While Liberty Media Corporation (NASDAQ:FWONA) 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.
- 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?
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.