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Wetherspoon (JD) PLC
04 November 2014
For immediate release
JD Wetherspoon plc
Press article
The following article first appeared in Propel on 4 November
2014 and is repeated to further its distribution. It represents the
personal views of Tim Martin, chairman of JD Wetherspoon plc.
"
How to spot a winner: The Restaurant Group versus Punch
There is great pressure on stock market-quoted companies to
comply with corporate governance advice, issued by the FRC (the
Financial Reporting Council), even though, as I recently wrote in
Propel, the performance of the compliant companies has been much
worse than those which have flouted the rules.
It's fascinating to analyse the divergent fortunes of the best
and worst performing pub and restaurant companies in this context
since 2007, the last year before the banks dragged the world to the
edge of a precipice. The outright winner in the PLC stakes since
then has been The Restaurant Group (TRG), owner of Frankie and
Benny's, Chiquitos, Garfunkels and other well-known venues.
TRG was rocking and rolling in 2007 , with sales of GBP367m and
profits of GBP43m and has continued to shoot the lights out, with
sales soaring to GBP580m and profits to GBP73m by 2013 - a
brilliant outcome in a deeply disturbed economic environment. Yet
TRG was a featherweight compared with Punch Taverns, the Giant
Haystacks of the pub world. Punch had profits of GBP282m from its
8,000 or so pubs in 2007 but, like a rocket running out of fuel, it
has plummeted earthwards ever since, being rescued from oblivion
recently, by a last-minute deal with its bondholders, which left
shareholders with almost nothing.
The multi-billion dollar question for investors, bankers,
suppliers and others is whether anyone, apart from Mystic Meg,
could have foretold the divergent performances from analysing the
board structure of the 2 companies from their publicly available
2007 annual reports- I believe the answer is undoubtedly yes and
the case studies illustrate valuable lessons for analysts on the
ingredients of commercial success.
TRG breached corporate governance rules in several important
respects and these breaches gave it an enormous commercial
advantage over the hapless Punch board. It's non-executive chairman
Alan Jackson, a veteran of the leisure industry, had worked as an
executive for TRG for several years, before taking up this role -
executives who become chairmen are deeply frowned upon by the
guidelines. Yet the elevation of a successful executive to the
chair can create a sense of continuity, often valued by employees,
and also means that executive directors themselves take a
longer-term view, if one or other of them might be involved as
chairman in the future.
In contrast, the compliant Punch chaps dutifully appointed an
outsider as chairman, with a background in planning and strategy,
rather than at the pub or restaurant coalface. Although there are
no absolutes, the appointment as chairman of someone with little
industry experience, and no experience as an executive at the
company, has been a common feature of financial catastrophe at many
pubcos, banks and supermarkets in recent years.
So, advantage number one for investors to note- a successful
executive with experience of the company is far more likely to make
a successful chairman. What else should you seek as a portent of
success? The TRG board set-up illustrates another important factor
- companies with a majority of executives or former executives, in
breach of governance guidelines, invariably fare better than those
with a majority of "independent" non-executives.
TRG had a majority of 4 executive directors on the board, with
immense collective experience of the company, combined with a
strong "operational" bias. Directors Kevin Bacon and Trish Corzine,
for example, had joined TRG as area managers over 10 years before
2007. This operational experience, personified in a majority of
executive directors, is surely a self-evident advantage for a
restaurant company. Yet the surreal governance guidelines typically
approve of arrangements like Tesco's, with external appointments as
CEO and finance director being the only executives on the board -
is anyone surprised this formula ends in trouble?
Our trawl through history causes us to wince as we review the
2007 Punch board- like a boating melodrama near the Niagara Falls,
we know what's coming , but can hardly bear to look. Punch had 4
executive directors in 2007, although they had combined service
with the company of only 8 years between them, a bit more than half
Trish Corzine's tenure at TRG.
The Punch CEO had a strange CV for a publican, having spent most
of his working life, it appears, at a bank. Not only that, he
combined the day job with roles as chairman of recently-troubled
restaurant company Tragus and a directorship of travel firm Tui.
Stone the crows- did he wear his underpants outside his trousers?
Strangely, the idea that executives and companies can benefit from
this sort of vain "pluralism" is a common myth in governance
circles- as if Andy Murray could improve his game by spending a few
days a month at Spurs.
Punch's annual report shows that there was almost no true
operational experience on the board of Britain's largest pub
company in 2007, in complete contrast to TRG, apart from one chap
who had recently been appointed to run Spirit, a small part of the
company then. In any event, the 4 executives, in accordance with
the guidelines, were outnumbered by 5 non-executives, also in
marked contrast to TRG.
Other possible danger signs for readers of corporate runes
include the length of the annual report. TRG's was a modest 66
pages in 2007, whereas Punch's ran to 108. Watch out for photos too
- Punch's had 3 pages of photos before you hit any words and a
full-page each for the visages of the CEO and FD. Self-praise is
another dodgy indicator- Punch described itself as "lean, driven
and dynamic" and "driven by passion"( was this Russell Brand's
work?), whereas TRG was more modest in its hyperbole.
The TRG versus Punch comparison is not an anomaly. Wetherspoon,
Fuller's and Young's, with similar non-compliant arrangements to
TRG, all performed well in this period. In contrast, the compliant
Enterprise and Mitchell's and Butler's both suffered huge financial
problems.
In conclusion, a strangely detached elite of non-executives has
ended up in the driving seat in UK PLCs, obsessing over their
various committees while Rome burns. Companies which have complied
with governance rules and structures have been falling apart at the
seams- first the banks, then the supermarkets and pub companies.
The rule-makers themselves at the FRC represent a narrow section of
society and have little experience outside banking, the law and the
City. The corporate governance code itself is deeply flawed, with
excessive focus on board relationships with shareholders, excluding
almost completely the far more important relationships with
employees and customers. For now, the paradoxical truth for
investors and others is that you are far safer dealing with
non-compliant PLCs like TRG or Fuller's than with compliant ones.
Time will tell if this counterintuitive message is percolating
through to the ivory towers of the City.
"
Enquiries:
Company spokesman Tel.: 07956 392 234 / 020 8352 5012
Eddie Gershon
Notes to editors
1. J D Wetherspoon owns and operates pubs throughout the UK. The
company aims to provide customers with good-quality food and drink,
served by well-trained and friendly staff, at reasonable prices.
The pubs are individually designed, and the company aims to
maintain them in excellent condition.
2. Visit our website: www.jdwetherspoon.co.uk
3. The next interim management statement will be issued on 5 November 2014.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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