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Pilkington downgraded to “outperform”, plus plans to pay non-executives in shares

Goldman Sachs said it downgraded British glassmaker Pilkington Plc to “outperform” from “trading buy” after recent outperformance by the stock.
In a research note, analysts at the investment bank sai…

Goldman Sachs said it downgraded British glassmaker Pilkington Plc to “outperform” from “trading buy” after recent outperformance by the stock. In a research note, analysts at the investment bank said Pilkington had outperformed the benchmark FT S&P European index by some 48% through the past three months and had risen to near their 114 pence price target. However they said they continued to expect outperformance by the stock in the longer term, viewing the company as an efficient allocator of capital, and because of good demand conditions in most of its markets. “One of Pilkington“s principal attractions is its ability to provide technical asistance and license technology for new float lines,” the note said. “This has allowed the company to increase its asset base with minimal allocation of capital. In the long term, Pilkington is therefore earning similar profits to its peers, but from a much lower initial investment.” Meanwhile, Pilkington is poised to become the first British company to pay its non-executive directors exclusively in shares in a ground-breaking arrangement designed to align their interests with the shareholders. The new scheme, which is expected to be announced at next month“s annual meeting, was revealed in letters sent out by the group to its largest shareholders earlier this month. In future non-executive directors, who include Sir Nigel Rudd, the chairman, will be obliged to take their pay in shares. The number of shares they each receive will be calculated pro rata against their cash salaries, so Rudd, who earned UK 200,000 from the group in 1998/99 would have received 215,000 shares instead. Pilkington“s other non-executives include Oliver Stocken, the former finance director of Barclays, Bill Harrison, the former head of BZW, and Jim Leng, chief executive of Laporte. Each receives around UK 25,000 a year which under the new regime would equate to a block of 26,900 shares. The directors will then have to pay tax in cash on the shares, which will come out of their own pockets. Under the new scheme there will be three tiers of share distribution. Ordinary non-executives will receive the smallest handout, while those who sit on either the audit committee or the remuneration committee will receive a larger share. The top tier is intended for Rudd as chairman. The directors will be forced to hold the shares for a minimum of four years which means that each will build up a substantial stake in the company. The novel scheme has been masterminded by Paolo Scaroni, Pilkington“s chief executive, who wanted to ensure that the group“s board acted in the best interests of shareholders. Other companies are thought to be keen to introduce similar schemes but have been concerned about opposition from either their directors or their largest shareholders. Until now, various corporate governance guidelines have made it difficult for companies to offer equity to non-executives, although company boards are often criticised for having little or no economic interest in the companies they run. Pilkington is thought to have presented its plan to the Association of British Insurers, the institutional shareholders lobbying group, which is believed to have backed it. The response from the main shareholders has also been positive since any dilution caused by the share issue will be minimal. Pilkington used Arthur Andersen to create the scheme and to ensure that it met all legal and accounting standards. Andersen is now expected to take the plan to other companies to persuade them to take it up.

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