As
mentioned in my article “How to measure stock reputation”, the focus on
shareholder value is the second thing to look at in order to measure stock
reputation. For this case study, I looked at American companies on the Dow
Jones Index.
Focus of the Board
To begin
with, the focus on shareholder value has to come from the board of Directors. In order to rate this focus, I looked in
detail at board composition and governance for several companies. In particular,
I identified the presence (or not) of significant shareholders on the board and
the separation (or not) of the CEO and Chairman roles. To refine my analysis, I
looked at other secondary criteria to answer the following questions: Is a
significant shareholder the Chairman of the Board? Is the CEO the main
shareholder of the company? Is there a State shareholder with a representative
present on the Board? In case on a combined CEO and Chairman role, is there a
Lead Independent Director on the Board? Is a majority of the board composed of
independent board members? Are there only independent board members when
excluding the CEO and significant shareholders? Finally, based on these two
main criteria, as well as secondary ones, I rated the shareholder value focus
of each board.
This
analysis showed that few boards have a strong focus on shareholder value, but
that is not the case for the majority. Two-thirds of Dow Jones companies are
rated below average and two elements explain this.
First, most
of these companies were founded decades ago and do not have any reference
shareholder. They are fully public and owned by institutional investors who do
not sit on the board.
Second,
most of the time, the CEO is also the Chairman of the Board. Despite corporate
governance best practices and shareholder pressure, American CEOs cling to this
traditional model that gives them the power and allows them to control the
board. Facing criticism, they have recently accepted to name Lead Independent
Directors to their boards, but those board members still do not have enough
power to really threaten CEOs in the case of share price underperformance.
Focus of the CEO
Next, to
measure how much of a priority is given to shareholder value, the CEO’s
incentive linked to the share price performance needs to be analyzed. Indeed, the
best way to align the interests of executives and shareholders is to pay
executives a high proportion of shares and stock options. Also, I looked at the
number of shares (and stock options) owned by each CEO. More precisely, I
measured the value of the CEO’s stocks ownership and compared it to his annual
salary (including bonus). On this basis, I was able to rate and rank the
shareholder value focus of each CEO.
*Before recent change of CEO
Overall,
this analysis is very positive for US companies. Three-quarters of the CEOs analyzed
own shares equivalent to more than five years’ worth of salary. Therefore, they
are extremely incentived by the performance of their share price.
Among them,
JP Morgan and UnitedHealth CEOs are the most incentivized. Their stock
ownership represents more than 80 years of salary. In part, this can be explained
by their seniority as CEOs (for almost 10 years they have cumulated shares and
stock options), and in the case of JP Morgan’s CEO by his relative low annual
salary (he did not receive a bonus in 2014). Yet, this shows above all the
boards willingness to align CEO interest with that of shareholders.
On the
contrary, McDonald’s and IBM’s CEOs owned relatively few shares compared to
their salaries. This is due partly to their relatively limited seniority in
their positions but also because they have sold many shares over the last
years. Whatever the reason, at the end, their wealth is not linked to share
performance and this may worry investors.
Investor Relations intensity
Investor
Relations activity is the last thing to analyze in order to measure shareholder
value focus. Even without board pressure and without financial incentives,
management can involve itself in an active IR program. To measure these
actions, the best approach is to measure the time dedicated by management (CEO
and CFO) to investors (results, roadshows, conferences, investor days…). It is
unfortunately difficult to obtain precise information on the management
timetable from outside of the company. Also, to get an idea of management
involvement in IR activities, I listed the number of investor’s events to which
the company participated (excluding the mandatory ones such as quarterly
results and AGM). This allowed me to rate IR intensity.
On average,
Dow Jones’ companies participated in six events per year. However, some are
much more active than that. For example, General Electric and Cisco have participated
in more than 20 events per year. Alternatively, Nike seems to have participated
in a limited number of events.
Conclusion
By adding
the results on these three criteria, it was possible to rate the shareholder
value focus for each company.
Microsoft
and Wal-Mart obtained the best rating due to the presence of important
shareholders on their boards, the separation of the CEO and Chairman roles and an
significant share ownership of their CEOs. To the contrary, Chevron was at the
bottom of the ranking as its CEO was also Chairman and owned very few shares on
its company.
More
broadly, these American companies have relatively good ratings as regard to their
shareholder value focus. On the negative side, CEOs are often Chairmen and there
is not much threat in theory from their boards. On the positive side, they are
highly incentivized by their share price performance. This is not often the
case in Europe or Asia.
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