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Shareholders’ Equity Analysis
- Are the stockholders really
owners?
- Do you know where your
equity dollars are?
- How comprehensive income
can affect stock values
- Watch out for your Dividends
- Stock splits, dividends
and reverse splits
- Spin-offs, tracking stocks
and determining new cost
basis
- Stock rights give board of
directors more power then
they are entitled to
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Are the stockholders really owners?
During my
youth, every May and June, when the annual reports and proxy statements were
published, my father and I would read and discuss every company he owned. I
loved to look at the pictures of the companies’ products and facilities; it
helped me understand what the companies did, and gave me a sense of
ownership. We actually read the proxy statements and voted for the directors
and issues accordingly. One of the companies he owned was SCM. One year,
they were in a proxy fight; one of the directors called our house and asked
my father to vote his 400 shares a certain way. At the time, the director
was also the Chairman of RCA! That was the way it was years ago; from a
youth’s perspective, even the small shareholders felt as if they were
company owners.
When proxy statements are mailed to me these days, I
usually throw them out with the junk mail. Most investors spend around ten
minutes reading their annual reports. I’m not even sure that “non-financial”
type investors know what a 10K is.
Some companies, in their annual reports, don’t even
show pictures anymore; moreover, some CEO’s feel they are doing the
shareholders a favor by sending out hard copies of the annual reports. It
seems that management has forgotten that the shareholders are the owners.
Today many investors no longer feel a sense of
ownership, and some even distrust the managers stewarding their assets.
Corporate
governance starts with shareholder involvement. In the recent past, I
listened to a shareholder meeting of Elan in Dublin Ireland. I believe the
turnaround of the company was the direct result of the blunt conversations
shareholders had with management. Those shareholders were ready to spar.
Their management team knows exactly how their investors feel. These types of
active and vocal meetings are needed in the United States.
A few years ago, I was the CFO of a small public
company listed on the American Stock Exchange. For a few weeks prior to the
annual shareholder meeting, I prepared all my materials, memorized all the
figures and rehearsed the script that the attorneys gave me to read. The
meeting was held in a nice hotel a few blocks from the office. I was dressed
in my best Hickey Freeman suit and Hermes tie. Everyone showed up: the
management team, the auditors, and the attorneys; everyone but the
investors. Almost no outside investors attended. To put salt on the wounds,
the auditors had us do the entire script with practically no investors. This
highlights one of the major problems with corporate governance in the United
States: shareholders are not actively overseeing their investments.
Corporate governance is now coming to America from
Europe, but not because of the corporate scandals and legislation publicized
in the news. It’s being driven by a population that is getting older,
realizing for the first time that stocks are worth real money. The stocks
are paying for their kids’ college education. The dividends received are
being used to go out to dinner. This is the first time that the post World
War II generation sees, for itself, the value of securities. Buying and
trading stocks is one element of investing, but understanding their value is
another aspect of owning stocks. It is like if one receives a large
inheritance, it’s a good practice to take out a small amount and buy
something. It makes one understand the value of what they have. This
generation is just beginning to understand the value of wealth, and that
stocks have real purchasing power. With the Internet bubble behind us,
investors are starting to appreciate the monetary value of the stocks they
have, and are paying more attention to the companies they own, and how they
are managed. The emphasis has now shifted from trading stocks, to owning
companies.
Corporate websites, live shareholder meetings
available on the Internet, and access to SEC filings, are some of the new
technologies that are reconnecting companies with their owners.
Investors, however, need to have an adult perspective
on the realities of stock ownership. Shareholders have a financial interest
in a company, but they are not “real” owners. Owners get monthly financial
statements. Owners regularly review forecast and budgets. Owners tour
facilities and meet with customers. Owners get involved in product
development. Owners have inside information. They may even get a free
T-Shirt or a company pen. Owners can have lunch with their families at the
company’s cafeteria. Don’t be fooled by the rhetoric. Most investors have no
input whatsoever in how a company is run. Shareholders don’t even have the
right to set the CEO’s compensation. Most shareholders would not even be
allowed through the doors of the companies they own. Why not open up the
company’s corporate cafeteria to shareholders? The biggest waste of
corporate resources is not utilizing the skills, knowledge, and connections
of its shareholders.
There is a
difference between having a financial interest in a company and being an
owner. That said, let’s move forward.
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