British housebuilder Persimmon was thrust into the media spotlight last Tuesday after the company announced profits exceeding £1bn.
For investors in the UK-listed stock, the returns over the past five years have been stellar, rising nearly 69% in the space of half a decade. As at 28 February 2014, the company’s share price stood at 1446p per share, today it is trading around 2443p.
The company achieved these hugely impressive figures in the face of suggestions by fund managers, institutional investors and politicians, that the company exhibits inadequate corporate governance and has fostered excessive remuneration policies.
It could even be argued that criticisms levelled at the housebuilder are unfair, given the exceptional profits and sustained share price growth over five years. So, while its remuneration policies are perhaps “not very ESG”, the company has made excellent returns for investors. But how sustainable is the business model for the coming years?
Casualties of controversy
Since 2013, the UK government has operated a ‘help to buy’ scheme, designed to assist people to get on the housing ladder. The scheme offers a loan of up to 20% of a property’s value if the buyer chooses a new build from housebuilders, like Persimmon.
In 2017, the UK government said that it had already deployed £10bn of taxpayers’ money to fund the scheme and was planning to extend a further £10bn.
Investor concerns grew that too much of this money was finding its way into the pockets of the company’s management through the Persimmon remuneration policy.
Reports at the time suggested that the then chief executive, Jeffrey Fairburn, was in line to receive a bonus in excess of £100m, in recognition of the company’s “growth and capital discipline”.
Investor groups reacted with anger. Companies such as Glass Lewis and Pensions & Investment Research Consultants (Pirc) said the company’s remuneration policies were inadequate.
By December that year, investors were calling for heads to roll. A Reuters report at the time stated that the company’s former chairman, who was also chair of the pay committee, quit after he failed to curb the remuneration plan, deemed excessive.
The departure of the chairman did little to appease investors, who took their grievances to the annual general meeting in 2018. The remuneration policy squeaked through, however, with 51.48% of investors approving it and 48.52% against. But investors were still unhappy.
Continuing saga
On 7 November 2018, chief executive Fairburn announced he was standing down. Royal London Asset Management was among the investors to issue a public statement in response.
“Executive pay has cast a long shadow over Persimmon’s strong performance for shareholders,” said Ashley Hamilton Claxton, the company’s head of responsible investment.
“This saga is a clear example of how a poorly thought out remuneration decision, in this case made six years ago, can have serious consequences for a company and its shareholders.”
Aberdeen Standard Investments (ASI), which owned 1.3% of Persimmon at the time, welcomed Fairburn’s departure. Euan Stirling, global head of stewardship and ESG investment at the firm, said: “Persimmon’s reputation has been tarnished by issues around Jeff Fairburn’s pay.
“We welcome the action taken by the board and we will continue to engage with the company in order to help, where we can, with the restoration of the company’s standing.”
But what were the serious consequences? The change in leadership? Well, it didn’t exactly lead to a stranger taking over. Quite the opposite, in fact. Dave Jenkinson, initially interim chief executive and now confirmed replacement, has been with the business since 1997 and was previously group managing director.
Since the beginning of the year, the company has introduced new measures to cap pay and bonuses for directors. In February, The Guardian reported that it had reduced payouts in light of investor pressure. But some investors still held concerns about the potential earnings from the revised incentive scheme.
ASI now owns about 2.5% of Persimmon in its active and passive funds. When contacted by Portfolio Adviser, Stirling said: “The reason we were so concerned with the pay of Mr Fairburn was that it had the potential of setting a new high watermark for UK executive remuneration.
“Persimmon has a long history of operating successfully, and we feared that the reputational damage that would follow from the firm’s remuneration outcomes would significantly hamper its operations and return profile should the company become an outlier with regards to its pay practices.
“Because of the emerging pay controversy, Persimmon lost a substantial cadre of its board members, including its board chair and the chair of its remuneration committee. In mid-2018, a new board chair was appointed at the firm, and we have been pleasantly surprised by the speed and clarity of his approach, which resulted in the departure of Mr Fairburn.
“With the recent appointment of Dave Jenkinson as CEO we look forward to engaging with the company on their plans for future strategy.”
Business implications
The biggest development occurred more recently. On 23 February, The Times reported that the UK’s housing minister James Brokenshire was weighing up whether to allocate future contracts for the Help-to-buy scheme to Persimmon, and had asked the company to explain some of its business practices. The news would be significant to the company, given that half of the 16,000 homes it built last year were sold under the scheme, according to the article.
Some investors have applauded news of a review, saying that the government has an obligation to drive best practice in industry.
“The company has been in the firing line since the scandal broke of the bonus awarded to its now ex-CEO,” said Tom Brown, managing director of real estate at Ingenious. “Alongside good financial governance, the government should drive best practice across the industry,” he said.
A new approach
Persimmon’s response came quickly. Last Tuesday Persimmon confirmed Jenkinson’s appointment as chief executive, and announced new measures likely to be received positively by investors.
It said that the new CEO would not participate in any annual bonus arrangements throughout 2019, despite the company’s substantial profit announcement. The company also said it was willing to consult with shareholders on the future remuneration package for the CEO.
“It has also been agreed that Dave will not participate in annual bonus arrangements in 2019 and will not receive an award under the group’s 2017 Share Performance Plan,” a company spokesman said in a statement.
“As previously announced, Dave’s remuneration did not change when he was appointed interim group chief executive. The remuneration committee expects to implement a new remuneration package for Dave from 1 January 2020, we expect to consult with major shareholders on this in autumn 2019.”
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