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Financial sector executives are getting richer

While investors and savers get poorer. A look at PSG, Coronation, Trencor and more.
Still sweating: Edcon went from star to laggard after Bain loaded up its balance sheet with debt. Seems it’s just a matter of time before the once-great retailer disappears. Image: Moneyweb

Stellenbosch-based investment holding company PSG was the centre of much of last week’s market chatter, with commentators speculating wildly on how it planned to sustain its eye-wateringly generous, inappropriate and undeserved executive pay packages after it unbundles the bulk of its stake in Capitec.

“They’ll find a way, don’t worry,” said one weary and understandably cynical shareholder. The first thing will be a repricing of all the share options.

Mid-way through the week the group announced its plans to offload 28.11% of Capitec to shareholders, leaving it with 4.3% of one of the fastest-growing and most profitable banks in South Africa. The unbundling is in response to growing shareholder frustration about the widening discount between the PSG share price and the value of its component parts – in excess of 30% in recent months.

Hardly bashful

Not shy of resorting to a bit of hyperbole, the PSG executives likened their plan to that of Naspers’s trillion-rand unbundling of Prosus last year.

No doubt it is this sort of grandiose thinking that underpins the group’s consideration of remuneration matters.

At the end of the week its annual financial statements revealed that the top three executives – CEO Piet Mouton, finance director Wynand Greeff and executive director Johan Holtzhausen – had been paid a total of R135.5 million. For financial 2018, remuneration for the same three was R127.4 million.

In both years the bulk of the value came from gains on exercising share options – R95.7 million in 2019 and R91.5 million in 2018. Mouton’s remuneration was R47 million in 2019, Holtzhausen got R45.1 million and Greeff R41 million.

Unvested options ‘out of the money’

The massive share option gains were made when the options were exercised in April 2019 at the comparatively attractive ruling share price of R265.

In what may – or may not – have been an attempt to calm shareholders’ frustrations about this generosity, PSG says in a note to the financial statements that the subsequent decline in the share price means the unvested share options are currently “significantly out of the money” and that the executive directors will be penalised if the share price does not perform over time – unless they’re repriced.

Of course even PSG’s largesse looks almost reasonable when stacked up against the huge amounts of money the top guys at Coronation Fund Managers pocket every year, almost without fail.

The poor savers

Last week we heard once again from a group led by executives who will never, ever have to worry about not having tens of millions of rands to fritter away, about the inordinate pressure on savers and the danger of having no social security net.

One analyst wondered if the comfort provided by this wealth didn’t make Coronation more tolerant of underperformers such as Trencor, or perhaps make them less wary of high-risk operations such as Steinhoff and African Bank.

“They’re getting so much themselves they probably don’t see that the millions being spent on Trencor’s chronically underperforming board represents really bad value,” suggested one Trencor shareholder.

Talking of which, Trencor’s AGM this week looks set to be quite a heated affair. Unlike Coronation, some of the Trencor minority shareholders are desperate to see some action from a board that seems just as desperate to secure its continued stress-free existence until December 2024.

AGM of the week?

On the subject of AGMs, last week’s prize for best-performer goes to Old Mutual. Sibanye-Stillwater deserved to win thanks to excellent choreographing by the group’s formidable company secretary, but was pipped by the insurer, who provided a useful insight into what must have been a truly grim year for it.

Manuel, also assisted by an extremely effective company secretary, engaged with shareholders in a reasonably open manner, shedding light on some of the circumstances around the Peter Moyo debacle.

Sticking with the subject of big finance, at last government has appointed a new CEO to the Public Investment Corporation (PIC). Presumably the announcement that Abel Sithole is taking up this crucial position will soon be followed by the news that he is stepping down as commissioner of the Financial Sector Conduct Authority (FSCA).

Edcon’s fall from grace

On matters more mundane, Mr Price didn’t miss the opportunity to delicately trash Edcon last week.

It released a Sens announcement providing clarity on its plans to issue up to 10% more equity and stating that it has no intention of buying any part of the severely struggling clothing retailer.

It seems just a matter of time before this once-great operator will disappear from the local market.

Ironically, way back in the early 1980s the two founders of Mr Price were working at Ackermans until then-Edgars bought the chain and fired them. What a lucky break that was for Mr Price shareholders.

Also ironic is that the refusal by Mr Price’s board to sweat its balance sheet (load it up with debt) is one of the reasons the group is looking quite comfortable right now.

In stark contrast Edcon went from star performer to laggard shortly after Bain Capital loaded up its balance sheet with debt and imposed crippling targets on management.

On a completely different matter, it apparently took Value Group – or was it the JSE? – two days to work out that an evidently related-party transaction had to be approved by shareholders. It’s difficult to imagine what took so long.

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The only way is for there to be a change to the financial system.

Love your style of writing Ann

My approach is simple : I avoid investing in companies with boards that breed situations like this. Excessive pay, reported earnings that bear little correlation to cashflow from operations, and boards that are stacked with old time buddies and family.

It means I missed some good bull runs, but also means I missed several disasters.

Richer off fees.

Not off performance.

There’s a very big difference between the two!

Prof> Michael Hudson in his various books, particularly “Killing the Host” and “J” is for Junk Economics” has set out exactly how the financial sector has actively converted classical productive based Capitalism into finance based Capitalism, which has resulted in the obscene accumulation of wealth in favour of the Finance, Insurance and Real Estate sectors, through the creation of unproductive debt.
This aberration in the role that financial capitalism has played, has resulted in funding being largely diverted from real productive enterprise towards the funding of transfers of existing assets, which has exacerbated inflation and funded scams like the subprime mortgage fiasco, where packages of toxic mortgages were bundled together and marketed internationally as “worthy” Investment opportunities, sucking in the “professional” investing class and contributing to the biggest bank bale out scam ever. The question was asked by none other than the QE2 of her ministers “how did no-one see this coming?”
This targeted bale out has had the effect of not providing relief to those borrowers adversely affected by the granting of what were bad and contrived loans, but rather “saving” the very banks responsible for perpetuating the Ponsy Scheme.
True capitalism was tainted in the process, the real productive economy was starved of sustainable funding, whilst those manipulatively indebted, suffered financial distress. Collapse was inevitable, but instead of those responsible bearing the burden, it fell onto those who could ill afford it. The worst result of all is that this unbridled debt creation, in which banks are able to create money out of debt, has sown the scene for the sorry situation faced by virtually all western economies, where the vast majority of wealth now resides in the top 1% of the population, most by far are all in sectors of the economy unrelated to real productive endeavour.ost of the world has conceded its productive endeavour to China where the pandemic has unveiled the folly of this policy in exposing how the world at large has destroyed its ability to produce what is necessary to sustain demand and provide gainful employment. Financial capitalism has been party to the successful decoupling of economies from the support of real productive activities in favour of the pursuit and creation of unrepayable levels of debt, both nationally and individually and those responsible have garnered unseemly levels of wealth while citizens struggle to sustain themselves or find employment in contracting “real” economies. Despite the evidence presented, the financial scam continues and creation of the next extreme bubble is being supported by quantitative easing and the insane reduced interest rate levels that are being introduced. MAdness reigns supreme and we rush like lemmings to the brink.

….ever heard of Paragraphs?

Options should not be priced or repriced at the bottom of the market. Some times the pricing is so precise it beggars belief. Paperwork takes a few days/weeks and approvals often use a day corresponding with the market low.

South African stocks have lagged international comps. Part of this is due to lack of state support for companies, which has exacerbated cash flow difficulties experienced by some. However most companies’ stock prices should do well as long as they are able to survive this period (which most public companies will). There is of course a higher probability that companies will fail. By issuing options to management now, management teams are able to benefit massively from a recovery which will not be mainly due to their performance. Indeed, the way they have managed companies until now (e.g., too much debt) might have contributed to very depressed stock prices. If touch-and-go companies survive, stock prices could fly but pricing options at depressed prices now is unfair on suffering external shareholders.

You will continue to be writing about this subject for many years to come….it will not change easily unless shareholders are active and powerful enough with their votes to NOT allow this excessive remuneration. Alternatively, shareholders must vote with their feet invest in other companies with reasonable and acceptable remuneration. In light of these excessive remuneration packages paid to PSG Directors, I will be selling my shares in PSG.

Selling shares unfortunately won’t help. Management prefers non critical shareholders. What will help is when active and especially the passive investors (who are capturing more AUM and are fortuitously permanent shareholders) start to vote against the chairman and the adoption of financial statements.

With regard to Financial sector. Are fees being charged fairly even across the board, or there are instances where fees are layered and not visible to clients. A Testamentary Trust administered by one of the top Financial services is charging fees almost equal to income paid to a beneficiary.Is there any way of challenging this?

End of comments.

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