Xstrata holders right to fret over Mick’s rewards
By Quentin Webb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Xstrata shareholders are right to fret over Mick Davisâs potential rewards from selling the company to Glencore. The chief executive drives a hard bargain, is a shareholder too, and wonât be the one recommending any merger to outsiders. But there is a potential conflict of interest in that Davis could receive two extra benefits merely for clinching a deal.
First, the Xstrata boss will see three years of âlong-term incentive planâ shares vest immediately and in full upon any takeover. If the latest LTIP award is in line with previous years, this element of Davisâs deal will be worth about 8 million pounds. Options worth another 1.8 million pounds net will also vest.
Second, Davis will be entitled to receive a cash payment equal to a yearâs pay, bonus and benefits following any âchange of controlâ. The Sunday Telegraph reckons this would be worth another 5.7 million pounds. But it seems unlikely that Davis will actually take this cash. He certainly shouldnât if he is the new CEO of the merged group. It would be farcical to pull the cord of his golden parachute if he is staying in the cockpit.
Shareholders should draw some comfort from Davisâs significant existing interest. His holdings exceed 55 million pounds once ordinary shares, and vested but unexercised options (less their strike price) are tallied. That helps align his economic interests with other investorsâ.
Still, the general principle is right. When companies are as entwined as Glencore and Xstrata, merger proposals merit close attention anyway. And parachutes can certainly cloud CEOsâ thinking. In U.S. companies, where independent chairmen are admittedly less common, researchers at Philadelphiaâs Drexel and Londonâs City university have found that the more glittering a CEOâs parachute, the lower the premium offered to shareholders.