Solve CEO Conflicts Once and for All

Shareholders are willing to put up with all sorts of excesses as long as stock prices are rising. Once the market hits the skids, however, you start hearing a lot more complaints about bad management.

Whether it's nine-figure severance packages, backdated stock options, or just plain egomania, residents of the company boardroom are definitely on the outs right now. If you're fed up with corporate greed, stop fighting with your own management and vote with your money -- by choosing companies whose managers act in your best interest.

You're fired!
It's downright insulting to see the things company managers get away with. In theory, shareholders have a voice in making major decisions that affect the company at large. Yet in practice, it rarely seems to work that way.

The problem is that shareholders don't have much direct say in how to run their company. Much like the electoral college, rather than choosing management directly, shareholders usually have the right only to elect people to the board of directors. Then, the directors are responsible for picking a company's CEO and other top executives. With many big institutional shareholders blindly going along with company nominations for the board, individual investors often end up having no real say -- and no effective way to complain.

Having a stake
In order to protect yourself from company executives who have little incentive to act in your best interest, one thing to consider is whether your company's directors and executives are also large shareholders. Owning shares helps align the interests of company insiders with those of shareholders. In contrast, executives who don't have a significant stock position in their companies don't really feel the pain when their mistakes hurt share prices.

Warren Buffett is perhaps the best-known example of a corporate leader who holds a huge stake in his company. But there are plenty of others. Here are just a few:

Company

Executive

Position

Value of Shares Held

Chesapeake Energy (NYSE: CHK  )

Aubrey McClendon

Chairman/CEO

$1.87 billion

Microsoft (Nasdaq: MSFT  )

Steve Ballmer

CEO

$11.22 billion

Garmin (Nasdaq: GRMN  )

Gary Burrell

Chairman Emeritus

$1.48 billion

Loews (NYSE: LTR  )

James Tisch

President/CEO

$540 million

Schwab (Nasdaq: SCHW  )

Charles Schwab

Chairman/CEO

$3.05 billion

Wynn Resorts (Nasdaq: WYNN  )

Steve Wynn

Chairman/CEO

$2.28 billion

Yahoo! (Nasdaq: YHOO  )

Jerry Yang

CEO

$1.14 billion

Source: Yahoo! Finance. May include direct and indirect share holdings.

Not a perfect method
You'll notice from the companies above that just because corporate insiders have large share holdings doesn't necessarily mean that management and shareholders will always agree. Yang, for instance, has taken flak over the Microsoft takeover debacle, costing shareholders a deal at a price almost 25% higher than where the stock currently trades.

There are a couple of reasons for that. At some point, share-holding executives attain a high enough net worth that minor price movements aren't important -- even if they represent millions of dollars each day. As a result, other factors, such as pursuing their vision for the business, may distract them from their duties to uphold shareholders' interests.

Also, keep in mind that shareholders themselves don't all own shares for the same reasons. For instance, short-term investors who are looking for a quick buck might support an acquisition offer. At the same time, long-term investors might oppose such an offer, believing that they could make even more by hanging onto the business.

Despite these shortcomings, looking for companies with insiders who own a bunch of shares only makes sense. Executives who put their money where their mouths are have a lot more credibility than those who run for the exits with a wad of cash when the going gets tough.

For more on dealing with corporate executives:

Charles Schwab and Garmin are Motley Fool Stock Advisor recommendations. Find out what companies we think have the best interests of shareholders in mind with a 30-day free trial -- there's no obligation to subscribe.

Fool contributor Dan Caplinger has his core portfolio set up. He doesn't own shares of the companies mentioned in this article. Garmin is a Motley Fool Global Gains pick. Microsoft and Chesapeake Energy are Motley Fool Inside Value selections. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy makes you the big winner.


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