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How much is your board worth?

Mirror, mirror on the wall, who is the most expensive (AltX) board of them all...?

Keith McLachlan*
30 September 2009 07:40
The board of directors of a company is vital to its effective functioning, strategic direction and the eventual success of
the business, as explained in my previous article.

Especially in a listed company where there is almost always the complete split between the owners (ie, shareholders)
and the management (ie, the board), it is vitally important that strong corporate governance is adhered to.

This is an especially topical subject, given the recent release of King III where the board is the focal point for good
corporate governance.

But, while as valuable as a strong board is, how much should it cost? Put differently, at what point is the board's
value outweighed by its cost?

Obviously directors should be compensated for their time, skills and experience. But, as every company is a
business, its owners (ie, shareholders) need to be compensated for the money they have spent.

There are two major drivers of shareholder returns: growing profits and a rising share price. Growing profits should
(eventually) drive growing dividends, so-for simplicity sake-this can be counted as the same thing. A rising share
price can be directly linked to a larger market capitalisation.

Based on this logic, a listed company whose profits and market cap are larger should have a (bigger) board that is
paid more...or a board that is paid more should produce a company whose profits are bigger and a market cap that is
larger.

While this logic is not completely flawless and cannot always be perfectly applied, I have taken a sample of profitable
AltX companies and calculated the following ratios:

1. (Company market cap) / (Total board's remuneration)

2. (Profit before tax & board's remuneration) / (Total board's remuneration)

3. (Company market cap) / (CEO's remuneration)

4. (Profit before tax & CEO's remuneration) / (CEO's remuneration)

In my sample it was interesting to note that the average AltX company's market cap is 34.5 times the board's
remuneration package (ratio #1 above) and its adjusted profit before tax is only 10.4 times the board's remuneration
package (ratio #2).

This last fact is quite interesting, as it implies that the average sample company is sacrificing 10.4% of its profits in
order to maintain its governance structure.

The higher either ratio #1 or #2 is, the higher the multiple of the ratios will be, thus producing a single arbitrary (but
comparable) number in order to rate and rank each of the sampled companies.
Ordering this multiple of ratio's #1 and #2 shows that the most expensive boards (of those sampled) are run by the
following five AltX companies:

Market
PBT Total
Code AFS Board Market Cap PBT Cap Ratio Ratio Ratio
ANS 2009 14,977,000 99,559,628 2,416,000 7 1 8
SFH 2008 3,461,888 21,628,839 9,635,203 6 4 24
IRA 2009 14,197,000 106,703,694 38,989,000 8 4 28
RBA 2008 7,243,750 49,600,000 23,637,064 7 4 29
ACE 2008 5,578,000 42,443,247 8,158,000 8 5 35

Firstly, note that there are different financial years being compared. This is simply due to different year ends,
availability of information and various other factors. Also, because reporting of profits and disclosure of directors'
remuneration is lagged by the reporting process, there is a difference between the financial year's results and the
current company's market cap.

Albeit, these shortcomings being pointed out, should this really matter? Shouldn't boards be consistently
remunerated, run consistent businesses and, thus, shouldn't these ratios be fairly comparable from year to year?

Ansys (JSE:ANS) comes out as the single most expensive board paying its members a total of just under R15m for
the 2009 financial year, where the group produced net profits of only R1.5m. Halving the board's remuneration
(directors must at least eat!) would more than quadruple net profit.

About this disappointing performance the Ansys directors report that it "...represents a departure from past trends as
Ansys adapts to the new global reality. These adaptions include governance reform, curtailment of expenses and the
strengthening of management and market development."

Governance reforms costing R15m? Is this not a bit excessive? The shareholders who have watched their ANS
shares drop over 51% in value since listing might agree with this.

SA French (JSE:SFH) is the second most expensive board that has watched its construction-fuelled profits implode to
a loss of between 6.29c to 7.69c per share. The group is the sole distributor, in South Africa and sub-equatorial
Africa, of tower cranes manufactured by Potain France and with the drop in market cap and dropping profits turning to
losses, how much is the board going to pay/has the board already paid itself for the 2009 financial year?

It is also worth noting that SA French's CEO is the most highly paid CEO sampled relative to the measurement
criteria above (#3 multiplied by #4). Quentin van Breda is actually SA French's "executive chairman" (which goes
against the King III recommendation of the separation of CEO and chairman and the independence of the chairman)
and took home a healthy R1 531 387 in the 2008 financial year (which is around 15% of profit before tax).

In his defence, Quentin holds a number of industry qualifications and has relevant experience of over 30 years.

Other top-heavy board remuneration packages relative to performance include:

· Infrasors (IRA) the supplier of infrastructural products who under-raised capital at listing and proceeded to
continually miss forecasts,

· RBA Holdings (RBA) the builder of affordable housing that has had its sales flattened-perhaps by no fault of its
own-by external property and financial market pressures, and

· Accentuate (ACE) also supplying the construction industry with a range of products.

On the opposite side of the spectrum, the five "cheapest" or best value for money boards belong to the following (of
the sampled) AltX companies:
Market
Cap PBT Total
Code AFS Board CEO Market Cap PBT Ratio Ratio Ratio
BWK 2008 5,416,225 1,800,000 407,884,179 49,056,890 75 10 757
ISB 2009 3,890,000 1,602,000 150,800,000 75,961,000 39 21 796
ATR 2009 4,249,000 2,050,000 333,258,554 72,696,754 78 18 1,420
AET 2008 2,199,960 1,117,800 147,502,285 72,969,870 67 34 2,291
BFS 2009 5,150,000 1,555,000 1,139,950,039 154,875,632 221 31 6,878

It is interesting to see that Blue Financial Services (BFS) completely shoots the lights out with its 2009 board's
remuneration ratios. Relatively speaking, BFS's board is at least three times better value than its closest AltX
competitor and over 20 times cheaper than fellow listed micro-loans competitor, African Dawn Capital (ADW).

Another noteworthy board remuneration comes from Africa Cellular Towers (ATR) coming in third place. The ATR
Board, though, is dominated by the joint CEO-chairman (again a company in breach of King III) founding shareholder
Christian Kruger with his packaging totalling 48% of the total board's remuneration.

This is versus the sample's average CEO package's percentage of board's remuneration of 34%.

On this note, the highest paid CEO (as a percentage of the total board's remuneration) is CIC Holdings' Trevor
Rogers who takes home just over 54% of total directors emoluments. Despite this, CIC Holdings overall board's rank
th th
is actually fairly good, as it comes in 9 best place (ie, the 9 best value) in the sample of 32 AltX listed companies.

Another interesting observation out of this sample is that generally the companies that seem to over-pay their boards
over-pay their CEOs too...or visa-versa. Perhaps these boards are too dominated by these certain individuals...?

Finally, a word that in order not to skew the ratios, I have not included any companies that made losses.
Philosophically, though, should the boards even be paid in the event that a profitable operating business (not one in
setup phase) makes a loss? In fact, how many of these losses could be avoided by just paying the board less in the
same way that Ansys could have chosen to double its profits by sacrificing some of its board's fat...

While no doubt there will be arguments for and against the facts presented in this article and there are definitely
shortcomings in the ratios used, the point should not be lost on minority shareholders of listed companies: always
question your board's expense versus the value it adds.

For transparency you can download my full sample (note that it covers only 32 of AltX companies) and calculations in
Microsoft Excel here.

* Keith McLachlan, from www.SmallCaps.co.za holds numerous AltX and small cap shares

Source: Moneyweb Online - http://www.moneyweb.co.za

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