The 103rd annual general meeting of Naspers Limited will be held in Cape Town on Friday 25 August 2017 at 11H15. There will be a number of ordinary resolutions to vote on and five special resolutions to vote on. 

There has been a show of shareholder activism of late in South Africa, with a growing percentage of shareholders no longer simply nodding through resolutions, questioning governance, and making their vote of disapproval and alternative point of view heard.

For the purposes of this note, I have settled on two resolutions relating to executive remuneration, an increasingly contentious topic.

Naspers 

Share price ZAR: R2992 

Net shares in issue: 431,3 million

Market cap ZAR: R1 290 million

Trading Buy and Portfolio Buy

Ordinary resolution #7 is “to endorse the company’s remuneration policy, as set out in the remuneration report in the integrated annual report by way of a non-binding advisory vote”. This means that even if hypothetically 100% of shareholders voted against the remuneration policy, it would have no force and effect. The use of the word “endorse” is a little presumptuous as it implies implicit approval or support, when in fact there may well be shareholders who disapprove.  

Ordinary resolution #10 is to approve amendments to the Naspers share incentive scheme such that there is a four-year vesting period rather than a five-year period with 25% of the award vesting each year rather than the current policy of vesting running from years three to five. This ordinary resolution needs a majority of 75% to pass.

The three executive directors receive fixed pay and pension contribution, an annual performance incentive, and long-term incentives in the form of Naspers N share options and appreciation rights in the underlying businesses. In 2017, the CEO received $1,1 million in basis pay, pension contributions of $125 000, an annual performance incentive of $973 000, and the fair value of long-term incentives was worth $10,4 million.

The annual performance incentive is split 50% “group financial results” and 50% “operational and personal objectives”.

Share options and appreciation rights are issued at market value. Executive directors who retire and become non-executive directors can retain their share options and appreciation rights under the rules of the group’s share-based incentive schemes only if they serve on group boards.

Awards released during the period 1 April 2016 to 31 March 2017 for the CEO were Naspers N share options at fair value of $10,5 million and appreciation rights at a fair value of $8,3 million. Outstanding awards not yet released are Naspers N share options at fair value of $34,0 million and appreciation rights to the value of $29,0 million.

On 31 March 2017, the group held 3,3 million Naspers N ordinary shares as treasury shares to settle outstanding options under share incentive schemes. This has a dilutive effect of 2 US cents per N ordinary share.

So, we have two issues to consider.

Firstly, a non-binding vote on remuneration. Whether you agree or disagree with executive compensation and how it is arrived at doesn’t matter. But let’s say you take exception, it will still be recorded as disapproval and thus the percentage of those disagreeing will be public knowledge. Call it a protest vote if you will from those who don’t want to “endorse” the executive pay policy.

Secondly, we have a vote on amendments to the Naspers share incentive scheme. This is not advisory and has a high hurdle. If enough shareholders take exception it is possible for the proposed change to be rejected.

Below, I have put forward points in favour from the Yey camp and points in disagreement from the Nay camp. This is factual and I personally express no view either way. Having read both points of view, you the shareholder should then make your choice, Yey or Nay. 

I have issued several notes analysing Naspers. These include “Tencent robust Q2 result” on 16 August, "A hero delivery" on 13 July with an update on 31 July, “Result ready reckoner” on 23 June, and “Marked-down Tencent proxy” dated 11 January. I’d suggest clicking though to those notes if you’d welcome a refresh on the analysis or if you have not had the opportunity to view it yet.   

Yey

Ordinary resolution #7 and ordinary resolution #10

• Basic pay and annual incentive bonus is not excessive for a R1,2 trillion or $90 billion market cap company that in F2017 generated revenue of $14,6 billion and EBITDA of $3,3 billion. The CEO gets a measly 0,07% of the EBITDA.
• The incentive bonus seems ok, after all half is on the group result, which if bad would mean they get penalised, and I am sure the company has worked out a reasonable formula for the operational and personal objectives.
• I’m not sure how they work out that hefty long-term incentive, but I guess Naspers, as an international company, has to secure the best international talent and reward commensurately.
• Let’s face it, Naspers core headline earnings last year was a whopping $1,75 billion, an increase of 40%, with core headline earnings per share up 36% in US dollars. The CEO may get a huge dollar salary and bonus but if he is responsible for that sort of performance shareholders should not quibble.
• Five years ago, Naspers cost you R455 per share whereas today it is over R2900 per share, an increase of over 500% in rand. I can’t think of a share on the JSE that comes close to beating that. In fact, the All Share Index has seen almost no growth in close to four years. As I benchmark my returns in rand against the JSE that is good enough for me.
• The company says that long-term incentives align executive remuneration with shareholder returns over time. With a return of 500% over the last five years and 100% over three years it is only fair that the executives share in that stellar return though share options and appreciation rights.
• If Naspers want to relax the period by one year to four and for the executive have the benefit of taking ownership of 25% of the stock options each year from year one, rather than 33% each year but from year three, then that seems fair. They say the amendment is to “align them with changing commercial realities and to bring them in line with market standards”. If that is the trend internationally then we have to move with the times.
• I think the numbers speak for themselves, they are pretty. I intend to vote in favour of ordinary resolution #7 and ordinary resolution #10. I say Yey.

Nay

Ordinary resolution #7 and ordinary resolution #10

• Naspers has several majority owned assets, the largest and most profitable being the well-established MultiChoice (DSTV), and associate investments, in which it has a minority interest.
• The largest associate investment is Tencent, a 33,51% interest. Naspers is irrelevant to Tencent, it is a passive investor. The Tencent dividend and profits from MultiChoice and Media South Africa are the main source of cash. Tencent contributes all the reported EBITDA and over 100% of earnings. Assets other than Tencent make a huge combined loss so group core earnings is misleading.
• Basic pay and annual incentive bonus are excessive as management is being rewarded for losing an increasing amount of money each year. They should get penalised for the aggregate losses that they manage and not get the free-rider benefit from an asset that they have no influence on but which is the goose that lays the golden eggs. Existing management had no role in the historic decision to buy a share in Tencent and they certainly don’t deserve to be rewarded for that.
• Naspers reports results in US dollars. In US dollars, my return has been very poor relative to Tencent. Over five years, Tencent has increased by over 500% in US dollars whereas Naspers is up only up 260%. Tencent has outpaced Naspers by a factor of almost 2x in dollars.
• What concerns me is that the Naspers discount to its stake in Tencent of close to 30% compares to a premium of around 30% five years ago, a huge derating.
• The company says that long-term incentives align remuneration with shareholder returns. When we measure properly, the executives are being rewarded for underperforming on that which they are in control over and in so doing prejudicing shareholders. If we had invested in Tencent separately we would be twice as well off today.
• To relax the share option conditions and make it less challenging is unacceptable. Long term means just that, not short term. And when it comes to annual performance incentive, there are no transparent benchmarks that we as shareholders can look at to see why they got that bonus. And “group financial results” should have no role as more than 100% of the group earnings are produced by Tencent.
• This thing about “changing commercial realities” and “market standards” is questionable. They give no substantiation to this claim. A company should do what is right for its circumstances. Relaxing an already generous incentive system, that includes the hard work and ingenuity of Tencent but excludes the lack of return elsewhere, is not on.
• I think the numbers speak for themselves, they are not pretty. I intend to vote against ordinary resolution #7 and ordinary resolution #10. I say Nay.

Wishing you profitable investing, until next time

Mark N Ingham

If you liked this blog, check out why we think AGMs are awesome and how you can attend and officially vote at the next one: 

Ever attended an AGM? Here’s how!