Those shareholders in Sun International (SUI) who voted against its pay policy on 22 November (49.89% of shareholders, while 5.05% abstained) probably did not do themselves any favours, at least in the short term. Since then the share price has fallen from R101 to R95.6 by midday yesterday (2 December).
The market value of the company has fallen accordingly, from R11.53bn on 22 November to the current R10.91bn, a loss of R617m – a whole lot more than the extra they might have paid senior executives.
Clearly the vote on pay could not easily be said to have helped shareholders. However it is impossible to say how much it cost them with certainty. There may well have been other forces at work driving the share price lower, forces common to all the JSE listed companies – or hotel and casino companies in particular.
Ideally we would isolate these market effects from the impact of events specific to Sun International itself. Unfortunately the relationship between the share price and that of the market itself is a very weak one. The relationship between the share price and that of its rival Tsogo Sun (TSH) is also too weak to enable us to isolate market-wide effects on the share price with any degree of confidence.
Perhaps coincidentally, the Tsogo Sun share price and market value have also been subject to downward pressure recently, though less so than Sun International.
Nothing can be more important for shareholders than the quality of top management and the incentives that encourage their efforts on behalf of shareholders. The essence of good corporate governance is for the directors to appoint the best possible chief executive, at a market related package, and to design the right package for him or her that is related to the internal return on capital realised by the company. The board should to be able to manage the market place for top management well.
This market, like the market for capital and the goods and services companies deliver, is itself a competitive global market. Another responsibility of any board of directors is to make sure that the remuneration policies, including the mix of contractual and performance based rewards, for all employees, is well designed for shareholders. Impressing the soundness of such policies on shareholders is part of the role to be played by the CEO and the board.
Second guessing these essentially complex policies at annual meetings of the company is unlikely to add shareholder value. Nor are interventions in remuneration packages by governments and their regulators likely to be helpful to shareholders. Such interference is very likely to be driven by envy about income differences, rather than objective measures of performance that play well in the political arena and usually receive encouragement in the media.
The man or woman in the street usually finds it a lot easier to understand the extraordinary rewards of the superstars of sport and entertainment that fill the arenas. The role played by the superstars of business in generating revenue and profit is clearly not so well appreciated.
The true quality of remuneration policies of a company (as of its management generally) will be measured by the share market – not so much by absolute share market performance (which is often beyond the control of the company), but by the relative performance of one company compared to its close competitors.
Such comparisons will be determined by sustained differences in the internal rates of return on investing shareholders capital. It is to these differences that management should be held accountable for at annual general meetings and to which remuneration policies should be directed. Votes about how much the CEO has earned, or will earn, may serve only as a distraction.