Nasty surprises that can shock shareholders into selling frenzy

Poor handling of the royal yacht episode offers lessons to business on why it helps to alert the City if profits are lower than expected. By George Pitcher. George Pitcher is chief executive of issue management consultancy Luther Pendragon

A word about that royal yacht. For all the talk of it being a flagship for British industry, the royals seem to enjoy the odd sunshine cruise on it. Charles and Diana honeymooned on it, so it obviously isn’t all fun, but there is a case for suggesting that Britannia is a benefit in kind and, therefore, something on which the royal family should pay income tax – to which the Queen graciously acceded in the wake of the Windsor Castle fire.

This would mean that the royal yacht became for the Queen what a company car is for the rest of us. Now, by my calculations, the “scale charge”, as the Inland Revenue calls it, would amount to 35 per cent of the 60m value of the new yacht, or 21m. The royals are, I presume, higher-rate taxpayers, so would face a tax charge on their benefit in kind of 8.4m on the yacht.

Simple. The taxpayer forks out for the yacht, the Queen contributes as a taxpayer and, in turn, is taxed on its benefit. It is economic, fiscally equitable and easily understood by taxpayers and voters.

If I choose to run a 200,000 Bentley Mulsanne Turbo on the company, then I face a tax-bill of some 28,000. I can, of course, mitigate my tax liability on a benefit in kind by arguing that it is used more for business than pleasure purposes. In the case of the royal yacht, that would mean putting some detail on Michael Portillo’s claim that Britannia is always pulling multi-million-pound contracts for Britain. I’m sure a modern monarchy wouldn’t object to being subjected to the rigours of the tax inspector.

The companies that supposedly benefit from Britannia have to subject themselves to such rigours all the time. And not just the rigours of the tax-man. They also have to face the rigours of the market that is so beloved of Portillo and his colleagues. That is how we measure their performance – and, again, I’m sure that Portillo et al would be anxious to see Windsor Shipping plc measured against the unforgiving nature of market performance criteria. It is he, after all, who claims that opponents of a new royal yacht do not understand “enterprise culture”.

So, had the commissioning of a new royal yacht been handled as a proper commercial venture – subject to fiscal strictures and performance criteria – the “market” may have bought into it.

There is a parable here for British businesses which have unpalatable or difficult news to announce. The aim should be to explain as fully as possible in advance what the justifiable circumstances are that have given rise to the bad news. If taxpayers feel they have a right to own – and therefore resist owning – a royal yacht, then shareholders have a much stronger right to expect that their companies are fully justifying themselves. It is on this basis that shares are held or sold.

I reckon there is some evidence of a growing tendency among some companies not to get this right. In other words, rather like Portillo and the royal yacht, the news is presented as a fait accompli and the shareholders (or taxpayers in the case of the yacht) are expected to lump it. Unsurprisingly, they largely choose not to lump it – or, rather, they choose to sell lumps of it.

Take a couple of recent examples. At the tail-end of last week, Sainsbury’s looked a truly green grocer as it announced that profits forecasts should be downgraded by 70m to 640m-650m and watched some 13 per cent wiped off the value of its shares. City analysts claimed to be “shell-shocked” by the announcement.

At the tail-end of last year, Racal Electronics issued a blunt profits warning on a Monday, ahead of a results presentation on the Tuesday. The market was, again, taken by surprise and Racal’s shares lost 18 per cent.

I know that the rules governing analysts’ briefings are onerous and that companies are, in any event, understandably anxious that adverse news is taken in one hit, so that share prices are not subject to protracted periods of volatility. But these companies must have the wit to find means of not leaving analysts “shell-shocked” and market-makers in a frenzy of activity to out-bid each other in their efforts to mark down the shares.

Market trends, the nature of competition, one’s position in the economy and the cycle of investment are but a few matters that could usefully be discussed ahead of the kind of bald statements that emerge from companies such as Sainsbury’s and Racal.

It could serve to limit the downside of City sell-notes during tough times. But, just as importantly, it would largely remove the stigma of failure from the minds of stakeholders in these businesses. Whether it is royal corporate hospitality, groceries or electronics we are talking about, explanation over a period of time has surely got to be better than an announcement completely out of the blue.

If there are ways of making an investment of 60m in a new royal yacht on behalf of British industry more palatable for taxpayers, there must be ways of issuing profits warnings in British industry that are more acceptable for its shareholders.

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