The latest trading update from pubs chain JD Wetherspoon (JDW) is, as usual, overshadowed by a rant from chief executive Tim Martin. Hang on a minute, though: this one isn’t about Brexit. It’s about corporate governance.
A Broken System
Martin reckons the current system has led directly to the failure or chronic underperformance of many businesses, including banks, supermarkets and pubs. It has led to the creation of almost unreadable annual reports full of jargon, clichés and platitudes that confuse rather than enlighten. He doesn’t do thing by halves.
Far from seeing non-executive directors as usefully holding executives to account, he perceives them as disenfranchising the executives and the workforce – the people who, Martin argues, have real expertise and are the cornerstone of business success.
For good measure he accuses the people who make the rules of ignoring the customers and also of ignoring the regulations they impose on others.
It’s a fair point that sometimes part time non-executives can seriously outnumber full-time executives but the most spectacular failures have been where non-execs fell short in their duty of curbing the excesses of the chief executive. The debacle that was Royal Bank of Scotland (RBS) in Fred Goodwin’s time before the financial crash is an obvious case. However, no system can entirely counter human frailty.
Where Martin has a good case is complaining that the corporate governance rules discourage long-term occupancy of a seat at the board, with chief executives lasting on average five years and non execs only four. Unless things are going badly wrong there is every reason to encourage continuity. A team that is delivering the goods should stay on as long as possible. Investors do well to back successful management.
The trading update from Wetherspoon was quite interesting as well. Total sales increased by 5.6% in the 13 weeks to October 27, with like-for-like sales 5.3% ahead. Wetherspoon has spent £43.3 million on buying the freehold of pubs that it previously leased. Now that is a lesson worth learning. So often in the past retailers have thrown away their assets on senseless sale-and-leaseback that put their premises into the hands of property companies, trading short term gains for long term pain.
The shares gained 2.7%. They are, though, still below September’s all-time high. There could be more gains ahead.
Housebuilders' Costs Ease
There was a key sentence in the trading update from housebuilder Taylor Wimpey (TW.): “Over recent months we have seen a softening in the cost pressure experienced earlier in the year and expect that cost inflation will reduce as we go into 2020.”
Given that demand continues to outstrip supply, the rising cost of building homes was the one big worry for shareholders across the sector. If that worry is easing, then there is no reason why investors should get cold feet despite a slight squeezing of margins recently.
It is true that TW admitted seeing “some increasing customer caution, particularly in the higher-priced markets of London and the South East”. However, the order book remains strong and cancellation rates remain low. Results for this year are in line with expectations.
I hold shares in Taylor Wimpey and two other housebuilders. I will continue to hold and collect the dividends.
Burberry Shrugs Off Hong Kong Crisis
It takes more than a few weeks of rioting to stop rich people in Hong Kong from buying luxuries. Burberry (BRBY) reports sales up 5% and operating profits up an underlying 14% in the 26 weeks to 28 September.
That’s a much better performance than many people, including me, expected and it reflects well on the new strategy of introducing new products and realigning distribution towards the luxury market.
The shares rose 3%, although they are still well below last July’s peak. If you have stayed in since then you will want to hold on. The future looks brighter than it did four months ago despite the Hong Kong riots.
