Archive for the ‘CEO’ Tag

Pay Ratios

 

Interest by the media, the public, and shareholders in the pay of CEOs has never been higher, and governments have increasingly taken notice of this in recent years. It is perceived as inequitable and often unjustifiable as to why there should be such large discrepancies between the pay of CEOs and of the employees in their companies. Recent legislation in some countries, and proposed legislation in others, has sought to address this concern by ensuring that companies disclose the ratio of CEO pay and the median employee’s pay in their company.

US Companies

In 2015 the SEC adopted amendments to Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, on pay ratio disclosure such that companies have to provide details of the relationship of the annual total compensation of their employees and the annual total compensation of their Chief Executive Officer (CEO), i.e. the ratio of the CEO pay to the median of the annual total compensation of all employees. This applies to companies’ for their first fiscal year beginning on or after 1st January 2017.

Honeywell International, a large multinational corporation, was the first major U.S. public company to disclose its ratio of CEO pay to that of the median employee with a pay ratio of 333:1.

The American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) highlights that in the S&P 500, Mattel had the highest ratio of CEO pay to median worker pay with a ratio of 4987:1. They reported a higher ratio still in the Russell 3000 where Weight Watchers International had a pay ratio of 5908:1. More detail is available at:

https://aflcio.org/paywatch/company-pay-ratios

UK Companies

In the UK, listed companies with more than 250 UK employees will legally be required to annually publish and justify the pay difference between chief executives and their staff for the first time. The regulations governing pay ratios will, subject to Parliamentary approval, come into effect from 1 January 2019 with companies reporting their pay ratios in 2020.

The disclosure of pay ratios is part of a move to hold larger companies more accountable for CEO pay and will provide helpful insights into the difference between CEO pay and average employee pay in different sectors and in individual larger companies in the UK.

https://www.gov.uk/government/news/uks-biggest-firms-will-have-to-justify-pay-gap-between-bosses-and-their-workers

 

Japan

Japan is a country whose CEOs have traditionally earned less than their global peers and where the ratio of CEO pay to that of the average employee has been lower than in countries such as the US. Part of this is attributable to the culture of Japan where very high pay ratios between CEO pay and average employee pay would not be viewed favourably.

It will be interesting to see what the impact of the disclosure of pay ratios in the US and other countries will be in the coming years.  Already shareholder revolts over executive pay during 2018 are growing and high pay ratios of CEO pay to the average employee’s pay could increase shareholders’ dissent on this issue.

 

Chris Mallin

June 2018

 

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Yum China: A Case Study

The scale of the operations of Yum China Holdings is striking and the structure of the he board interesting.  But the vital questions are:

  1. Why did Yum China announce its Chairmen and CEO succession plans well in advance?
  2. Should all listed companies be required to declare their Chairmen and CEO succession plans?

 

Yum China Holdings

Kentucky-based Yum Brands Inc., owners of KRC (Kentucky Fried Chicken, Taco-Bell. and Pizza Hut brands), opened its first restaurant in China in 1987.   By the time their Chinese operations were spun off, on 31 October 2016 to Yum China Holdings Inc., it had become China’s largest restaurant chain.  Yum China owned the franchise for Pizza Hut in China with more than 1,500 restaurants in over 400 cities; and the franchise for KFC, with over 5,000 outlets in nearly 1,000 towns and cities.  Taco Bell operations were also starting.

Primavera Capital Group, a China-based global investment firm, made a strategic investment in Yum China and the company was then listed on the New York Stock Exchange (YUMC) in November 2016.  Yum China Holdings Inc. is registered in Louisville Kentucky with headquarters in Shanghai.

 

Yum China strategy

The company outlines its view of its potential on its website:

‘Our brands are integrated into popular culture and consumers’ daily lives.

We are dedicated to serving our customers’ evolving needs by enhancing the in-store experience, improving mobile connectivity, introducing innovative new products, and constantly delivering value.  We also remain focused on driving shareholder value by growing sales and profits across our portfolio of brands through increased brand relevance, new store development and enhanced unit economics.  With a rapidly growing consumer class and increasing urbanization, Yum China is well positioned for long-term growth’.

 

The board of directors of Yum China Holdings[1]

The board has nine members, seven of them independent according to the company.

 

Fred Hu is chairman and founder of Primavera Capital Group, a China-based global investment firm (“Dr. Hu has served as chairman of Primavera since its inception in 2010.  Prior to Primavera, Dr. Hu served in various roles at Goldman Sachs.)

Peter A. Bassi served as president then chairman of Yum! International Restaurants.  Prior to this, Mr. Bassi spent 25 years in a wide range of financial and general management positions at PepsiCo, Inc., Pepsi-Cola International, Pizza Hut (U.S. and International), Frito-Lay and Taco Bell.

 

Christian L. Campbell is currently owner of Christian L. Campbell Consulting LLC, specializing in global corporate governance and compliance.  Mr. Campbell previously served as senior vice-president, general counsel and secretary of Yum Brands from its formation in 1997 until his retirement in February 2016.

 

Ed Chan Yiu-Cheong is currently a vice-chairman of Charoen Pokphand Group Company Limited and has been an executive director and vice-chairman of CP Lotus Corporation since April 2012.  Mr. Chan was regional director of North Asia of the Dairy Farm Group.

 

Edouard Ettedgui currently serves as the non-executive chairman of Alliance Française, Hong Kong.  Mr. Ettedgui also currently serves as a non-executive director of Mandarin Oriental International Limited, the company for which he was the group chief executive.  Prior to that, Mr. Ettedgui was the chief financial officer for Dairy Farm International Holdings.

 

Louis T. Hsieh currently serves as a senior adviser to the chief executive officer and as a director of New Oriental Education & Technology Group.

Jonathan S. Linen is a member of the board of directors of Yum! Brands, a position he has held since 2005, and of Modern Bank, N.A.  Mr. Linen is advisor to the chairman of American Express Company after serving as the vice-chairman of American Express Company.  Mr. Linen also served on the board of The Intercontinental Hotels Group.

 

Micky Pant is the chief executive officer of Yum China.  Mr. Pant has served as chief executive officer of Yum! Restaurants China since August 2015.  Over the past decade, Mr. Pant has held a number of leadership positions at Yum! Brands, including chief executive officer of the KFC Division, chief executive officer of Yum! Restaurants International and president of Global Branding for Yum! Brands and President of Taco Bell International.

 

Zili Shao has served as co-chairman of King & Wood Mallesons – China.  Mr. Shao held various positions with JPMorgan Chase & Co., including chairman and chief executive officer of JPMorgan China, vice-chairman of JPMorgan Asia Pacific and chairman of JPMorgan Chase Bank (China) Company Limited.

 

Yum China announces its Chairman and CEO succession plans

On 5th October 2017, Yum China announced that its Chief Executive Officer, Mr. Micky Pant, would become Vice-Chairman of the board and Senior Advisor to the company on 1st March 2018.  Ms. Joey Wat, who currently serves as President and Chief Operating Officer, would succeed Mr. Pant as Chief Executive Officer.

 

The company explained that Mr. Pant had served as CEO and a member of the Board of Yum China since its spin-off from Yum! Brands, Inc. and, prior to that, he served as CEO of Yum! Restaurants (China), when it was a division of Yum Brands Inc.

“We are exceptionally grateful to Micky for leading the Company through its spin-off and building a solid foundation as an independent company,” said Dr. Fred Hu, Chairman of the Board of Yum China Holdings.  “We thank Micky for his many significant contributions and are pleased that he will be Vice-Chairman of the Board and will also continue to serve the Company as its Senior Advisor in order to ensure a seamless transition to Joey.”

“Joey is an extraordinarily talented executive and the ideal leader to become our next CEO,” Dr. Hu continued.  “Joey has a strong track record of achieving results, and with her unique ability to translate vision and strategy into future world-class operations, I have no doubt that the Yum China business will continue to grow under her strong leadership.

Ms. Wat spent seven years in management consulting, including time with McKinsey & Company’s Hong Kong office.  From 2004 to 2014, she served in both management and strategy positions in the Hong Kong-based Hutchison Whampoa group, including time as Managing Director of their UK company, which operates the pharmacy chain Superdrug.  Ms. Wat joined Yum China in September 2014, first as President of KFC China and then as Chief Executive Officer of KFC China in August 2015.  She has been the President and Chief Operating Officer of Yum China since February 2017 and was appointed as a member of the Board in July 2017.

 

Source: Tricker, Bob and Gregg Li, Understanding Corporate Governance in China, Hong Kong University Press [forthcoming]

 

[1] Yum China press release.

 

British Airways loses IT – a case study

British Airways (BA) used to be called ‘the worlds favourite airline.’  Not any more.   On May 27 2017, a world-wide systems failure grounded all BA flights.  Check-in desks at London’s Heathrow and Gatwick and other airports around the world were unable to access passenger details.  470 flights were cancelled in London and a further 183 on the following day, with many more flights stranded around the world. Tens of thousands of passengers were left standing around for hours with no information, until being told to ‘come back tomorrow’.  BA airport staff seemed unprepared for the huge numbers of stranded passengers. BA web sites and inquiry operators had little information, other than that all flights had been cancelled. Passenger baggage piled up and did not reach them for days.  Compensation claims for delays and lost baggage were estimated at over £100 million.   The reputation loss for BA was immeasurable.

Although some immediately thought this must be a cyber attack, it was not.  BA’s initial explanation for the systems breakdown was loss of power to servers on the central reservation system. Other systems reliant on access to passenger data, including the flight loading system and the baggage handling system, then shut down.

IT experts suggested that with such sophisticated systems, BA must have included back-up power supplies.  Indeed they had, but it emerged that the power had failed totally because a maintenance worker had turned it off.  The back-up systems, a generator and batteries were working perfectly.  Then, once power was restored, efforts to re-boot the systems were bungled.

Some BA ex-employees, who had been laid off as a result of a head office cost cutting drive, suggested that the heart of the problem was a decision to out-source IT work to an Indian company.  ‘The BA system is a legacy system that has evolved over generations of equipment and software changes,’ they said. ‘The inter-relatedness of the systems and the complexity of the data is immense.  BA needed people who had grown up with the system.  This is not the first time the system has failed this year.’  BA denied this suggestion.

British Airways, once the country’s flag-carrier, is now a subsidiary of the International Airline Group (IAG), a Spanish company, which also owns Iberia, the Spanish airline.  IAG’s shares had risen significantly in the previous year and suffered only a small fall following the BA systems saga.

The CEO of IAG, Willie Walsh (who had previously headed BA) did not appear during the crisis, leaving the situation to be handled by BA’s CEO, Alex Cruz.  They were both criticised for delays in offering explanations or apologies.  An official raised a storm by suggesting that passengers would receive full refunds on their tickets, but BA would not pay for the cost of missed connecting flights, alternative travel arrangements, or accommodation.

Subsequently, BA apologised to its customers and commissioned an independent inquiry.  The British airlines’ regulator, the Civil Aviation Authority, was also called on to examine the case.

At the previous AGM of IAG, shareholders had received a letter from a corporate governance advisory group that ‘the board should consider bolstering the IT experience of its non-executive cohort: only one of the serving non-executive directors has IT experience.’

 

Discussion questions:

  1.  Who was responsible for this debacle?
  2. How might such a situation have been avoided?