Tom Winnifrith – Why directors and investors are conflicted – it is about misalignment
The company is delighted to announce that it has issued shares to a) grow the business by acquisition b) to provide working capital to grow the business c) in response to institutional demand or d) all of the above. Very rarely does a company say that it is issuing shares because it is running out of cash. The reality is that this is all too often the reason. And some companies seem rather keener on issuing shares than others. The reason: management and shareholder misalignment.
Nigel Wray always bangs on about this and he is right. When you invest in a business you want the CEO and other key personnel to want exactly the same thing as you which is, if we cut to the chase, the share price to go up with a few dividends as a bonus.
Now it is very rare for a PLC director to have no skin in the game at all via shares. When that is the case you really have to ask why? However if you skim through the annual reports of all too many AIM companies you will see that the shareholding of the main men (and women, lest I be accused of sexism) is, in absolute terms, not great. And relative to their total compensation it can often be trivial.
If a fellow earns £400,000 a year and has shares in his company worth, say £500,000 what is more important to him: The share price gaining more than 7% a year (the long run rate of return on equities) or a continuation of the corporate gravy train? A 10% increase in the share price is worth only £50,000 to him and he can rarely sell without getting panned on the Bulletin Boards so that is really just a paper gain. And as such, his real aim, must not be to see the shares race ahead but to ensure that he continues to trouser £400,000 a year for as long as possible.
Issuing more shares ensures that the gravy train is fully funded. And it has another effect. It spreads out the shareholder base ever more thinly making it very hard for any shareholder revolt to be organised. If one looks at the more aggressive serial share issuers (Motive TV for example) its shareholder list must run into thousands by now as bucket shop after bucket shop has palmed stock off on lucky clients. It would be impossible to herd all those cats into one grouping to oust a board that has patently not delivered.
Given remuneration levels across AIM the level of misalignment of interests between boards and investors has never been greater. Yet if this is flagged up, the response of most boards is merely to award themselves even more share options (a one way bet) in order to “incentivise management.” I do not think that the answer is regulation or more rules. I just note cases where the misalignment is clear and extreme and note that one is not obliged to own any share and that this is the sort of stock the discerning investor should avoid almost in principle.
Tom Winnifrith is a financial journalist of 25 year experience who is widely disliked in the City for pointing out the failings of advisers and quoted companies. You can find most of his work atwww.shareprophets.com