Ever see those plate twirlers, the guys who balance plates on the end of poles and run around madly trying to keep them all spinning? Some executives remind me of these plate twirlers as they run not only their own businesses, but serve as directors or chairmen on the boards of numerous other companies.
Running a business these days requires a lot of dedication and focus. An owner with too many plates in the air can easily be distracted. That's why even Warren Buffett likes to keep the original management in place when he buys a company, simply because they know their business. It would be unfair to expect Buffett to understand and be able to capably run a candy business, a credit card company, a soft drink manufacturer, or a razor blade maker all at the same time.
Yet some business owners seem to think that like the plate twirlers, they can juggle a multitude of businesses. To see just how many plates in the air executives at companies I own have, I'll look at the company's annual proxy statement, which tells me not only where else they work, but also how much they're paid and whether the company has any side deals with them. A little Googling doesn't hurt, either.
A casual plate twirler
At one company I own, Casual Male Retail Group (Nasdaq: CMRG ) , the chairman not only runs the clothier, but he's also the chairman, director, or owner of a number of disparate businesses ranging from a holding company called Jewelcor Management to website hosting service Web.com (Nasdaq: WWWW ) . As a shareholder in the clothier, though, I'm concerned he might be spreading himself a little too thin. And when companies start engaging in business dealings with their executive's other companies, I get a little more worried.
A few months ago, I pointed out why significant "related party transactions" between senior executives or directors and their affiliated companies always raise a red flag for me, even though one study found that 40% of all companies in the S&P 500 have some kind of related party transactions. Many times these deals lead to conflicts of interest because they are not conducted at "arms length" -- that is, on terms that would be generally available in the marketplace. For example, I wrote that Gap (NYSE: GPS ) used a construction company of the chairman's brother, and Aaron Rents (NYSE: RNT ) used company funds to pay for the race car dreams of the president's sons.
Looking at Causal Male's proxy statement, I can see just how active Holtzman is. Using Jewelcor -- which used to be a jewelry distributor with dozens of storefronts and catalogs, but now serves as his vehicle for ingratiating himself onto a number of boards and into several senior management positions -- Hotlzman has agitated for change at various companies, including Nautica (now a subsidiary of VF Corp. (NYSE: VFC ) ), First Penn Bank (Nasdaq: PSBI ) , and the defunct Argonaut Technologies and Thistle Group. He also used Jewelcor to create licensing deals such as those in place with George Foreman Enterprises, where he just so happens to also serve as co-chairman with the former boxing great.
Benefits of plate twirling?
Notwithstanding my hesitation about related-party deals, sometimes they can work to the benefit of the company. Casual Male's deal with George Foreman has resulted in the boxer's line of clothing becoming one of the retailer's best-selling brands, accounting for 23% of 2005 revenues. It's been such a big hit that the line of clothing has even supplanted Casual Male's own private-label line. Plans are in place to extend the boxer-turned-grill salesman's name and image to a number of other products, including shoes and a zero-calorie fat substitute called Z-Trim targeted to food companies and restaurants.
Despite Holtzman's apparent varied interests, it doesn't seem to have hurt Casual Male's performance yet. Since he took the reins of the company in 2002, the stock has risen from just over $1 a share to nearly $10 today, adding more than $300 million to the company's market value in the process. Regardless, I remain a wary shareholder since investors need to stay sharp and ensure that the boss continues looking out for their interests, as well as his own.
Executives and directors need to remain focused on their main business and not get distracted by their ancillary sidelines. Investors would also be wise to focus their attention on their investments and tread carefully when buying shares of companies whose executives are spinning a lot of plates.
Companies are required to provide you with the information, but it's up to you to read the fine print. And the annual proxy statement is a great place to begin digging up the nitty-gritty details
Negotiate the labyrinth of related party deals with these Foolish articles: