Boomers, Markets & Money

A Down-to-Earth Discussion of Financial and Lifestyle Information for Baby Boomers


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Survey Says: Give Apple Common Shareholders a Slice of Cash

DSC_1165Tech companies have a hard time accepting that they’ve grown up. Acceptance of middle age doesn’t come easy to any of us, I guess.

Weekday mornings I read the CFA Institute Financial Newsbrief, an email newsletter that collects financial articles from around the world. It’s an easy way to scan many stories quickly. This week’s poll caught my eye because it concerned Apple and dividends, two hot topics in the investment world.

The poll asked was: “What is likely to provide Apple shareholders the highest risk-adjusted rate of return on the company’s excess cash balances?” SmartBrief was kind enough to allow me to share the poll results.

Poll of readers of the CFA Institute Financial Newsbrief. Weekday email newsletter sent out by Smartbrief.

CFA Institute Financial Newsbrief. SmartBrief

I voted for the top choice: “Common stock dividends, including a one-time or a series of special dividends” which received 45.04% of readers’ votes.

Here’s why:

Companies have a natural life cycle. When they are young, they need to reinvest earnings to grow the company. As they mature, they generate more money than they need to expand. Apple clearly has enough cash it needs to research, develop, and manufacture new products.

Executives will be tempted to do something foolish with excess cash.  They might acquire a company that doesn’t add value for shareholders. Or compensate themselves excessively.

• Individual investors are looking for dividend-paying stocks because they are searching for yield.

If you want to scan a selection of stories from numerous publications quickly on the investment and business world you can sign up for the CFA Institute Financial NewsBrief. SmartBrief also offers email newsletters for other industries and all are offered at no charge.

APPLE ON FLOWERED PLATE Red Delicious


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How to Fudge Statistics: Lessons from CEO Salaries

Some points in AAII’s article “Questioning High Approval Rates for Executive Compensation” were amusing.

The article summarized some of the points of Towers Watson’s October 2012 “Getting Pay for Performance Right: Executive Compensation Flash Survey Findings”.Dollar Sign

Points from the AAII Article:

  • The Dodd-Frank Act requires that shareholders vote approval of CEO pay at least every three years—unfortunately, the votes are non-binding. What’s the point of that?
  • The Tower Watson survey found that stockholders voted yes for most compensation proposals. Ninety percent of companies reported that executive pay packages received seventy-one percent or greater approval ratings by shareholders.
  • However, 81% of companies surveyed said they defined the peer group they were compared against. Or as AAII put it “compensation committees are handpicking the companies to measure pay against.” Do you get to pick the person’s salary that you are compared to?
  • Only about 38% of companies considered discussions with stockholders, who actually own the firm! Company boards and compensation committees influenced decisions in 77% of cases.

Compensation Conflict

The situation boils down to a topic covered in every introductory corporate finance class—the agency problem. BusinessDictionary.com defines an agency problem as “A conflict arising when people (the agents) entrusted to look after the interests of others (the principals) use the authority or power for their own benefit instead.”

CEOs and upper level executives are only employees of shareholders. However, minority shareholders don’t have voting control of the firm and usually don’t have the resources to organize to protect their interests. Hence, we see some outrageous pay packages. In my opinion, this money should be turned over to shareholders in the form of dividends or reinvested in the company to create real long-term value.

What is Your Opinion On High-Level Executive Compensation?

Please leave a comment on your thoughts on this issue. Any suggestions for improvements in the compensation process are most welcome.

Resources:

Questioning High Approval Rates for Executive Compensation” AAII Journal December 2012

Tower Watson Executive Pay Bulletin November 8, 2012

America’s Highest Paid CEOs”apr Forbes, April 2012