Wealth creation should be rewarded, not sneered at

Shareholders quibbling over the remuneration package being awarded to Sir Martin Sorrell should take stock of the wealth he creates.

I like Sir Martin Sorrell. My more cynical friends and business associates tell me that this is because I have never worked for him. If that is so, I am happy for this situation to prevail. It has always seemed to me that if one struck up a pleasant, social rapport with, say, Vlad the Impaler – shopping for leather-wear, meeting for a quick latte between beheadings – it would be a shame to spoil things by getting involved in business with him.

I don’t mean to compare him to Vlad, but Sorrell is said to be aggressive when it comes to contested takeovers. It’s important that takeovers are contested, so that full prices are paid for targets. This is in the best interests of takeover targets’ shareholders. It is also important that these assets are made to sweat once they are acquired – that’s in the best interests of WPP Group’s shareholders.

These are ineluctable truths of business and they don’t make for close friendships. As it happens, I don’t have a close friendship with Sorrell. I haven’t seen him for years and our only contact recently has been confined to the odd schoolboy e-mail exchange about bath-shaped recessions and the like. I didn’t contest his bid for Cordiant Communications last year, not only because I wanted to preserve the historic goodwill between us, but because I didn’t have the money.

But it’s fun to follow him in the public prints. It’s almost a rite of spring that WPP will announce some new executive incentive plan and institutional shareholders will become excited about it, abetted by some quarters of the British press. “Greed” seems to be a common theme here and there’s usually a flurry of stories that are resonant of the great “fat cat” press coverage of the mid-Nineties, which nobody seemed to notice was driven by New Labour for electoral purposes.

It was also driven at annual general meetings by Pensions Investment Research Consultants (PIRC), which for a period seemed to carry the corporate governance banner against the so-called fat cats. These days the role largely belongs to the Association of British Insurers (ABI).

WPP was last week forced to revise a proposed incentive scheme that could have generated a remuneration package of some &£44m for Sorrell. An extraordinary meeting, due this week to approve the share-incentive scheme, had to be postponed. Prominent among the shareholder rights groups objecting to Sorrell’s large and perfectly formed package was the ABI.

I was intrigued by a follow-up story in the Financial Times on Monday, which reported that WPP had rejected a shareholder’s demand that there should be a separate and specific vote on Sorrell’s individual remuneration package. Legal & General, it appears, wanted to isolate Sorrell’s arrangements from the other 18 WPP executives who stood to benefit from the Leadership Equity Acquisition Plan.

It’s always interesting, under these circumstances, that shareholders are available anonymously to criticise the incentive schemes of executives. They are unwilling to stick their own heads above the parapet, while simultaneously demanding that the executives of the companies in which they are invested are accountable and transparent in their corporate governance.

You may be able to tell that my sympathies are swinging away from the likes of PIRC and the ABI, which do not always offer the levels of accountability and transparency that they demand of the corporations in which they are invested. But there is a bigger issue too.

The Department of Trade and Industry (DTI) has just produced the 2004 edition of its Value-Added Scoreboard, which purports to measure the wealth-creation performance of the top 800 companies in the UK. Value-added is defined by operating profit, less employee costs, depreciation and amortisation – or, more simply, as output, minus inputs of good and services.

Intriguingly, considering all the corporate governance flak it has taken recently over its miscalculated oil reserves, Shell comes top in the UK with a value-added figure of &£18.3bn. And Vodafone is third, with a figure of &£15.2bn – which puts all those fat-cat stories of former chief executive Sir Christopher Gent’s monumental remuneration into some sort of perspective.

So where does WPP come? It’s difficult to rank order, because the Scoreboard stops doing so at number 12 with Halifax Bank of Scotland (&£5.3bn). But WPP scores a very creditable &£2.8bn – well ahead of Havas (&£987m) and Omnicom Europe (&£333m). Across Europe, in the media and entertainment sector, WPP defers only to Vivendi Universal (&£11.8bn) and Bertelsmann (&£4.3bn).

Does this mean that Sorrell can incentivise himself as he wishes? Of course not. Does it mean that agitating shareholders should take account of wealth created, rather than become obsessed with the narrow measure of gross wealth received by Sorrell and other WPP executives? Yes, it most certainly does.

George Pitcher is a partner at communications management consultancy Luther Pendragon


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