WHAT are Xstrata’s shareholders playing at? The answer seems to be a game called Ultimatum. It’s a simple experiment that shows why shareholders can’t be relied on to accept that any deal is better than none.
Here’s how Ultimatum works. Player G is told he can have £100. He has the option to give an amount at his discretion to player X. Player X then has the option to accept or reject the deal. If X says no, nobody gets any money at all.
Now, the best plan for G seems to be to give X £1 and keep the rest, while X should accept any deal above zero. It’s free money, after all. But when Ultimatum is played out experimentally, the results show that people in X’s position spike deals that don’t seem fair, even if it costs them money. G needs to offer around a 60:40 split to keep anything.
The team behind the Glencore-Xstrata merger seem to have forgotten about this basic principle of human psychology. First they offered current Xstrata shareholders a disappointing multiple of Glencore shares. Then, with shareholders’ reservations about the deal already known, they revealed an astonishingly generous pay deal to retain Xstrata staff without relating it to their future performance. Xstrata’s owners certainly have reasons to feel shortchanged.
The momentum of the shareholder spring and the intricacies of the voting requirements on 12 July have made the original merger proposals untenable, with small minorities of shareholders able to bring the whole thing down over either the merger terms or the pay deal. But it was a bad move in the first place, and now Ivan Glasenberg of Glencore and Mick Davis of Xstrata find themselves on the wrong end of a shareholder ultimatum.
bonuses manipulated lower
Barclays bosses didn’t wait to be told they were in trouble over Libor manipulation, announcing that Bob Diamond, Chris Lucas, Jerry Del Missier and Rich Ricci would all forgo annual bonuses.
Despite the legendary scale of bankers’ bonuses, this gesture won’t make much of a dent in the cost of the scandal. Based on 2011 deferred cash and share bonuses, Diamond and Lucas would forfeit £2.7m and £1.8m. Adding in the bonuses of Barclays’s highest-paid senior executive officers as a proxy for Ricci and Del Missier yields a total for all four of £13.5m, still less than five per cent of the total payout.
It’s a hefty blow to them: 43-69 per cent of their total remuneration. But it’s hard to feel sympathy. This scandal is bad for the industry and the City. Diamond wasn’t chief exec at the time, but as head of corporate and investment banking he can hardly avoid the pointing finger.
Marc Sidwell is City A.M.’s managing editor.