Garnishee orders, Tsogo-style

Unintended consequences on a lottery scale, or a modern version of thumbscrew torture?

You will remember the R200 million of loans that Tsogo Sun awarded to five of its 14 executives, to enable them to buy its own shares from SABMiller when the latter divested. My column on that topic can be found here.

Consider some numbers regarding CEO Mr Marcel von Aulock’s new situation at Tsogo Sun:

  • F2014 Basic earnings: R4 798 000, say R400 000 per month
  • New loan in F2015: R87 000 000, a fringe benefit taxed at R489 375 per month
  • PAYE in F2014: R153 764 per month (my estimate)
  • PAYE in F2015: R349 590 per month (my estimate)
  • Take-home pay F2014: R246 160 per month (my estimate)
  • Take-home pay F2015: R50 410 (my estimate)

Imagine the following conversation (apologies to Mr Von Aulock’s private life): “Darling, great news! I’ve been awarded a huge loan from the company and I can buy shares with that. But sorry, we’ll have to draw in the belt a bit, because I’m going to be about R195 750 short every month now…”

Ouch. And double ouch. This really feels like a garnishee order rather than a bonus.

Why worry, you ask? The salaries were of a telephone-number size before, so what if they have to live on one-fifth of that for a while? (And of course, Mr Von Aulock could expect to receive after-tax dividends of about R1,3m twice a year as well, provided that profits remain stable.)

My concern in this phase of the Tsogo Sun rollercoaster ride is for the effect their new-found frugal living could have on their attention to their main jobs: managing Tsogo Sun to be as sustainably profitable as possible. That is what all the shareholders and most of the other stakeholders want, surely!

I might be overly concerned, but this consequence of the largesse displayed by the directors (and strongly supported by main shareholder HCI) seems more like torture than a gift. Taken with less-than-lustrous operating profit growth over three years, it is also difficult to see the share value appreciation shooting the lights out, especially given the expectation that share markets will lose value overall.

I am concerned, yes.

What increases my concern is what I perceive to be a lack of transparency between board and shareholders, the exit of the normally very vigilant SABMiller, and shareholder apathy plus what could be similar slackness at the oversight level. These might currently be only light wisps of smoke, but could also be early signs of fire. Shown up early, they could of course be stamped on to avoid catastrophe.

Smoke wisp A:

The remuneration policy at Tsogo doesn’t spell out a great deal: it certainly did not prepare us for termination payment to two senior managers, Messrs RA Collins and GI Wood, who both resigned early in August 2013 and together were paid R38,7m to go in peace, plus long-term incentives of R33,6m. These figures get no mention in the integrated report or indeed in the remuneration report; they do surface in part on page 65 and in full on page 78 of the consolidated annual financial statements, though. It immediately makes one wonder what other staff members received termination payments, and why an early exit gets you to earn a long-term incentive. Surely the remuneration report should have had a note as to the companies’ policy on termination benefits?

Smoke wisp B:

SABMiller is now out of Tsogo completely; their normal style of a watching governance brief will be sorely missed by minority shareholders.

Smoke wisp C:

Going by the voting pattern at the AGM, minority shareholders really don’t seem to care. Of the some 715m votes cast (out of a possible 1 182m) some 563m would be in respect of the major shareholder HCI, I expect; that means that 92m shares from minority shareholders were voted for the remuneration policy; 40m were voted against it, and 20m abstained. The rest (some 467m shares) lay dormant somewhere. 39,5% of the shares simply observe, or don’t even turn their heads, so to speak. Another ouch.

Smoke wisp D:

The chair of the audit committee, Mr RG Tomlinson, is not present when the AGM starts but arrives after the meeting (which started 30 minutes late; the chairman was not yet there); this looks rather lax. Taken on its own this is probably not the most significant failing in a company’s history; but taken together with some of the other issues, one begins to wonder…

One day we’ll know whether individual smoke signals made up a bigger picture. In the meantime the wheel keeps turning, be it at roulette or the big wheel of time. Shareholders, wake up!

(This article by Theo Botha and Charl Kocks, who recently retired as a director of Proxy View, was published on MoneyWeb in 2014.]