There was an article in today’s Wall Street Journal regarding bondholders demanding payment due to the lack of timeliness of firm’s reporting their earnings and other financial reports. Primarily, it was hedge funds holding bonds who where effectively placing the firm in default and in some instances demanding reorganization under the Federal bankruptcy laws. This led me to think about how Value Investors view topics including corporate governance and the responsibility of investors to enforce their interests in extreme instances.
Both Graham and Buffett stress the need that a firm’s management be in line with the interests of shareholders and understand who they are working for. In today’s corporate world, executives have large compensation packages and in turn are expected to produce results that benefit the shareholder. I believe that if management is out of line with shareholders, then they have the obligation to protect their investment and through proxy change management.
It is necessary to pay a premium to both recruit and retain solid management, but when the company is facing tough financial times this same management must be expected to share the burden. It is absurd to allow executives to enjoy their perk packages when earnings hit the wall and cuts are made to employment, dividends, and share price.
The costs associated with entering into bankruptcy proceedings are extremely expensive and should only be utilized under absolute extreme instances. Of course, only bondholders can enter into these types of legal engagements, but a diversified portfolio should include a minimum amount of debt instruments. We must embrace management and work together to attain the results both parties desire, but maintain a sense of scrutiny on their performance. It is vital as Value Investors that we keep an eye on the people who are controlling the companies that we own shares of.
On a completely side note, we here at ModernGraham.com, would like to congratulate Warren Buffett on the marriage to his long time companion Astrid Menks. We wish the best to the both, here is the article describing the events: Warren Buffett’s marriage.