We need a new birth of shareholder freedom!

Mahalanobis

As for the Wall Street banks: They aren't run for the benefit of the stockholders anyway. They are run for the staff.

This was the eighth of ten reasons not to own bank stocks now. The original list is from here. Sadly, it is a valid reason to re-examine the whole concept of owning stocks at this point. Corporate governance is dead. Dead. The stockholder is the mark at the poker table. The directors are all too often at heart just management suckups and sycophants. That is, when they are not themselves management. Absurd percentages of earnings are transferred to managers. Stock buybacks and empire-building acquisitions are prioritized over cash dividends, and shareholders are fobbed off with a promise of greater earnings and share prices in the by-and-by. So maybe we should all just own bonds and commodity-linked investments for a decade or so!

Or perhaps we need a great stockholders' strike! Such a strike would be ended only when corporation by corporation, we get much more shareholder-friendly and shareholder-empowering bylaws and directors truly committed to a vision of corporate governance where their duty is first, second, and last to maximize the long term value of the enterprise to those who have bought their shares, be they individuals or institutions. That, by the way, would end any notion of a fiduciary obligation to open the gates and do business with those whose goal is only to slash, pillage, burn and dump the enterprise while exiting with a quick hundred million bucks or so.

Nothing too radical about that, is there? Don't look for the government to do it for you! They are too narcissistic, inept, slow, and um, manipulable by lobbyists to do more than mess things up worse.

Seriously, now. Stockholders' tea party time, anyone?

It's an Inflammatory Read, and it Should be!

So, the shareholders are taking it on the chin, and the directors are doing their usual marvellous job of protecting the shareholders' interests. Management? Big bonuses at Goldman, as usual. And, as the article points out with remarkably restrained words, when an chief executive is forced to go, like at Merrill or Bear Stearns, he gets to keep his stock options. Look closely at the following beautifully, bluntly honest quote:

"The employees and executives at Bear Stearns own a significant portion of the firm; as such our interests are closely aligned with outside shareholders,'' company spokesman Russell Sherman said. ``We are intensely focused on delivering value to our shareholder base.''

By making themselves as big a part of the stockholder base as they can???

I'm waiting for an ETF holding profitable companies with dividends, without larcenous stock options programs camouflaging dilution by stock buybacks, and with directors militantly committed to defending stockholder interests, specifically minimizing management influence over the board. Haven't seen one yet!. We've got everything else! If the name isn't taken, they could call it the Governance Leaders Fund! An ETF with contrary practices could be called the Sticky Fingers Fund!


Bloomberg.com: Exclusive

Here's What the Accounting Watchdog Keeps Hidden: Jonathan Weil / Bloomberg

Not in the CPA realm, never have been. The conflicts which can come at those doing audits, who after all do wish to keep their clients, can be serious indeed. Many times investors have been stunned at things which come out after a company gets a "clean", unqualified auditor's opinion. Accounting firms have been sued by investors and others, and in well-known instances have been devastated by the outcome. As investors, whether you invest in stocks of single companies or in mutual funds, you need to know that decisions on direct holdings or underlying portfolio holdings are made based on fair presentations of the financial picture.

Hold that thought, and read this:
Bloomberg.com: Opinion

'Buyback Boondoggle?' -- Matthew Hougan's blog at Index Universe

I've blogged on this a few times. See, I'm not nuts on this.

A quote: “The decline in dividend increases is disturbing, especially in light of continuing moderate earnings growth and the abundance of corporate cash,” [Howard] Silverblatt [senior analyst at Standard & Poor's] said in a statement. “We believe the present wave of corporate buybacks is contributing to the slower pace of dividend growth in 2007."

Hougan's take: "[They] strike me as tantamount to deferred pay raises for corporate employees. Whereas dividends are paid out to current shareholders, buybacks – by reducing the number of shares outstanding – represent payments to both current and future shareholders ... including the holders of vested and unvested stock options."

His bottom line on this: "It seems like a blatant conflict-of-interest for managers – who often hold large options positions – to make decisions about whether to buyback stock or boost dividend payments."


BLOG IU.COM - Buyback Boondoggle?

Stock buybacks are a good thing, right? -- USA Today

Good article. I noted particularly the problem of "companies announcing stock buybacks from 1981 through 1995 averaged 24% more shares outstanding five years later, says Akhtar Siddique, economist at the Office of the Comptroller of the Currency." The ugliest possibility is that the buybacks were just "camouflage" for the dilution of shareholder value due to outsized stock option plans transferring the stockholders' company and its earnings into the hands of managers and favored employees. Cash dividends are a more honest way to reward stockholders. Of course, when the directors are management and management toadies, then that dilution can be seen as a very good thing. To get a simplistic approximation of the percentage of the annual earnings given away, you have to get into the annual report, find the number of shares reflected in the options grants, find the market value per share, calculate the total current value of that many shares, and compare that number to the company's earnings after tax. You may be shocked.


Stock buybacks are a good thing, right? - USATODAY.com

WSJ: Hedge Funds Vote (Often)

I've linked to the intro, the full story is subscription-only. I blogged on this awhile back, and I hope that significant reform is achieved. In the print edition, the story is on page C1. The SEC is said to be in a "may act" mode. When hedge funds borrow shares for the purpose of voting on issues which can have short-term effects on share prices, be certain that they have no one's interests at heart but their own. "It's called "empty voting", and from here looks like a fundamentally corrupt practice. I'd say, "ban it." But then, I'd probably say "ban hedge funds" also. As has been said, they are not a new way to invest, they are a new way to enrich fund managers.


WSJ.com - Login

Do I dare to disagree with an Investor's Business Daily Op-ed? "Backdating Bunkum"

Boy, that would require some chutzpah. OK.

(link is below)

IBD: "Since Aug. 29, 2002, companies have been required to report new option grants within two days, which does not leave much opportunity for changing the date. So the alleged 'backdating scandal' — an artifact of capricious changes in tax and accounting regulations between 1992 and 2002 — is ancient history by now."

My reply: Not for the companies restating their earnings, unable to get their 10-Qs out on time, facing lawsuits, and definitely not for the individuals with adverse career consequences or even he prospect of having to defend themselves against criminal charges for falsification of corporate records.

IBD: "Another key myth is that there is something inherently unfair about receiving stock options 'in the money' (priced below some later market price)."

My reply: Priced below the then current price would be more correct! It is wrong. it is unfair. It is in a very real sense theft of corporate value from the other stockholders. For example, I cannot buy Apple or HP or Dell stock at the lowest price of the last month, quarter, or whatever. Neither can you. I couldn't if I was a stockholder either. Pay him his salary. Give him his benefits. Give him a bazillion options. But do it all honestly. Or are all these implicated big-shot executives too poor or inherently too devious to just do it right?


IBD Editorials: 'Backdating' Bunkum

Bloomberg: "Options-Toll Rises as Corporate Lawyers Retire, Quit"

Hey! So, what's the problem, huh? So what if a few executives finagled their options grant date? Why all this fuss? Everybody's done it, and no one will ever know. And you worked real hard for the company last year. You're entitled to be taken care of too. We'll just fix the papers, OK? Sign here. You don't want to be known as some kind of ethical freak do you?

Well, now we know.

And why are the corporate counsels being made the fall-guys? Well what do you want Apple to do, fire Steve Jobs? Yes, the corporate counsel should have stopped it. Corporate counsels can be removed if they get in the way of CEOs. It would be an unequal contest. But which is better, to be fired for doing what is right, or to be fired later as the fall-guy?

Well, imho it's like this. When the options grant date was illegally backdated, it was for a reason. It was certainly not done to cost the manager in question more money! Generally, a date was chosen using good 20-20 hindsight, to get a lower share price factored in and thus a larger gain later. Documents were falsified to cover the backdating. So where is the victim? The problem, is that the favored few were in a real sense stealing from the other stockholders. It is that simple. If anyone should be pilloried in these cases, it should be the offending manager(s) and the directors who were asleep, governance-wise.


Bloomberg.com: Exclusive

More on WSJ's "How Borrowed Shares Swing Company Votes"

There are some letters to the Editor in today's WSJ on this. (p.B5) I blogged on the original article Here.

The thrust of the letters seems to be that the phenomenon of "empty voting", or voting borrowed shares in order to influence corporate governance without benefit of having bought sufficient shares to properly do so is not common, and would violate a federal reserve margin regulation. Thank heaven. But should that be sufficient comfort? I'm glad that "empty voting" is uncommon.

It should be nonexistent. I would argue that it is wrong whenever it occurs or is attempted and should be precluded as suggested in the original article by a requirement that shares be owned in order to vote them. If this complicates life for short sellers, that's tough. Perhaps short sellers would have to offer their borrowed shares "ex-votes", with the votes only following when they close out their position! Wouldn't that be fun for the brokers? Buyers could refuse to buy, or limit their order to "owned shares", making the borrowed shares a little less valuable. Woo-hoo!

Doing this might even offer a way to get realtime aggregated short selling information to all market participants, and a way for the regulators to quickly target instances of another "uncommon" abusive speculative practice sometimes seen, the selling of shares in excess of those available for borrowing. Don't even get me started on that!