Lawyerly Crafted Proxy Statements Deftly Rape Shareholders
Proxy documents, issued to shareholders, back-to-back with their annual report get drafted by specialist corporate lawyers who make them as boring and unreadable as possible. They come in such small type size print that I’d use a magnifying glass for readability.
Curiously, Ray Irani, former headman at Occidental Petroleum, now being bought up by Warren Buffett, extracted over $500 million, backed by his complicit boardroom cronies. Irani, finally, was forced into retirement by activist shareholders.
Here’s Carl Ichan weighing in! “These managements need shaking up, they're horrendous. They take money from the peasants and then hire mercenaries (laughs) to protect their castles mainly by browbeating the peasants. So we attacked the castle. Wait, I don’t want to call shareholders peasants. Don't put that in the article. Call them the oppressed majority.”
Years later, Carl owned a huge pile of OXY, made a good profit, but sold out prematurely. I own OXY, along with Exxon Mobil, bought lower too. It looks as if Buffett, sooner or later, will buy all of OXY.
I have mixed feelings on both pieces of paper. Currently, they sell under 10 times earnings power in a bubbling oil futures market. But, how long do the good times last? Let oil futures drop 20 or 30 bucks and these two stocks can fade badly, at least 30%. The stocks then will sell on average earnings power over a 3 to 5 year cycle. We’re talking $6 a share for Exxon’s earnings, not $10 a share, maybe this year. I’m subliminally bullish, but scared.
Exxon, is less responsive to its earnings power, possibly north of $10 a share. Dividends, of course, lag badly. Management, after its great September quarter raised the cash payout a couple of pennies, with the stock presently yielding 3%. Free cash flow runs as much as earnings per share with capital spending’s pace looks like one third of free cash flow. Clearly, Exxon is underspending or doesn’t believe its level of free cash flow is sustainable. Something has to give in a healthy earnings setting. Dividends should be significantly enhanced. Past few months, stock’s trajectory has zipped from low eighties to $111.
Next, I dialed up the XOM proxy report, a 101 page job in small print size. I decided to plow through it come hell or high water. How many investors would undertake such self punishment? Skipping boiler plate, I came to what’s what, how management compensated itself.
Well, Exxon’s headman‘s package came to around $25 million per annum. This is serious money in anyone’s language. Let’s hope he earns it. Choosing the right oil fields to develop around the world and allotting capital spending productively year over year, cycle to cycle.
XOM headman, Darren Woods, owns 26,000 shares, which ain’t much more than I own. But I paid cash and don’t know the first thing about prospecting for oil. I’m surprised Darren doesn’t own a bigger stake in his company which sports a market capitalization over $350 billion, Darren’s well under 1% of his company’s market valuation. This is no entrepreneurial swashbuckler like you find at Tesla, Meta, and Alphabet, where the headmen normally owns arithmetic control of his company.
Most high achieving tech houses badly disappointed shareholders past 12 months or so. They’ve been cut in half. High for Meta stood at $353 now $108. Where were analysts while Meta, Tesla, Amazon and Netflix were self-destructing? Nowhere! Consensus on these goods was uniformly bullish, taking in management “guidance” with few reservations.
The whole concept of management guidance needs to be abolished by analysts who totally accept management's “take away''. I remember the headman at Xerox refusing to respond to dumb questions from analysts. “Do your homework”, he would chastise the room. If I can’t build a credible earnings model for a tech house, I’ll pass. Best advice I ever gave myself.
To date, I’m unaware of the SEC intervening in the allotment of equity to insiders. Elon Musk for example, awarded himself a large percentage of Tesla. Median compensation packages for the heads in over a hundred of the largest corporations runs over $20 million. I’ve no problem here just so long as the company in question shows relative good earnings performance in its peer group. But, options and stock grants shouldn’t dwarf salary and bonus numbers. I never bought a share of Salesforce.com because of outsized grants in options while GAAP earnings remained negative.
HOUSEHOLD EQUITIES SHARE OF FINANCIAL ASSETS
In equity markets tiny differences in input can cause enormous changes in stock prices. A change of .01 of 1% in unemployment set off a 200 point reaction in the S&P 500 on black Monday, an overnight drop of 19%. Block traders wouldn’t even pick up their phones to take client orders. Too dangerous to be left holding the bag. Contrast all this with the 1960’s when I’d take 2 months to write a research report. No computers, just a slide rule and semi logarithmic green paper available.
The Big Board then traded on average 4 million shares, daily. I don’t remember any stock priced at $500. Today, Tesla can trade over 100 million shares, daily. Its
12-month share price has ranged from over $400 to a low of $177.