Wednesday, November 25, 2015

When will shareholder boards create company rules?

Future, Managers, Minions

Based on a comment from Matthias found here in combination with discussions at work concerning that democracies very rarely "learn" since new people come in power all the time this reflection started to form in my mind.

Looking back in time religion had, upon the time of creation, an important function of bringing "laws" and structures to people. It also brought them hope, comfort and unification but that is unimportant for this reflection.

Writing this today I am 100% certain that I am wrong. At some point in life I have received and accepted the idea that society was, before religion arrived, completely lawless and that religion therefore was what brought in laws and structures. Of course that must be wrong. There has always been societies and there has always been rules no matter written or not. I mean did people really not live according to the rule that stealing from your neighbour is something bad? I strongly doubt that. I have mentioned it before and I will keep mentioning that humans going back several thousands years were just as intelligent as we are today. They only had different (less) knowledge and less possibilities to pass that knowledge on to the generations after them.

So besides from these society rules there was always some kind of religion that additionally had their own rules and laws as well. It does not matter if that religion believed in Odin, Mictlantecuhtli or Christ. Some kind of religion existed and there were additional rules due to it.

Over time the rules were written down on paper and entire legal systems were created. This today means that we, depending on the country we live in, live according to these written rules, our religious believes and our status in society, or at least we try to follow these rules.

Without, for instance, the legal system it would be very difficult to give the stability that is needed in human society today. Better still are the different country variations of constitutional rights since these are extremely hard to change for a democracy. The system was well thought of so that it would not be enough for one idiot to arrive and to demand changes but there as to be a series of idiots to be able to push the changes through and in democracies we hope that the populations (including future generations) will not be so stupid that they will allow that to happen.

So, for democracies to protect themselves they have created "constitutional rights" and my question then is... WHY OH WHY ARE NOT COMPANIES DOING THE SAME?

There are so many famous investors (Lynch + later on Buffett) saying that one should invest in companies that are so easy to run that even an idiot can do it because sooner or later an idiot will. Ok... why then not make sure that if that idiot arrived he or she will by pure automatic "shareholders constitutional rights" be kicked out. There could be so many problems solved with this! I mean any rules could be created by the board to protect the shareholders and it should also be made! These rules would of course NOT be allowed to be changed by the running managers but only by, for instance, the third manager if all wanted the same thing and the board agreed to it.

One rule I would then directly want to see would be:

No manager will receive salary + benefits (bonus, options all of it!) in the size exceeding 40x the average salary of the company employees. Either they take the job or they do not. It is as easy as that. If they want to change that... well they can, but they themselves will not profit from it so will they demand to change it? I doubt it.

You are not allowed to start a share buyback program if the company P/E is above the average historical P/E for the company. The other day I was reading how Nike was starting yet another massive share buyback program. Come on! The shares are traded at a P/E of around 33 today. 33! In the last five years the P/E High is at 27 and the P/E low was at 18 and now it is up at 33 and they decide to push a share buyback program. Insanity! Is this in the interest of the shareholders or of the managers and the value of their connected bonuses/options?

There should also be rules to prevent the empire guys from running amok! Those guys are dangerous! Adding debt like insanity and buying company, after company so that they get their darn growth (and empire) that they were not competent enough to create on their own. I do not know how best to control this but a limitation in size of acquisition, P/E paid for acquisition or debt build up size could probably be measures to protect against that.

Well... there are so many things that one could write "shareholders constitutional rights" about and in my opinion we must start to do this. Things have, in many cases, gone out of control and the best and quickest way to get things under control again is by rules and regulations. It is as easy as that.

Which rule would you love to see in the "shareholders constitutional rights"?


Matthias said...

My rule: The Top Management has to work at least one week per year, in a blue-collar worker Position.

Fredrik von Oberhausen said...

Sounds like a good rule!

I think it was here in Germany that I watched a show with bosses for big companies going out into different sections and pretending to be an intern to see and get a better feeling for how the blue-collar work was actually running.

All honour to them for doing that however... it was embarrassing to see how little these bosses actually knew of the conditions on the floor. Embarrassing!

So yeah, I fully agree, it should be a rule!