AVI on Friday released its annual report for 2023, which highlighted how concerned the South African food producer and fashion retailer is to retain its top talent after its interaction in 2021 with US snacks and confectionery giant Mondeléz.
This despite the company only showing a 4.4% rise in annual headline earnings in the year ended June after battling cost pressures, as it was knocked by the effects of load shedding and was forced to hike prices to consumers amid a moribund economy.
AVI’s shares are down 1.01% in the year to date, having fallen 28.07% over the past five years.
AVI owns a portfolio of consumer goods brands ranging from Five Roses, to I&J, Green Cross shoes, to its Snackworks division consisting of popular brands such as Bakers, Baumann’s, Pyotts and Provita.
And while AVI’s report makes for fascinating reading - from the in-depth history of rooibos and communities to the increasing problems with a deterioration in municipality services such as water, electricity and roads to the battle the company has had to pass on price increases to consumers, retain them and still manage to be profitable, from a corporate governance perspective - the company’s battle to convince its shareholders that it needs to change its remuneration trajectory is perhaps the most interesting aspect of all.
In December 2021 the market booed the announcement that discussions with US snacks and confectionery giant Mondeléz International regarding the potential acquisition of its Snackworks division had been terminated and it had withdrawn its trading cautionary.
To add to the injury, AVI announced at that time, its chief financial officer (CFO), Owen Cressey, who held the position since May 2006, had quit from December 31, 2022, to take the role of business unit president, sub-Saharan Africa, at Mondelez International in January.
In its annual report on Friday, the company revealed that it feared at that time that all its other top execs were in danger of being poached and to retain them, extra-ordinary measures had to be taken.
As a result, AVI had to pay special retention bonuses to identified group executive management by approval of its Remuneration Committee (Remcom), which were CEO Simon Crutchley (R13.3m), the current CFO Justin O'Meara (R3.5m) and Michael Koursaris, Business Development Director and Executive Director (R5.3m).
This led to the total salary 2023 bill for top execs being higher than normal.
As regards remuneration, Crutchley in 2023 got paid R54.4m from R33.5m the prior year - a 62% salary hike. Its former CEO Cressey was paid R13.1m in 2022, while its current CFO O'Meara was paid R11.4m in 2023. Koursaris was paid R19.4m from R11.2m, a hike of 73%.
AVI said that during the year, the uncertainty created by the prolonged negotiations with Mondeléz prompted its Remuneration Committee (Remcom) to consider its executive retention strategy.
The strategy considered recognition and reward, the impact of change, other opportunities being offered to top talent, flexibility, and executive well-being.
“The daily demands of the group executives coupled with the potential changes that could arise from a successful transaction, alternatively the uncertainty that could arise from a failed transaction, created a situation in which Remcom believed there was a heightened risk of losing key executives before the negotiations could be finalised.
“Alternatively, in the event of a successful transaction, key executives could be lost before the transaction could be finally implemented, which it was anticipated would take a significant amount of time,” it said in the report.
The risks to the business were carefully considered and with the approval of the board, it was decided to implement a once-off special retention bonus for key individuals, over and above the approved, annual, performance-related bonuses.
The amount paid to the executive directors and key management was R63.7m, AVI said.
Then amid the executive thin ice, on July 1, 2023 Gavin Tipper stepped down as chairman following his acceptance of an executive position outside of AVI in August 2022. Michael Watters replaced him as chairman.
Watters and Crutchley noted in the annual report, “The performances of the board and individual directors are regularly evaluated, however, the fees paid to non-executive directors do not reflect their differing levels of skill and experience, or their contribution.
Shareholder pushback
And now AVI is pushing to hike its remuneration policy after its Mondeléz crisis, but is getting shareholder pushback.
Its annual report lists the company’s main shareholder as the Government Employees Pension Fund with 20.7% of its shares (via The Public Investment Corporation), Allan Gray with 6.2% and Vanguard Investment Management 3.7%.
During financial year 2022 Remcom had instructed 21st Century to assist with a review and benchmarking of its long-term reward frameworks.
21st Century identified that the revised AVI Executive Incentive Share Scheme offered limited retention value for executives, as well as talented and high-impact company employees, and that while the Deferred Bonus Share Plan could be seen as shoring-up the company’s retention strengths, it was based on the short-term incentive earned and, if no short-term incentive was earned, retention was further diluted.
It was concluded that if the Deferred Bonus Share Plan was the main source of retention, the company exposes itself to significant retention risks, AVI said.
21st Century then recommended to Remcom that the approved Revised AVI Executive Share Incentive Scheme and AVI Deferred Bonus Share Plan be terminated and replaced with a forfeitable share scheme.
Shareholders were asked to vote at the 2022 annual general meeting (AGM) held on November 9, 2022, on the increase in fees for each role, based on this amended framework.
More than 50% of shareholders voted in favour of the fees but, as these were special resolutions requiring a vote of 75%, no increases in non-executive remuneration were approved for financial year 2023 other than an increase in the fees payable to non-executive directors from R385 506 to R500 000, which was subsequently reduced by the board to R450 000.
“It was apparent to the company from shareholder queries received prior to the Annual General Meeting that more information and engagement was needed in order to explain and motivate the new framework and attendant fee increases,” AVI said, adding that it would re-table a proposal with amendments at the forthcoming annual meeting.
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