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J Smart (LSE:SMJ) has loads of assets, including piles of cash, and has produced satisfactory profits in recent years relative to its market capitalisation. On quantitative criteria, and on grounds of having a reasonably sound business, it is a NCAV investment.
However, before making the final decision we need to check the ability of the senior managers and whether they have displayed high integrity with regard to minority shareholder interests.
Experience and competence
The Smart family, who own more than half the shares, have been running the show since 1947. John M Smart worked 50 years for the company, and dominated it for the 29 years to 2017 as Chairman. He presided over an almost unbroken record of profit.
John M. Smart has now retired, but his legacy lives on, both in terms of reverence (somewhat diminished?) for the Construction side of the business and in terms of extreme conservatism on the balance sheet, dividend levels and strategic direction.
His sons, David W. Smart, Chairman and Joint Managing Director, and John R. Smart, Joint Managing Director, now dominate the board
David, at 44, has been with the company for 18 years and on the board since 2010, and owns 11.9m shares (26%)
John R Smart, 47, joined in 2002 and has been a director since 2013. He too has 11.9m shares.
Both have experience elsewhere, one in quantity surveying and one in property surveying. They are thought of as slightly more progressive than their father
There are two other executive directors: Alasdair Ross, 55, joined the company in 1989 and was appointed a director in 2012, and Patricia Sweeney, 48, joined 2011, and was appointed director in April 2017. All directors earn the same salary of £109,000, with just a few benefits and pension scheme payments tacked on. No element of their remuneration is based on performance metrics.
| £000s | 2017 | 2016 | 2015 | 2014 | 2013 | ||||
| Director’s remuneration | 537 | 516 | 503 | 493 | 644 | ||||
| Employee’s remuneration | 11,005 | 11,678 | 9,908 | 8,038 | 11,330 | ||||
| Number of employees | 260 | 298 | 246 | 193 | 283 |
Integrity
The hiring of non-executive directors is seen by these down-to-earth builder types as unnecessarily increasing costs and administrative burdens for no discernible benefit. Thus there is no protection for minority shareholders from NEDs should the executives turn on them.
But, in my experience with these family-dominated firms the NEDs are of limited value. Protection comes from the character of those with power. Are the instinctively decent? Do they have habits of fair dealing? Are they loyal?
On this front we have some supportive evidence:
Exhibit 1: Waiving dividends.
The family have forgone millions of pound in dividends over the years, simply by refusing to take them. When asked why they do this by Duncan MacInnes they express the view that they don’t need it and by waiving “shareholders cannot accuse them of self-dealing” – this shows an extreme impulse to behave well. The former chairman has said of his family’s dividends that they were better off if they were reinvested in the business, and “How much money do you need?!” (an interview by Duncan MacInnes)
Exhibit 2: They run a tight ship.
Their office is a dated non-descript 1960s or 1970s block, with nothing changed since the original décor. The current Smart directors are cut from the same cloth as earlier generations – austere, no-nonsense, with a reputation for being miserly on expenses. Director salaries are very low.
Exhibit 3: Not playing games.
They are intensely focused on the day to day
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