How the DFS group was ambushed

FURNITURE retailer DFS was the most improbable company to become the target of a shareholder rebellion over largesse for directors.

Its founder, the famously eurosceptic Lord Kirkham, measures his wealth in hundreds of millions of pounds, so no conceivable pay, bonus or share options were going to make a significant difference to him.

Its other two executive directors, chief operating officer Jon Massey and finance director Ian Bowness, last year earned little more than £250,000 between them, so they are hardly the fattest of fat cats.

But last week, as predicted in Financial Mail, the company was forced to make an embarrassing about-turn ahead of its annual general meeting after shareholders showed their anger over proposals for a revised share option package.

DFS simply had not seen the rebellion coming. The company's existing share option scheme dating back to 1993 included a rule that capped employees to total share options worth no more than four times their annual salary.

Some staff were now hitting that limit and the company could give them nothing more. That was what lay behind the move to rejig the scheme.

Lawyers were consulted. A new scheme was approved by the company'sremuneration committee chaired by Malcolm Walker, former head of Iceland. And last month, details of the scheme's proposed revisions were publicised in advance of the annual meeting.

The National Association of Pension Funds, representing several big institutional investors, approved the plan. DFS seemed set fair.

No one - or at least no one at DFS - expected any upset. But, apparently unnoticed at the company's Doncaster head office, the Association of British Insurers, also representing big investors, was unhappy. Several-weeks ago, it sent DFS an official-notice signalling its disquiet, but this was somehow overlooked.

The ABI's objections were twofold. It was uncomfortable with the proposal that the revised scheme would allow directors and others to receive options over shares worth twice their annual salary in a single year.

It also felt there should be a more challenging target for share-price performance before the options kicked in. DFS proposed to stay with the 1993 scheme's test, that its share price should simply match inflation.

The ABI thought it should outpace inflation before the scheme paid up. But it was not until 10 days ago, when Financial Mail told DFS that the ABI was mustering support in opposition to the revised option scheme, that the company realised it had a problem.

Over last weekend, as proxy voting forms from shareholders were counted, DFS decided that it had to give in. And on Monday, just 24 hours before the company's shareholders meeting, Kirkham announced that DFS was withdrawing the new plan 'as a result of shareholder concerns'.

Chief operating officer Massey said: 'The shareholders own the business and therefore we have to respect their views . . . We are paying the price for not doing our homework.'

DFS was graceful in defeat, but it is determined to come up with yet another scheme revision to allow it to reward people such as store managers, who typically earn about £40,000 a year, for their efforts.

The ABI was jubilant. DFS may have been an improbable scalp for the association. But at least it showed that sometimes, just sometimes, institutional shareholders can organise themselves well enough to force a board to do what the shareholders want.