Corpcapital’s big schlenter

By Howard Preece
Associate editor


IN THEORY, fine-sounding phrases are uttered about corporate governance. In practice, Corpcapital is a company where the three non-executive directors were pushed to the fore by its six executive directors to justify their exorbitant remuneration packages.

Although not in so many words, this is in essence the underlying message in Nic Frangos’s letter of resignation of 2 December to Corpcapital chairman Eric Ellerine.

Frangos makes shocking claims about restraint of trade payments totalling R37m handed to the top management in the past three years. Other sources say the amount could top R50m.

Frangos chaired the remuneration committee until he resigned his directorship. According to his letter – which Corpcapital does not believe is in the company’s interests to share with shareholders – restraint payments were part of remuneration and should have been brought to the committee’s attention.

Frangos alleges no information about such payments was ever disclosed to a meeting of the remuneration committee at which he was present. He was forced to ask the company secretary to provide him with a summary of payments for the past three years. “I am sure you (Ellerine) were as shocked as I was to discover that R37m had been paid to management in the form of restraints of trade.”
In 2001, the three listed entities – Corpgro, Corpcapital and Corpcapital Bank – merged to form the current Corpcapital. Frangos says information about the restraints was not disclosed to the old Corpgro board, nor were agreements to pay the executive management huge sums disclosed to the remuneration committee, despite requests.

Frangos says it can be argued this was a matter for Corpcapital rather than for Corpgro. Nonetheless, he still believed it was a pertinent issue and the potential clash of interests should have motivated full disclosure to Corpgro’s board and shareholders. Any remuneration a director receives must be disclosed as such. This includes restraint of trade payments.

The 2000 annual report of the then Corpcapital reflects a R9,1m restraint of trade payment. For Corpgro, an amount of R3,7m was disclosed for a subsidiary. The full R9,1m was not reflected in Corpgro’s financial statements, and it is not clear whether the smaller amount was included in the R9,1m.

In 2000, executive director pay almost trebled, from R6,6m to R17,6m. This was also the financial year when the group’s controversial investment in Cytech was announced. The British Virgin Islands-registered company was revalued from R2,7m to R150m. In the same year, Corpgro’s consolidated headline earnings were R151,7m, and Corpcapital’s R133,4m.

Cytech’s revaluation made a substantial contribution to profits in 2000. At the annual meeting, audit committee chairman Tom Wixley was vague about whether the Cytech revaluation was considered when directors’ bonuses were calculated. Executive directors shook their heads, but there was no outright denial.

In his letter, Frangos goes into much detail about his drawn-out battle with Corpcapital’s executive directors over implementing a sound remuneration policy. Shortly after the 2001 merger, a new remuneration committee was appointed with Frangos as the chairman.

CEO Jeff Liebesman wanted the old remuneration committee to meet to consider a double bonus for him on the grounds that he did not get a bonus the year before. Liebesman also wanted his share options backdated and revalued. Frangos objected.

At a remuneration committee meeting, Frangos also stated that director remuneration for the 2001 financial year should be fully disclosed. He claimed, in his letter to Ellerine, that the six executive directors had responded aggressively to his request.

Frangos insisted, and won this round. Jeanine van Zyl, an analyst from Old Mutual (which holds 8,2% of Corpcapital), contacted Liebesman shortly afterward with queries about remuneration.

Frangos maintains that Liebesman’s reply did not agree with the facts. On questioning Liebesman about it, Frangos was told they obviously saw things differently. “The incident shows management’s evasive and non-transparent approach to remuneration,” he says.

Frangos was careful to repeat in his letter to Ellerine that several of the incidents and issues to which he refers are supported by documentation to which shareholders, such as Old Mutual, would be entitled access. Old Mutual did not attend last week’s AGM but voted, by proxy, against several of the proposals raised.
Ellerine did not inform share and proxy holders at the meeting that any investor, particularly one as influential as Old Mutual, had voted against a number of the company’s proposed resolutions. In fact, those present at the meeting did not hesitate to agree to voting conducted by a show of hands.

In Corpcapital’s case, shareholders – who have apparently now asked to see Frangos’s letter – will be curious to know how and where the management had added value, in relation to the rewards they received.

In the three years to 31 August 2002, ordinary shareholders’ equity rose from R630m to R1 237m. Deduct the R434m from an issue of new shares and add dividends of R79m. This leaves R275m of added value.

But this figure should be compared to headline earnings of R434m declared in the same period, apparently the basis for the bonuses paid.

There is a difference of R159m between the two figures, which shows that the income statement is not always a true reflection of added value. In the three years, executive director remuneration amounted to R58m, equal to 21% of the added value.

The minorities of the former Corpcapital Bank who objected strongly to the exchange ratios when the three companies merged in 2001 now have further reason to feel aggrieved about that transaction.

According to Frangos, who does not mince his words in his letter to Ellerine, Corpcapital’s executive directors looked at their own remuneration first and forgot about their fiduciary duty to shareholders.

Frangos’s letter is not likely to be the last word on the subject; it’s probably just the first salvo in what could turn into a heated debate about corporate governance.

The Frangos letter

SELECTED excerpts from Nic Frangos’s letter to Corpcapital chairman Eric Ellerine, 2 December 2002:

• “. . . Immediately on the formation of Corpcapital out of the TPN cash shell, problems arose which evolved over a period to the present boardroom disagreement about principles of disclosure and corporate governance. This disagreement started with the proposed award by management of a significant shareholding to themselves in Corpcapital, on its formation three years ago. You (Ellerine) were furious and a meeting took place with management, which became heated and emotional. It was the first indication that management was not going to come to terms with accepted methods of managing conflicts of interest. Since then, the disagreements have broadened to cover other aspects.”

• “. . . You (Ellerine) were appointed to the Corpgro remuneration committee, and both you and I were appointed to the remuneration committee of Corpcapital. During the next two years (from May 1999), neither you nor I were invited to a single Corpcapital remuneration committee meeting. If we look back at what happened during this period, the remuneration of management increased significantly and substantial restraint payments were made. In most cases, the details were not disclosed to the holding company even though they were material.”

• “. . . Jeanine van Zyl of Old Mutual contacted the CEO (Jeff Liebesman) with queries related to the remuneration disclosure. The CEO’s reply contained misrepresentations and outright departures from the facts.”

• “Fifteen months of significant effort by the remuneration committee were summarily negated. The pattern seems to be clear. When you agree with management, you do a good job; when you don’t agree with them, you are chastised and isolated, as though directors report to management and not the other way around.”

• “No remuneration committee meeting that I had previously attended had been presented with information on restraints of trade. It was for this reason that I instigated an inquiry to the company secretary requesting him to ensure that we were provided with a schedule of restraint payments over the previous three years. I am sure you were as shocked as I was to discover that R37m had been paid to management in the form of restraints of trade. This information had not been previously disclosed to the holding company board and no agreements had been seen by the remuneration committee, even though they were requested.”

• “The Cytech story is not only a disclosure issue but is perhaps the clearest indication of a value system with which I cannot identify. Having initiated the inquiry two years ago in a proper way through the board, little effort was made to satisfy my initial inquiries . . . notwithstanding my following the process, I did not receive information timeously but received aggressive and personal letters from the CEO to boot. Eventually, when the facts were out, both you and Tom Wixley confirmed at our meeting on 29 June 2002 that none of the facts had previously been disclosed either to the audit committee or to the board of directors. What could possibly speak stronger on the lack of commitment to transparency by management?”

• “The differences of opinion (relate to) a lack of disclosure to shareholders of a company which made a material contribution to profits, frustrating the efforts of a non-executive to obtain information, no full audit of (Cytech), no independent valuation despite the potential conflict of interest, management given a significant role during the “independent valuation” and use of intimidating tactics by management against me.”

• “. . . sustained efforts have been made to deflect my inquiries, shift the agenda and personalise issues, often with the use of intimidating tactics.”

• “. . . new regulations won’t solve the governance problems we’re seeing today. Those problems can be solved only if (Corpcapital’s) independent directors step up to their legal and fiduciary responsibilities. . .”

• “. . . I have come to the view that the orientation of the six (executive directors) is to favour their own interests rather than that of (shareholders). When they are opposed, they wear down opposition; and if the opposition persists, they have shown no reluctance to adopt aggressive tactics.”

• “. . . Benji (Liebmann’s) letter is a further example of the intimidating tactics that have been employed against me in recent times to dissuade me from pursuing my rights. . . You (Ellerine) further confirmed that copy of the letter had been personally vetted by Wim Trengove (non-executive director and human rights lawyer).”

• “I can no longer support a management team where I regard their agenda as not being in the interests of all shareholders.”

Corpcapital’s directors

Executive
Jeff Liebesman (CEO) Martin Sacks Errol Grolman Neil Lazarus Benji Liebmann Barry Kalkoven
Non-executive
Eric Ellerine (chairman) Wim Trengove Tom Wixley
By Deon Basson deonbass@mweb.co.za