Rolls-Royce’s biggest investor calls for board ‘refresh’

Causeway Capital Management, the biggest shareholder in Rolls-Royce, has called on the incoming chair of the UK aero engine-maker to “refresh” the board as the group emerges from one of the industry’s worst ever downturns.

Jonathan Eng, portfolio manager at the California-based investment group that owns just under 9 per cent, said he would like Anita Frew, who takes over as chair of the FTSE 100 group in October, to consider whether it had the right expertise at the top.

“I really believe the board needs some fresh thinking. The company is facing some challenges,” Eng told the Financial Times.

Rolls-Royce’s existing board had been “fine for what it was”, he said, but now was the right time to review its make-up. He declined to comment on individuals.

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Frew, who will become the first woman to chair the 115-year-old group, joins at a critical juncture as the engineering company, led by chief executive Warren East, seeks to recover from the impact of the pandemic. Along with other aerospace companies Rolls-Royce must also navigate the transition to net zero. Investors are watching closely how the company, which was forced to shore up its balance sheet with £7.3 billion (€8.51bn)of new equity and debt last year after much of its income dried up, manages that transition.

Rolls-Royce needed to make sure it had the right expertise to tackle the decarbonisation challenge, Eng said. Frew should also consider the depth of the board’s engineering expertise given the company’s durability problems on the Trent 1000 engines and any relevant experience on health issues given the pandemic.

“I will be asking [Frew], do we have the right people now that will ask the questions when sticky situations come up, because they will come up,” said Eng.

Rolls-Royce said it regularly reviewed the “effectiveness, composition and skillset” of its board, using “independent advice and benchmarking”, and engaged in “robust succession planning”.

Eng also said he wanted the company to consider the future of its power systems business, whose engines help to power ships and trains, in the next three years. Analysts said the company could likely raise more than the division’s pre-pandemic annual revenues of £3.5 billion from a sale.

“With a stroke they can become an aerospace and defence company and they can fix their balance sheet issue in one go,” said Eng, although he stressed that he was still undecided.

Rolls-Royce said the company had been “emphasising that we are a global power group for some time now and that broad breadth of business is really serving us well”.

‘Size up’

Causeway, which was founded in 2001 and manages about $47 billion of assets, first bought into Rolls-Royce in 2018. It decided to “size up” its investment at the height of the pandemic, said Eng.

The company, he said, had done a “really good job” cutting its cost base and was close to fixing the Trent 1000 problems. It now has greater than 50 per cent market share of the large, wide-body civil aerospace market, putting it in a strong position.

“Covid has really woken up a lot of management teams and [they] have said, hey, we’ve got to change.”

The company swung back into profit in the first half of this year although it warned it would miss a target to deliver £750 million in free cash flow next year owing to the uncertain pace of recovery in international travel.

It is close to completing a sweeping restructuring to cut 9,000 jobs and has promised to raise at least £2 billion from disposals. It has said the cost-cutting will deliver £1.3 billion of annual savings.

Shares in Rolls-Royce closed at 116p on Friday, up almost 15 per cent in the past month.

Nick Cunningham, analyst at Agency Partners, who this month issued his first “buy” recommendation in 30 years of covering the stock, said: “We are buyers of the stock for what we believe will be a near inevitable recovery in the next two to three years.” – Copyright The Financial Times Limited 2021