Why is No One Talking About Libery Media's Lack of Corporate Governance?

Liberty Media Corporation is known as a media and telecom conglomerate, little attention is being paid to the complete lack of effective corporate governance that is supposed to protect shareholders.

Jun 18, 2014 at 10:16AM

While Liberty Media Corporation (NASDAQ:LMCA) has impressive financial performance, Foolish investors would be wise to look at what are a mess of conflicts, dual roles in multiple companies, and a board of directors that lack independence.

Board of directors or board of conflicts?
A board of director's purpose is to be a link between upper level management and the shareholders and should be a voice of reason elected by investors to keep management in check. Poor corporate governance implies different kinds of risks that shareholders may face on their investment.

Liberty Media's corporate governance webpage states the board will be staggered, have no less than three members, and the majority of directors will be independent. This sounds good, but is it true? A staggered board implies that not all directors are up for reelection at the same time. This can lead to restricted authority for shareholders to change board composition compared to full annual elections. Some argue staggered boards better serve deep-rooted management by making it more difficult to support interests of shareholders since you cannot get rid of everyone all at once. Independent directors are supposed to oppose and question management, and bring an outside point-of-view.

Board composition:

  • John Malone is the chairman not only for Liberty Media, but two other Liberty affiliated publicly traded companies(NASDAQ:QVCA).  He also serves on the board of companies that Liberty has an inherent interest in by owning large portions of their equity.
  • The CEO of Liberty Media, Gregory Maffei, is also the CEO of two other Liberty affiliates and serves on their boards. He is also on the boards of other Liberty Media equity investments, not unlike Malone.
  • The other seven members of the board have multiple conflicts including: ex-CEO of Liberty Media, working for Malone's old media company in the mid 90's, being on multiple Liberty affiliated boards, and being John Malone's son.

Not a single board member is free of conflict of interest in some way or another. The fact that there is not one independent member should raise issues for Foolish investors. Making matters worse is they claim majority independence. What definition of independence are they using when a rational person could see that they have none?

Compensation and ownership structure
John Malone owns a large percentage of the voting power of the companies he serves. This Motley Fool article not only introduces CEO Maffei's high compensation, it also states that in most cases the voting percentage for John Malone is over 33%. It is usually a good sign to have management share in the ownership, but this creates a conflict of interest with management since there are so many intertwined companies with the same management team.

The compensation committee is supposed to provide incentives to management for the long-term good of the company. This can be done by awarding bonuses and stock options tied to performance goals.

Maffei's performance goals include beating the market by 5%, investing excess capital, and overseeing the company's investment portfolio.  These goals are not asking for much. Liberty has amplified its leverage in recent years coupled with stock buybacks. No wonder they want all those stock options when they can inflate earnings per share with leverage and buybacks to increase the price. This is financial engineering at its finest. Also, Maffei has a hefty severance package of $168 million upon change in control or termination without cause and $70 million for termination with cause. These tactics are used to impede takeover attempts or mergers. These are not shareholder friendly clauses.

What's the risk?
Although corporate governance often gets overlooked, the risks involved with Liberty Media are substantial. The structure of all the Liberty Media companies is rather confusing with many subsidiaries, equity interests, ventures, and partnerships. There is risk that company assets are not being used as efficiently as they could be for the benefit of shareholders. Hidden value could be unlocked with the right strategy. Performance goals set by the compensation committee incentivize short-term gains as opposed to strategic long-term performance. The lack of board independence implies no outside thought or opposition to the current direction or strategy of the company which is one of board's main objectives. Lack of independence breeds complacency among company management decisions which could mean company assets or resources could be used more efficiently.

Governance issues affect stakeholders over long investment horizons. The issues discussed are not so cut and dry and cannot be easily expressed in percentages or how they will impact earnings next quarter. Alas, they do raise questions that any long-term investor should ask. These questions should speak to a more expansive issue at hand: What does the lack of effective corporate governance policies say about the people who are taking in public funds? Are they putting all that equity to good use or is there room for improvement if someone were there to question what the higher ups think is best practice? Why is severance pay so high? Is it an intimidation tactic to ward off change? Why is stock compensation so high especially when performance goals are easily achieved?

Foolish Takeaway
Overall, Liberty Media is a well-performing media empire run by some big names. Corporate governance best practices are often overlooked by investors, but can seriously impact investment value over the long-term. Liberty Media's corporate governance policy is just a bunch of words that mean nothing and do not apply. Do not be fooled, there is more to investing than just looking at financial performance.

Warren Buffett's biggest fear is about to come true
Warren Buffett just called this emerging technology a "real threat" to his biggest cash-cow. While Buffett shakes in his billionaire-boots, only a few investors are embracing this new market which experts say will be worth over $2 trillion. It won't be long before everyone on Wall Street wises up, that's why The Motley Fool is releasing this timely investor alert. Click here to learn more about what's keeping Buffett up at night and the one public company we're calling the "brains behind" the technology.

Zach Friesner has no position in any stocks mentioned. The Motley Fool owns shares of Liberty Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers