Thursday, April 27, 2006

What to do when you can't vote out management. And Does stock price trump governance?

Do you need a class example of how shareholders can influence management behavior even when management controls the majority of the board.

Is the Times In Play on Wall Street? - April 27, 2006 - The New York Sun - NY News:
"Morgan Stanley Investment Management announced last week that it withheld votes for the company's class A director nominees at the April 18 annual meeting, prompting much speculation. In all, 31% of class A shareholders - a hefty percentage - declined to vote for management's nominees."

"The family owns 19% of the 144.3 million shares outstanding, and 91% of 834,242 class B shares, or 20% overall. Class B shares are convertible into class A shares on a one-for-one basis, but are entitled to select nine of 13 directors, thus giving control to class B holders.

Nonetheless, management will likely be prodded into making some changes....two moves by management in recent years appear to have especially angered investors. First, the decision to build a monumental headquarters building strikes some as having been a misuse of the company's capital. Second, management's expenditure of $2.9 billion in stock repurchase programs from 1997 to 2004, at considerably higher prices, has come under fire."
In a much related article the Washington Post has a very interesting look at another firm with high insider control but with much less criticism: Google. By Allan Sloan in Monday's paper:
"Consider, if you will, the differing ways the Street is treating the New York Times Co. and Google, both of which have high-voting stock for insiders and low-voting stock for regular old public shareholders"
So what's different?
"Stock price. Times Co. stock has been setting new multiyear lows and is depressed even by the depressed standards of newspaper stocks. Google, by contrast, is up about 30 percent in the past month and more than 400 percent from its initial public offering price less than two years ago."
This idea that stock price dominates all of else does have support in the financial literature (for instance it is broadly consistent with Jensen's "Agency Costs of Overvalued Equity").

2 comments:

Rob Hayward said...

Nice one! Thanks for that.

CompanyCounselor said...

Interesting subject that you discuss. Seems that some management might not care that the stock price is low because they consider themselves turnaround execs. If the company goes bankrupt, they might get severance for staying to do the transition. If the company gets bought, they already have severance for change of control. What do you think of this?