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Wednesday, 15 April 2015

Ernst’s Economy at BNR Newsroom. Exclusive conversation with Errol Keyner, spokesman and deputy managing director of the Dutch Investors Association (VEB)

Yesterday evening, I was again present at BNR Newsroom, the semi-live recorded talk radio show, hosted by the radio interviewer ‘par excellence’ and eminent host, Paul van Liempt. The theme of the show was the executive remuneration and bonuses in The Netherlands, which seemingly have run out of hand during the last fifteen years. I will return to this show in a later article.

After the program, however, I had the opportunity to talk with Errol Keyner: spokesman and deputy managing director of the influential Dutch Investors Association (VEB).

Errol Keyner, deputy managing director of the Dutch Investors
Association VEB. Picture taken at BNR Newsroom
Picture copyright of: Ernst Labruyère
Click to enlarge
I was very curious about his opinions, with respect to executive remuneration. As spokesman of the VEB, he is one of the most influential stakeholders with respect to the soaring variable rewards and bonuses for top executives of companies, with a quotation at the Dutch stock exchanges.

During our conversation, we concluded both that there is an enormous discrepancy between the size and the quite loose payment criteria for the long term bonuses at one hand and the actual achievements of the executives at the other hand.

Here is an extensive summary of my conversation with Errol Keyner:

Ernst: Would it not be better, when the long-term remuneration for executives would only be effectuated after three years or more, when the dust clouds of their policy changes have vanished and the long-term effects of this new policy have been disclosed?

Errol: This is something for which I have fought very often at shareholders’ assemblies. Paying a long-term reward to a CEO after only three years, is in fact “insane” at a company like Shell ($RDSA:NA).

In such a company, one sees that the impact of strategic measures is only visible after 10, 15 years. This time horizon is perhaps a bit shorter at other companies, but a long-term reward, which is already effectuated after 2, 3, or 4 years, is useless to these eyes. When you consider that the CEO is supposed to take strategic measures, this is actually a short-term reward.

Ernst: Shell is a good example, due to their failed oil field strategy in the past, which caused the company substantial problems.

Errol: Since five years, Shell is heavily gambling on the success of the exploration and trade of gas [probably both natural gas and LNG – EL]. Only in about ten years, we will know whether this strategy has actually worked or not. At that very moment, you should be able as a shareholder to tell the executive whether his options and stock portfolio may be paid out or should be fully withdrawn. What they do now is indefensible. 

Ernst: I consider that also the case at a company like KPN telecom ($KPN:NA). Or were they simply unlucky that a few companies, like Skype, Twitter and Whatsapp hijacked their main business model…?!

Errol: That is their búsiness, for crying out loud!

Ernst: Did former CEO Ad Scheepbouwer of KPN not almost ruin this company, with his stock buy-back programs and his super-dividends, at the expense of necessary investments in the increasingly obsolete network infrastructure of KPN?

Errol: Scheepbouwer as a CEO indeed weakened the company enormously, from a financial and economic point of view. The worst thing is, however, that during his time as CEO at KPN, the remuneration policy has been changed five times (!). And never to his disadvantage. In spite of those changes, the supervisionary board decided to overrule this salary policy on a number of occasions, in order to hand out an extra, discretionary payment to him. Seemingly, this man lived for his entitlements to such extra payments.

Ernst: Yet, was Scheepbouwer not the shareholders’ champion?! Because of his massive share buy-back program and the jumbo-dividends, which he paid out during the years of his leadership?

Errol: Two things make shareholders happy: exchange rate increases and dividends. At KPN the rate increases did work for a while, but shareholders who still own their KPN shares right now, ponder about his leadership: “Thanks for nothing. What the heck has he been thinking all those years?!”. The most important thing for a buy-and-hold investor are foreseeable profits in the long run.

Ernst: But the KPN shareholders received those jumbo dividends?!

Errol: The company was almost ruined by Scheepbouwer. Of course: when I – as a shareholder – have to choose between a bad investment and a dividend, I choose for the latter, in order to get some money after all. Still, as a CEO he failed blatantly. 

Perhaps he was a hard-working, honest and competitive man, but he was incompetent, to start with. I don’t know how Eelco Blok [The successor of Ad Scheepbouwer at KPN – EL] will be seen eventually. It is yet too early to judge him. Whether he is competent or not, we will see in a few years, when the impact of his policy became more visible.

Ernst: Is a shareholder – generally someone with a shorter time horizon – the ideal motivator / judge for an executive reward? Should this topic not be considered with the Rheinland model in mind?!

Errol: I am a representative of the Investors Association VEB. I represent investors. What should always be in the interest of investors? Long term yields!

We don’t fight hard for the interests of hedge funds, which squeeze a company dry, while fully ignoring the future chances of this company. We look for long-term yields, so simple is that!

When you ask an investor: “Would you prefer a yield of 20% to be paid out right now, or annual yields of 12% for the next twenty years?”, I am pretty sure about the answer from our members; especially from the large pension funds.

They prefer a steady rate development with good dividends and yields, but above all a rock-solid company with a prosperous future. They don’t want a good company to be made insolvent by greedy investors. It is a different thing with bad companies, without a real future. When you own their shares and you get the chance to get some money out of it, be my guest and leave the remainder of the company to rest.

Still, most shareholders follow a buy-and-hold strategy and feel strongly attached to the companies they own: “their” companies feel almost like their family.

Ernst: As far as I’m concerned, the large pension funds mostly stood out for their deafening silence at shareholders’ assemblies, in the past?!

Errol: Yes, they did speak themselves out on too few occasions in the past. Yet, the last three or four years, they are much more involved in the discussions at those meetings. 

You hear sometimes stories, that greedy speculators ruin companies. Still, the most investors that I know – large and small – are quite loyal to the company and just want good dividends and yields in the long run: year in, year out. Like an old-fashioned deposit book with a much higher interest than normal.

The executives, who “mess up big time”, so to speak, are often driven by stimulants, coming from short-term rewards. They impoverish the companies in the long run in favour of short term yields, like for instance Ad Scheepbouwer did. 

When they are not paid sufficiently, according to themselves, they ask for a remuneration adjustment. And when they are still not rewarded sufficiently, they ask for an additional, discretionary payment. It is totally useless to run a company like that. Such executives are definitely not the winners they think they are.

Ernst: Why do CEO’s step in the trap of being blackmailed by a hedgefund, like Jana or TCI (The Children’s Investment fund), which deal with companies, like ABN Amro,“at gunpoint”?

Errol: I don’t call it blackmail. TCI had less than 1% of the ABN Amro stock in those days; not 30% or 80%. It did not have actual power to enforce change. The state of affairs leading to the split up of ABN Amro was unnecessary, from an executive point of view.

By the way, actually TCI was totally right. ABN Amro wasn’t a good company then. It was managed poorly and had to deal with poor financial results and a strategy that was totally inconsistent and out of focus. In my humble opinion, the company indeed needed a thorough cleansing in those days. I hear often: “It is a shame that the company has been torn apart”, from people in the Old Boys’ Network. I reply then: “Tell me why?!”.

You reckon: RBS almost perished, after the company had bought its share of ABN Amro. That event was IMHO totally accountable to ABN Amro. The final result is that RBS is now for 85% owned by the British state. Fortis – the second partner in the ABN Amro takeover deal – did indeed perish. Only Banco Santander, the Spanish bank and the third and last partner in the troika, benefitted more or less from the ABN Amro deal.

The third company that perished due to ABN Amro, is SNS Reaal. It made a huge mistake by buying Bouwfonds Property Finance from this bank. In hindsight, Bouwfonds proved to be a black hole. All in all, ABN Amro had turned into a very sick company; far removed from the national champion it thought to be, at the time.

Ernst: But why did the company become so ill?!

Errol: ABN Amro was out of control. Not only have a lot of poisonous products been sold to the customers, but many of the transactions, executed by the bank, were totally opaque. The essence of the credit crisis as a whole was that products have been sold which were not transparant anymore: not only for the customers, but also for the bank itself. They simply did not know and understand anymore what they had on their balance sheets. As a matter of fact, the bank had become a badly managed company. It was bad for the customers, bad for the bank itself and bad for the shareholders.

Many shareholders have an image that they only make short term investments and they are not really interested in the long term financial health of companies. After our conversation, I am quite convinced that this image is not true for Errol Keyner and the members of his Investors Association.

When shareholders are indeed interested in the long-term prospects of quoted companies, they form an indispensable part of the financial health of such companies. In case of the latter, the companies, management, personnel and the shareholders themselves all profit from this.

And with respect to the ‘outrageous’ executive remuneration: this will be a argument-laden subject for many years to come.

The most important factor – in my humble opinion – is that there is a clearly visible and positively correlating influence of the CEO on the achievements and the financial/economic wellbeing of the company: not only short-term, but especially in the long run, when the dust clouds of policy changes have settled and the long-term effects become visible. 

The remuneration of such an executive manager should therefore be adjusted to this long term and not only be based upon short term goals and opaque “key performance indicators”. This way, the perverse stimulants and moral hazard can largely be removed from the system.

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