Streetwise

Lauren Rudd

Sunday, November 4, 2012

Shareholder Respect

A key element in the analysis of any company’s investment potential is the deference it has for its shareholders. Corporations that rank high on your investment list should respect their obligation to place the well-being of shareholders and employees above that of its executives. Unfortunately, executive compensation often points to a shirking of this responsibility.

With the filing of 2011 proxy statements, the extent of last year’s largesse has become clear. The median or middle point of executive pay for the 200 highest compensated CEO’s was $14.5 million and the median pay increase was 5 percent, according to a study conducted by Equilar, a compensation data firm.

While no one wants to stifle initiative, hard work and the associated monetary rewards, consider the ramifications to corporate morale when rising executive compensation collides head-on with layoffs and pay reductions, all layered on a mantra of necessary cost cutting - despite rising profits.

Although the previously mentioned 5 percent median increase was smaller than last year’s, it comes at a time when stubbornly high unemployment and declining wealth are uppermost in the minds of those on Main Street. And we are only talking about the CEOs of public companies, not the many billions of compensation doled out to those who run hedge funds and private-equity firms.

Within the universe of public companies there were two executives who had nine-figure paydays last year. David Simon, CEO of Simon Property Group, was the second-highest paid executive, receiving $137 million. He joined the exclusive nine-figure niche occupied by Tim Cook, who succeeded Steve Jobs at Apple. Mr. Cook received $378 million. If it is any consolation both companies said their plans incorporated one-time rewards that would not be repeated and depend on future company performance.

While Apple shareholders overwhelmingly approved Mr. Cook’s compensation, Simon Property shareholders rejected Mr. Simon’s package at the Company’s annual meeting with 73.3 percent voting no. However, such votes are not binding.

So what happens when corporate management pays more attention to their personal piggy banks than the corporate cash box? John DeLorean, a former 17 year veteran of General Motors stated it quite succinctly back in 1979 in his book, “On a Clear Day You Can See General Motors.”

“Our inability to compete with the foreign manufacturers is more due to management failure than anything else. Past management spent our lush advantage extravagantly...the system and management are stifling initiative. Leadership and innovation are impossible...Not only is management of no help, most of what they do is wrong...Isolated executives find their markets taken away by competitors attuned to the wants and needs of the public.”

To which I would add, “And the needs of the company’s employees and shareholders.”

Keep in mind that DeLorean wrote those words over 30 years ago, well before the current level of lavishness set in. And well before self-indulgent executives forced deterioration in the esprit de corps of their workers.

Therefore, from an investment perspective you should seek out those companies that demonstrate a fair and efficient management style that extends deep into the executive suite, while avoiding those where management is more self-serving. Given the current market environment such investments should be easier to find today than ever before.

Mr. Cook’s compensation aside, an excellent example was set by Apple’s former CEO, the late Steve Jobs. In his book titled, “Steve Jobs,” Walter Isaacson recounts how upon seeing the menu for a dinner for President Obama, Jobs responded that some of the dishes proposed by the caterer – shrimp, cod and lentil salad – were way too fancy.