LONDON — In the latest episode of the Rational Perspective podcast, Naspers group’s Chief People Officer Aileen O’Toole provides perspective on the eye-popping earnings of Naspers CEO Bob van Dijk. And it doesn’t take long to realise that like his predecessor, Naspers chairman Koos Bekker, Van Dijk is living proof that the group’s secret sauce delivers. O’Toole takes us through the thinking that shapes the Naspers pay policies and promotes its highly entrepreneurial culture. And unpacks the highlights of a 25 page executive remuneration report released last week which provides greater transparency for shareholders. – Alec Hogg
This is the Rational Perspective, I’m Alec Hogg, and today we look at Naspers’ disclosure on remuneration. Setting pace scales is among the most vexing challenge for a multinational corporation but the complexity becomes almost overwhelming for a group like Naspers, which competes against global tech titans in 150 countries around the world but is headquartered in one of the most unequal societies on earth. Adding to this complexity is a double-edged sword of its early investment in Tencent, the Hong Kong start-up that has become one of the world’s biggest internet businesses. Because of the huge impact of Tencent’s uplift for Naspers, shareholders fret that executives who weren’t even around at the time the investment was made are now getting a free ride.
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Then there’s the impact of a European-based executive team being paid in hard currency, which appears extreme in terms of the rand reporting base. As Naspers’ Chief People Officer, Aileen O’Toole has the responsibility for this hot potato, she is the one who is going to be telling us all about how to handle it, and as you’ll hear, her approach has been to push for the highest possible level of transparency to encourage rational debate amongst shareholders, stakeholders generally, and the media. The centrepiece of all this is a radically enhanced 25-page remuneration report that was released on Friday, alongside the 2018 Naspers’ Annual Report. Well here, is the former eBay exec, who joined Naspers 4 years ago.
Would you believe that our remuneration philosophy and policy has always been right, so this year’s report is really about enhanced disclosure, not just in terms of data but also in terms of transparency and telling the story in a more, digestible way. But in addition, we have made a number of changes to both the membership of our Remuneration Committee, and to the design of our various programs. So for example on the Remuneration Committee, we’ve rebalanced the membership towards committee members who have an international focus and a tech focus, and lower tenure as well. So Craig Enenstein has stepped onto the committee as the chair, and Emilie Choi, who is also from the US has stepped-on, and they’re joined by Roberto Oliveira de Lima from Brazil, a very experienced CEO and General Manager.
Those changes are clearly targeted to appease the international investment community. The new Remuneration Committee chair, Craig Enenstein, has for the past 12 years been CEO of Corridor Capital, the heavyweight private equity firm that’s based in Los Angeles. He knows all about Silicon Valley. Emilie Choi was LinkedIn’s Head of Corporate Development for 8 years before she took on a similar position at Coinbase. That’s a leading digital currency exchange. And Brazilian Roberto Oliveira de Lima is a global executive, who has served on the boards of major groups in telecoms and financial services around the world. They come from a school, which quite clearly believes executives need to have plenty of skin in the game.
We’ve created an even tighter alignment between management and our shareholders by introducing clawback divisions on our shorter term or annual bonus, and our longer-term incentives and our longer-term incentives are typically share options or share appreciation rights. So on place that we differ actually, from our tech competitors for talent is that we don’t give full value shares or restricted stock for our leadership teams. By giving share appreciation rights or share options, value has to be created in order for those people to get paid, so it creates a really tight alignment.
The other thing we’ve introduced is a shareholding requirement for our CEO and he’s required now to hold 10 times his base salary in Naspers’ shares for the duration of his tenure and that, in itself, creates an even tighter alignment between his remuneration outcomes and the shareholders’ returns. He’s already met that requirement. We’ve announced that in the report that was issued today, and going forward, you’ll see a statement about whether he continues to meet it in the reports that we’ll issue in future years.
So does that mean that he’s not allowed to sell down to a level which is less, or the value is less than 10 times the annual remuneration?
Yes that’ right. It’s a particularly significant shareholding requirement and typically what you see in the UK, for example, would be two to five times. Five times would be considered a very draconian holding requirement. But we’re informed by the market but we don’t slavishly copy it and given the size and scale of our operation, the level of capital investment involved, and indeed the historical share grants that the CEO has received, our committee thought 10 times was an appropriately strong signal to the market. But we really do want to create this kind of alignment between executives and shareholder outcomes.
Aileen, I noticed, reading through the report, that there’s quite a lot of long-term thinking, 10 years, for instance… Just unpack that for me, would you?
We operate in very competitive markets. We’re competing against global tech titans in many of those markets, as well as local competitors, and what we know in consumer internet is that we often need to invest over the long-term to achieve scale and to really get significant numbers of customers using the product, before you then go for profitability. So it’s usually investment to get to scale, and then profitability follows. That takes some time, particularly in the high-growth markets in which we operate, so the reason you’ll see a long-term focus in our remuneration is because we want our people to think long-term, which is aligned with how our board thinks, and indeed, how our shareholders think. So you don’t want short-term thinking in your executives, and that’s why we go with long-term incentive plans, so although longer-term incentives will typically invest or become available to the employee over 4 to 5 years. They continue to be available for a further 5 years, so there’s a 10-year period in total. Hopefully, at the end of the 10-year period a lot of value has been created for the shareholder, and the employee gets the opportunity to pick-up whatever profit they’ve made on their schemes, so we’re all about the long-term and we want our executives and our recipients of the longer-term incentives to think the same way.
The detailed report also provides information on the earnings of CEO Bob van Dijk, financial director – Basil Sgourdos, and recently retired executive – Mark Sorour. In rand terms their earnings are eye-popping but O’Toole says, it needs to be seen in perspective and actually, the remuneration strategy has been very carefully thought through.
In general, these days, what you see is a blend of Naspers share operations and Naspers e-commerce share appreciation rights. So for the CFO and the CEO, it’s really a blend between these two schemes. So we think it’s important for them to have Naspers share options because in the end, the CEO is responsible for capital allocation decisions across the group and indeed, exercised that authority quite publicly this year in relation to selling down a little bit of Tencent. So you want those executives to be tied to the shareholder in the form of Naspers share options but you also want them to be incentivised to grow those internet businesses to scale and profitability over the long-term.
And the e-commerce share appreciation rights scheme is a basket of assets essentially. We ask Deloitte to independently value all of our internet businesses every year and the e-commerce scheme is the sum of the parts of all those valuations and we particularly like that because it holds the participants accountable for any bad investments that are made, as well as the upside on the good investments. So this basket of assets means that the executives are truly accountable for the good and the bad decisions they make over time, and anything that doesn’t work out becomes the downside drag on any upside created by the good bets that are made. So it is a blend and it is complex but we have a lot of interests and it’s important that our remuneration structure is designed so that we incentivise the right behaviours over the long-term.
Who are you similar to? You say that Naspers does, and we know, compete with the tech titans around the world but this remuneration strategy seems rather different to what is employed elsewhere. Are there any of those groups that are similar to yours?
There are similarities and differences with a lot of the global tech companies for sure. Where we’re similar is in terms of the type of talent that we’re competing for, and in the longer-term focus of our incentives. To that extent, we’re in the same game but there’s a couple of places that we diverge from those global tech companies. In particular, one important thing to note is that we don’t give our senior leaders and executives restricted stock or full value shares. That’s a very common practice in US tech, and we don’t do it because we feel that giving someone a longer-term incentive that has an intrinsic value on day one. Somehow that divorces them a little bit from alignment with the shareholder. So by giving our executives only share appreciation rights or share options – it means that they have to deliver value on behalf of the shareholder before they can make money themselves on these incentives. That’s an important place that we diverge. The other place we diverge is around the vesting schedules and the vesting periods. So I mentioned that typically there’s a 10-year term and that’s where we’re similar. But when I look at US tech companies their vesting period is typically 3 years, and often there’s monthly vesting within those 3 years. We’ve remained at 4 or 5 years with annual investing. It’s much more conservative but in the end, we are a long-term focussed and we want to retain our talent over the long-term. So we haven’t slavishly followed the fashion there. We’ve done what’s right for us.
Aileen, there’s been a lot of criticism from shareholders, traders, observers about the fact that as Naspers has such a big stake in Tencent, if the Tencent share prices goes up, the Naspers’ executives get a free ride. Is there anyway that you’ve been able to address that with the Remuneration Policy?
Yes Alec, I think that’s true. There is a lot of concern about it and I hope the increased disclosure this year will give people a higher level of comfort that we actually have considered this and that our blended approach really balances some of these issues out. So what you’ll see, if you look at the composition of the shorter-term and the longer-term incentives is that quite a bit of it is not related to Tencent. So if you look at the short-term incentive for the CEO, for example, you’ll see it’s broken into financial objectives, and operational and strategic objectives. Most of them don’t relate to Tencent, so they’re the short-term, within the financial year objectives that he’s been set by the board. And if you move onto the longer-term incentives then you’ll notice that they’re split between Naspers’ share options and Naspers e-commerce share appreciation rights. So we want our senior executives to have Naspers’ share options because it really closely aligns them with the shareholder experience, and for better or for worse. So at the moment, what is the big concerns of our shareholders is around the conglomerate discount we experience. Well, it’s good in a way that the senior executives experience that pain along with the shareholders, through their own personal incentives and so they are motivated to solve this and indeed, we’ve made some statements about the fact that we’re looking at structural solutions for this. In addition, of course, to bring our e-commerce businesses to scale in profitability. On the other side of the long-term incentives are the share appreciation rights, which relate to e-commerce, and these are really a basket of assets where we look at the value of all of our e-commerce interests. And this way we hold the senior executives accountable for all of the investment decisions they make in e-commerce, over the long-term, both the good ones and the bad ones. So this blended approach really allows us to address some of the Tencent concerns and make sure that our executives are in the same position as our shareholders, over the long-term.
What about the absolute level, the nominal value of what Bob van Dijk earns, how do you benchmark that he’s not being over or under paid?
Yes, that’s something that our committee spends a lot of time on, as you can imagine, and it looks at what’s happening in the markets, through benchmarking, it also seeks external advice in terms of the appropriate mechanisms to remunerate him. So when I look at what the CEOs at other public companies, which disclose the CEO’s earnings or are getting paid. Actually, Bob van Dijk’s cash package is quite modest, so if I look at Booking, or eBay, or Expedia, or IAC, or Altaba typically you’ll see CEO cash packages between $2m and $5m a year. So in that context, Bob is definitely at the lower end of the scale. What you’ll also see in the Remuneration Report this year is a very clear view that more than 90% of his pay package is at risk through shorter-term and longer-term incentives. So that’s not a particularly comfortable place to be, for any individual but again, we think it’s appropriate because we deploy a lot of capital, we make a lot of investments, and it’s appropriate that that risk is there at the more senior levels in the business. It really creates this alignment and this ‘pay for performance’ philosophy comes to light, through those decisions. So compared to the market the cash is quite modest and if value is created for the shareholder, value will certainly flow to the senior executives but I think our shareholders don’t have a problem with that.
You must have engaged at some point with some of your major critics and your shareholders, and perhaps taken into account what they were saying.
Yes of course we did. I personally engaged with some of our larger shareholders this year, as well as other shareholders, who had questions or concerns about the way we do remuneration. Their feedback, actually was quite convergent, no matter who we spoke to and where in the world they were. So they really wanted us to tell a better story of what we do and why we do it, and I hope we’ve achieved that in this year’s disclosure. They also had some comments about the tenure of our Remuneration Committee members, and some comments about design and dilution, and all of those I think we’ve addressed in the design changes we’ve made, and indeed in our announcement that we were going to the market to buy back shares to address the dilutions our shareholders experienced as a result of our employee longer-term benefits. So I think we’ve come a long way this year, but we’re in a long-term partnership with our shareholders and the conversation will continue, so I’m very much looking forward to their feedback at the AGM and beyond, and we will continue to talk.
That was Aileen O’Toole, who’s the Chief People Officer at Naspers, a group that has emerged from the Southern tip of Africa to become one of the world’s major media companies. It got there through some very smart calls, buying into Tencent when the company employed just 30 people. Going big on Flipkart in India, ahead of the Walmart acquisition this year. Getting in on Mail.ru. Betting heavily on Delivery Hero, and online classified adverts markets, where it’s now a global leader, and a whole lot more. Well, part of the secret sauce, O’Toole has told us is attracting and retaining entrepreneurial leadership, with the hand-picked CEO Bob van Dijk, having 90% of his earnings at risk. They certainly are following that to the end result. Few other CEOs of global corporations have as close an alignment with shareholders.
This has been the Rational Perspective, until the next time, cheerio.
