Shareholder Value vs Executive Compensation Value

Earlier this week, there was a CNBC report (link here) that showed over 70 public companies accessed the PPP program. They did this while also having access to regular public markets. The likely reason why they used the PPP program goes back to old the business lesson that any financial gain for the company is worth any damage outside the company.  This lesson also was exhibited by a pillar US company, Disney, who furloughed tens of thousands of employees in order to keep a dividend and some executive bonuses.  This brought the dismay of none other than Abigail Disney (story here). All this begs a couple of questions. Do executives truly understand how to best bring value to shareholders? Can boards of directors do a better job of setting up executive goals to benefit the shareholders? After watching decisions made over the last two years, the answer is undoubtedly yes.

While financial reward is an important part of shareholder value, it is only a part of the equation. Shareholder value goes much deeper both on vertical and horizontal levels. Better adapted executives are able to generally know who the shareholders are and understand how to deploy both investors capital and profits gained from running the business that provide added value (financial, health, community, etc.) to their shareholders.   There is a new and better representative term for those executives are still running on the old lesson, Executive Compensation Value. This is because most moves in this manner help to achieve their own value metrics, not shareholders. Heavy focus is on stock prices, balance sheet optimization, etc..Thankfully, as in the example below, these decisions are becoming more and more transparent.

This current economic situation can be used as a great example. Do you think the executives of these 70 + companies asked the question " If we take this money from the government, are there shareholders of ours that will end up getting shorted, even though we have access to other funding markets and they don't?"? The answer is probably no. The opportunity to get money at this rate was too enticing and sure as the day is long the Executive Compensation Value biases were firing on all cylinders. It didn't matter that it was taxpayer money. The current poster company for this is Shake Shack. They are valued at $1.7 billion and took a $10 million loan (now being returned) from PPP because they could and it was cheaper than normal capital markets. Ruth's Chris Steakhouse followed along with a $20 million loan. How many of their customers who are also shareholders through work retirement programs could have used that money for their own businesses and employees?   

Disney's decision making falls under this Executive Compensation Value umbrella completely. In a national emergency, when their streaming service subscriber numbers double, and you still lay off thousands of employees to make a dividend payment, you hit on every ECV metric and completely missed the boat on shareholder value metrics. We don't need the few bucks. We need your employees not to be on government payrolls and spending our tax dollars.


This is not just a corporation problem. It is a problem for all organizations. Harvard, with the richest endowment, is one of the organizations that was selected to receive funds through the separate CARES Act. The same biases and greed do not discriminate on whether the organization is a publicly traded company, or the a higher learning organization.

If you are an executive in an organization, please make sure the entire investor experience is analyzed when making decisions on accepting government funds. Sometimes, bad decision making can cause both direct and indirect pain for your investors.    


** This blog is used for opinions and ideas and should not be used as a direction to act without doing your due diligence.**


  

New Donation to Illinois PPE Network

Due to some excellent trading by KDK Options (link here), a donation was made to the Illinois PPE Network (link here). This network of individuals and organizations have spent time, and resources to assist in the fight against COVID-19.

Please consider making a donation of resources (financial or otherwise) if you can.

** This blog is used for opinions and ideas and should not be used as a direction to act without doing your due diligence.**