Wetherspoon (JD) PLC (LON:JDW) chairman Tim Martin launches an attack on City regulators

J D Wetherspoon plc (‘Wetherspoon’ or ‘the Company’) presents below its Q1 trading update for the 13-week period up to 27 October 2019.

Current trading

For the 13 weeks to 27 October 2019, like-for-like sales increased by 5.3% and total sales by 5.6%.

 Property 

The Company has opened one new pub since the start of the financial year and has disposed of four. We intend to open between 10 and 15 pubs in the current financial year.

In the current financial year to date, the Company has spent £43.3m on buying the freeholds of pubs of which it was previously the tenant and has bought back £6.4m of the Company’s shares.

Corporate governance (and guaranteed eventual destruction)

Commenting on corporate governance issues, the Chairman of Wetherspoon, Tim Martin, said:

“While acknowledging the need for a sensible system of corporate governance (CG), I have, for many years, expressed the urgent need for modification of the CG code, summarised in our 2019 annual report (Appendix 1).

“There can be little doubt that the current system has directly led to the failure or chronic underperformance of many businesses, including banks, supermarkets, and pubs.

“It has also led to the creation of long and almost unreadable annual reports, full of jargon, clichés and platitudes – which confuse more than they enlighten.

“I believe by vesting so much power in non-executive directors (NEDs), the system is also disenfranchising executives and the workforce – the people who have real expertise and are the cornerstone of business success.

“Another tectonic fault is that the institutions and advisers which oversee the code, as described below, do not themselves adhere to the rules they impose on others.

“The vast gap between the technocrats who make the rules and commercial reality is illustrated by the 2016 CG code, which refers to shareholders 64 times, employees three times and customers not at all.

“In contrast, commercial reality, which should be reflected in the code, is encapsulated in Sam Walton’s Walmart mantra – “Who’s number one? THE CUSTOMER!”

“A core problem is that CG institutionalises short-termism, inexperience and navel-gazing.

“‘Independent’ non-executive directors (NEDS), who work part time, are limited by the code to nine years’ service and stay, on average, for just over four years

“It is also common practise for there to be only two executive directors, the most senior of whom, the CEO, averages only about five years’ – managements and workers are thus absurdly underrepresented.

“A cursory glance at the board compositions of major UK PLCs underlines the issues.

“Tesco, for example, which has 450,000 employees and is the UK’s largest supermarket group, has only two executive directors, with total service of about nine years and 11 NEDs with total service of 38 years. The overall average, including NEDs and executives, is only 3.7 years.

“This sort of corporate structure is mirrored in banks, retailers and pubs – where long-term performance, over recent decades, has usually veered between poor and catastrophic.

“Adherence to a tick-box culture means, for example, that there are no NEDS on the boards of major UK banks (HSBC/RBS/Barclays/Lloyds) who have any personal experience of the last banking crisis at their company – when it is clear that inexperienced boards were a major factor in that crisis.

“In contrast, non-compliant companies like Wetherspoon (average tenure 15 years), Fullers’ (10 years), Dart Group (12 years) and Berkshire Hathaway (19 years) have often fared far better, with experienced boards, long-term shareholders and a long-term view.

“Compliance with CG guidelines increases the risk of failure – companies like Northern Rock, HBOS, Carillion, Thomas Cook and Mothercare were compliant with the code, but had shockingly low levels of experience (around 4 years per director) and executive representation.

“Stefano Bonini and others (Harvard Law School Forum, June 2017) highlighted this problem and correctly said that “long-tenured directors … decrease the likelihood of corporate scandals … (and) …  accumulate information and knowledge.”

“A Noddy-in-Toyland aspect of the current farce, as indicated above, is that the ‘comply or explain’ principle, which underlies the code, is not observed, in practise, by many ‘enforcers’ – ie institutions or their corporate advisers.

“‘Comply or explain’ means that advisers and investors have an obligation to weigh up explanations for non-observance of the guidelines.

“However, in reality, many never do – including, it seems, governance advisers such as PIRC.

“For example, Wetherspoon’s largest institutional shareholder, Columbia Threadneedle (CT), without any advance notice to the Company, did not support the re-election of two of our long-serving directors at last year’s AGM – in spite of our repeated explanations in annual reports.

“As a result, three of our four NEDs felt compelled to offer their resignations – inevitably destabilising the company in the process.

“Yet CT’s owner is Ameriprise (a US company), two of whose independent NEDs have themselves exceeded the nine-year rule.

“The Ameriprise chairman also breaches the nine-year rule – and combines the roles of chairman and CEO, a further breach of UK guidelines.

“In this context, the fact that CT is a US company is irrelevant. It has decided that one rule applies to itself, but that another should apply to Wetherspoon.

“In addition, US shareholder, Blackrock did not support Wetherspoon’s long serving NEDs last year, but they also have directors who exceed the 9-year rule on their board.

“Not all institutions behave like CT and Blackrock. Two of our largest shareholders strongly support Wetherspoon’s approach as illustrated in letters written to the company (appendix 2). Common sense does exist, in small pockets, in the City.

“Indeed, in thousands of meetings with shareholders in the last 27 years, I and my colleagues have almost never been asked about corporate governance – although the guidelines are clearly the predominating factors in PLC board composition – and at AGMs.

“The tick-box malaise, to which only strong-willed contrarians – and those with no financial interest in the perpetuation of the current system – are immune, is particularly rife at CG advisers.

“For example, the CG adviser PIRC recommends its clients to vote against my own re-election as chairman of Wetherspoon on the basis, inter alia, that I have been chairman for more than nine years (a milestone I hit in 1992).

“Amazingly, while advising Wetherspoon that it should have four or five ‘independent’ NEDS, the hypocritical PIRC has, itself, just one on its own board – someone whose only apparent employment experience has been at a local authority.

“However, PIRC’s own website misleadingly says that it adopted, in 1988, “a private company structure with…executive directors and a board of non-executives drawn from the founding pension funds and public figures” – a structure that clearly no longer applies today.

“Furthermore, the founder of PIRC, Alan MacDougall who still sits on his own board after 33 years (but seems to believe I shouldn’t be on mine), has no relevant PLC experience having, according to his LinkedIn profile, a “BA Sociaology (sic) 2:2 – Social policy and Soviet Studies” and work experience at the National Union of Mineworkers and the Greater London Council.

“MacDougall has questionable personable judgement, referring to himself on his Twitter account as a “governance expert” and an “ex-Eurocommunist”. In my opinion, many people equate communism with fascism, since millions of Europeans perished or were imprisoned under its yoke.

“It is perhaps a concern that PIRC has a low rating of 2.6 on the employment website Glassdoor, and appears to rely on inexperienced and temporary workers to analyse complex company reports for corporate governance purposes.

 “In summary, my view is the UK CG system is up the spout – and is itself a threat to listed companies – and therefore to the UK economy.

“By institutionalising inexperience, the code guarantees the eventual destruction of the culture or ‘DNA’ of successful companies – and culture has ‘strategy’ (with which the code is obsessed) for breakfast, as respected management philosopher Peter Drucker has said.

“Board structures should probably more closely resemble the successful Fullers – a chairman with 41 years’ experience at the company, combined with directors with extensive executive experience and long-term loyalty.

“In addition, genuine observance of ‘comply or explain’, rather than current lip service, should be mandatory.  One-size-fits-all does not work in the real world.

“Board composition à la Fullers can’t guarantee future corporate success – but rigid compliance with current CG guidelines will almost certainly guarantee eventual mediocrity or failure.

“City regulators and lawmakers should make haste.  Even Wetherspoon, a medium-sized company, has 42,000 employees, 13,000 of whom are shareholders, and it contributes about one pound in every thousand of UK taxes (£764 million in 2019) – it’s not in anyone’s interest to kill a golden goose.

“But, perhaps above all, no sensible business, looking to the long term and genuinely apprised of the reality of the CG system, would float on the London stock market today – who wants to guarantee eventual destruction, after all?”

Outlook

Tim Martin said:

“The Company is frequently asked for comments by shareholders, customers and the press for comments on Brexit. I strongly believe that the UK economy will be better off on the basis of ‘no-deal’ rather than the deal proposed by the government. I’ve dealt with this point in some detail in the latest edition of Wetherspoon News (appendix 3).

“We continue to anticipate a trading outcome for this financial year in line with our previous expectations.”

Full update HERE 

READ
Wetherspoon (JD) PLC (JDW) Statement re Investment Plans

 


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