Nick Bubb's verdict: Why won't shareholders give Mike Ashley a bonus?

Mike Ashley can’t keep himself out of the news and almost as soon as he had tied up his new strategic investment in MySale and agreed an in-store concession trial with Debenhams last week than he incurred the wrath of a leading body of institutional investors (the Association of British Insurers) over his latest share incentive plan.

Ashley may be the master of all that he surveys in the world of sports retailing and investors who have backed him since he took Sports Direct public in 2007 will have no complaints about his management skills.

But major listed companies have obligations in terms of their corporate governance and it is in this area that Ashley is still having problems with many big institutional investors. The shareholder vote is coming up on July 2, the third such confrontation over his incentive package - and so far the great man is losing 2-0…

The principle of incentive packages is that they should be clear and transparent and the beneficiary should have to meet stretching performance targets, ie not “something for nothing”, but the non-executive directors of Sports Direct have struggled to come up with a scheme for Mike Ashley that fits the bill.

The problem is that although Ashley dominates the company and owns a majority of its shares, he doesn’t take a salary or get any dividends on his shares. So, the only way to reward him seems to be to award him even more shares, over and above the “normal” option schemes.

But many investors struggle with the idea that Ashley should need any extra incentive, given his huge 58% shareholding in the company, and some investors aren’t interested in Ashley’s personal tax affairs and just want things done properly.

Back in September 2012, a “Super Stretch Share Scheme” for Ashley did not receive enough support at the AGM. And then in April this year, the EGM about the revised Ashley share option scheme had, embarrassingly, to be cancelled, because of continuing lack of institutional support. even though the company claimed that investors had been consulted. An editorial in the Guardian argued that “Giving Mike Ashley £72m in shares would have set an appalling precedent”.

But the Sports Direct non-execs are persevering and they are now aiming to get approval at an EGM next Wednesday for a new and more stretching and more inclusive bonus scheme.

The terms of the revised 2015 Bonus Share Scheme provide for the grant of nil-cost options over up to 25m shares in the company, amounting to c4.2% of the issued share capital, but the vesting of any options require all the following EBITDA targets to be met:  FY2016 of £480m in its 2016 financial year; £570m in 2017; £650m in 2018 and £750m in 2019.

These look to be stretching EBITDA targets and no doubt Ashley will be hoping that England do much better in the 2018 World Cup in Russia…but first he has to get shareholders to back the new scheme and the current sticking point is that Sports Direct, unaccountably, refuse to say how many of the 25m shares will be allocated to Mike Ashley, as opposed to members of staff. Investors are suspicious that his allocation of the scheme is disproportionately large.

Unfortunately, the auguries for July 2 are not good, with the ABI issuing one of its famous “red-top” warnings, its highest level of warning about corporate governance abuse, about Sports Direct to the big UK pension funds and insurance companies, advising them to vote against the incentive plan. Ashley is ineligible to vote himself and the plan needs a majority of the other shareholders to agree.

Emotions are running high and whether either side backs down before July 2 remains to be seen, but to mis-quote Lady Bracknell (in Oscar Wilde’s play “The Importance of Being Earnest”): “To lose one EGM vote may be regarded as a misfortune. To lose a second looks like carelessness. And to lose a third would be ridiculous”.

Ashley’s traditional response to losing a vote on his share option incentive scheme has been to sell a big chunk of his shares, but there is a limit to how far he can keep doing that and there’s a limit to how far the institutions can keep calling his bluff.

How far the sterling performance of the Sports Direct business is being affected by all these machinations - and England’s early exit from the World Cup - will become clear on July 17, via its final results.