Star Bulk Carriers’ new chartering-based incentive compensation plan is unlikely in itself to threaten shareholder value, but could be dangerous in the hands of less scrupulous shipowners.
That was the take this week from shipping corporate governance guru Michael Webber, the Wells Fargo Securities equity analyst who admits he is conflicted on the Star Bulk plan.
I don’t like it in general, but I can get why they’re doing it
Michael Webber
Talking to TradeWinds, Webber says he takes comfort from the solid reputation of Star Bulk management and the assent of private equity backer Oaktree Capital Management.
He also likes that the management awards would come in restricted stock rather than cash, which gives management incentive to still deliver a strong stock price for all shareholders.
No link to share price
But he is less happy that the awards have no connection to what is happening with Star Bulk’s share price, which makes the structure different from most, if not all, incentive compensation regimes.
“I don’t like the fact that it’s not tied to equity performance,” Webber says.
“I don’t like it in general, but I can get why they’re doing it. I’d have a much bigger problem with it if the awards were in cash. That would terrify me, especially because that structure could be a recipe for some of the industry’s more unsavory characters to copy.
“It’s easily bastardised into something that’s really nefarious. It doesn’t take much tweaking for this structure to become very shareholder unfriendly.”
Star Bulk has consistently scored in the top half of Webber’s trademark corporate governance scorecard, which in May ranked 56 public shipowners on their adherence to best practice in areas such as related-party conflicts and board composition.
Since the scorecard’s inception, Star Bulk has consistently ranked in the top half, and often significantly higher. Its most recent ranking of 16 placed it in the second quadrant, a drop from tenth place previously.
Star Bulk chief executive Petros Pappas is an experienced and well-regarded manager. Star Bulk president Hamish Norton is a former US investment banker who was known to steer clients towards governance best practice during stints at Jefferies, Bear Stearns and Lazard.
Oaktree influence
Also entering the scenario is the reported influence of largest investor Oaktree in instituting the new standard, linking management financially to its advocacy of scrubber use.
Oaktree would hardly endorse a structure that loomed as adverse to its own interests, or so the reasoning goes.
These factors have likely contributed to the generally tolerant, if not friendly, reaction of other equity analysts last week.
Deutsche Bank’s Amit Mehrotra said he was “completely OK” with the scheme, even “with optics not great, given management is effectively diluting existing shareholders if performance significantly exceeds average benchmark levels”.
Jefferies analyst Randy Giveans was far more positive, saying he would be willing to tolerate the 4% maximum dilution because of what — in his view — such above-market charter rates would do for share price.
