Not only a Russian affair: Executive pay and corporate governance in the wild West

*This content is supplied by Sean Peche, Portfolio Manager, Ranmore Fund Management Ltd*

First appeared on LinkedIn


“The company will grow earnings next year”, said Bill Browder,

“…if management steals less money than they stole last year”

He was talking about Russian oil giant Gazprom at a conference I attended back in 2004/5

But I wonder how this differs from the excessive executive compensation I see in the US.

Yes, I know it’s not “stealing” because Exec Comp plans are derived by “Independent Remuneration Consultants” (IRCs) who justify their existence with a changing list of benchmark companies and complex plans that are approved by Shareholders at AGMs.

But the trouble is most shareholders are Passive these days.

Take Dollar General (DG), where the share price is back to 2018 levels – down 59%

In the three years 2020 – 2022, the former CEO was paid $117m – so says their 75pg 2022 Proxy statement

Except this uses the value of stock awards at the grant date, not what he cashed in.

That was $279m, according to SecForm4.com!

Now DG’s Annual Report shows they spent $7.8bn repurchasing shares in the three years to Feb 2023 at an average price of $214

It’s currently $108.

In June 2023, they said, “.. to maintain financial flexibility & stay in line with our goal to maintain our investment grade credit ratings and our associated debt leverage ratio target, WE DO NOT PLAN TO REPURCHASE SHARES IN 2023.” [capitals added by the author for emphasis]

Yet only ten months earlier, on 25 August 2022

“The Company’s Board of Directors increased the authorization under the share repurchase program by $2.0 billion”

Why increase buybacks by $2bn when the company:

– had $22bn of liabilities,
– only generated $300m of FCF in the prior six months,
– was trading on a PE of 25x (earnings yield of 4%)
– had to issue debt costing 4.625% a month later!

Who thinks borrowing at 4.6% to invest at 4% makes sense, even with a tax break?

When Directors receive share awards exceeding what’s paid in cash, they may focus on the share price.

And when those IRCs make management’s incentive target “Adjusted EBITDA”

Management doesn’t worry about Interest.

But how about this?

In the SEVEN days after the $2bn buyback announcement, SecForm4.com tells me the former CEO SOLD 339k shares for $82m!

Now, maybe he needed the money…

My new favourite website says he grossed $75m only eight months earlier by selling 337k shares.

So, why was the CEO selling if buying shares was such a great deal for the company?

We know the truth with the share price halving – it wasn’t a great deal for the company.

But spare a thought for their 163,000 employees.

The new CEO earned $12.9m or 702 times the $18k earned by the “median compensated employee” according to their Proxy’s Pay Ratio Disclosure

But using the former CEO’s “cashed out” $82m gives ME a ratio of 4,495 times!

i.e. he earned more per weekday ($328k) than a median employee earns in 18 years!

Is this the Capitalism we want?

So read the Proxy, Vote and monitor Form 4’s.

You don’t even need to speak Russian.

Disclaimer:

The portfolio manager has no positions in the aforementioned company.

Ranmore Fund Management Ltd is authorised and regulated by the UK’s Financial Conduct Authority.

The content is for information purposes and does not constitute investment advice.

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