We All Want The Best Managers But.......

I am not opposed to rewarding success but it seems clear to me that the financial rewards for senior managers at small and medium-sized listed British companies is a serious problem. Something that activists appear to have really overlooked is the notice periods operated by most public companies. In a world of zero-hour contracts and little job security for most employees, CEOs of listed companies are frequently on contracts that require 12 months notice. Firing a poorly performing senior manager can be seriously expensive. I would have thought that a three-month notice period should be a satisfactory norm for all concerned.

There may also be serious unintended consequences of giving low/no-cost share options to managers. In the event of a takeover, the management's idea of a good price could be very different from that of private investors. There might also be liquidity problems. How does a management team sell its substantial and low-cost holdings? Investors expecting a lucrative takeover may need to pay a lot more attention not just to the degree of "Skin in the game" but what managers have actually paid for those shares as well as the scale of outstanding options. 

We Know About Remuneration But What About Expenses?

An investor buying into a small private company would probably want a forensic breakdown of how the money is being spent but for some unknown reason, this logic seems to go out of the window when investing in quoted companies. First class travel, expensive hotels, fine dining can all seriously impact the bottom line. The results can be disastrous. The "Lifestyle" company has become a problem for London's resource sector. There is virtually no oversight on how shareholders' money is being spent. 

When Does He (It's usually a he) Start Work?

It's no exaggeration to say that the office cleaner has clearer guidelines in terms of working hours than the average CEO of a listed UK company. There is an assumption made by many investors that the boss is a workaholic with his (Normally a man) nose to the grindstone. This may be true but it's not necessarily the case. The boss may have many irons in the fire and how the working week is spent is nobody else's business. It's not impolite to ask how many hours per week the boss puts in and where that time is spent. At the moment that is not clear.

Takeovers Are Welcome But Being Taken For A Ride Is Not

Don't get me wrong, I welcome takeover offers but at the right price. The recent takeover offers for two technology companies that I have invested in struck me as being too low. However, institutional investors appeared keen to get out. If this is going to become the norm, it does raise the serious question as to why bother investing in this area at all? Something appears to be not adding up. Small-cap technology stocks are often under-researched. Therefore, there seems to be little investor appetite and so trading volumes are often low. The result is that institutional investors face liquidity problems when disposing of stock. Getting in is the easy bit but they cannot get out. At the same time, many of these companies have valuable IP that may be very attractive to buyers. The outcome is a low takeover offer with the knowledge that major shareholders view this as the only viable exit. A possible solution is for small companies that are under-researched to be far more pro-active in promoting themselves. Possibly setting a benchmark figure for corporate marketing as a percentage of revenue.  

Ridiculous as it may seem, but the timing and location of many AGMs discourage the participation of private investors. The cynic in me says that some companies simply do not want private investors attending these events and asking difficult questions. But, I would suggest that it's this type of discussion and debate that creates reasons for an investor to buy and sell the stock. It encourages greater liquidity - the root problem that institutional investors have with small listed companies and the reason why they are so tempted to accept a low takeover offer.

Communication Not Cover-Ups

Something I find quite ridiculous is the habit that some companies have of releasing bad news at inopportune times such as late Friday afternoon. It simply looks bad and shows a lack of respect for shareholders. It is also very suspicious. It might be interesting for someone to put a Bot to work to retrieve these releases and then analyse them. I like companies that communicate clearly, concisely and regularly without the PR waffle.

Shareholder Activism

In the digital age, I would have thought that giving shareholders a legal right to contact each other would be fairly straightforward, obviously subject to data protection laws. Those that wish to take part could opt-in. Some type of online platform could facilitate discussion about the company and its stewardship. At the moment most private shareholders appear to be functioning in silos. The exchange that is taking place is via bulletin boards and is of very questionable quality. If, as part of their listing requirements, companies had to provide a platform where suitably qualified investors could discuss the company, I believe that we could see a better functioning market. There are also major issues with private investors holding stocks in nominee names and becoming one removed from voting on serious issues including remuneration packages.

Complex Financial Products

My broad view of complex financial products, especially those that are leveraged, is that they are best avoided. Counterparty risk, liquidity issues, even the legality of agreements could be called into question during a market meltdown. I generally prefer investing in ordinary shares. A relatively simple structure that has stood the test of time. However, I recently bought into an ETF covering a theme that was not adequately and cost-effectively covered in a way that was suitable for my needs. But, in general, I try to keep investing as simple as possible. I’m also wary of companies that have complex financial structures. I tend to think that complexity equals potential problems. It creates too many moving parts.

Skin In The Game Has limits

I am sure that most private investors would like to see senior managers owning a significant stake in the business. But it does have some serious implications if the situation is manipulated. Put crudely, investors can be ripped off by unscrupulous managers who take the company private. Profits may be suppressed and assets downplayed. Maybe investors should take a much closer and sceptical look at companies where the directors are within spitting distance of the magical 75% vote.