The way a company treats minority shareholders is a key consideration when it comes to any investment thesis. Naturally, you don’t expect to be granted special priority, but nor do you want your interests ignored.
Fair treatment is the bare minimum you, me or anyone else can expect as a shareholder. We’ll consider how Barclays (LSE: BARC) (NYSE: BCS.US) has behaved over bonuses, which in 2013 increased 10% — despite pre-tax profits falling by 33% to £5.2bn — and whether this is detrimental to Barclays’ operations.
Should Barclays shareholders hold their breath, and hope for a more equitable distribution of profits? Past behaviour, of course, is a pretty good indicator of future behaviour, so I wouldn’t necessarily hold my breath. This is despite new research, which we’ll soon come to, suggesting Barclays is self immolating over pay.
Instability
At Barclays recent AGM it became clear that the frustrations of individual investors over bonuses is shared among some major stakeholders, including Standard Life and F&C. Standard Life, which owns nearly 2% of Barclays, commented:
“We are unconvinced that the amount of the 2013 bonus pool was in the best interests of shareholders, particularly when we consider how the bank’s profits are divided among employees, shareholders and ongoing investment in the business.”
Sir John Sunderland, the independent director in charge of approving Barclays’ bonus pool, would argue otherwise. Were remuneration levels to fall below the market rate, then an exodus of key staff would ensue. It’s all about remaining competitive, according to Sunderland, in order to “ensure the health of the franchise”.
Yet, according to John Thanassoulis, a professor at Warwick Business School, the result is the exact opposite. Increasing bonuses when profits have declined will, he argues, “weaken the bank’s financial stability”.
The bonus policy is stoking fires. While the intention is to hire the best talent to generate improved returns, Barclays winds up overreaching itself, hence the instability.
Is it too risky to own Barclays?
The solution proposed by Thanassoulis is a cap on remuneration in proportion to assets. Whether this would work in practice is irrelevant to an investment thesis at this point. Indeed, the cycle of bonus pay needs to end — that much is clear — but I’m waiting to see proof that a cap wouldn’t be circumvented.
Barclays’ share price, as you might expect, has performed poorly. Shares in Barclays have tumbled 41p, or 14%, to 250p in the last year. I’m not sure I’m comfortable investing in a business that seems determined to use gasoline to put out flames.
