Investing mastermind Benjamin Graham, Warren Buffett's teacher, tells us:
"[T]here are just two basic questions to which stockholders should turn their attention:
- Is the management reasonably efficient?
- Are the interests of the average outside shareholder receiving proper recognition?"
I'm concerned that Las Vegas Sands (LVS 5.86%) fails the second test. Here are some issues that raise my concern.
An abundance of related-party transactions
Las Vegas Sands' 2013 proxy lists a large quantity of related-party transactions (i.e., business deals that took place between the company and individuals with whom insiders had a special relationship before the deal).
While some related-party transactions can be legitimate, they can create the potential for conflicts of interest and result in outcomes that put the interests of insiders directly ahead of the interests of shareholders. For this reason, cautious companies often try to avoid engaging in an abundance of related-party transactions to avoid the appearance of misconduct.
Here are a few "highlights" from Las Vegas Sands' related-party transactions that have me concerned.
- Las Vegas Sands agreed to shell out $3.1 million to buy the assets and lease interests of Carnevale Coffee Bar, which was previously 50% owned by one of CEO and Chairman Sheldon Adelson's family trusts. The proxy makes no mention of how the coffee bar's value was appraised and whether Las Vegas Sands got a good price for it.
- In 2008, Las Vegas Sands sold Adelson's wife shares and warrants "on substantially the same terms as those offered to the public in a simultaneous public offering." However, I question the contractual provision that required the company to pay "$280,000 in costs and expenses of Dr. Adelson relating to the Hart-Scott-Rodino Act clearance for the exercise by Dr. Adelson of the warrants she held" when she exercised them in 2012. Was this a privilege that the company would have offered to any investor taking such a large stake during this time of great need at the company, or was this a special favor granted to Adelson's wife because of her special relationship with him?
- Adelson's son-in-law was paid $675,000 for his work as Las Vegas Sands' vice president of corporate strategy. But was he the best person for the job, and can that salary be justified in terms of long-term shareholder value?
While none of these deals is necessarily bad for shareholders, taken together they make me uneasy. Also, because Adelson and family control the majority of share votes, there would be little shareholders could do to change things if they were to discover that Las Vegas Sands was using shareholder capital irresponsibly.
Other businesses in the industry also have copious related-party transactions. In particular, founder-led businesses Wynn Resorts (WYNN 12.05%) and Boyd Gaming (BYD 8.83%) reported a large number of such transactions in their 2013 proxies, including employment of relatives, employee use of company services, and employee use of company-owned property. MGM Resorts International (MGM 11.30%), on the other hand, didn't have to report any related-party transactions in its 2013 proxy.
So while some of the major players have plenty of related-party deals, it looks as if the bigger influence is from the founders, rather than the gaming industry itself, in which the founder/leaders also exercise a great deal of control over share votes. Adelson, his family, and related trusts own about 52% of Las Vegas Sands' company stock. Wynn Resorts CEO/Chairman Stephen Wynn and his ex-wife and fellow director, Elaine Wynn, together own nearly 20% of company stock. Boyd Gaming CEO/Chair William Boyd, along with fellow directors Marianne Boyd Johnson and William R. Boyd, together own about 37% of company stock.
The Foolish bottom line
While none of these transactions provides conclusive evidence that Las Vegas Sands' management is acting against shareholders' best interests, taken together these transactions worry me a great deal. Despite the company's recent success in increasing revenues and earnings per share, I believe these deals raise questions about whether we can trust Adelson to act in the best interests of shareholders at large when those interests diverge from his own -- especially when he, his family, and related trusts own more than 50% of the company stock, preventing average shareholders from voting out his preferred directors.