Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Tuesday, April 17, 2012

about that vote

Citi's shareholders have spoken.

So-called "say on pay" votes, a requirement of the Dodd-Frank financial reforms give shareholders a vote on company executive compensation packages. These packages have long been disclosed in proxy materials each company sends to shareholders annually, but now everyone gets a say. The vote is a non-binding approval, disapproval or abstention on the whole package. Last year, most shareholders got to vote on how often they would hold this vote (a vote on a vote! how meta!) either one two or three years.

In Citi's annual meeting, shareholders voted 55% against the executive pay package - their CEO made $15 Million last year, while the owners didn't get an expected raise in the form of increased dividend.

This is the first example I can think of where such a prominent company's shareholders have clearly disagreed with executive compensation. It makes sense that you wouldn't often see rejection like this, people invest in a company partly because of faith in the management. It is still a good thing that people do exercise their vote, it is one of those reminders to the board that they are accountable to somebody else.

Monday, April 16, 2012

the carry trade

In case you haven't heard, short term interest rates are super low right now. In fact, they can't go too much lower. Since the end of 2008, the Fed Funds Rate has been between 0 and .25%. This is an overnight rate target, and supposedly can change any time. It has not changed at any time for the past few years though.

Banks borrow from the Fed at this rate. This has been great news for the banks, give them cheap money, and they can get to work making more money from it. The problem is, it hasn't been quite so easy for everyone else, people and businesses to get that cheap money (I've just gotten declined for a credit card, and that wasn't even the cheap money!) so that they too can make more money.

Former FDIC chair Sheila Blair has come up with a great solution: Let EVERYBODY borrow from the Fed! With cheap loans, we can start businesses, or just invest in bonds and make easy money just like banks are. The article is well worth a read, it explains how anyone with access to this incredibly cheap money has prospered over the past few years.

Thursday, April 12, 2012

voting your shares


Its that time of year when shareholders are receiving ballots to vote on board members, compensation opinions and other matters in the companies they own. It may not seem that your individual votes really matter in the grand scheme of things, after all, you only own a few shares of millions, and the issues to vote on are pretty tame anyway (a pre-defined slate of board members, an auditor selection and maybe a few shareholder calls for more transparency in various areas). It is important, however, that you have and exercise that right.

A shareholder in a company is a shareholder in the economic interest of the company. When the company makes money, you have a share in that. Shareholders also have a share in the running of the company - this is where your vote comes in. Matching control of the company to economic benefit is very important. It would be silly to have a company where one person only cares about the money and not the operation and another person only cares about the operation but not the money. One has no way to carry out their desires, and the other has no profit motivation!

Google has a dual share srtucture. There are about 268M shares of their Class A stock and 67M shares of Class B stock. The Class A shares have one vote each, while the Class B shares have 10 votes each. According to their latest 10-k filing, Larry, Sergey and Eric held 92% of the Class B shares. This keeps control of the company effectively in their hands, with about two thirds of the total votes in those three hands.

As you can see, this puts the control of the company in the hands of a few people. This was done to insulate the founders from nefarious "short term demands" of those pesky, finicky shareholders.

Now Google is distributing a new share, Class C, for each share of Class A or B stock. For the moment, this keeps economic and control interests exactly the same. Class C, however, has no voting rights whatsoever. Google intends to use these for its equity compensation and possible acquisitions so that current voting power will not be diluted. Going forward then, control shares will not be diluted, but economic share will be. Hopefully, they will not be too reckless wielding this new paper even though it won't come back to bite in the form of less control. This makes Class C shares much less attractive for a company being acquired, however.

It is a good step that Google will stop diluting the voting rights of current share holders, but their structure is still not the most shareholder friendly.

One account that I manage is long GOOG.