Wetherspoon (J.D) Regulatory News (JDW)

For immediate release

JD Wetherspoon plc

Press article

The following article first appeared in Propel on 4 November 2014 and is repeated to further its distribution. It represents the personal views of Tim Martin, chairman of JD Wetherspoon plc. 

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How to spot a winner: The Restaurant Group versus Punch

There is great pressure on stock market-quoted companies to comply with corporate governance advice, issued by the FRC (the Financial Reporting Council), even though, as I recently wrote in Propel, the performance of the compliant companies has been much worse than those which have flouted the rules.

It's fascinating to analyse the divergent fortunes of the best and worst performing pub and restaurant companies in this context since 2007, the last year before the banks dragged the world to the edge of a precipice. The outright winner in the PLC stakes since then has been The Restaurant Group (TRG), owner of Frankie and Benny's, Chiquitos, Garfunkels and other well-known venues.

TRG was rocking and rolling in 2007 , with sales of £367m and profits of £43m and has continued to shoot the lights out, with sales soaring to £580m and profits to £73m by 2013 - a brilliant outcome in a deeply disturbed economic environment. Yet TRG was a featherweight compared with Punch Taverns, the Giant Haystacks of the pub world. Punch had profits of £282m from its 8,000 or so pubs in 2007 but, like a rocket running out of fuel, it has plummeted earthwards ever since, being rescued from oblivion recently, by a last-minute deal with its bondholders, which left shareholders with almost nothing.

The multi-billion dollar question for investors, bankers, suppliers and others is whether anyone, apart from Mystic Meg, could have foretold the divergent performances from analysing the board structure of the 2 companies from their publicly available 2007 annual reports- I believe the answer is undoubtedly yes and the case studies illustrate valuable lessons for analysts on the ingredients of commercial success.

TRG breached corporate governance rules in several important respects and these breaches gave it an enormous commercial advantage over the hapless Punch board. It's non-executive chairman Alan Jackson, a veteran of the leisure industry, had worked as an executive for TRG for several years, before taking up this role - executives who become chairmen are deeply frowned upon by the guidelines. Yet the elevation of a successful executive to the chair can create a sense of continuity, often valued by employees, and also means that executive directors themselves take a longer-term view, if one or other of them might be involved as chairman in the future.

In contrast, the compliant Punch chaps dutifully appointed an outsider as chairman, with a background in planning and strategy, rather than at the pub or restaurant coalface. Although there are no absolutes, the appointment as chairman of someone with little industry experience, and no experience as an executive at the company, has been a common feature of financial catastrophe at many pubcos, banks and supermarkets in recent years.

So, advantage number one for investors to note- a successful executive with experience of the company is far more likely to make a successful chairman. What else should you seek as a portent of success? The TRG board set-up illustrates another important factor - companies with a majority of executives or former executives, in breach of governance guidelines, invariably fare better than those with a majority of "independent" non-executives.

TRG had a majority of 4 executive directors on the board, with immense collective experience of the company, combined with a strong "operational" bias. Directors Kevin Bacon and Trish Corzine, for example, had joined TRG as area managers over 10 years before 2007. This operational experience, personified in a majority of executive directors, is surely a self-evident advantage for a restaurant company. Yet the surreal governance guidelines typically approve of arrangements like Tesco's, with external appointments as CEO and finance director being the only executives on the board - is anyone surprised this formula ends in trouble?

Our trawl through history causes us to wince as we review the 2007 Punch board- like a boating melodrama near the Niagara Falls, we know what's coming , but can hardly bear to look. Punch had 4 executive directors in 2007, although they had combined service with the company of only 8 years between them, a bit more than half Trish Corzine's tenure at TRG.

The Punch CEO had a strange CV for a publican, having spent most of his working life, it appears, at a bank. Not only that, he combined the day job with roles as chairman of recently-troubled restaurant company Tragus and a directorship of travel firm Tui. Stone the crows- did he wear his underpants outside his trousers? Strangely, the idea that executives and companies can benefit from this sort of vain "pluralism" is a common myth in governance circles- as if Andy Murray could improve his game by spending a few days a month at Spurs.

Punch's annual report shows that there was almost no true operational experience on the board of Britain's largest pub company in 2007, in complete contrast to TRG, apart from one chap who had recently been appointed to run Spirit, a small part of the company then. In any event, the 4 executives, in accordance with the guidelines, were outnumbered by 5 non-executives, also in marked contrast to TRG.

Other possible danger signs for readers of corporate runes include the length of the annual report. TRG's was a modest 66 pages in 2007, whereas Punch's ran to 108. Watch out for photos too - Punch's had 3 pages of photos before you hit any words and a full-page each for the visages of the CEO and FD. Self-praise is another dodgy indicator- Punch described itself as "lean, driven and dynamic" and "driven by passion"( was this Russell Brand's work?), whereas TRG was more modest in its hyperbole.

The TRG versus Punch comparison is not an anomaly. Wetherspoon, Fuller's and Young's, with similar non-compliant arrangements to TRG, all performed well in this period. In contrast, the compliant Enterprise and Mitchell's and Butler's both suffered huge financial problems.

In conclusion, a strangely detached elite of non-executives has ended up in the driving seat in UK PLCs, obsessing over their various committees while Rome burns. Companies which have complied with governance rules and structures have been falling apart at the seams- first the banks, then the supermarkets and pub companies. The rule-makers themselves at the FRC represent a narrow section of society and have little experience outside banking, the law and the City. The corporate governance code itself is deeply flawed, with excessive focus on board relationships with shareholders, excluding almost completely the far more important relationships with employees and customers. For now, the paradoxical truth for investors and others is that you are far safer dealing with non-compliant PLCs like TRG or Fuller's than with compliant ones. Time will tell if this counterintuitive message is percolating through to the ivory towers of the City.

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Enquiries:

Company spokesman Tel.: 07956 392 234 / 020 8352 5012

Eddie Gershon

Notes to editors

1. J D Wetherspoon owns and operates pubs throughout the UK. The company aims to provide customers with good-quality food and drink, served by well-trained and friendly staff, at reasonable prices. The pubs are individually designed, and the company aims to maintain them in excellent condition.

2. Visit our website: www.jdwetherspoon.co.uk

3. The next interim management statement will be issued on 5 November 2014.