Are airline executives 'pigs at the trough'?
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. |
Yes!
(everything within these parentheses is simply to make my post meet the minimum number of characters) |
Bad Board Behaviour
Not as much as our banks' CEOs.
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