Shareholders of the World: Unite

The problem

We are now coming down from the exalted heights of a few years of good times, when CEO’s pay has grown by outrageous multiples. The pay of the CEO has grown to the point where it is in the millions. Where once the guy who ran a company was paid perhaps 10 times average earnings, they are now paid around 100 times, if not more.

This has been justified over the years by the Remuneration Committees who set CEO pay. These committees are formed from the board members of the company setting the pay. The pay levels are often justified as being needed because good management is a rarity, good managers exist in a world market, so we have to pay world market prices.

The fallacy of this argument becomes apparent when we import CEO’s from other countries (remember AMP under George Trumball?), and then find to our shock and horror that their reign-of-error ends in disaster. Likewise the various other managers and CEO’s who do a seagull: come in, make a big flap, crap everwhere, and then piss off.

The boards and advisors who set remuneration are usually members of the ex-CEO’s club, so it’s hardly surprising that they help their mates to stick their trotters further into the trough.

To add insult to injury, there are two other common practices when setting a CEO’s pay: giving them shares in the company, or issuing options.

In both cases, the reason given is “to align the interests of management with those of shareholders”. What utter piffle. Read on.

The Fallacy

Giving a manager shares (at no cost)  allows that person to share in the upside, if the shares rise in value they do nicely. Naturally there is an incentive there for them to work to increase the value of the shares. But remember, if the shares don’t rise in value for whatever reason, the executive concerned started with nothing and still has something. And something is better than nothing. So they can’t lose: Shareholders share the upside and the downside, free shares given to executives allow them to share only the upside and not the downside.

Options are even more insidious. The option is a right to purchase shares at some time in the future, but at a price set now. The time of purchase is called the exercise time, the price is called the strike or exercise price. Normally, options will be priced in such a way that all concerned hope the shares will be worth more, at the exercide time, than the strike or exercise price. So the executive gets to buy below market. The incentive here is for the executive to work to get the price nice and high so they can exercise the options and make an instant paper capital gain.

Both approaches are often dressed up in all sorts of other variations. You can get “performance rights”, and “executive option plan vesting shares” and god knows what else. Fundamentally they are all either a grant of shares, or of options.

Fortunately the bad old days of options being issued with a price of 1 or 2 cents are gone. Those were the ultimate get-rich-schemes for executives.

All these schemes amount to a free ride for the executives.

Here’s why:

  • Shares in a company are an ownership stake. If you own shares, you own a little part of the company.
  • Grants of shares and options come at a cost to the ordinary shareholder who had to use real money to buy the shares.
  • Granting shares to executives dilutes the holdings of the other shareholders.
  • Irrespective of how you pitch it,  the executives bear no downside risk. Apart, perhaps, from to their reputation. But not in monetary terms.

And finally, and most fundamentally, executives are there to work for the good of the company owners: the shareholders. It’s their job. If the executives are broken, get rid of them and get some new ones that work.

The Solution

If executives want to own shares in the company they work for, they should pay for them. Just like anybody else. Then they have a real ownership stake, and feel real pain when the share price falls.

Nothing else counts.

The Manifesto

So, shareholders large and small: sign up to the shareholders manifesto. Three little things you need to do and remember:

  • I will vote in company elections at the Annual General Meeting.

Always. Without exception.

  • I will vote against pay rises for the board members.

The board are there to represent the owners, not to get rich.

  • I will vote against all issues of shares or options to executives.

Always. Without exeception.

If you want, vote against the Remuneration Report as well. This sends the board a strong message that you, the owers don’t like the excessive pay packets of the management of your company.

Do these things! Help to begin and then maintain the ejecting of bloated executive entitlement princesses from the their palaces.

Make business better by thinking and behaving like an owner.


Too right.

Shareholders should be activists, acting like owners and keeping THEIR management honest, all the time.

All day every day, or they’ll take advantage and line their pockets at our expense.

Comment by Wally | December 15th, 2008 8:49 pm | Permalink

Very good point Wally. Over the long term, shares will always outperform other investments so a CEO doesn’t crystllise a loss unless they sell. I’m all for them buying shares in their own company but to have a gratis bunch awarded as part of the salary packaging clearly doesn’t act as an incentive. I’m incensed that our Prime Minister for example, earns much less than the Chairmen and women of banks! The problem is, when companies are performing well, shareholders become lazy and don’t vote in AGMs it’s only when times are tough that these issues come to the fore.

Comment by Baino | December 15th, 2008 8:24 pm | Permalink

Wally, you’ve got one of those rare blogs that can entertain and inform as well. This is the kind of article that you should be sending in to ‘The Age’ or a mass-market (but intelligent, mind) magazine to inform them. Alternatively, also contact the ‘Get Up’ group who tend to grab good issues and publicise them. Seriously.

After all, my only prior knowledge of shares was via ‘Wall Street’ and when my folks went all wild and crazy in the seventies and bought into those infamous NZ pine forest options…..

Comment by Kath Lockett | December 16th, 2008 8:55 am | Permalink

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