The Hour Glass

[d.o.g.]

Which scenario is your FAIRER choice, and WHY?

I think this is a great question because it goes back to first principles. My answer to this question is that it depends entirely on who the person answering is. The arguments may be controversial, but hear (read) me out.

From the point of view of the controlling shareholder, the fair answer is to pay almost everything in salary and little or nothing in dividends.

Why? The controlling shareholders, as executives, have put in 100% of the effort, therefore they should get 100% of the rewards. A concession could be made that IPO investors contributed capital and should therefore be entitled to dividends as their reward. But how many shareholders have been there since IPO? For sure, the minority shareholders who bought in the open market did not contribute any capital to the company, so they have done nothing and therefore deserve nothing.

This reasoning is not wrong when we think about our own jobs. After all, we all want to be paid fairly for our work in our jobs, and would fiercely object to credit and rewards being shared with a member of the project team who replaced an existing team member, but then did nothing. Yet, this is precisely the position that minority investors who buy in after IPO find themselves in - as unwelcome new members of the team, who do no work but still claim a share of the spoils.

Indeed, unlike minority shareholders who can easily sell and leave, controlling shareholders are stuck with the business. In that sense they are taking on even greater risks than that implied by their larger shareholdings alone. So they could argue that for taking on disproportionate risks, they should be given disproportionate rewards.

As a controlling shareholder, the only reason to pay dividends would be to maintain a reasonable stock price, so that the company is able to use its stock as currency to raise cash or to buy another company if it so desires. In that regard, it helps greatly to have some sort of consistent dividend record. So most controlling shareholders, their personal views notwithstanding, resign themselves to paying at least a nominal amount of dividends.

From the point of view of the minority shareholder, the fair answer is to pay the equivalent market rate in salary and everything else in dividends.

Why? Ownership and management are independent issues. If the company is paying an outsider $X to do the job, then the controlling shareholder should also be paid $X to do the same job, not a penny more. The fact that the executive is a shareholder is of relevance only when it comes to paying dividends. Nobody forced the owners to take the company public. If they don't like sharing the profits, take the company private. When they own 100% of the company they can have 100% of the profits.

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Market reality usually lies somewhere in between the 2 extremes. I own shares in a few companies where the highest paid executives are not the controlling shareholders. I consider the controlling shareholders of these companies particularly enlightened.

Sadly, it is much more common to see the controlling shareholder being paid way more than senior executives who are non-family, even though these same people are running the company when the controlling shareholder is not around (sometimes by design).

However, since our economy is capitalist (one share one vote) and not cooperative (one member one vote), most controlling shareholders will continue to do as they please. The only real vote that minority shareholders have is: to own the shares, or not. If you are not happy, you are free to sell your shares.

As always, YMMV.

[Salty]

The managers can pay themselves less and more using stock option, thus in line with shareholders.
Then again, stock option have its own problem.

Bonuses can also be benchmarked to competing firms' performance.

[KopiKat]

Follow Warren Buffett, he's paid $100k/yr, a pittance (really peanuts!)for a CEO managing such a huge biz.

With his interest in Berkshire closely aligned with that of it's shareholders (irregardless if new or old), there's greater motivation for him to get his bigger financial rewards from the success of Berkshire.

Any such listco in SGX??

[lanoitar]

The controlling shareholders, as executives, have put in 100% of the effort, therefore they should get 100% of the rewards. A concession could be made that IPO investors contributed capital and should therefore be entitled to dividends as their reward. But how many shareholders have been there since IPO? For sure, the minority shareholders who bought in the open market did not contribute any capital to the company, so they have done nothing and therefore deserve nothing.

Er... this one no logic leh...

Even if we have not bought shares during IPO, we have taken over the place of those who did, by buying over their shares. The original IPO equity is thus contributed indirectly by the final holder of the security. Tio bo?

If this is indeed the mindset of controlling shareholders, it's really the buay ngam.

[d.o.g.]

Even if we have not bought shares during IPO, we have taken over the place of those who did, by buying over their shares. The original IPO equity is thus contributed indirectly by the final holder of the security. Tio bo?

The fact remains that the capital has ALREADY been contributed. When you buy in the secondary market your capital now goes to the seller, not the company. As far as the company is concerned you have given it nothing, and therefore it owes you nothing.

The company could be said to be ethically obligated to the investor who puts in money. But the obligation ceases when that specific investor leaves. It is not transferred to the new shareholder who bought over the exiting investor's stake.

Like I said, apply this to your job. You have a big project with several team members. Everyone does their share. Then, after the project is completed but before bonuses are paid out, one of the team members is replaced by a new person. This new person demands a share of the bonus on the basis of being a part of the team, even though he didn't lift a finger to do any of the work that resulted in the bonus. Are you going to merrily share the bonus pool with him? No, you'd call him a parasite, among other things, and tell him to get lost.

Now replace project with IPO, team member with shareholder and bonus with profits. Do you think, from a controlling shareholder's perspective, that you are getting a fair deal, to put in 100% of the work but only a portion of the profits? Sure, at IPO there was a pool of other shareholders who contributed capital, but if they've all long since sold out, what do you owe the new shareholders? Nothing at all.

I am not saying I condone such thinking. Just playing the Devil's Advocate (which, by the way, is a most interesting book).

[CityFarmer]

The fact remains that the capital has ALREADY been contributed. When you buy in the secondary market your capital now goes to the seller, not the company. As far as the company is concerned you have given it nothing, and therefore it owes you nothing.

The company could be said to be ethically obligated to the investor who puts in money. But the obligation ceases when that specific investor leaves. It is not transferred to the new shareholder who bought over the exiting investor's stake.

Like I said, apply this to your job. You have a big project with several team members. Everyone does their share. Then, after the project is completed but before bonuses are paid out, one of the team members is replaced by a new person. This new person demands a share of the bonus on the basis of being a part of the team, even though he didn't lift a finger to do any of the work that resulted in the bonus. Are you going to merrily share the bonus pool with him? No, you'd call him a parasite, among other things, and tell him to get lost.

Now replace project with IPO, team member with shareholder and bonus with profits. Do you think, from a controlling shareholder's perspective, that you are getting a fair deal, to put in 100% of the work but only a portion of the profits? Sure, at IPO there was a pool of other shareholders who contributed capital, but if they've all long since sold out, what do you owe the new shareholders? Nothing at all.

I am not saying I condone such thinking. Just playing the Devil's Advocate (which, by the way, is a most interesting book).

I am not quite agree with thinking presented.

The company is ethically obligated to the shareholder, either via IPO subscription or via secondary market. The shareholder right is transfer with the sale of the share in secondary market.

Let's also apply to project in job. I will replace IPO subscribers as initial project partners. New partner bought over the share from initial partner with a $ value. After the transaction, the new partner is definitely eligible for the profit, isn't it?

[shanrui_91]

a very interesting discussion of investor's right vs key mangement and controlling shareholder

it is definitely useless for the minority shareholder to try to do anything funny given that the company is doing well at the moment and they have a huge shareholding. if the company is not doing as well or overpriced, it will be very easy to make a decision to sell the share. I guess this is just one of the many factors that one has to consider and weigh when investing.

Theorectically, as long as you hold onto 1 share of the company, you deserve a right to have your concern voiced out and a chance to vote on certain issue. However, at the end of the day, it is still the majority that wins given that they are still the one who owns the largest part of the business

[d.o.g.]

The company is ethically obligated to the shareholder, either via IPO subscription or via secondary market. The shareholder right is transfer with the sale of the share in secondary market.

Shareholder rights are a legal entitlement. They are transferred with the sale.

Ethical obligations are a different matter and are entirely at the discretion of the controlling shareholder to honour. They are under no legal compulsion to accord the new shareholder the same respect or deference showed to the old shareholder.

That is to say, if dividends are distributed, ALL shareholders will share. That is their legal right. But the controlling shareholder is not REQUIRED to declare dividends to the new set of shareholders even if he is ethically obligated to do so. Indeed, the appearance of an unwelcome shareholder may well induce the controlling shareholder to reduce or even omit dividends, in order to frustrate the unwelcome shareholder into leaving. In such a case, the controlling shareholder may not be behaving ethically, but he is certainly acting legally.

Again, I am not saying that I agree with such thinking, just that such thinking can be seen to be valid from the controlling shareholder's perspective.

[crabcrab]

The coming 33rd AGM for The Hour Glass Limited will be held at Marriot Hotel, Legacy Suite, Level 2 on Wed, 18 July 2012 at 10am.... Anybody here attending the AGM??

[shanrui_91]

The coming 33rd AGM for The Hour Glass Limited will be held at Marriot Hotel, Legacy Suite, Level 2 on Wed, 18 July 2012 at 10am.... Anybody here attending the AGM??

i should be going though I am very busy this month