HONG KONG--(BUSINESS WIRE)--Oasis Management Company Ltd. (“Oasis”, “we”) is one of the largest shareholders of The Restaurant Group plc (“TRG”, “the Company”), beneficially holding c.12.3% of the Company’s issued share capital. In February 2023 Oasis publicly expressed its concerns regarding TRG’s prolonged share price decline, continuing negative perception in the market, governance failures and the necessary steps needed to begin the process of rebuilding value for shareholders.
Oasis’s two prior press releases can be read here:
In March 2023, TRG communicated its medium-term strategic plan, as well as the Board’s intentions for the ongoing governance of the Company in its 2022 Annual Results Announcement and 2022 Annual Report. Far from the strategic plan being seen as an important and welcome move towards restoring market confidence, the TRG share price instead slumped by c.15% in response. The 2022 Annual Report then compounded shareholder pessimism as governance, much like strategy, remained effectively unchanged.
Remuneration Policy Not in Shareholders’ Best Interests
In 2020, the Board prematurely revised management’s Remuneration Policy to replace the Company’s performance-linked long term incentive plan (“LTIP”) with a Restricted Share Plan (“RSP”) – a scheme that awards shares on a time-vesting basis, without any direct connection to Company performance or shareholder returns. Despite the uncertainty posed by the pandemic (noted by TRG as the reason for the switch), institutional investors expressed significant concerns regarding the nature and timing of the change.
Investors’ strong misgivings were reflected in opposition from proxy advisors and c.37% of TRG shareholders casting dissenting votes when the policy was put to a vote in October 2020. Without the support of a small number of TRG’s largest holders, the proposals would have failed heavily. Since the policy was adopted, the two subsequent remuneration reports have also been heavily opposed: c.20% voted against in 2021, and c.32% voted against in 2022. Coverage of the views given by investors is noted after the main text.
Inexplicably, the Board, led by seasoned NED Ken Hanna, has requested approval of the 2023 Remuneration Policy which importantly retains the RSP, in spite of:
- it clearly being strongly opposed by a significant proportion of the Company’s shareholders,
- the newly communicated Company strategy being based around clearly defined medium-term EBITDA improvement targets, and
- the original rationale regarding the uncertainty of the pandemic abating completely (Oasis notes that the Board justified the 2020 revision to the policy “given the exceptional events of 2020 related to Covid-19” (Link))
Retaining the RSP will continue to reward the senior management team with a potential grant equivalent to 125% of their salary in shares, subject only to the discretion of the Remuneration Committee against a vague, qualitative and entirely subjective underpin, instead of linking to performance through transparent stretching KPIs.
The proposed continuation of the RSP is even more unpalatable in the case of the TRG CEO, Andy Hornby, who already receives a highly generous base salary which is disproportionate compared to the size of TRG, as well as relative to the wider workforce. The effect of a high base salary is further exacerbated alongside bonus opportunities and share award grants which are both calculated as multiples of the base salary.
Deloitte’s annual benchmarking exercise of remuneration levels in the FTSE 250 (Link) places Andy Hornby’s base salary - £658k in 2022 – as higher than the median level for companies with a market capitalisation of between £1.9bn and £3.2bn (some 5-10x larger than TRG). The Company’s current market capitalisation stands at just £296m; at the time of the Deloitte publication, the Company’s market capitalisation was just £225m.
A separate Deloitte study of FTSE SmallCap (Link) identifies £428,900 as the average CEO salary for a company within the £201m to £350m market capitalisation band.
Despite his salary already being very generous, the Board has seen fit to increase Andy Hornby’s salary for 2023 to £674,450 (a 2.5% increase – Link); this comes despite the Company remaining loss-making for the last four years (statutory losses before tax: FY22= -£86.8m, FY21= -£35.2m, FY20= -£132.9m, FY19= -£37.3m).
Giving any CEO the comfort of a disproportionately high base salary, as well as failing to include any performance criteria within the pay element responsible for incentivising long-term value creation, would be highly questionable at best. In the case of TRG, it can only be considered tone deaf and wholly inappropriate, serving only to further distance management from the experience of long-suffering shareholders who have endured damaging capital value destruction along with zero dividends or returns of capital since the current CEO’s tenure began.
The Board is Responsible for Management Accountability
In March 2023, the Board communicated its medium-term strategy after Oasis publicly called for clarity on strategic direction. To describe the strategic plan as underwhelming and failing to restore market confidence would be an understatement. This further demonstration of the Board’s unwillingness to recognise the need for more fundamental changes resulted in the share price falling by c.15% in response.
This lost opportunity to turn the tide on market sentiment rubs more salt in shareholder wounds sustained over the past five years, exaggerated by the £547m of shareholder equity capital raised – an amount far exceeding the Company’s current market capitalisation and raised at prices much higher than the current share price.
Shareholders who participated in those equity raises have seen the value of their investment collapse by c.70% since 2018. Longer-term shareholders have suffered even worse performance, losing a staggering c.93% since the 2015 peak, whilst currently receiving no dividends, buybacks or capital appreciation.
Regrettably, management is simply not aligned with shareholders; ownership of TRG shares by the CEO and CFO at the beginning of 2023 was 47% and 61% of base salary, respectively, despite a Board-mandated expectation of executives holding shares equivalent to 250% of salary (a threshold that increased from 200% on introduction of the RSP). The Board needs to act rapidly to close this widening gulf between management’s perspective and the ruinous shareholder experience, especially when the new strategic plan has received such a poor reception from the market.
TRG continues to be one of the worst-performing listed UK leisure stocks and we believe it will remain so until executive management is held to account and incentivized to perform. Recurring failures in pay structures despite years of clear shareholder feedback, should not be tolerated and indicate a fundamental failure of the non-executive members of the Board (both longstanding and newer members) – especially the Chair of the Remuneration Committee – in heeding these concerns and performing their duties.
Oasis therefore intends to vote against the following resolutions at the Company’s upcoming AGM:
- AGAINST: Item 2 – Approval of the Remuneration Policy;
- AGAINST: Item 3 – Approval of the Remuneration Report; and,
- AGAINST: Item 10 – Re-Elect Zoe Morgan (Chair of the Remuneration Committee).
We urge all shareholders to express their views directly and exercise their votes at the upcoming AGM to deliver a clear message that the Board’s existing approach to remuneration is failing to deliver for shareholders and should not continue. Despite our significant concerns, Oasis continues to believe in the underlying potential of TRG’s business and has a strong desire to work with the TRG Board to overcome the Company’s strategic and governance challenges; we hope the Board will take bold steps in the near future to address the concerns of its shareholders and begin a virtuous cycle of value creation for all stakeholders.
Opposition to October 2020 EGM Proposal to Introduce the RSP and Amend the Remuneration Policy
BlackRock: “Remuneration arrangements are poorly structured. Poor use of remuneration committee discretion regarding the grant of a one-off award.”
BMO Global Asset Management: “Equity awards to executives should be linked to stretching performance targets rather than time-based vesting requirements”
Abrdn: “The proposed policy replaces a performance-based long-term incentive structure with a non performance based one, leading to higher certainty of reward outcomes. The change is not considered to be accompanied with a sufficient reduction in quantum opportunity. We were also aware that the remuneration policy was not due for renewal until 2021 and were not convinced that abandoning the remuneration policy one year early was the right priority in response to the general uncertainty of COVID 19.”
Fidelity International: “1- Excessive quantum. 2- No long-term incentive arrangement.”
Opposition to 2021 and 2022 AGM Proposals to Approve the Remuneration Report:
Aviva: “Concerns over generosity of arrangements / Poor performance linkage / Lack of retrospective disclosure on bonus awards”
Legal & General Investment Management: “A vote against is applied because the bonus was paid reflecting performance during a year without taking into account the experience of other stakeholders”.
Royal London Asset Management: “… we have some concerns over the decision to grant shares at an enhanced level under the restricted share plan, given the wider circumstances of the last 12 months …”
Oasis is publishing this release solely for informational purposes in its capacity as manager of and/or investment advisor to private funds managed and/or advised by it. The release and the information, statements, opinions, interpretations and beliefs contained in it are exclusively those of Oasis and are provided in good faith, but no representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the contents of the release, and no person shall be entitled to place any reliance on the release or its contents. This release is not intended to be, nor should it be construed as, investment, financial, tax or legal advice, or a recommendation to buy, sell or hold any security or other investment or pursue any investment strategy. Neither the release nor any of its contents constitutes an inducement or offer to purchase or sell or a solicitation of an offer to purchase or sell any securities or other investments in The Restaurant Group PLC or any other person.
Oasis Management Company Ltd. manages private investment funds focused on opportunities in a wide array of asset classes across countries and sectors. Oasis was founded in 2002 by Seth H. Fischer, who leads the firm as its Chief Investment Officer. More information about Oasis is available at https://oasiscm.com.