Executive pay has been a contentious issue in recent years, with bankers’ bonuses stealing many headlines. Shareholders have been voicing their opinions on bonuses paid to top executives and the management teams at the banks in question are unlikely to be too pleased with the turn of events.
Nearly one third of shareholders from Credit Suisse opposed the bonuses that were set out to be paid to their executives; more than 50% of shareholders from Citigroup rejected the plan to pay their Chief Executive £9.2m for 2011 and, at the end of April, almost a third of shareholders at Barclays refused to support the bank’s pay awards. Barclay’s Chief Executive was to be paid £17.7m, but this revolt is just another indication of how the tide is turning against having to pay big bonuses to retain the best staff.
Bonuses are essentially there to reward good performance. For example, if a company or bank achieves higher than expected profits, you may support a bonus for the key individuals who achieved this. However, in the case of Barclays, the £17.7m package for the Chief Executive was to be paid, despite him saying that his bank’s performance in 2011 was ‘unacceptable’. I wonder what bonus might have been suggested had the performance been ‘acceptable’?
Revolts over big bonuses are not a new thing for 2012. Over the past few years, more and more resentment has been growing for the huge pay increases received by top managers. Many big companies around the world have seen shareholder revolts and this could mean the tide is beginning to turn on big bonuses. The following articles consider this contentious issue.
Credit Suisse and Barclays investors revolt over pay Reuters, Matt Scuffham and Katharina Bart (27/4/12)
Aviva rocked by shareholder rebellion over pay Guardian, Jill Treanor and Julia Kollewe (3/5/12)
Tide turns on bank bonuses as revolt hits UK Scotsman, Bill Jamieson and Tom Peterkin (28/4/12)
Barclays AGM: ‘We can’t pay zero bonuses, the consequences would be dire’ Telegraph, Harry Wilson (27/4/12)
Barclays shareholders have spoken. The overpaid must listen Guardian, Chuka Umunna (27/4/12)
Barclays suffers executive pay backlash Financial Times, Patrick Jenkins (27/4/12)
Aviva to review pay policy amid investor concerns Wall Street Journal, Jessica Hodgson and Vladimir Guevarra (30/4/12)
UBS faces shareholder opposition over executive pay New York Times, Julia Werdigier (3/5/12)
Low returns stir Europe-wide revolt on bankers’ pay Reuters, Steve Slater and Sinead Cruise (25/4/12)
Barclays targeted over bonuses Telegraph, Louise Peacock (9/4/12)
UBS gets stinging rebuke from shareholders on pay Reuters, Katharina Bart (3/5/12)
Vince Cable urges investors to keep up the pressure on executive pay Guardian, Jill Treanor (4/5/12)
Questions
- To what extent do you think high bonuses are the most important variable to a company in retaining the best staff?
- In The Telegraph article by Harry Wilson, Barclays’ Chairman is quoted as saying: ‘We can’t pay zero bonuses, the consequences would be dire’. What would be the consequences if Barclays did pay zero bonuses?
- What would be the consequence if all UK firms paid zero bonuses?
- How would smaller bonuses affect shareholder dividends?
- The Guardian article by Chuka Umunna says that ‘excessive pay and rewards for failure are bad for shareholders, the economy and society.’ Why is this?
- Should those receiving big bonuses be forced to give them up, if their company has under-performed?
- What are the main arguments for and against paying out big bonuses?
We frequently hear about two companies merging with each other, whether for certainty, market share or economies of scale. However, in this case, we’re looking at a de-merging of one company to create two companies. Foster’s will be split to create two stand-alone companies.
With Foster’s retaining its beer business, a new company called Treasury Wine Estates will take over its ailing wine division. This split comes after 99% of investors cast their votes in favour of the split. The future profitability of this demerger is uncertain and how the stocks of the two separate companies trade in the coming months will give a clear indication of whether or not this divorce is the right move.
Foster’s votes to split beer and wine business Telegraph, Richard Fletcher and Jonathan Sibun (29/4/11)
Investors agree to split Foster’s into beer, wine units BBC News (29/4/11)
Two halves: Foster’s to split its beer and wine operations Mail Online (29/4/11)
Foster’s wine-beer demerger to clarify divisions’ value The Australian (30/4/11)
Questions
- What type of de-merger could we call this?
- How do you think the share prices of the 2 separated companies will fare following the de-merger?
- How concentrated is the beer and wine market? What effect will the de-merger have?
- In the BBC News article, Donald Williams says ‘The wine business needs a better pricing environment before it is likely to perform.’ What does this mean?
- Why has the wine division been a financial drain for so long?
What is the future of the Royal Mail? One thing for certain is that it needs an injection of money, which has led the government to consider either privatisation of the Royal Mail or selling it. Over the past years, we have seen continued strikes by the postal service in response to proposed changes in working practices. Mr. Cable commented that:
‘Royal Mail is facing a combination of potentially lethal challenges – falling mail volumes, low investment, not enough efficiency and a dire pension position.’
However, there are concerns that the privatisation or sale of the Royal Mail could lead to higher prices, job losses and further pension problems. The transfer of the Royal Mail to the highest bidder could shift the pension deficit, currently standing at £13.3 billion, to the taxpayer, potentially costing each taxpayer £400. The choice for the public is stark: either lose the right to send a letter anywhere in the UK for the same price or take on postal workers’ pensions.
Expecting massive opposition from the Communication Workers Union (CWU), Ministers are looking to pursue an arrangement similar to that of John Lewis, whereby staff are given shares in the company. This will give the staff an incentive to perform well to improve the performance of the company and hence increase their future dividend. Read the following articles and then try answering the questions that follow.
Royal Mail is to be privatised, government confirms BBC News (10/9/10)
Royal Mail sell-off is confirmed BBC News, Hugh Pym (10/9/10)
Royal Mail privatisation backed Press Association (10/7/10)
Royal Mail sale could cost £400 per home as taxpayers set to fund £13.3 billion pension deficit Mail Online, James Chapman (10/9/10)
Royal Mail pension plan challenged by regulator BBC News, Ian Pollock (30/7/10)
Ministers consider offering 20 per cent of shares in Royal Mail to staff Telegraph, Christopher Hope (10/9/10)
Cable to privatise ‘inefficient’ Royal Mail Independent, Cahal Milmo and Alistair Dawber (11/9/10)
Royal Mail revolution needed, say bankers Telegraph, Louise Armitstead (10/9/10)
Questions
- What are the problems that the Royal Mail is facing? Why have they occurred?
- What are the arguments for and against privatisation of the Royal Mail?
- How might privatisation lead to job losses and higher prices?
- What type of business arrangement does John Lewis have? Explain why this may improve overall performance of the company?
- If the pension deficit is passed on to the government, why will it cost the taxpayer? Is such an arrangement (a) efficient (b) equitable? Explain your answer.
It’s probably one of the most recognisable names in the world – Disney. Well, as if the company wasn’t already established enough, it’s just got a bit bigger, with a $4bn deal with Marvel Entertainment, Inc. Characters such as Mickey Mouse, Cinderella and Donald Duck have now been joined by some more masculine characters including Spider-Man, Iron Man and the X-Men. Much of Disney’s recent success has come from films appealing to girls, but in-house Disney franchises appealing to boys are fewer and further between. “We would love to attract more boys, and Marvel skews more in the boys’ direction, although there is universal appeal to many of its characters” said Bob Iger, Disney chief executive. “Marvel’s is a treasure trove of characters and stories, and this gives us an opportunity to mine characters that are well known and characters that are not well known.”
This new deal is likely to have major repercussions for Warner Bros and all of the major Hollywood studios, as well as those with a vested interest in Marvel. It is also hoped that this deal will restore some of Disney’s profits, which have been reduced through the current economic downturn. The following articles consider this deal and the likely results.
Weaker sales dent Disney profits BBC News (30/7/09)
Disney to buy Marvel in $4bn deal BBC News (31/8/09)
Walt Disney buys Marvel Entertainment in £2.5billion deal Mirror News (1/9/09)
Disney take-over of Marvel Telegraph, Paul Gent (2/9/09)
Disney’s Marvel Deal Forces DC’s Hand Defamer, Andrew Belonskey (10/9/09)
Disney deal puts Marvel online slots at risk for Cryptologic Online Gambling News (9/9/09)
Disney’s picl-up of Marvel not so super: Citi FP, Trading Desk (4/9/09)
Disney to buy Marvel in $4bn deal (video) BBC News (1/9/09)
Of mouse and X-men Economist (3/9/09)
Disney buys Marvel, Now in Business with every studio in Hollywood Defamer, Brian Moylan (31/8/09)
For Disney’s announcement of the take-over, see:
Disney to acquire Marvel Entertainment Disney Corporate News Release
Questions
- Discuss the pros and cons for consumers of the take-over of Marvel Entertainment by Disney.
- Which factors will have had a significant impact on Disney’s profits in the current recession? Explain why.
- What do you think will be the likely impact of the take-over on Marvel’s shareholders?
- Discuss the main ways in which a business can grow and consider their advantages and disadvantages.
- How will Disney’s Marvel deal affect its competitors and those with whom it does business? Is Disney going to be able to control prices and other aspects of business deals?
Banks appearing in the news has become commonplace in the past year or so. Everyday, there has been something newsworthy happening in the banking sector, whether in the UK or abroad. A recent development in this sector is Barclays agreeing to sell its fund management division, BGI, to Blackrock for £8.2 billion. Barclays says that there are strategic reasons for the sale, which undoubtedly add to the 8.2 billion other reasons. This deal will put the bank in a strong position to make acquisitions next year in creating the world’s biggest asset manager. It will also allow Barclays to weather any further storms on the horizon. The articles below look at recent developments.
Blackrock in £8.2 billion Barclays deal BBC News (12/6/09)
Blackrock and a hardplace The Economist (12/6/09)
Bob Diamond: The builder of Barclays Telegraph, Louise Armitstead (13/6/09)
Barclays offloads fund management business BGI to Blackrock for £13.5 billion Telegraph, James Quinn (12/6/09)
Inside Look: Blackrock buys Barclays fund unit for $13.5 billion Bloomberg, youtube (12/6/09)
Sovereign wealth funds back BlackRock move to acquire Barclaysd Global Investors Telegraph, Louise Armitstead, James Quinn (12/6/09)
Blackrock targets Barclays firm BBC News (8/6/09)
Questions
- What are the ‘strategic reasons’ behind Barclays’ decision to sell its fund management division?
- The Blackrock and a hardplace article talks about the benefits of economies of scale. What does it mean by this?
- What are the advantages and disadvantages of combining fund management with banking and creating such a large business?
- Given that Barclays’ fund management, BGI is a successful part of its business, does their agreement to sell it put them in a stronger position?
- What will be the likely impact of this deal on the economy? Consider who will be (a) the winners and (b) the losers.