A Word I Never Heard

I spent most of my career in America’s Fortune 500 corporations.

I started my career in a multinational bank, learned the treasury trade in a multinational manufacturer, and a global mining company, and then learned the asset management business in one of the world’s largest oil companies, Standard Oil (which is now part of BP).

I spent twenty years dealing in all sorts of corporate finance – and another 16 years serving these types of companies as one of their pension fund investment managers. I was in thousands of meetings with managers, senior executives and board members. They were some of America’s finest financial engineers and corporate managers.

Not once in one of these meetings – not once while being around all those professionals- did I hear a particular word spoken:

“Shareholder”

You would think, in all that time, it would be normal, even if occasional, to hear the interests of the Shareholder discussed or championed. NEVER ONCE did I hear the Chairmen, Presidents, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents or Treasurers speak about the interests of Shareholders.

It is hard to believe, but I assure you it is absolutely true.

I don’t want you to think this was an isolated instance. If it were, I would not be telling you this. This was in every company I worked for or with. Most of you would recognize the names of all these companies.

The collective owners of large public companies, the Shareholders, have become the “Forgotten Class”. The Shareholder is all but invisible to the company’s managers.

How is this possible? Why does this happen? And what does it mean?

Why Shareholders Are the Forgotten Class

The major reason the Shareholder has become invisible in today’s world is because corporate managers don’t really work for Shareholders, and Shareholders are not involved in the operations of the company they own. The company’s managers work for the Board of Directors. The Board of Directors is supposed to represent the interests of the owners. It doesn’t.

The Board of Directors controls the company’s managers and rewards them with promotions and higher pay.

The Shareholders have nothing to say about this, and so are ignored by the managers.

Shareholders benefit from stock ownership in only two ways; they receive dividends, and/or the stock price increases. But a company is under no obligation to pay you a dividend, and a rise in the price of the stock is dependent on performance of the managers.

As a passive minority investor, there is nothing you can do about these limitations. And if the managers mismanage the company into trouble, you are the first in line to lose your investment and the last in line to be paid.

As an investor, how do we rebalance this out of balance situation so that it is more in our favor? There are a number of ways, but there is one fool proof way that is simple and easy.

As investors, we can insist on receiving a cash payment from our company. After all, we are the owners.

There must be some sort of recognition of the importance of our status as owners and the managers must have a continuing awareness of our presence. The only way I know to accomplish this is to insist they pay us.

The real issue boils down to control… control over the cash flow of the company.

Share buybacks are not a substitute, often championed as the best and most tax advantaged method to reward Shareholders. This is nonsense and just another way for managers to keep control of the cash flow.

The simple fact is a dollar in our hands, as investors, can be better allocated, than a dollar in the hands of our company’s managers.

Cash flow enables us to grow, improve and rebalance our portfolio.
Receiving regular and significant cash in the form dividends or distributions is the first and most important part of our portfolios.

May you live long and prosper,

Mike Williams, CFA

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