News/Analysis
Tesco's 2011 Annual General Meeting (AGM)
The CtW Investment Group (part of the Change to Win coalition), which invests and manages money for a number of union pension funds in the U.S. including the United Food & Commercial Workers (UFCW) union, is calling for incoming Tesco plc board chairman Richard Broadbent to order and lead an "objective and independent" review of the United Kingdom-based global retailer’s U.S. Fresh & Easy Neighborhood Market chain.
The union-affiliated investment group's request came in the form of a letter it sent today to Broadbent, in advance of Tesco's Annual General Meeting (AGM), which is being held in Nottingham, UK on Friday.
Broadbent, who is currently deputy chairman at Britain's Barclays Bank, is set to join Tesco's board as a non-executive director July 2. He will become chairman on November 3, 2011, when current board chair David Reid retires. [See - May 11, 2011: Richard Broadbent to Join Tesco's Board July 2; Become New Chairman November 3.]
Since Broadbent isn't set to become chairman for four months, it appears CtW Investment Group is timing its letter to the not yet member of Tesco's board and its future chairman to Friday's annual meeting, where he is up for a vote by shareholders to approve his nomination to the global retailer's board of directors, which consists of an about 50%-50% split between Tesco senior executives, including CEO Philip Clarke and deputy CEO and Fresh & Easy Neighborhood Market CEO, Tim Mason, and outside or non-executive directors. As a board member and then as chairman, Broadbent will be a non-executive director, meaning he doesn't work for Tesco.
The group says in the letter an independent review of Fresh & Easy is needed in order to determine what additional steps Tesco needs to take to make good on the commitment made by CEO Philip Clarke after taking over in March of this year that the fledgling U.S. grocery chain, which lost about $307 million on sales of about $818 million in its most recent fiscal year (ended February 26, 2011), will break even by the end of its 2012/13 fiscal year, which is 20 months from now.
There are currently 176 Fresh & Easy Neighborhood Market stores open and operating in California (127 units), Arizona (28) and Nevada (21).
Tesco has opened 22 new Fresh & Easy stores so far this year - 12 in Northern California, its newest market region, and 10 in Southern California, where it has 101 of its 176 stores. There are currently 12 Fresh & Easy grocery markets in Northern California and 14 units each respectively in the Bakersfield and Fresno metropolitan regions in California's Central Valley.
Clark said recently (confirming our earlier report of 40-50 new stores this year) Tesco plans to open 50 new Fresh & Easy stores in 2011. As part of its break-even plan for Fresh & Easy, Tesco says it will have 300 stores open and operating by February 2013, at which point it says it will break even with the U.S. operation.
CtW Investment Group also has a problem with Tesco's proposed new senior executive/board director remuneration or pay plan, which will be voted on by shareholders at the annual meeting on Friday, specifically the part that no longer ties Fresh & Easy Neighborhood Market CEO Tim Mason's pay to performance at the grocery chain.
This argument is really a moot point though, for two reasons.
First, CtW Investment Group last year objected to Mason's pay and bonus structure under Tesco's then pay-for-performance scheme, which is still in effect.
For example, Mason made over $6 million in 2009, despite huge losses [See: Strong Group Revenue & Profit For Tesco... But $253 Million Loss at Fresh & Easy] at Fresh & Easy. Tesco said his pay, bonus and stock compensation was in reward for "meeting certain corporate benchmarks and milestones" with Fresh & Easy.
In other words, performance is in the eye of the corporate beholder. And is often the case, it doesn't have to be based on profit and loss, particularly when it comes to start-up-type ventures like Fresh & Easy (four years in November 2011), although in our analysis and opinion Mason's pay last year was too high ($2.5 million might have been reasonable) considering the continued high losses at Fresh & Easy. But we didn't expect him to give any of it back.
More significant though in terms of rendering the argument CtW Investments is making moot in our analysis is the fact as of March 2011 Mason became Tesco's group deputy CEO and chief marketing officer, as well as CEO of Fresh & Easy.
Therefore, unlike from 2006-2010 when his sole responsibility at Tesco was for Fresh & Easy, he is now not only the CEO of the U.S. chain but also deputy CEO to Philip Clarke, as well as the global retailer's chief marketing officer. As such, in our analysis, the argument his pay should be tied to Fresh & Easy's performance, which it really never was in practice if one defines performance as making a profit or at least coming close to break-even, has been rendered moot by his elevation to deputy CEO of Tesco.
Mason has been a member of Tesco's board since February 16, 1995.
Before moving to the U.S. in January 2006 to start up Fresh & Easy as CEO he was Tesco's chief marketing officer, based in the UK, a position he again holds as of March, as part of his job title trifecta at Tesco.
Mason remains based at Fresh & Easy's headquarters in El Segundo, California but has been spending a considerable amount of time since March at Tesco's headquarters in the UK, as well as traveling to its other global outposts. For example, he's spent the last few days in Eastern Europe with his boss, CEO Philip Clarke, and other Tesco senior executives, who are putting on a road show for financial analysts.
CtW investment Group and the UFCW union were front and center, joined by numerous others, at last year's Tesco AGM over the issue of compensation for the global retailer's senior executives who also serve on its board. The pay issue was the major hot button at the 2010 investors' meeting, where a whopping 47% of company shareholders voted against Tesco's Remuneration Report.
[We chronicled the going's on at last year's AGM in this story - July 5, 2010: Verbal Fireworks at Tesco's 2010 Sharholders' Meeting in London - which we suggest you read. Also See - June 23, 2010: Tesco Fresh & Easy Neighborhood Market CEO Tim Mason Gets Big Stock Award Featuring a Singular Twist.]
Earlier this month Tesco moved to avoid any such similar behavior from shareholders when they meet in the United Kingdom on Friday, when it released a revamped pay plan for its senior executive/board directors. The new "all for one and one for all" scheme attempts to reward all the senior executives/directors based on Tesco's overall performance, at least in theory.
Ironically, this is what CtW Investment Group and the UFCW union, who's pension funds it manages and invests objects too because it lumps Mason in with all the other Tesco senior executives on the board rather than basing his pay on Fresh & Easy's performance. But as we detailed above, since Mason is deputy CEO and chef marketing officer of Tesco along with being CEO of Fresh & Easy Neighborhood Market, including him in the mix seems kosher to us.
Plus: Who says Mason will remain CEO of Fresh & Easy for long, now that he has major Tesco group responsibilities?
For example, Former CEO of Tesco's operations in Taiwan, Jeff Adams, who was transferred to Fresh & Easy Neighborhood Market in 2008 and is its head of retail operations, a lesser position than he held previously in Taiwan, has been waiting patiently in the wings in El Segundo for nearly three years. He would be one of Tesco deputy CEO Mason's logical internal replacements as CEO of Fresh & Easy - based on the way Tesco does internal succession - should Mason return to the UK.
[For some background on Jeff Adams at Fresh & Easy USA read - March 12, 2008: Breaking News: Tesco plc. Makes Major Personnel Change to Fresh & Easy Neighborhood Market USA Senior Management Team; and September 22, 2008: Key Personnel Breaking News: Co-Vice President of Retail Operations Brian Pugh No Longer Employed At Tesco Fresh & Easy Neighborhood Market.]
The irony involving CtW Investment Group's position on the new executive/director pay sheme is because it appears from all indications we have the majority of Tesco's other investors - CtW holds some stock in Tesco through the pension funds it manages for the UFCW and other labor unions so qualifies as an investor in the company - particularly the big and all-important institutional investors who control the voting, are in favor of the new pay plan, which is expected to pass by a much higher percentage of votes than the Remuneration Plan did last year.
A representative of CtW is set to be at Friday's Tesco AGM, according to the firm. The UFCW union also told us it will have someone there, as it did last year.
We don't expect the same level of fireworks this year as there was in 2010 at the meeting [Verbal Fireworks at Tesco's 2010 Sharholders' Meeting in London.] But there should be a robust, albeit brief, discussion of the new pay plan.
We also don't expect any action to be taken by Tesco's board now or in the future regarding the request in the investment group's letter to Richard Broadbent for an "objective and independent" review of Fresh & Easy Neighborhood Market - at least not one the results of which Tesco would make public.
Tesco has a solid agenda for its annual meeting Friday, which only runs for two hours, from 11 am-1 pm. You can view the agenda here.
Fresh & Easy Buzz will have a correspondent at Friday's AGM. We'll be offering news reports and analysis of the annual shareholders' meeting in the blog. Stay tuned.
Related Stories
May 11, 2011: Richard Broadbent to Join Tesco's Board July 2; Become New Chairman November 3
April 19, 2011: Tesco's Fresh & Easy Neighborhood Market Posts Biggest One-Year Loss Yet - $307 Million Loss on Sales of $818 Million
March 1, 2011: Fresh & Easy Neighborhood Market CEO Tim Mason Pockets Nearly $1 Million From Sale of Tesco Shares
February 28, 2011: Changing of the Guard: Clarke Takes Over the Reins as Tesco CEO Wednesday
February 28, 2011: Big Day For Tesco CEO Terry Leahy: Retirement and A Birthday But No Break-Even For Fresh & Easy USA On His Watch
February 25, 2011: A Parting Gift: Retiring Tesco CEO Terry Leahy Exercises Options and Sells Nearly Three Million Shares of Company Stock
February 23, 2011: 'The Insider' - Incoming Tesco CEO Philip Clarke Visits America - And Fresh & Easy Neighborhood Market
January 27, 2011: Incoming Tesco CEO Philip Clarke Names Expanded Corporate Executive Committee
October 8, 2010: 'The Insider' - Incoming Tesco CEO Philip Clarke Needs to 'Imagine' When it Comes to Fresh & Easy Neighborhood Market USA
October 5, 2010: Philip Clarke's Early Welcome to America: Tesco Logs $151 Million Half-Year Loss For Fresh & Easy Neighborhood Market
July 21, 2010: Fresh & Easy Neighborhood Market CEO Tim Mason Leads All Directors in Tesco Stock Share Incentive Plan Payouts
July 5, 2010: Verbal Fireworks at Tesco's 2010 Sharholders' Meeting in London
July 2, 2010: Tesco's Director Remuneration Report Approved at Today's AGM; But 47% of Shareholders Voice Opposition to Director Pay Packages
July 1, 2010: A Preview of Tomorrow's (July 2, 2010) Tesco Annual General Meeting
June 23, 2010: Tesco Fresh & Easy Neighborhood Market CEO Tim Mason Gets Big Stock Award Featuring a Singular Twist
June 24, 2010: Warren Buffett Strikes Again: Buys 2 Million More Shares of Tesco Stock For 3.2% Ownership Stake
June 12, 2010: 'The Insider' - Will Phil Clarke Shake Things up at Fresh & Easy Neighborhood Market USA When He Becomes Tesco CEO in 2011?
June 4, 2010: Every Little (Bit) Helps: Tesco Fresh & Easy Neighborhood Market CEO Mason Paid $6.188 Million For 2009
[Also: Click on the following links - 2008 AGM, 2010 AGM July 2 2010, AGM, Ctw Investment Group, Ctw shareholder letter, executive compensation, Tesco, Tesco 2010 shareholder meeting, Tesco director compensation - to read stories about past Tesco annual general (shareholder) meetings and related topics.]
