnaround – and there is a strong case for treating turnarounds differently from other companies. Countrywide may well not survive the next year.
Estate agency is a terrible business to be in right now, with house prices under pressure, particularly in the most lucrative markets in London and the south east, with rising costs on the high street and, most importantly of all, with the chains starting to come under attack from the new breed of low-cost online sellers.
Who wants to run a company like that? It is going to be incredibly hard work, in a tough market, and the chances are that you won’t succeed, and will come out of the whole process with no job and with your reputation in tatters. It isn’t much of a gig. With a company that far up the creek, and with little sign of a paddle, it would be very tempting to bail out and get a job somewhere else.
But that, of course, wouldn’t be great for shareholders. If they are to have any chance of recovering any of their investment they need a team in place that is willing to work incredibly hard, and that has the skills and the imagination to come up with a plan that might just work. The last thing they need is for the managers to drift off somewhere else. So there has to be some kind of incentive plan in place, and it has to be based on shares as well as salary.
For a company in deep, deep trouble, any kind of share plan is going to be generous if the recovery plan works. When a stock has collapsed from 600p to 14p there are only two things that ever happen: either the company goes bust, or there is a dramatic recovery and the shares go back to 100p or more. That is why investors buy into recovery stories. You either lose your entire investment, or you make a fortune. It is going to be virtually impossible to design a share scheme that doesn’t pay out a fortune if the company survives – precisely because the odds are against it.
In nearly all cases, shareholders are right to stand up to greedy executives. In normal circumstances, one suit can be swapped for another and it doesn’t make a great deal of difference to how the company is run. But rescue turnarounds are the one exception. The executives are taking a genuine risk with their careers and their reputations, and it makes a huge difference whether they make good or bad decisions. They deserve to be rewarded for that – because if they don’t stick around, their shareholders will probably lose everything.
The City is absolutely right to take a stand against executive greed. But it also needs to learn when it is justified – and allow the occasional exception.