tom winnifrith and Directors expenses and the potential for abuse
Director’s Expenses – why are they not disclosed?
Once again this issue comes onto my radar screen as I ask of Sefton Resources (SER) the AIM listed company suing me for libel, how many flights for its chairman Jim Ellerton to and from his Hawaii mansion were paid for by the company? It is a simple question that Sefton declines to answer. If the answer was nil it would have said so. So I assume that it is a lot more than nil and would like to know the cost. As, I suspect, would shareholders who are down 99.5% since the IPO.
Of course the inverse correlation between shareholder return and director comfort at Sefton Resources will be my specialist subject when I eventually appear on Mastermind but this is not just a Sefton issue. Quite rightly, after two or three years of AIM delivering up fairly miserable returns for investors many directors are being asked to justify pay packages and bonuses which have seen them profit while investors who actually put up the risk capital to get these businesses started and keep them going are taking the sort of spanking that Max Mosely would enjoy! Am I allowed to say that any more under our new code of press suppression?
But what has not been nailed down has been the issue of director’s expenses. There is no legal requirement to disclose how much an individual director claims on expenses. It is clear that some are abusing the system royally. In a smaller company the FD and CEO may well be the only two executive directors. In one case I stumbled across recently the CEO and the FD was the same man. I rather thank that this is a recipe for disaster as it was in this case. But the point is that even with a split FD/CEO if they are the only execs there is likely to be scant control on the expense account.
I can hear already the objections to greater disclosure from CEOs saying that they work long hours and that 95% of their expenses are on air tickets for business and hotel rooms for business. Fine, not a problem. Disclose everything. What I suggest in the Winnifrith plan is that the annual report of every listed company should disclose not only pay, bonuses, pension contributions but also the total expenses claimed by e ery director and the amount spent on travel and accommodation by the company on that director. In terms of accommodation shareholders should see the amount and the number of nights covered and in terms of travel a similar breakdown on flights. Just one figure for entertainment will do, it does not need to be broken down into boozy lunches, strip joint visits etc.
This disclosure would allow two things. One it would quickly become apparent which CEOs stayed in £600 a night hotels and which stayed at Travel Lodge. And two it would allow investors to gauge the REAL cost of hiring a CEO. It is all very well seeing that a total package in an annual report is £350,000 but if it subsequently emerged that expenses totalled £250,000 then investors should be aware that the real cost of hiring someone was (with NI) £650,000. Now I kid you not, get full disclosure and in some cases those are the sort of sums that you will be talking about. Shareholders would thus be able to make a fair assessment of whether a given director was really good value for money. Right now they cannot.
Directors will say that this just adds to the regulatory burden of being on AIM. Yes it would d,o but the amount of work involved should not be great. But if AIM is to thrive and not fail then investors need to be able to make rational decisions and not worry that they are being fleeced by fat cat directors. If companies want access to investor capital it must come at a price.