Shareholders give the Sainsbury board something to chew over

New boy Justin King hopes to give J Sainsbury a fresh start after recent setbacks

J Sainsbury, the supermarket group, suffered a massive rebuke from its independent shareholders yesterday.

J Sainsbury, the supermarket group, suffered a massive rebuke from its independent shareholders yesterday.

Barely one in five of the votes cast by those outside the Sainsbury family were in support of the group's remuneration report at its annual general meeting, which also saw shareholders accuse the once mighty grocery retailer of having become a "joke".

Sainsbury was only saved from total humiliation over its remuneration report, which included a controversial possible payout of £2.3m for its former chairman, Sir Peter Davis, because it managed at the eleventh hour to persuade the Sainsbury family - which controls 35 per cent of the shares - to vote in favour of the report.

Including the Sainsbury family shares, 70 per cent of shareholders who had cast their votes before yesterday's annual meeting were in favour, while a still sizeable 30 per cent rejected the report. A further 37 million abstention votes were registered.

If the verdict of the City was damning, it was nothing compared with what was in store for the Sainsbury board at the Queen Elizabeth II Conference Centre in Westminster yesterday. Plenty of ordinary investors made the trip to the meeting to deliver in person their own equally harsh assessment about the story Sainsbury has had to tell in recent months.

While that story has been one of a dismal performance compared with competitors, profits warnings, and upheaval in the boardroom, it is the contentious £2.3m performance-related award for Sir Peter, who was ousted two weeks ago, which has become the lightning rod for shareholders' ire.

One investor at the meeting wanted to know why no one on the remuneration committee - which is headed by Keith Butler-Wheelhouse, and which signed off on the hefty award - had "apologised to shareholders for this appalling fiasco that has damaged the company so deeply".

Having ousted Sir Peter unceremoniously, Sainsbury has been working furiously in the past week to convince the world that it has withdrawn all support from the plan to award Sir Peter the bumper bonus. In a statement on Thursday, Sainsbury explained the £2.3m payout was based on a previous assessment of how well Sainsbury was doing. It said its new chief executive, Justin King, had discovered the business to be in a far worse state than previously thought, making it completely inappropriate to give Sir Peter such a generous award.

It was one private investor who put Sainsbury on the spot more succinctly than has been done so far about the confusing situation. Grace Smith, a shareholder, stood up and asked the board:

"Are those of us who have got used to rewards for failure now to have to get used to rewards for deceit? Was Sir Peter Davis economical with his reporting to the board? The inference from the statement was that the board did not know what state the company was in. If Sir Peter Davis were reporting fully, the question remains, why did the board not know what was evident to Justin King?"

It was a question which Lord Levene, Sainsbury's senior independent director, who had the unenviable task of chairing the meeting, found impossible to answer. He resorted to the refuge of saying the whole matter was in the hands of the company's lawyers, making it impossible to discuss it in public.

But Lord Levene's anger at the mess Sir Peter has left behind was clear. When challenged about another recent bitter bust-up between Sainsbury and the City - its failed attempt to hire Sir Ian Prosser, former chairman of Bass, as its next chairman - it was hard not to see his remarks as a veiled criticism of Sir Peter.

Sir Ian had "stood down with considerable dignity and did not ask for any money from the company", Lord Levene said. "He acted absolutely correctly and we have nothing to reproach him for."

While Sainsbury's well-attended AGM was always likely to be the forum for a litany of discontent about its spectacular fall from grace, its board tried hard to persuade shareholders that this was the nadir, from which the supermarket chain could start to regain its strong position on the high street.

The fresh-faced Mr King, who took the top job at Sainsbury after leaving Marks & Spencer, where he was head of its food division, struck a resolutely upbeat note. He said he was "delighted" to be at the AGM of what he termed "a really fantastic company".

The plan from now on, Mr King said, would be to "make this business great again". Those who follow the company believe it is an ambitious task. Sainsbury, until the mid-1990s Britain's largest supermarket business, has already issued two profit warnings this year, and is now in third place in the market behind Tesco and Asda, the latter backed by the US giant Wal-Mart.

Mr King, 43, who has cut his teeth at Asda, and has also been head of the luxury ice cream brand Haagen-Dazs in the UK, will release full details of his rescue plan on 19 October. But he acknowledged he has already found plenty to do, including sorting out Sainsbury's disastrous problems with its supply chain, which, despite being part of a £2bn investment orchestrated by Sir Peter, have frequently left shelves unstacked.

Attention will also be paid to the range Sainsbury sells. Mr King said he wanted to regain Sainsbury's past pre-eminence among shoppers who favoured a large choice, especially among ranges such as new types of food, and organic products. But he conceded there would be "no point having choice if you have problems with availability".

There will also be a change of direction on the sale of non-foods - where Tesco has streaked ahead - with Sainsbury abandoning its current strategy of selling limited clothing lines in a wide range of stores in order to concentrate on offering a larger selection in its biggest outlets.

But, given the group is already about 5 per cent more expensive than Tesco and Asda, the thorniest issue of all will be what Mr King decides to do with the prices customers have to pay. Sainsbury could attempt to go upmarket to compete with Waitrose - the premium-stocked, premium-priced, South-east-based food retailer owned by John Lewis.

But most observers think Mr King will role his sleeves up to slug it out in the same arena as his larger rivals, though with an emphasis on quality that could help attract a larger number of more wealthy customers willing to pay slightly higher prices.

It is quite likely that Sir Peter - who had two bouts of his career at Sainsbury, the first in the 1980s, when he left in disgust because the controlling family would not give him the top job - is feeling pretty sore now. Even his most vehement critics admit he implemented a lot of change at Sainsbury, which Mr King just might benefit from. But that is unlikely to be for some time.

One analyst said: "The stores look very good now thanks to all the investment, but Justin King has barely scratched the surface about what needs to be done. We will have to see what Mr King has to say in October but there really does not seem to be a quick fix."