Monday, July 5, 2010
Verbal Fireworks at Tesco's 2010 Sharholders' Meeting in London
Yesterday, Independence Day in America, we watched colorful fireworks displays of the pyrotechnical kind.
But on Friday, July 2, at Tesco's Annual General Meeting (AGM) of its shareholders in London, UK, there were colorful fireworks of the verbal kind between Tesco CEO Terry Leahy, who is retiring in March 2011, and Bill Dempsey, an executive of the United Food & Commercial Workers (UFCW) union. A number of Tesco shareholders also got in on the verbal fireworks display.
As we reported in this story on Friday, July 2 - Tesco's Director Remuneration Report Approved at Today's AGM; But 47% of Shareholders Voice Opposition to Director Pay Packages - 38% of Tesco's shareholders, along with an additional 9% who abstained (47% total), voted against approval of the global retailer's Directors' Remuneration Report, the final corporate report of the 2009 compensation packages of Tesco senior executives who also serve on the company's board.
That nearly half of Tesco's shareholders - who in this case are comprised primarily of the big, institutional investors because that's who has most of the voting rights - voted against or abstained from voting for the Remuneration Report's approval is being considered as the largest shareholder rebellion seen in The City (the UK's version of Wall Street) this year.
The vote against Tesco's boardroom pay policy, which surprised almost everyone in terms of its intensity, comes on the heels of reports issued recently by at least four corporate governance groups - CtW Investment Group, Pirc, RiskMetrics and Manifest - critical of Tesco's director pay packages. All four of these groups encouraged shareholders to vote against the Remuneration Report prior to Friday's AGM and vote on the matter.
Additionally, analysts in the food retailing group at financial firm Citi issued a report - "Tesco: The Year Ahead Might Be Difficult Too," - on April 21, 2010, suggesting Tesco's "aggressive" accounting practices, although not illegal, leave much to be desired. The Citi report also suggested Tesco's director compensation was too high in relation to its accounting practices.
In the report, the Citi analysts accuse Tesco of over-aggressive accounting practices and argue its profits last year would have been £800 million ($1.214 billion) lower if the retailer added up the numbers in the same way as most of its UK competitors, such as the Morrisons supermarket chain, do. But Tesco chairman David Reid said at Friday's AGM there are "material inaccuracies" in the Citi report. However, he didn't go into specifics, nor has Tesco issued a written rebuttal to the report. Reid stated at the AGM that the board is "absolutely satisfied that our accounting policies are appropriate".
The primary focus of the director pay revolt - and it's not over just because the 2010 AGM is and the vote to approve prevailed, as we suggested it would - is Tesco director and Fresh & Easy Neighborhood Market USA CEO Tim Mason and his $6 million-plus 2009 pay package. Mason will add the additional title of deputy-CEO in March 2011, when CEO Leahy retires and current director of international operations and IT Philip Clarke takes over as CEO.
[See our recent stories linked for background on Tesco director and Fresh & Easy Neighborhood Market CEO Tim Mason's 2009 compensation package. June 4, 2010: Every Little (Bit) Helps: Tesco Fresh & Easy Neighborhood Market CEO Mason Paid $6.188 Million For 2009 and June 23, 2010:Tesco Fresh & Easy Neighborhood Market CEO Tim Mason Gets Big Stock Award Featuring a Singular Twist]
The basic argument is that since Fresh & Easy lost $253 million in Tesco's fiscal year 2009/10, which ended in February 2010, along with the fact Tesco is predicting a similar loss for this fiscal year, which ends in February, 2011, Tim Mason's $6 million-plus pay package is out of sorts in the northern direction based on his performance as CEO of Fresh & Easy.
However, Tesco said at Friday's AGM that Mason's 2009 compensation isn't based on Fresh & Easy's performance because it's still in start-up mode. Rather, a company spokesperson said, Tesco director and Fresh & Easy Neighborhood Market CEO Tim Mason's compensation is based on a combination of his contributions as a corporate director, along with criteria at Fresh & Easy like the "look of the stores and customer response" to the business.
However, Mason's total compensation was second only to Tesco CEO Terry Leahy's; even higher than that of incoming (March 11, 2001) Tesco CEO Philip Clarke's total package.
The fireworks: Tim Mason's $6 million-plus pay package, and Fresh & Easy in general, was the topic of considerable conversation and discussion by investors at Friday's shareholders' meeting. Fresh & Easy Neighborhood Market and CEO Mason's compensation also came up repeatedly during a question and answer session between investors and Tesco's board.
For example, one Tesco shareholder, a private investor, told the board he's voiced considerable skepticism in the past, as well as now, about the retailer's Fresh & Easy venture. But each time, he said, "you disregard me," and others who have similar concerns.
The fireworks started to emerge a bit stronger when Michael Garland, director of value strategies for the CtW Investment Group, told the board he and other investors want to know whether Tesco has taken any steps to independently assess its business strategy for Fresh & Easy, since it's failed to reach profitability, and since Tesco says it won't come close to break-even next year. He also questioned whether the pay of Tim Mason and other executives has any connection to performance metrics and standards.
In response, Tesco board chairman David Reid said: "We do have strong independent oversight of the board." But he didn't go into detail.
In his response, Reid also reiterated what Tesco has been saying about its Fresh & Easy venture for a little over two years now in regard to attempting to explain the basis of CEO Tim Mason's pay package and the performance to date of Fresh & Easy: "It’s not easy [Fresh & Easy] because of the economic conditions [in California, Nevada and Arizona] but we absolutely believe in it. We are on the case and getting on with it, he said.
CtW Investment Group invests pension fund money for the Change to Win coalition of labor unions in the U.S., which includes the United Foods & Commercial (UFCW) union. It's an investor in Tesco for the unions.
Then the really colorful verbal fireworks started - the Tesco 2010 AGM verbal equivalent of yesterday's huge Macy's Fourth of July fireworks display in New York City.
Bill Dempsey, director of the UFCW union's Capital Stewardship Program, stepped to the microphone and charged Tesco's senior management of taking a "litigious, divisive approach" in the U.S. with its Fresh & Easy Neighborhood Market and refusing to meet with the UFCW, which represents 1.3 million retail grocery store workers and employees at allied businesses in the U.S., Canada and Puerto Rico.
Dempsey, who's last name happens to be the same as that of the late and famous Irish-American boxer, Jack Dempsey, who's nickname was the "The Manassa Mauler," then counter-punched, saying: “If the Tories and the Lib Dems can agree to form a government, why can’t the [Tesco] management agree to one meeting with the union?" he asked the board.
Apparently Dempsey's comments got Tesco CEO Sir Terry Leahy's Irish up. Feeling his steel cut oats, Leahy replied: "Your union [UFCW] has never welcomed Tesco to the US. You opposed Tesco from day one, and you have gone on opposing and obstructing. This is no basis for a partnership."
Leahy then went on to tell Bill Dempsey, who is no shrinking Irish shamrock himself, that Tesco has "excellent relations" with its Fresh & Easy Neighborhood Market employees in the U.S., who - he added with emphasis - don't wish to join the UFCW union.
This is the very first time Tesco CEO Leahy has spoken out in such a public forum on the Fresh & Easy-UFCW issue in any length, beyond saying: "It's up to our employees to decide if they want to join a union in the U.S." It appears Sir Terry has now determined that Fresh & Easy's store-level workers have decided they don't want to join the UFCW, at least based on his response to Bill Dempsey's question at Friday's shareholder meeting.
Sir Terry's response also offers a glimpse of what sources have told us has been a seething - and perhaps even loathing - feeling he's developed over the UFCW regarding the union's nearly three-year campaign to organize Fresh & Easy workers, and some of the methods its used in working towards its goal, both in the U.S. and in Britain.
Perhaps the Tesco CEO allowed a bit of that seething steam to escape on Friday, since he's a short-timer, retiring from Tesco on March 11, 2011. Leahy has no plans to join Tesco's board as a non-executive member when he retires either. Therefore, come March 11 he will be cutting all formal ties, accept perhaps as a personal investor, with Tesco. In other words, Friday's AGM was his last chance - and ironically the first opportunity he's taken - to vent his feelings on the union issue in a major public forum as Tesco's CEO.
It is a fact though that the UFCW has asked Tesco CEO Leahy and members of the board to meet with them numerous times, including the time in early 2008 when Joseph Hanson, the UFCW's international president, asked Britain's Prince Andrew to arrange a sit-down for him with representatives of Tesco's senior management and members of the board. [See - February 11, 2008: Supermarket Union President Asks Britain's Prince Andrew to Arrange A 'Sit-Down' With Tesco Fresh & Easy Neighborhood Market Senior Executives]
Tesco though has always refused to meet with the UFCW executives, including that time. And perhaps the decision by CEO Leahy not to meet with UFCW executives, despite multiple invites, was in-part behind Bill Dempsey's getting his Irish up and feeling his steel cut oats in terms of his comments to CEO Leahy and the members of the board? The UFCW is an investor in Tesco through its pension funds, which are managed by the CtW Investment Group.
The tension between Tesco and the UFCW is high, and Friday's AGM, just two days before the Fourth of July holiday in America, is one of only three times in the last three years - the 2008 and 2009 AGM's being the other two - where executives of the UFCW and Tesco have been in the same room together. And the verbal fireworks were no less incendiary than the physical ones were yesterday, at the various Independence Day celebrations in cities and towns across America.
Now that the 2010 AGM has come and gone, including all the verbal fireworks, what does it all mean going forward? Very little in terms of anything changing the situation.
The bottom line is that Tesco does not want Fresh & Easy Neighborhood Market unionized. It's model - and hope - for a successful U.S. food and grocery retailing division is more similar to the non-union chains Trader Joe's, Whole Foods Market, Aldi and a couple others, rather than the big union chains like Kroger and Safeway.
On the other hand, Tesco's Fresh & Easy Neighborhood Market USA has been one of the UFCW's top three (and often number one) priorities in terms of its organizing of non-union chains in the U.S., despite the fact Fresh & Easy has under $500 million in annual sales and has lost half that much in the two fiscal years Tesco has been keeping count.
Tesco isn't likely to meet with members of the UFCW, unless it acquires a union chain and then has to. Meanwhile, the UFCW hasn't been able to get the employees at even one of Tesco's Fresh & Easy stores to call for a union vote to date, despite trying extremely hard to do so, and coming close.
As such, in our analysis and opinion, when it comes to Tesco in America with Fresh & Easy and the UFCW union, what we're going to see is more of the same: continued organizing and campaigning by the union - including taking Tesco's Fresh & Easy before the National Labor Relations Board like it's recently been doing; and continued defense against unionization by Tesco and its Fresh & Easy chain, which currently has 159 stores in California, Nevada and Arizona.
July 2, 2010: Tesco's Director Remuneration Report Approved at Today's AGM; But 47% of Shareholders Voice Opposition to Director Pay Packages
July 1, 2010: A Preview of Tomorrow's (July 2, 2010) Tesco Annual General Meeting
June 4, 2010: Every Little (Bit) Helps: Tesco Fresh & Easy Neighborhood Market CEO Mason Paid $6.188 Million For 2009
June 23, 2010: Tesco Fresh & Easy Neighborhood Market CEO Tim Mason Gets Big Stock Award Featuring a Singular Twist
June 24, 2010: Warren Buffett Strikes Again: Buys 2 Million More Shares of Tesco Stock For 3.2% Ownership Stake
June 21, 2010: The Missing Link in Tesco's Purchase of Fresh & Easy Neighborhood Market Meat Supplier '2 Sisters Food Group'
June 4, 2008: News and Analysis: UFCW Union Takes its Tesco Union Organizing Campaign Across the Pond to the United Kingdom Beginning Today
June 26, 2008: Tesco 2008 AGM: Charges of Tesco's Exploiting Workers at Indian Factory Heat Up On the Eve of Corporate Annual General Meeting
June 22, 2008: Vocal Cast of Critics and Advocacy Groups to Attend Tesco's Annual General Meeting On Friday, June 27
June 26, 2008: Tesco 2008 AGM: Barack Obama Sends Second Letter to Tesco CEO Requesting the Company Meet With U.S. UFCW Union Leaders About Fresh & Easy
August 5, 2008: UNI Global Union Launches Tesco-Specific Alliance; Calls For Tesco Executives to Meet With UFCW Union Officials Over Fresh & Easy Neighborhood Market
February 11, 2008: Supermarket Union President Asks Britain's Prince Andrew to Arrange A 'Sit-Down' With Tesco Fresh & Easy Neighborhood Market Senior Executives
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