Vox unpopular
Having bet the farm on single stock futures and lost, Vox Telecom is considering giving its gun-toting directors another farm to play with.
Five Vox directors lost as much as R274m when brokerage Dealstream went bust in September. In the case of CEO Doug Reed, Jacques du Toit and Mike von Holdt, it wiped out their investments in Vox completely.
The Vox case succinctly shows how directors of small companies are exposing their companies to unacceptable risk by investing in risky derivatives. In this case, these directors held 12,7% of Vox’s shares through single stock futures and contracts for difference — a large chunk of a company whose shares don’t trade very often on the JSE.
Dealstream’s collapse means shareholders will now have to pay for another “incentive scheme” for staff and directors, which could dilute existing shareholdings by 5%, according to analyst Irnest Kaplan.
But why should shareholders subsidise this mess? The directors fouled up by investing in derivatives (especially with an unknown quantity in Dealstream), so why should they be rewarded for taking poor decisions and losing all their shares?
Speaking after Vox’s AGM, which lasted all of 10 minutes, executive chairman Tony van Marken defends his colleagues: “Look, these share positions were wiped out because there was fraud at Dealstream. Everyone was deceived. And the new share scheme won’t just be for directors, but for all staff.”
But this isn’t quite the whole story. For one thing, the directors were betting on Vox’s price going up at a time when it was falling. Even if these futures positions were held at a reputable brokerage, directors could have still been wiped out.
Kaplan says it’s a tough call: “Management clearly lost their own shares through their own actions, so shareholders might feel aggrieved at rewarding them with more shares. But if they’re not given incentives, you can’t expect them to do a good job running the company.”
David Couldridge, investment analyst at Fraters, says “it’s a risk issue” that substantially dents your confidence in management. “We would be asking some serious questions before we voted to give them more shares,” he says.
But Kaplan would favour keeping Reed’s management team in place and issuing them with more incentives, rather than booting them out for a new team.
“If the plan is reasonable and there isn’t much dilution, management should get the benefit of the doubt. New management would disrupt the business and would also need to be given incentives,” he says.
This appears to be the consensus: at Vox’s blink-and-you-miss-it AGM, 99% of shareholders voted to re-elect Van Marken and Reed. If there was a time to boot directors off the board, that was it.
Quite how the new share scheme will work, and the extent of the dilution, hasn’t yet been revealed.
Van Marken won’t give much away. “We’re obviously very conscious not to dilute our existing shareholdings too much, given how much the existing shareholders have been hurt in recent times,” he says.
At least, Vox says, it will put the details of the new scheme into a circular, and let shareholders vote on it.
Did none of the Vox directors raise questions about this at the time? Van Marken doesn’t answer this directly, but says: “We were trying to reduce the level of gearing, and I’d converted 5m single stock futures into shares in June. But no-one foresaw what would happen.”
But the fact that shareholders have to make this tough decision illustrates the absence of rules around directors tying up all their shares in risky single stock futures.
Prof Geoff Everingham, who was on the King 3 committee, says it may be a governance failure. “If you’re acting in your personal capacity, then it’s your problem. But if it feeds back into the company, then it may be another story.”
And Vox has poor governance.
According to the new draft King 3, a chairman should be “an independent non executive” who sets “the ethical tone of the company”.
But Vox doesn’t have an independent non executive chairman; instead it has Van Marken as executive chairman.
Also, though a company should have a majority of non executives on its board (and most of those should be independent), Vox’s nine-member board contains four non executives. None of these could be considered “independent”, as they all represent shareholders like Mvelaphanda or RMB.
Best-practice governance isn’t required of AltX companies, but perhaps a few independent directors might have asked tough questions about the futures exposure of the directors.
According to FM research, Vox still has one of the largest open single stock futures positions of any company. At last count, this position stood at R203,4m — 23,5% of Vox’s market capitalisation.
Though this would normally ring alarm bells, in this case that position is 98%-held by RMB, and this will close out to virtually nothing at the end of March.
This is some dramatic deleveraging, considering that in July 2008 the single stock exposure to Vox was R776m — nearly four times the current position and equal to 35% of Vox’s stock.
But while the position unwinds, the fact that directors put all their eggs in the futures basket leaves a big question mark over Vox’s credibility that will be answered only after a few years of solid numbers and no further disasters.
Little wonder executive chairman Van Marken won’t let directors take derivative positions again on Vox. “We need to restore our credibility, and I realise it’s a long process, but this is where it starts,” he says.
Kaplan still rates Vox a “buy” partly because, at 59c, it is 83% lower than the R3,55 it hit in June 2007.
Also, though Vox may have overpaid when it forked out R337m for Storm Telecom, its Orion division already provides voice telecom services for 200 of the top JSE-listed companies, four provincial governments and 50 municipalities.
“The last year’s been a humbling experience for all of us,” says Van Marken. “Would I do it again, investing so much through derivatives? No I wouldn’t,” he says.
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