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

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

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

MarketWatch, via Yahoo Finance: "It's getting easier to create a socially responsible savings plan"

Looking to try to do some good in the world with how you invest your money? Who wouldn't like to do that? The idea's interesting, and the article discusses the appearance of "socially responsible" choices in 401(k) plans. The link is below.

The first thing I would urge you to notice is that the 401(k) vendor is using the socially-responsible approach as a marketing strategy. This does not make it a bad thing, but it is largely about the use of socially-responsible investing as a successful marketing niche, because of its' appeal to investors who want to do a good thing. IMHO a 401(k) vendor who wants to do a good thing should start with setting fees and fund expenses at the low end of the competitive range. I can find not one word about fees in the article.

There are a few counterpoints in the article, and I will highlight one I think is extremely important: "Some people criticize socially responsible mutual funds for having lackluster performance. However, that isn't always the case." That isn't always the case? Boy, that's a powerful defense. The problem is that often it has been the case. The company most typically excluded by socially responsible mutual funds is Altria, fka Philip Morris. Nobody gets excited about owning the stock of purveyors of cigarettes. I don't -- my father lost most of a lung to cancer. Like many of his generation, he smoked. You should not smoke, but it still is a free country. But I'll admit this, Altria is probably one of the most consistently profitable and best performing long-term stocks you could have owned over the last fifty years, and the company does not stiff its stockholders. Jeremy Siegel called it the best single-company investment in his book The Future for Investors. It returns cash money to investors in the form of dividends. It is an honestly-run company too, as far as I can tell. I'm not touting it. What I am saying is that you could very likely find that many "socially-responsible" or environmentally-oriented companies don't gain in share value over time like Altria, don't pay out dividends like Altria, or have badly inferior records for honestly running their businesses, and keeping conservative accounting standards.

It is no simple call. Indexed products, arguably the best approach available, include the problem companies. Cull out your objectionable companies as you will, and you will very likely pay a price in lower portfolio returns, and still find your "socially-responsible" holdings in the newspaper over and over again after some scandal blows up. There are too few companies out there that will not ever disappoint you in some significant way.

In an imperfect world, I would urge you to try to invest as well as you can, for the best returns -- you'll need them -- and support your favored causes, like smoking cessation and addiction recovery, with your dividends and long-term gains. If you invest unwisely, you may not have the financial means to help your causes.

Otherwise, where do you stop? Throw out the gun makers, the war-mongering defense contractors, the casino operators, the booze makers, the ... carnivore meat-packers, the oil companies, the coal-mining companies, the polluters, the oppressors of poor third-world peoples, the fast-food operators who make America obese, the credit card vendors, the Predatory Retailer who is non-unionized and who stamps out locally-owned stores, the ... list goes on, depending on your own views of what is socially irresponsible. Is this any way to make a sane portfolio?

here's the article:

Yahoo! Personal Finance

Washington Post --"Puffing Up Performance? Accounting of Sales by Dot-Coms, Other Companies Increasingly Troublesome to Regulators"

Here in the USA we like to tell ourselves that our accounting numbers and corporate governance are the best. Well, the Europeans think we could do better, and ... I certainly hope that we don't see another round of stories about bad accounting at dot.coms.

The point? Investors and real managers need good numbers and reasonable, conservative accounting approaches. Only hustlers need juiced-up numbers.

Puffing Up Performance? - washingtonpost.com

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Why I Post on Things

In a brief look back at what I've posted on, I have noted a couple of things which someone who does not know me might think are just hobby horses. They aren't. They go to the heart of smaller investors having a fair chance to achieve their own financial goals through access to the good returns which the financial markets can provide for those who invest wisely and patiently. You see, getting those returns is my business.

I have written frequently about hedge funds. There is room in the world for them I guess. But they have huge clout and very little restraint, and serious potential for actions damaging to their own and other investors. Yes, the market will deal with a hedge fund which invests poorly, but I would really rather not have the world's financial markets go through convulsions with them in their death throes, if you don't mind. We get enough of those anyway.

I have written also frequently on the subject of shareholders' rightful interest in not having the corporate enterprise's earnings slashed by utterly fantastic manager pay, excessive managerial stock options, not to mention unscrupulous or illegal abuse of same. Corporate directors are before anything else the trusted stewards of the shareholders' property (the corporation, if you please) and should not forget that. Whether the stockholders are investing to fund their retirements, college for their children, or just to gainfully deploy the financial resources they have accumulated, they have skin in the game. A managerial "hireling" with big pockets and a short-term employment horizon should be seen as having a radically lesser stake in the corporation's earnings. Mutual funds have largely supplanted individual shareholders, for many valid reasons, but they should never feel that they have no responsibility to vote their shares wisely, and in ways jealously protective of their portfolio holdings' long-term investor returns.

The common theme: we all, as investors, need and require orderly financial markets, and good directorial stewardship in the Board Room.

I know one person who is rather cynical sometimes about things. He's pretty smart. I can almost hear him saying, "...you know, that really is the way it's always been, and it's the only way it ever will be, and you're too old to be sooooo naive." Well I would just say that there are two world views through which you can see how things are. I will take a "half-full glass" view, acknowledge the imperfections of people and organizations and try to do what I can. There is power in reason, and in communication. Improving things, even if just incrementally, is possible. That other view is no fun at all.

More on Ruckus Over Nardelli's Compensation and Home Depot's Independent Directors

I sort of felt obligated to come back to this when I saw the NYT article linked below, as I had touched on it before.

It seems there are some HD stockholders with voices. The company now says that a majority of independent directors will have to approve Mr. Nardelli's compensation. How independent they are has yet to be seen, and in all fairness, there may be some pretty hefty sums built in to Mr. Nardelli's deal with Home Depot.


Home Depot to Review Pay - New York Times

Home Depot's Nardelli Gets $210 Million -- Stockholders Get Shaft

Back to Corporations 101: A pop quiz, with only one question: To whom do the profits of a corporation belong?

(a) To the Government
(b) To the Managers
(c) To the rank and file employees
(d) To the owners, the stockholders

The correct answer is (d) the owners, the stockholders. The other answers are incorrect.


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