Here’s a tricky question: is Darktrace more like The Hut Group or more like Deliveroo? The fate of this week’s fabulously-priced technology stock may determine whether more of these British companies list in London, or whether more of them skip to New York to exploit the local mania for special purpose acquisition companies. For most of us, though, the first problem is to describe exactly what it is that these businesses do.
THG shot to a big premium for finding a profitable way to connect customers with brands over the internet (the brands it owns are hardly household names) while Deliveroo suffered the worst stock market debut in years for a major offer. It is in danger of being rated as a bicycle food delivery service. As for Darktrace, it provides cyber security by constantly checking to see that no snooper can get at your company data. Few outsiders understand how it does it, and not more than one investor in 100 could explain the inner workings.
Its problem is its history. It was heavily backed by Mike Lynch, who built Autonomy on the premise that the company could use artificial intelligence to mimic some of the processes of the human brain. Ignoring analysts’ unease at how it worked and its accounting practices, Hewlett Packard bought it for £7.4bn. Within minutes, almost, it decided that the business was a lemon, and wrote off most of the purchase price. The legal waves have crashed about ever since, and Mr Lynch is currently fighting extradition to the US. His then CFO is in gaol there.
Darktrace has many of Mr Lynch’s executives on board. The technology has advanced, as technology does, and the fans of Autonomy will be keen to buy the stock almost as an article of faith. They may even understand how it works. Those who are sceptical or ignorant might prefer to wait and see how big a shadow Autonomy casts over Darktrace. Great name, though.
This offer also provides something of a test for the corporate governance geeks. THG has a non-PC voting structure, but big investors still rushed to buy it. Deliveroo has a compliant structure, but may be forced to follow Uber and turn its delivery boys into employees, with similar impact on its cost of operation. This worry provided a helpful excuse for those investors who thought it overpriced to steer clear. In the words of the poet: money doesn’t talk, it swears.
We’ve just got to pay up
There was rather more than a sense of humour failure among the largest shareholders in Rio Tinto last week. Following the advice of the thought police in these matters, the Norwegian oil fund and the UK’s local authority pension forum together cast their votes against the company’s 2020 remuneration report. The focus of their ire was the reward paid to the departing CEO, Jean-Sebastien Jacques, who was in charge when the company bulldozed Juukan Gorge, an important Aboriginal site in Australia.
Rio’s top executives have paid with their jobs for this priceless blunder, and chairman Simon Thompson is following them out of the door. Us shareholders have not yet paid much, thanks to Rio’s huge profits from selling iron ore to China at many times its cost of extraction (the sites added a trivial amount of mineable ore to Rio’s reserves) but the replacements for highly competent senior executives are unlikely to be quite as good, even assuming they avoid any similar mistakes.
The revolting shareholders, however, were not claiming that firing the men was a mistake – almost everyone agreed that they had to go – but balked at their rewards for going away. Mr Jacques has not made as much as he would have done by staying, but he was still paid £2.7m last year, and Institutional Shareholder Services estimated that his “performance shares” are worth an impressive £27m.
So after the performance over the sites, why will he still get this reward? Sam Laidlaw, the chairman of the remuneration committee, put it bluntly: “The penalties applied to the responsible executives were, in the best view of the board, the most that could durably be applied and legally defended in light of the extent of the executives’ ultimate accountability for Juukan Gorge.”
This is rather more frank and honest than most companies manage. Rewards for failure frequently look outrageous to outsiders, and the usual justification, that the replacement executives have more urgent things to do than fight a court case against their predecessors, always looks weak. Mr Laidlaw has signalled that it is not the board that’s weak, but the legislation. Employment law, driven by the vision of an employee mistreated by a big bad company, favours the dismissed claimant.
The departee also has the almost incomprehensible complexity of today’s pay practices for senior executives on his side. When the remuneration report runs to 40 pages or more, it hardly takes a hot-shot lawyer to find justifications for his client to be paid handsomely to go away. Short of being able to prove, almost the level of a criminal case, that the departing directors had their hands in the till, or to risk a messy and distracting court case which they were highly likely to lose, it’s no surprise that Rio’s new crew decided to throw shareholders’ money at the old.
So, farewell then Bernie Madoff, as Private Eye would say. The world’s biggest fraudster has beaten the rap by dying 11 years into his 150-year sentence. Aged 82, few will mourn. He set up and ran a stunningly successful Ponzi scheme, a business that made Ponzi look like an amateur, using new investors’ money to pay out to the old. The steady performance was all a fiction, but he got away with it for far longer than he must have expected, to the point where on paper he had $65bn under management.
You couldn’t say the fraud made him rich, or that he lived a high life with yachts, palaces, girls or drugs. He was low-key, and it all looked so plausible, but for one thing: no investor in risk assets anywhere can make the sort of steady returns he claimed. It just cannot be done. If your financial adviser claims to do so, change him at once.
As the fraud grew, so the back office had to expand, and one of the most bizarre aspects of the story was his ability to keep the lid on his secret. As for the unfortunate victims, many have learnt the old lesson the hard way: do not put all your eggs in one basket, however pretty it looks.