blow.n.gasket
25th Apr 2010, 10:15
PIGS AT THE TROUGH
By Adam Schwab.
(Lessons from Australia’s decade of corporate greed.)
Just a few quotes from the book.
BEWARE THE HELPERS:
Keep a close eye on how much a company pays its advisers such as
Investment banks and consultants. If fees are high, investors should ask:
What exactly are management doing? Also keep in mind that advisers are not responsible to shareholders like employees are (although they will be concerned about their reputation)
READ THE FINE PRINT:
Investors should carefully read the terms of options and other rights granted
to executives. Hurdles should relate to long-term performance. If equity
Incentives are able to vest based on events that are outside the power of the executives (such as a change-in-control provision), those executives are not really incentivised to build long term wealth for shareholders.
INDEPENDENCE ISN’T ONLY FOR COUNTRIES:
A strong independent board is critical for publicly listed companies. It
Is even more vital when there is a dominant, founder CEO (or executive
Chairman), as was the case with Eddy Groves. While many successful
Companies remain dominated by their founder (such as Westfield’s Frank
Lowy or News Corporation’s Rupert Murdoch), shareholders are effectively
Buying a stake in what is really a quasi-private company. Ultimately,
Without an independent board that is willing to act in the interests of
Minority shareholders, domineering CEO’s will make the company a far riskier investment.
GOODWILL GONE BAD:
Unless a company is able to glean substantial cost savings or revenue
“economies of scale” from acquisitions, “goodwill” isn’t really an asset
at all. While some intangible assets are incredibly valuable ( a brand name
such as Coca-Cola or McDonald’s or Google can be worth tens of billions of
dollars), investors should focus on assets which directly contribute to cash flow, rather than what appears on a balance sheet.
LOOK FOR EXCEPTIONS, NOT RULES:
Struggling companies will often bury bad news below the “headline” results.
While ‘extraordinary gains’ are usually deemed to be part of ordinary
Profit, large losses are often dubbed ‘abnormal’ and hidden deep within
The notes to the financial statements. Poorly performing companies will
Report abnormal or extraordinary losses on regular occasions. If a gain is a one-off, assume it won’t be repeated- If a loss is due to management, assume it will be.
BEWARE RATS AND SINKING SHIPS:
The abrupt resignation of a senior, long-term executive without proper
Explaination is often a talisman for impending bad news. This is especially
The case when a CEO resigns and does not take a position elsewhere;
For example, the abrupt and unexplained departure of Enron CEO Jeffrey
Skilling occurred a short time before the company’s collapse.
WATCH OUT FOR DEPARTING DIRECTORS:
The most powerful tool in the arsenal of an independent, non-executive
Director is the power to resign. For a director to resign, he or she is usually
Strongly opposed to the direction that the company is headed. If a respected
Director departs a board for ‘personal’ reasons (and retains other
Business roles), it is usually a sign that all is not well.
AUDITORS ARE FALLIBLE:
Corporation laws require companies to hire auditors to review financial
Statements- Auditors are effectively paid by shareholders to make
Sure the data is not fallacious. If an auditor is being paid by the
Company to perform other services (such as tax consulting or due
Diligence),their independence may be compromised. The risk is greater
When the value of the non-audit services is relatively significant, or
If former members of the auditor are widely employed by the company.
Investors should reviewthe notes to a company’s financial statements to
Determine the relative level of audit and non-audit fees. It is also worth
Checking to see if any executives once worked for the company’s auditor.
INTERNATIONAL EXPANSION FOR DUMMIES:
With few exceptions, Australian companies have enormous difficulty
Expoerting their business model overseas, often resulting in steep losses for
Shareholders. Investors should be very wary of companies that announce
Grand overseas expansion plans. If the expansion succeeds, executives
Are feted and generally receive a significant pay rise. If the venture fails,
Shareholders are forced to accept huge write-downs while executives are
farewelled in typically golden fasion.
FINANCIAL STATEMENTS MIGHT LIE, BUT SHARE PRICES USUALLY DON’T:
If a company’s share price has fallen substantially, that is usually an indicator
That a company’s financial statements belong in the ‘fiction’ section.
Investors should always avoid trying to catch falling knives.
CASH IS NOT KING:
Investors will get the management they deserve. When considering investing
In a company, look closely at how it pays its executives.
If senior management are paid substantial fixed cash or short-term bonuses
(based on short-term metrics such as earnings per share or profit growth)
then they will be encouraged to take more risks with shareholder’ capital
or reduce expenses such as staffing or research and development.
By contrast, if executives are paid largely in equity which is ‘locked up’
For a number of years and vests based on challenging performance
Hurdles, they will be more incentivised to generate long-term growth and avoid risky investments.
COMMITTEES ARE IMPORTANT:
Investors should look closely at the composition of companies’ audit
and remuneration committees. These committees should consist of
independent directors. The role of the audit committee is essentially to make
sure that the financial statements prepared by the company are correct.
The presence of an executive on an audit committee is a major warning
That the company’s corporate governance practices are substandard.
CASH DON’T LIE:
If a company’ reported ‘sales” are substantially less than its operating
Cash flows, it is highly possible the company is being somewhat creative
With it’s financial reporting. ‘Sales” are an accounting concept and subject
to judgement and manipulation. Unless a company is completely fraudulent,
cash cannot be fiddled. If a company’s ‘sales’ continually exceed cash inflows,
stay away.
WATCH OUT FOR DIRTY ACCOUNTING TRICKS:
When companies use accounting methods to increase earnings, it is
Not a good sign. Profits that come from accounting changes rather than
Increased sales or lower costs are usually not sustainable and can even be
An indicator of far deeper problems.
None of the above quotes from Adam Schwab’s book is Qantas specific.
It did however raise the hairs on the back of my neck.
I wonder if Adam Schwab will do a book on Qantas where Matthew Benns book ‘THE MEN WHO KILLED QANTAS’ LEFT OFF?
To finish off with, the last paragraph of ‘PIGS AT THE TROUGH’ epilogue.
‘One of the overarching themes which traversed many of the companies covered
was the apparent absence of responsibility and diligence taken by non-executive
corporate directors. It was the job of these directors, most of whom are respected
members of the Australian business community, to represent shareholder’s
interests and minimize agency costs, that is, the costs associated with employing
managers whose interests were not aligned with smaller shareholders.
In virtually all cases, non-executive directors failed to properly undertake their
Trusted roles. Over the past decade, executives have been able to run their
Companies like personal fiefdoms, while directors did little or nothing to curb
Their largesse and institutional shareholders did virtually nothing to exercise
whatever minimal power they had.
If the companies studied in this book teach us anything, it is that corporate
Governance and executive restraint are issues which must not be ignored by
Investors, non-executive directors or governments. A failure to address them
In a meaningful way can lead to catastrophe.
By Adam Schwab.
(Lessons from Australia’s decade of corporate greed.)
Just a few quotes from the book.
BEWARE THE HELPERS:
Keep a close eye on how much a company pays its advisers such as
Investment banks and consultants. If fees are high, investors should ask:
What exactly are management doing? Also keep in mind that advisers are not responsible to shareholders like employees are (although they will be concerned about their reputation)
READ THE FINE PRINT:
Investors should carefully read the terms of options and other rights granted
to executives. Hurdles should relate to long-term performance. If equity
Incentives are able to vest based on events that are outside the power of the executives (such as a change-in-control provision), those executives are not really incentivised to build long term wealth for shareholders.
INDEPENDENCE ISN’T ONLY FOR COUNTRIES:
A strong independent board is critical for publicly listed companies. It
Is even more vital when there is a dominant, founder CEO (or executive
Chairman), as was the case with Eddy Groves. While many successful
Companies remain dominated by their founder (such as Westfield’s Frank
Lowy or News Corporation’s Rupert Murdoch), shareholders are effectively
Buying a stake in what is really a quasi-private company. Ultimately,
Without an independent board that is willing to act in the interests of
Minority shareholders, domineering CEO’s will make the company a far riskier investment.
GOODWILL GONE BAD:
Unless a company is able to glean substantial cost savings or revenue
“economies of scale” from acquisitions, “goodwill” isn’t really an asset
at all. While some intangible assets are incredibly valuable ( a brand name
such as Coca-Cola or McDonald’s or Google can be worth tens of billions of
dollars), investors should focus on assets which directly contribute to cash flow, rather than what appears on a balance sheet.
LOOK FOR EXCEPTIONS, NOT RULES:
Struggling companies will often bury bad news below the “headline” results.
While ‘extraordinary gains’ are usually deemed to be part of ordinary
Profit, large losses are often dubbed ‘abnormal’ and hidden deep within
The notes to the financial statements. Poorly performing companies will
Report abnormal or extraordinary losses on regular occasions. If a gain is a one-off, assume it won’t be repeated- If a loss is due to management, assume it will be.
BEWARE RATS AND SINKING SHIPS:
The abrupt resignation of a senior, long-term executive without proper
Explaination is often a talisman for impending bad news. This is especially
The case when a CEO resigns and does not take a position elsewhere;
For example, the abrupt and unexplained departure of Enron CEO Jeffrey
Skilling occurred a short time before the company’s collapse.
WATCH OUT FOR DEPARTING DIRECTORS:
The most powerful tool in the arsenal of an independent, non-executive
Director is the power to resign. For a director to resign, he or she is usually
Strongly opposed to the direction that the company is headed. If a respected
Director departs a board for ‘personal’ reasons (and retains other
Business roles), it is usually a sign that all is not well.
AUDITORS ARE FALLIBLE:
Corporation laws require companies to hire auditors to review financial
Statements- Auditors are effectively paid by shareholders to make
Sure the data is not fallacious. If an auditor is being paid by the
Company to perform other services (such as tax consulting or due
Diligence),their independence may be compromised. The risk is greater
When the value of the non-audit services is relatively significant, or
If former members of the auditor are widely employed by the company.
Investors should reviewthe notes to a company’s financial statements to
Determine the relative level of audit and non-audit fees. It is also worth
Checking to see if any executives once worked for the company’s auditor.
INTERNATIONAL EXPANSION FOR DUMMIES:
With few exceptions, Australian companies have enormous difficulty
Expoerting their business model overseas, often resulting in steep losses for
Shareholders. Investors should be very wary of companies that announce
Grand overseas expansion plans. If the expansion succeeds, executives
Are feted and generally receive a significant pay rise. If the venture fails,
Shareholders are forced to accept huge write-downs while executives are
farewelled in typically golden fasion.
FINANCIAL STATEMENTS MIGHT LIE, BUT SHARE PRICES USUALLY DON’T:
If a company’s share price has fallen substantially, that is usually an indicator
That a company’s financial statements belong in the ‘fiction’ section.
Investors should always avoid trying to catch falling knives.
CASH IS NOT KING:
Investors will get the management they deserve. When considering investing
In a company, look closely at how it pays its executives.
If senior management are paid substantial fixed cash or short-term bonuses
(based on short-term metrics such as earnings per share or profit growth)
then they will be encouraged to take more risks with shareholder’ capital
or reduce expenses such as staffing or research and development.
By contrast, if executives are paid largely in equity which is ‘locked up’
For a number of years and vests based on challenging performance
Hurdles, they will be more incentivised to generate long-term growth and avoid risky investments.
COMMITTEES ARE IMPORTANT:
Investors should look closely at the composition of companies’ audit
and remuneration committees. These committees should consist of
independent directors. The role of the audit committee is essentially to make
sure that the financial statements prepared by the company are correct.
The presence of an executive on an audit committee is a major warning
That the company’s corporate governance practices are substandard.
CASH DON’T LIE:
If a company’ reported ‘sales” are substantially less than its operating
Cash flows, it is highly possible the company is being somewhat creative
With it’s financial reporting. ‘Sales” are an accounting concept and subject
to judgement and manipulation. Unless a company is completely fraudulent,
cash cannot be fiddled. If a company’s ‘sales’ continually exceed cash inflows,
stay away.
WATCH OUT FOR DIRTY ACCOUNTING TRICKS:
When companies use accounting methods to increase earnings, it is
Not a good sign. Profits that come from accounting changes rather than
Increased sales or lower costs are usually not sustainable and can even be
An indicator of far deeper problems.
None of the above quotes from Adam Schwab’s book is Qantas specific.
It did however raise the hairs on the back of my neck.
I wonder if Adam Schwab will do a book on Qantas where Matthew Benns book ‘THE MEN WHO KILLED QANTAS’ LEFT OFF?
To finish off with, the last paragraph of ‘PIGS AT THE TROUGH’ epilogue.
‘One of the overarching themes which traversed many of the companies covered
was the apparent absence of responsibility and diligence taken by non-executive
corporate directors. It was the job of these directors, most of whom are respected
members of the Australian business community, to represent shareholder’s
interests and minimize agency costs, that is, the costs associated with employing
managers whose interests were not aligned with smaller shareholders.
In virtually all cases, non-executive directors failed to properly undertake their
Trusted roles. Over the past decade, executives have been able to run their
Companies like personal fiefdoms, while directors did little or nothing to curb
Their largesse and institutional shareholders did virtually nothing to exercise
whatever minimal power they had.
If the companies studied in this book teach us anything, it is that corporate
Governance and executive restraint are issues which must not be ignored by
Investors, non-executive directors or governments. A failure to address them
In a meaningful way can lead to catastrophe.