Executives of Brait are bailed out, but they insist it is not at the expense of the other shareholders. Is it?
When Brait morphed from a private equity entity to an investment holding company, the management team leading the change were given the opportunity to buy a 18% stake in the new company. They only had to come up with 20% of the value of the deal, the rest would be vendor financed by Brait itself. The shares would be held in a entity called Fleet. As the share price soared, nobody complained. But since then, the management of Brait has made value destructive decisions. That reflected in the share price, which has come down from more than 160 Rand per share to 24 Rands per share. In the meantime, Brait has refinanced the loan with Standard Bank and FNB. Current the value of the loan is a lot more than the security the banks hold, and Brait has decided to settle it. This is essentially worse than what Carlos Ghosn has been accused of by the Japanese prosecutors, when he convinced Nissans board to take on his personal currency swaps which were under water. But we are not in Japan, we are in South Africa. And here the board of Brait decided to issue a statement that the bail-out does not favor executives!
Besides being highly immoral, one must question the behavior this encourages. The board of directors are the custodians of the invested capital and it is their job to protect it and to grow it. Only they can decide where to invest capital. For that, they get paid astronomical salaries. If the capital allocation turns out to be poor, they should be the ones to take the blame. In Braits case, they were greedy and possibly over-confident to take such a large loan. Bailing them out when the share price comes tumbling down essentially means that they were able to take a leverage position with unlimited upside, but no downside. Evidently it leads directors to take unnecessary risk without considering the downside.
Brait is unfortunately not a unique case. Pepkor recently bailed out their executives, costing the company a few hundred million Rands, when their Steinhoff shares collapsed. Adept IT is considering issuing new options to their executives (at a lower strike price), because the last few were at such a high strike price that they would not be worth executing any time soon. Off-course, the reason for that is because the share price decreased from more than R15 to R5.11 in about 2 years. There are more examples, a few that are more complex, like the recent change in incentives at Woolworths. Their executives are rewarded on the return on invested capital, which is a prudent measure. But at the same time, they wrote down billions of Rands of their disastrous David Jones acquisition, which was their biggest bet ever. That means that the executive will be measured from a lowered bar, and not from the high water mark before the acquisition was written down. At least going forward, their measure of reward is in line with those of shareholders.
To understand the unfairness of these incentive deals where Managements are offered very lucrative incentives, only to be bailed out when things go bad, it helps to look at an analogy. Imagine that a portfolio manager invest so poorly, that the unit trust he manages constantly loses value. After the value of the fund is down by 70%, the management of the company he works for feel sorry for him and decide to pay him is performance bonus anyways. But because there is not enough income generate by the fund, the investors in the fund have to pay him by sacrificing some of their own invested capital. No doubt this would cause a total loss in confidence in the portfolio manager, the same should happen to managers who only scheme how they can make more money, even at the expense of ordinary shareholders.
It seems it is not only politicians who get rewarded for a poor performance.