Pick n Pay pyramid structure under fire

Improvements and shortcomings

A report by corporate governance advisers of brokerage house Avior ahead of this Friday's meeting rates the group's corporate governance as "adequate" and as improved, but points out what it says are serious failings.

These include a pyramid holding structure it says "dilutes shareholder rights contrary to best practice", the proposed fee for Mr Ackerman - more than five times that of his Shoprite counterpart - and a board policy of issuing of share options at a discount to the market price.

The criticisms highlight the difficulties of listed, family-run enterprises in fitting into tightening corporate governance norms and demonstrate the increased focus on corporate governance generally, particularly in relation to pyramid companies.

Losing patience

The global economic crisis and Pick n Pay's underperformance relative to rivals may show investor patience over governance thinning.

"The market probably ignored (the lack of independent directors) because of good performance and a general lack of interest in corporate governance issues. Both of these aspects have changed and I expect will come under increasing pressure," an analyst said.

Shareholder activist Theo Botha, who has long campaigned against Pick n Pay's pyramid structure, has previously pointed out certain fees of Pick n Pay Holdings were paid by Pick n Pay Stores. Botha last week said he would ask management about whether these fees, which have been paid for 26 years, and at his estimate totalled R16m, should not be paid back.

Structural board change positive

The Avior report says Pick n Pay Stores' board structure "lacks a majority of independent nonexecutives", although it says the recent change from an executive board chairman in founder Raymond Ackerman to a nonexecutive board chairman in Gareth Ackerman was "positive".

The Ackerman family maintains 27% Pick n Pay Stores board representation and 60% Pick n Pay Holdings board representation. Holdings is half-owned by Ackerman family interests and the holding company owns just more than half of Pick n Pay Stores.

Option scheme issue

One of the most contentious issues relates to the Pick n Pay Stores option scheme.

"We are critical of the ... scheme where options are granted at a 5% discount" to a calculated 20-day average market price, the Avior report says. The King 3 report indicates it should be calculated at no less than the average.

The report also criticises the authority given to directors to use up to 13.3% of shares in issue as share options as "excessive". To date, 10.1% have been issued.

The brokerage recommends voting against the proposed remuneration report and directors' fees at Friday's meeting.

In defence

Gareth Ackerman last week defended the company.

He was adamant the options scheme was vital, and that although it might be contrary to King 3, was in line with JSE requirements and would stay. He said the level of the discount had been halved from 10% to 5%, in line with JSE rules.

He also said the pyramid structure was not going to change and pointed out that improvements had been made in other areas.

"We are dealing with a number of issues and we absolutely intend to improve our corporate governance generally.

"Directors of Pick n Pay Stores are very aware that we are running the story from all shareholders, not just family interests."

Source: Business Day