Friday, July 1, 2011

Tesco Shareholders Meet: Board Says Yes to Pay Plan, No to Investigation of Fresh & Easy Neighborhood Market; Pig Farmers Say it's Impossible to Bring Home the Bacon

Tesco's 2011 Annual General Meeting (AGM)

Tesco's annual shareholders' meeting today in Nottingham, England UK, home of the Sheriff of Nottingham of literature fame, went off with precision - and with the exception of a couple interesting diversions was nearly as placid as the countryside surrounding the Midlands' city where it was held.

First up, Tesco's shareholders approved the global retailer's new Remuneration Plan, or pay package for senior executives who also serve on its board, by a whopping 97.2%. In contrast, at last year's annual meeting, 47% of shareholders voted against the Remuneration Plan for 2010.

What a difference a year - and a new pay scheme - makes.

In this story on Wednesday - June 29, 2011: Union-Affiliated CtW Investment Group Calls For 'Objective and 'Independent' Review Of Tesco's Fresh & Easy Neighborhood Market - we said Tesco shareholders - which really means the big institutional investors because that's where most of the votes are - would pass the global retailer's Remuneration Report, approving the new senior executive/board director compensation plan by a healthy majority, although even we were surprised by the whopping 97.2% in favor vote.

In June, Tesco unveiled the new pay plan for its senior executives who also sit on the board, as a way to try to put an end to what many shareholders and others have argued over the years is the controversial way in which the United Kingdom-headquartered global retailer compensates and rewards the executive directors.

The new pay (or remuneration) plan, which Tesco's board says is a simpler, more collegiate and more investor-friendly version compared to the old one, basically removes executive-level stock options from the senior executives-directors' compensation (bonuses and stock on top of base salary) package and replaces them with what Tesco is calling a performance share award.

All the directors performance share awards are based on the total performance of Tesco plc, rather than its individual divisions and the like, which is one of the collegiate aspects of the plan, according to Tesco.

In the new program Tesco also has dumped its four long-term financial incentive plans for the executive directors - which is something some investors and others have called excessive - and replaced them with just one plan.

The old plan also required five different performance measures or metrics to determine success in terms of the bonuses and stock options the executive directors would receive. In contrast, under the new and simplified plan, there are two performance measures: return on capital employed and earnings-per-share.

Additionally, under the old plan Tesco used over 20 performance measures to determine annual bonuses for the senior executives who also sit on the board. That's been chopped down to just seven in the new plan. More simplification.

All the directors will participate in the same plan now (collegiate), unlike under the old scheme, including board member-Tesco group deputy CEO, chief marketing officer and Fresh & Easy Neighborhood Market CEO Tim Mason, who was singled out among the executive directors previously, in that part of his bonus and stock option package was based on the performance of Fresh & Easy USA, which he's been CEO of since 2006.

The package though wasn't based on Fresh & Easy's making a profit or even breaking-even. Instead it was based on certain benchmarks put forth by former CEO Terry Leahy, who retired in March of this year, and approved by Tesco's board.

For example, last year Mason was given a bonus worth about 80% of his annual salary of £832,000 - which is about $1.336 million at today's conversion rate - even though Fresh & Easy had loses about 10% higher than the previous year.

In 2009, Mason took home total compensation of over $6 million, despite huge losses at Fresh & Easy.

In both cases then Tesco CEO Terry Leahy and the board said he earned the pay and bonuses, plus stock options, for hitting certain strategic goals and meeting certain corporate benchmarks and milestones.

From 2006 to last year Mason's only position, in addition to sitting on the board, was CEO of Fresh & Easy. But in March of this year he was named to the added posts of Tesco group deputy CEO and chief marketing officer for Tesco. Therefore, it makes logical sense he should be included along with all the other executives-directors in the compensation scheme, in our analysis. (See our Jun 29 piece linked above and below for more details about that analysis.)

No independent investigation of Fresh & Easy

In our story on Wednesday [Union-Affiliated CtW Investment Group Calls For 'Objective and 'Independent' Review Of Tesco's Fresh & Easy Neighborhood Market] we reported the labor union-affiliated Ctw Investment Group asked new Tesco board member and incoming (November 2011) chairman Richard Broadbent to initiate an objective and independent review of the retailer's El Segundo, California-based Fresh & Easy chain. Broadbent was approved by shareholders as a board member today. He joins the board tomorrow.

In our story linked above, we said the board would not do this now or anytime in the future. Tesco board chair David Reid, who is retiring in November, and the rest of the board did just that, dismissing the request by CtW and another firm, Pirc, saying it would not order such an independent review of Fresh & Easy Neighborhood Market. End of story.

In a statement Tesco's board said: "CtW doesn't own shares and doesn't represent shareholders. Pirc doesn't represent shareholders either. We are very glad that shareholders have endorsed the new Remuneration Plan."

CtW Investment Group manages pension funds for various U.S. labor unions, including the United Food & Commercial Workers (UFCW) union, which have investments in Tesco. It says it's therefore an institutional investor in Tesco, just like the various other fund management firms attending today's meeting. And since CtW was at the meeting, and Tesco only allows investors and the media at the annual shareholders' meeting, it would appear on the face of it the retailer recognizes the investment group as an investor. If not, why was CtW allowed at today's meeting?

A representative of CtW said today he was disappointed by the decision the board made to say no to an independent and objective investigation of Fresh & Easy. But he also said he was far from surprised by the decision.

The union pension fund-affiliated investment group was also at last year's shareholders' meeting, along with the UFCW union. The representatives of CtW and the UFCW were part of some verbal fireworks with then CEO Terry Leahy last year over the compensation issue (particularly as it pertained to Tim Mason), which is something Tesco and new CEO Clarke avoided at this year's shareholders' meeting. Read our story here - July 5, 2010: Verbal Fireworks at Tesco's 2010 Sharholders' Meeting in London. It's also good background in general for this piece.

The vast majority of investors at today's meeting were fine with the board's saying no to an independent investigation of Fresh & Easy, although many weren't fine or happy about the 176-store U.S. chain's continued losses, which to date are at about $900 million

CEO Clarke said little - and deputy CEO and Fresh & Easy Neighborhood Market CEO Mason said nothing - about Fresh & Easy at today's meeting, other Clarke's saying Tesco still plans to break even with the grocery chain, which lost about $307 million on sales of about $818 million in the fiscal year end February 26, 2011, by the end of the its 2012/13 fiscal year, which is 20 months from now.

Clark also said he's pleased with Fresh & Easy's "progress," based in part on the four trips he's made to its El Segundo, California-based headquarters offices and Riverside County distribution center campus since February of this year,  saying he believes the chain's on track to break even by February 2013, which is something he's said before a few times since taking over in March as CEO of Tesco.

Mason didn't make a presentation about Fresh & Easy at today's shareholders' meeting, which didn't surprise us but demonstrates how much Tesco wants to downplay its U.S. operation, which has 176 stores in California (127 units), Arizona (28) and Nevada (21), which is hundreds of fewer stores then it originally said it would have open by now.

The first Fresh  Easy stores opened in November 2007. Tesco originally planned to have 500 stores open by now and up to a 1,000 units open by the end of 2013. The plans now call for 300 stores to be open by February 2013.

We said from day one, late 2007 when the blog was started, that those store count number were over the top.

We were right.

And when Philip Clarke took over as CEO of Tesco in March, he said it would take 400 stores to break-even. In April he revised that to 300 stores. Terry Leahy's dream was for Fresh & Easy to be a cash cow for Tesco. Clarke, who inherited the loses at Fresh & Easy from Leahy and Mason, would be pleased as punch to break even.

This year's fireworks: Protesting pig farmers

Tesco's shareholders may have been fairly happy about things overall at today's annual meeting, voting by 97.2% in favor of the Remuneration Plan, as an example. But a group of about 70-80 British pig farmers and supporters protesting outside the conference center in Nottingham where the event was held were "slopping mad."

Struggling to bring home the bacon

The pig farmers and there allies said Tesco is paying them unfair prices for the pork they sell to the retailer, which is the UK's number one grocer, with an about 30% market share, and they want the retailer to pay a more fair price for the locally-raised pigs. Tesco's top two competitors, Walmart-owned Asda and Sainsbury's hold a combined national share of about 34%, to put just how big Tesco is in the UK in perspective.

One of the pig farmers said rising costs for feed are rapidly putting him in a situation in which if Tesco doesn't soon raise the price it pays him for his pork he will be losing money on every pig if he continues selling to the retailer.

A Tesco spokesman said the retailer believes it pays a fair price for the pigs and that Tesco makes a strong effort to support and advertise the locally-produced pork.

But the pig farmers weren't buying this, which is why they were protesting outside the shareholders' meeting, holding signs with various slogans, such as this one: "Tesco - how about the crumbs from your rich man's table?"

The protesting pig farmers received a significant amount of attention from investors and the media today though, perhaps proving that in addition to pork-producing the also know that in public relations as in pig farming the "squeaky" wheel most often not only gets the grease but also its 15 minutes or so in the spotlight.

But Tesco would be wise to sit down with these local pig farmers and try to hash something agreeable out, as the issue has been festering for a very long time in the UK.

Related Stories

June 29, 2011: Union-Affiliated CtW Investment Group Calls For 'Objective and 'Independent' Review Of Tesco's Fresh & Easy Neighborhood Market

May 11, 2011: Richard Broadbent to Join Tesco's Board July 2; Become New Chairman November 3

April 19, 2011: Tesco's Fresh & Easy Neighborhood Market Posts Biggest One-Year Loss Yet - $307 Million Loss on Sales of $818 Million
March 1, 2011: Fresh & Easy Neighborhood Market CEO Tim Mason Pockets Nearly $1 Million From Sale of Tesco Shares

February 28, 2011: Changing of the Guard: Clarke Takes Over the Reins as Tesco CEO Wednesday

February 28, 2011: Big Day For Tesco CEO Terry Leahy: Retirement and A Birthday But No Break-Even For Fresh & Easy USA On His Watch

[Also: Click on the following links - , , , , , , , ,  - to read stories about past Tesco annual general (shareholder) meetings and related topics.]

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