Question

Suppose you are a manager of an activist hedge fund named “The Lone Wolf Financials”. On 1 June 2020, you want to assess the corporate governance of Woolworths Group (ASX ticker: WOW) and whether it is an attractive shareholder activism target. Specifically, your analysis should address the followings

Analyse WOW’s (Woolworths) corporate governance by answering the following questions:

How does WOW’s accounting and stock performance over the past 5 years compared to its peers

Does WOW’s CEO have sufficient performance-based pay?

How easy it is to replace WOW’s current board members?

Answer 1

1.

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The market data shows that Woolworths Group has a higher P/E than the average (20.4) P/E for companies in the consumer retailing industry.

That means that the market expects Woolworths Group will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. Woolworths Group's P/E is 38.1 which is above average (18.6) in its market. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years.

When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.

2.

In 2016 Brad Banducci was appointed CEO of Woolworths Group Limited. It would appear that Woolworths Group Limited pays Brad Banducci more than the median CEO remuneration at large companies, in the same market. However, this fact alone doesn't mean the remuneration is too high. We can get a better idea of how generous the pay is by looking at the performance of the underlying business.

But clearly there are some positives, because investors have done well over the same time frame. Given this situation we doubt shareholders are particularly concerned about the CEO compensation. So you may want to check if insiders are buying Woolworths Group shares with their own money (free access).

3.

Unfortunately, there are times when things just don’t work out with a board member. This could range from board members being benign but useless (e.g., spouting generic advice that does not matter) to being actively destructive. While it is typically straightforward to remove a misbehaving employee, a poorly behaved board member may be harder to “divorce.” In general, investor board members are harder to remove than independents.

The Size and Composition of Board is determined by board, subject to the limits contained in the Constitution and the shareholders. The Constitution also provides that a person’s appointment as a director may be terminated in certain circumstances. These include: • If the director becomes of unsound mind • If the director becomes insolvent • If the director is removed from office • If the director is absent without leave for a continuous period of 6 months.