Who is rowing your investment boat?

THE DEBATE AROUND the alignment of executive remuneration with shareholder interests is starting to get heated. It’s a prickly topic. But there is a growing view that it is far more prudent to pick a share in a company where executive management has real skin in the game rather than to invest in a business that is managed by professionals who are paid many millions of rand for their services but own only a few or no shares themselves.

If a CEO (or FD, for that matter) stands to earn more in dividends and share price gains than from their executive package, it stands to reason that they will be focused on the key operating metrics that will ensure sustainable long-term performance. Capital allocation will be carefully considered. On the other hand, the criteria used to measure professional managers’ performance might not always be in shareholders’ longer-term interests. Targets for a geographic expansion plan or the generation of foreign revenue may introduce additional operational and financial risks into the business. The professional managers responsible could be long gone — fat bonuses in pocket — by the time shareholders register the real consequences of these decisions.

One might compare the capital allocation strategies of Cartrack with industrial meltdowns like Nampak and PPC. The former boasts a management team with proper skin in the game. The CEO of Cartrack is in the same boat as ordinary shareholders, and most certainly holding the same oars and rowing in the same direction.

Of course, these are generalisations. One could easily explode this argument by pointing to some of the JSE’s spectacular corporate failures — like Steinhoff and Seardel (now stitched up as Deneb), where original owner-managers were not exactly looking out for ordinary shareholders in their respective fiefdoms. There are also more than a few professionally run companies where management are not huge shareholders, but still treat shareholder capital like the scarcest of commodities — Afrimat, Stor-Age and Bowler Metcalf, to name a few.

I’d also take a shine to companies that make a point of properly provide incentives to all workers with shares — or phantom shares. Some companies with large labour forces appear not to agree. I’m probably being naive, but the first thing I’d do if I started a business would be to make sure my employees knew they would be sharing in the fruits of their labour. ●