As a shareholder of any public company, it's nice when you know your opinion counts. Voting is not a privilege -- it's a right.
One of the most important things you can vote on within a company is who will serve on the board of directors and represent your best interests. It's important to have independent directors who aren't too cozy with senior management. It's so important, in fact, that having a board with a majority of independent directors is a listing requirement for the Nasdaq and NYSE.
How does Travelzoo (Nasdaq: TZOO) fare in this department?
Who's the boss?
The company's founder, ex-CEO, ex-Chairman, and current director Ralph Bartel owns a controlling interest in Travelzoo. Although he has been unloading a good portion of his shares over the past several months, he still owns 8.5 million shares, which represents more than 51% of the shares outstanding. Holger Bartel, Ralph Bartel's brother, also currently serves as chairman of the board, even though he doesn't own any shares himself.
The fact that Ralph Bartel is in a position to control Travelzoo and elect the entire board of directors is definitely a risk factor. Even if every single other shareholder voted against him, he'd still have enough votes to strongarm his own path forward.
With great power comes great responsibility...
... just like my Uncle Ben used to tell me. As long as Bartel's interests are properly aligned with other shareholders', then his ability to sway the board likely won't harm investors. However, I did find an interesting note in the first-quarter 10-Q:
Note 14: Related Party Transaction
In July 2010, the Company entered into an independent contractor agreement with Holger Bartel, the Company's former Chief Executive Officer, the Company's Chairman and brother of Ralph Bartel, who controls the Company, to provide consulting services. Fees for these services rendered during the quarter ended March 31, 2011 totaled approximately $164,000.
I'd be interested to know what constituted these consulting services, since this arrangement appears to be self-serving on its surface. This actually isn't the first agreement of this nature. Holger Bartel also received $591,000 in 2008 and $275,000 in 2010 for similar arrangements.
Depending on what services were rendered, this arrangement could be entirely harmless. On the other hand, since the company has made a habit out of these types of deals, I would like a clearer explanation. For a textbook example of a self-dealing arrangement, look to when DryShips (Nasdaq: DRYS) CEO George Economou made his company buy vessels from another company owned by, you guessed it, George Economou. This type of self-dealing is a classic conflict of interest, and it will eventually only hurt shareholders.
The bright side
The good news is that we Fools like to see high levels of insider ownership, since it shows that those in the know have confidence in the company. Even though Travelzoo CEO Christopher Loughlin doesn't own any shares, Bartel's majority stake shows his faith in the company he founded.
It's common for founders to retain large stakes in their companies, since they've likely invested their livelihoods in rearing the companies. (They grow up so fast!) Amazon.com (Nasdaq: AMZN) founder and CEO Jeff Bezos still retains a stake greater than 19%, as that stock hovers near all-time highs. Founder and Chairman Charles Schwab (Nasdaq: SCHW) maintains a 15% holding in his namesake company.
It's even more encouraging when insiders take the initiative and buy more in the open market. Receiving equity compensation in the form of restricted stock and options is one thing, but taking out your personal checkbook to pay for shares is another thing altogether.
For example, take Ebix (Nasdaq: EBIX) CEO Robin Raina. Despite numerous bearish articles published recently, he put his money where his mouth is, picking up an additional 30,000 shares at $17.29 amid the stock's price weakness. The bill for that order came out to around $518,000, bringing his total stake in the company up to 10%.
In addition, you should also examine insider selling in context. If part of executive compensation comes in the form of equity, then a little bit of selling is just a way to cash out a paycheck. There could also be personal reasons to sell as well -- say, if executives need to diversify their holdings, or decide to buy new yachts. But if an insider (or multiple insiders) begins to dump shares at an alarming pace, that's a major red flag.
Out of Travelzoo's five-member board, both Bartels fail to meet the criteria of independence, since they have held executive management positions within the past three years, and they are immediate family members. Holger Bartel's consulting services also fail the test of independence. Despite the fact that the board does consist of a majority of independent directors, Ralph Bartel's controlling interest would allow him to change the composition of the board at his discretion.
Insider ownership is a powerful tool to find great stocks with the potential to outperform. Yet if insiders own enough shares to outweigh the voice of the individual investor, that fact makes it terribly daunting to enact any meaningful change.
Looking for stocks with high insider ownership? Try our CAPS stock screener.
