06/05/2014 - 06:53

Managers could nick shareholders’ silver

06/05/2014 - 06:53


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Increasingly generous staff share issues in the US threaten the rights of existing shareholders.

Managers could nick shareholders’ silver
DILUTION: Critics of Coca-Cola’s management shares plan say the move could ultimately give employees effective control of the company.

Watch out, the hired help is nicking the family silver.

Well, it’s not quite like that, but what is happening at a corporate level in the US might be seen as a modern day version of the staff helping themselves to the property of the landowner.

Not content with sky-high salaries and spectacular bonuses, the latest raid by management on shareholders’ funds is to snatch a bigger slice of capital, so big it might be seen as a form of takeover by stealth.

The current version of workers outwitting employers involves ultra-generous share issues to management, which threaten to seriously water down the status of existing shareholders.

As an idea, there is a lot to commend an alignment of interests between management and the owners of a business, but not to an extreme that might trigger a change of control.

What’s evolving in the US could eventually be seen as the worst idea to come from that country since someone conceived sub-prime mortgages, which sounded wonderful when first proposed but which led directly to the 2008 global financial crisis.

The management raid on corporate capital is best seen through events at last week’s annual meeting of the big drinks maker, Coca-Cola, where a radical new staff share plan was endorsed by shareholders.

This was despite low-key opposition and the abstention from voting on the plan by Warren Buffett, one of the world’s richest men as well as being a long-term supporter of the business and one of its biggest shareholders.

In theory, the Coca-Cola plan to pay some of its hired help, especially senior management, in shares as well as cash, could mean the workforce eventually owns up to 15 per cent of the company’s equity.

Given the size of Coca-Cola, which is valued on the stock market at $US140 billion, a 15 per cent block of shares might be seen as effective control of the business.

Mr Buffett, who speaks for 9.1 per cent of Coca-Cola, said he opposed the generosity of the share issue plan. “I could never vote against Coca-Cola, but I couldn’t vote for the plan either,” he said.

Despite Mr Buffett’s criticism, the plan received an 83 per cent vote of approval with shareholders loyally following the advice of the board.

Justification for paying staff in cash and generous dollops of shares swings on an argument that share buybacks will minimise any loss of economic value because they keep the total number of shares constant.

But, what is being overlooked is that share buybacks are more likely to be taken up by non-employees because the people working at Coca-Cola have a more focused interest in retaining the shares issued to them by the company.

Over time, non-employee shareholders will find that their status in the company is being watered down by employees, who have a vested interest in ensuring they get well paid, in cash and shares.

As a theoretical debating topic the question of staff share issues can swing either way. The alignment interest is strong, but so too are the rights of minority shareholders, who are already paying the hired help handsomely, in some cases with multi-million dollar salary and bonus packages.

Extending the alignment argument to a point where employees could be issued up to 15 per cent of a company is not just a poor business concept, it is one that will eventually damage a company willingly diluting the rights of its non-staff shareholders.



Profitless prosperity

Profitless prosperity is becoming the number one problem for the retail sector worldwide, with sales rising as the global economy recovers but with hardly anyone in the business making a reasonable return on capital invested.

In Australia, the problem of “selling more and earning less” has led to a dramatic downgrading of most big retailers by one of the world’s leading investment banks.

Citigroup, in a detailed report into retailing after the annual Easter sales, said the volume of goods being sold looked good but “margins were at risk”.

“While sales are good, the risk for second-half earnings in 2014 will be gross margins,” the bank said. “The timing of Easter and school holidays resulted in many retailers conducting mid-season clearances in late March.

“However, the clearances then dragged out for longer than usual till the end of April.”

The gloomy view of selling more and earning less (the classic definition of profitless prosperity) caused Citigroup to dish out a fistful of sell tips on stock exchange-listed retailers, including Harvey Norman, JB Hi-Fi, Wesfarmers and Woolworths.

Myer and Super Retail got off lightly with neutral ratings.



Weather bonus

Talk of an El Nino, the weather pattern caused by heating of the Pacific Ocean, has east coast farmers preparing for the worst because historically an El Nino triggers drought across much of eastern and central Australia.

WA farmers, however, might not be badly affected because studies of the 12 strongest El Nino weather patterns dating back to 1905 show that only small pockets of farmland on the south coast suffer from less than usual winter and spring rain.

In theory, a full-blown El Nino could be a bonus for WA farmers because of the double-header effect of reduced crop and livestock production in drought declared areas pushing up prices for grain, meat and wool, while a reasonable winter provides plenty of rain for local crops and pastures.

Last week’s wet start, which has some farmers on their tractors in readiness for planting the winter wheat crop, might have been a positive signal.



Cool on nickel

The same optimistic comments applying to farming might be made of WA’s nickel mining industry, if everyone believed that the Indonesian government will stick to its ban on the export of unprocessed ore, which has already added 33 per cent to the price of nickel.

One outside observer in the non-believer category is investment bank UBS, which reckons some of the leading local nickel producers are overpriced, with special reference to Mincor, which has enjoyed a strong upward move.

After hitting a 12-month high last week of 98 cents a share (120 per cent higher than the low of 44.5 cents last June) Mincor is heading for a price over the next 12 months of 70 cents, a view UBS backs up with a sell tip on the stock.

“Be wiser than other people if you can, but do not tell them so.” Lord Chesterfield.



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