How C&W's radical restructure fell short Key figures: John Pluthero, left, and Sir Richard Lapthorne Only two individuals" pictures feature in Cable & Wireless's online corporate history. One is Sir John Pender, the Victorian subsea cable pioneer; the other is Sir Richard Lapthorne. Pender built the telecommunications network that underpinned the modern Cable & Wireless, putting a "girdle round the earth" - the title of a 1979 company history. Sir Richard's legacy is more mixed. Since taking over as the group's chairman in 2003, he has presided over its rescue, been awarded a knighthood for services to telecoms, and overseen the 2010 demerger of Cable & Wireless Worldwide (CWW) from Cable & Wireless Communications (CWC), which he still chairs. But he was also designer and chief salesman of a "private-equity-style" structure and cash incentive plan launched in 2006. It was a radical ex­periment and drew vocal criticism. Sir Richard still defends his work fierce­ly. But while the plan was supported by a majority of shareholders and prof­ited those investors who sold at the peak, critics claim it also led to under-investment and enriched executives for achieving unsustainable share price rises. At demerger, the company's market capitalisation was £4bn. In July, Vodafone absorbed CWW, paying £1bn for the shares. Last week, CWC, which now has an equity market value of less than £1bn, announced the sale to Bahrain's Batelco of a portfolio of businesses from Monaco to the Falkland Islands, setting what was once one of Britain's largest publicly listed multinationals on course to become mainly a Central American and Caribbean telecoms operator. Cable & Wireless evolved from Pender's international cable companies via a 1929 merger with Marconi's wireless interests. Nationalised in 1947, it was one of the first UK privatisation candidates in the 1980s and the first company to challenge British Telecom's monopoly. In the frenzy that preceded the dotcom bust in 2000, C&W's market value rose to £38bn, making it one of the 10 biggest listed UK companies. But C&W's then board had already sown the seeds of decline, disposing of many of its historic assets and investing in ill-fated internet data and services businesses. A new structure Returning C&W to its former glory was already impossible when, in 2003, the board called on Richard Lapthorne - a famously sharp accountant and former finance director of British Aerospace - to save it. According to a former board director enlisted at the time, who declines to be named, it was "within an ace of going bust." The new management team, headed by chief executive Francesco Caio, set about restoring financial stability. They knew that while the internat­ion­al telecoms businesses, which eventually became CWC, provided a steady income stream, the UK operations (later CWW) were consuming cash and needed greater scale to compete with BT. In 2005 C&W took over Energis, a UK telecoms operator, bring­ing into the company John Plu­th­ero, a combative and ambitious manager, and his team to run the UK business alongside Harris Jones, in charge of the international operations. Sir Richard faced a challenge: how to structure and supervise the two parts of C&W, which had few obvious overlaps and faced different demands? The traditional option of appointing an overall CEO did not appeal. Sir Rich­ard says he asked himself: "How on earth can I run the company when I'm not a telecom guy and yet how can I delegate safely to them, because it was clear there was no space for a chief executive between me and Pluthero?" At the same time, he badly needed to keep Mr Pluthero and Mr Jones; if they quit, the former director says, he risked "the entire management team cratering." Private-equity management was in vogue. Buyout firms were borrowing heavily to take companies private - C&W itself was said to be in their sights - and luring listed-company executives to join a sector where they could work outside the public spotlight for potentially hefty rewards. While on holiday in the Malaysian archipelago of Langkawi in early 2006, Sir Richard - who knew and admired the direct style of private-equity governance - devised a radical structure for C&W. The two divisions would be managed separately: the UK-centred, business-to-business operation by Mr Pluthero; the international, mainly consumer-facing telecoms operators by Mr Jones. They would have separate boards that would answer to the central corporate operation, managed by finance director Tony Rice, and the main board under Sir Richard. To retain the executives and ensure they would "run it in their own self-interest," in Sir Richard's words, he proposed fuelling the new system with a cash long-term incentive plan (LTIP) that could in theory yield a payout of £22m each for Mr Pluthero and Mr Harris if stretching performance targets, linked to growth in the value of each of the two divisions, were met. But "there were disagreements among the non-executives about how far we should go," the same former director recalls, and concern about a lack of consultation. When Richard Lapthorne has a problem, he relies on Richard Lapthorne. Sir Richard denies there was any dissent. Changes on the remuneration committee as the plan was introduced had always been intended, he says. The structure and incentives were a "tactical imperative," to speed revival of the business. "I didn't have a clue what the strategy was going to look like," he adds, but he needed "a set of tools" to motivate the managers. Either way, some outsiders were furious. Other companies were trying out unorthodox and highly geared in­centives. But the C&W plan was attacked by unions, activist investors and governance specialists. Sir Richard had made a point, however, of first selling his ideas direct to fund managers, with whom he says he spent 80 hours, often one-on-one with chief investment officers. Sarah Wilson, CEO of Manifest, a proxy voting and governance advisory group, calls it a classic "divide and conquer" tactic. But it worked. The scheme, and subsequent amendments, were ap­proved by investors holding a majority of the shares. It was in fund managers" interests to see the share price rise - and rise it did, at least at first. At demerger, ac­cording to company figures, total shareholder value (including dividend and cash repatriated to the UK by the international division) had increased by £1.87bn over four years. But since then, the total shareholder return of both companies has deteriorated, casting doubt on the long-term benefits of Sir Richard's "tactical imperative." Under the LTIP, Mr Pluthero rec­eiv­ed just over £10m, according to Manifest. Overall, the plan paid more than £80m to 55 people. Yet measured in July, when CWW's sale to Vodafone was completed, the drop in total return for both companies since demerger was 40.3 per cent. An overall fall since 2006 of 1.7 per cent compares with a 69 per cent increase in the global telecoms index. Short-term focus . . . A more serious charge is that C&W's managers failed to invest in the company's long-term health. CWW's last chairman, John Barton, says the UK business was "under­invested and had been for years." Gavin Darby, who served briefly as CEO after Mr Pluthero's departure in November 2011, told analysts in February: "Short-term decisions were made to defer investment . . . [leaving] the business with an inefficient cost base." He says under-investment predated demerger: C&W had not integrated different UK networks ac­quired since 2005, for instance. Even observers sympathetic to Sir Richard say his plan failed to lay foundations for growth. "Short-term it was a success," says Abby Ghobadian of Henley Business School, co-author of a favourable case study on C&W last year in the Journal of Strategy & Management. If the long-term goal was to create a sustainable business then it wasn't a success. [But] he steadied the ship and at least gave something back to the investors. I think he had a difficult hand [which] he played as well as possible. Others are far less accommodating. Tom Dobell, who manages the M&G Recovery Fund, told investors in March he had finally sold its CWW shares, a stock "we wish we had never owned." Longstanding critic Steve Malcolm of Arete, an independent research house, says the "share price move never reflected financial reality" and the cost of securing Mr Pluthero was "far too high." Mr Pluthero declined to comment. But in an interview with City AM in April, he said: "You make decisions as best you can at the time - hindsight is a very cruel mistress. You're looking back thinking "Well I could have done that differently."" Sir Richard blames the dec­line in CWW's value on mistakes made there after he gave up the chairmanship, initially to Mr Pluthero, to concentrate on CWC. He points out that he lost money on his own stake in CWW and regrets not having stayed on as chairman of both companies. "My judgment was [CWW] needed Pluth­ero more than me," he says. With hindsight, I was probably wrong. CWC's shares have also fallen since demerger, as earnings from its Caribbean interests flagged, though anal­ysts are heartened by its "pan-Ameri­can" focus. Mr Rice, now CWC's CEO, concedes that if long-term incentives should lead to long-term value, "we have yet to deliver long-term value." Sir Richard, however, says the plan created the right incentives. Its beneficiaries had to buy shares in the company, giving them "skin in the game," and C&W's 100,000 shareholders - inc­luding some who bought in at privatisation 30 years ago - "had the ability to exit at the time of maximisation [of returns] if they wanted to." . . . costs in the long term The unorthodox structure of C&W suited its dual businesses. The supercharged incentive plan succeeded, for a time, in marrying executives" and fund managers" self-interest. But it was a product of a pre-crisis era, when many investors judged that the biggest risk to many listed companies was their lack of aggression compared with private equity counterparts. Guy Jubb, head of governance at Standard Life Investments, which voted for the original LTIP, said at the time that it was "in shareholders" best int­erests to ensure [managers] are effectively incentivised." He says now that the lessons of the C&W proposals inc­lude "the importance of ensuring executives" long-term interests are genuinely aligned" with those of long-term shareholders. But he adds that a similar proposal would not win investor support these days. The plan's engineer, meanwhile, says he would never again launch such a project - but not because it failed. "Why should I put so much energy into something when you get so little thanks for it?" asks Sir Richard. You get so little recognition of the bloody sacrifices you made yourself by putting [in] your own money. Why would you do it? Go and be a director of a North American company [instead] and get easy money.