Huge director bonuses and a sector-wide leasehold scandal have left housebuilder Persimmon’s reputation in tatters.
And it’s not good news for shareholders, who have endured huge volatility in the FTSE 100 listed company’s share price over the past year. Since June, the stock has dropped 14% to a low of £24.74 per share as criticisms over the company’s business practices mount.
The company’s latest half year results, published on Tuesday, belie the negative press surrounding Persimmon, with rising profits and strong sales in an otherwise challenging market. Profit before tax rose by a healthy 13% to £516 million in the first six months of the year, with revenue up 5% to £1.84 billion and completed sales 3.6% higher.
But with the CEO facing a criminal action and concerns about the sector’s outlook growing, the company will need to do all it can to boost its reputation among the British public and its investors.
The question is, how?
What’s really infuriating are the obscene bonuses Persimmon has paid out to its managers and directors, particularly its chief executive Jeff Fairburn.
Originally set at £100 million, Fairburn’s bonus was later cut to £75 million following a huge outcry. But the reduction hasn’t placated investors – it was revealed in June that leading shareholder Aberdeen Standard Investments had instructed lawyers to look into whether Fairburn could be prosecuted under the Companies Act.
“On high pay, the first people Persimmon have to reassure are shareholders who ultimately pay for these deals,” said Ed Monk, associate director from Fidelity Personal Investing’s share dealing service.
“Some 48.5% of them rejected the deal at the AGM, which counts as something of an uprising. As such, Jeff Fairburn’s decision to forgo a large share of this year’s deal was probably sensible. He can at least point to improving fundamentals at Persimmon, which is growing profitability and payouts to shareholders.”
The York-based housebuilder introduced its incentive bonus plan back in 2012 (before Fairburn’s tenure started) yet failed to include a bonus cap in the original terms of the scheme. It later admitted this was a mistake.
“The real problem has obviously been the lack of a cap. It seems bizarre, with hindsight, that there wouldn’t be a cap on rewards like this – it just seems like such an oversight,” said George Salmon, equity analyst at Hargreaves Lansdown. “The fact that the chair of the remuneration committee walked on the back of that is telling; I don’t think we’ll get a repeat of anything like that in the future.”
However, Helal Miah, investment research analyst at The Share Centre, suggests the issue could be debated for some time. “I don’t see executives trying to pay themselves less,” he said. “Jeff Fairburn said he would donate some of his bonus to charity, which is welcome, but others aren’t doing the same. Going forward the bonuses won’t look so big because a general slowdown in the market will take hold of the company’s results.”
What is especially galling about Persimmon’s payouts is they were driven by the huge profits the company made from the taxpayer-backed Help to Buy scheme, which helps first-time buyers get on to the housing ladder. More than half of its sales are said to be through Help to Buy.
“There have been a lot of favourable market movements for the sector since 2012 – the Help to Buy scheme, waiving stamp duty for first-time buyers, and low interest rates which make mortgage costs more affordable,” said Salmon.
“I think a lot of contention surrounds the question, how much of the growth were the directors actually responsible for? That’s where a lot of the upset and discontent has come from.”
Relying on the Help to Buy scheme is also a dangerous strategy. Monk points out that the scheme could end at short notice – something Persimmon itself identifies as a key risk.
“Many are already calling for that, particularly as the scheme designed to help young buyers has coincided with an astronomic pay deal for Persimmon boss Jeff Fairburn,” he said.
The row over fat cat bonuses couldn’t have come at a worse time, given that Persimmon has already come under pressure over its role in the leasehold scandal.
The company came under fire for selling houses on leasehold terms and holding on to the freehold in order to generate an extra source of income in the future. Some leasehold homeowners were given punitive terms with rapidly increasing ground rents or spiralling costs to buy the freehold at a later date.
Other housebuilders, including Bellway and Taylor Wimpey, were also caught up in the scandal.
Thanks to the government’s decision to ban new build leasehold houses, this issue is likely to resolve itself.
“However there is the possibility of a skeleton in the closet somewhere,” Salmon pointed out. “Taylor Wimpey had £130 million of impairments not so long ago and that was about exactly the same issue – punitive ground rents and leaseholder obligations. There is the possibility that Persimmon has that kind of skeleton in the closet as well.”
Another company which has had a tough time with public relations is Bovis Homes, which suffered problems with its build quality. It has started to turn this around – largely because of the appointment of new boss Greg Fitzgerald, who is strongly focused on customer relationships.
Bovis is now delivering a higher customer satisfaction score than Persimmon. “That’s quite telling – it shows it is possible to turn things around,” said Salmon. “It really comes from the top down.”
Persimmon probably doesn’t need to undertake a similar business overhaul at this stage, but if its customer satisfaction scores decline this will increase pressure on the company to implement a turnaround – and that could include replacing the CEO.
How the company treats first-time buyers could prove make-or-break.
“For a lot of housebuilders, their customers are first-time buyers who don’t have experience or knowledge of the finer details of buying a home,” said Miah. “The housebuilder often recommends that they use their conveyancer and it must be questioned how independent they are. First-time buyers generally want to buy as soon as possible and they don’t look at the T&Cs. They pay for it later on.”
What Persimmon can be sure of is that shareholders and the British public will be scrutinising its every move from now on. Saying the right things, and backing this up with action, will be paramount to improving its beleaguered reputation.