Sometimes I think certain corporate executives assume their investors are a bunch of mouth-breathing buffoons. There's certainly no shortage of shareholders who really, really shouldn't be investing (or handling sharp objects). Sadly, some of these people also tend to be the loudest advocates of "getting out a PR" or other such nonsense.
For the past two years, I've helped select stocks for the Motley Fool Hidden Gems newsletter. When management for a company I've selected acts in a way counter to its shareholders' interests, I take it personally. Like "I've invited some friends to a party, and the host insists on peeing in the punch bowl" personally.
I got an option on a 7-2 offsuit
Case in point: the most recent proxy from Cryptologic (NASDAQ:CRYP). The company, which offers online-gaming-software platforms, has been a great performer. Even in the intermediate term, any shareholder who held has made good money, including those in management.
Apparently, that wasn't enough. In this proxy, Cryptologic spelled out a program to grant some 400,000 employee stock options -- 250,000 to the rank-and-file, 150,000 to executives. This is a repeat of a 2004 proxy item, which failed. This time around, the company split the two votes: one for the employee option grants, one for the executives.
Now, just so I'm not misrepresented (again), I have no problem with options programs, provided they are expensed, though I believe that restricted stock grants provide much more balanced incentives. I also think that Cryptologic's executive team is excellent. But to sell the wisdom of granting options representing nearly 3% of the company, Cryptologic relied upon some real used-car salesmanship. They presented a table of companies and said, "See, of this list of companies, we have the second-smallest percentage of options-to-equity." The common trait of companies in the list, including Research In Motion (NASDAQ:RIMM), Manugistics (NASDAQ:MANU), and Oracle (NASDAQ:ORCL), seemed to be that they had granted more options than Cryptologic.
Well, great, I could generate a list showing that Cryptologic's option issuance is incredibly high, including another set of its non-peers. Human psychology expert Robert Cialdini would be proud, except that Cryptologic's effort was extremely clumsy. Mercifully, it seems shareholders felt the same way. The company failed to get enough shareholder votes for the executive option package to pass.
Again, I'm not souring on Cryptologic, but I don't have much patience with companies that fail to maintain a proper balance between the interests of executives and shareholders. If Cryptologic's executives do not feel that their talents are not sufficiently compensated -- and I'm not arguing that their salaries are particularly egregious -- perhaps they can create their own "options" by buying some Cryptologic shares.
Sportsman's Blind
Another Hidden Gems company, Sportsman's Guide (NASDAQ:SGDE), has a recent history of equity-related transactions that are bizarre at best. Fortunately, once again, shareholder indignation seems to have had an effect. Unfortunately, management's response has been about as coherent as a chipmunk on PCP.
Follow this logic: Sportsman's Guide's management proposes a stock option plan for management and employees that represents almost 14% (!) of total share float. This grant doesn't include the 10% of shareholder float granted in 2004. Total potential dilution from options: 43%. (Yet Sportsman's Guide didn't find its way onto Cryptologic's table. Must have been an oversight.) Facing some mighty ticked-off shareholders, the company pulled the plan and instead initiated a share buyback of up to 10% of the company's float.
So imagine my surprise when I came across a filing from two weeks ago stating that the company wanted to sell 2 million shares in a secondary offering. Why on earth would a company simultaneously buy 10% of its share float while issuing 40% of those same shares? If the company needs the cash, then why would it buy a single share back? Given the recent withdrawal of the 2005 stock plan, the timing of this filing strikes me as quite suspicious. At any rate, while I believe that Sportsman's Guide still constitutes a bargain from a financial perspective, further monkeying by management will change my mind in a hurry.
Stand a little closer to the razor next time
While I'm on the topic of brazen corporate behavior, I can't help commenting on Gillette's (NYSE:G) decision to give CEO James Kilts options to purchase 800,000 shares of company stock. Kilts' options could earn up to $14 million in profit. This amount isn't necessarily out of whack among CEOs of $50 billion dollar companies. But Kilts is already scheduled to receive $165 million when Gillette merges with Procter & Gamble (NYSE:PG).
If Gillette is disappearing into P&G, what is Kilts supposed to do to deserve the added incentive of all those stock options? I just don't understand why Warren Buffett, one of the largest Gillette shareholders and a longstanding critic of poorly constructed management-compensation packages, hasn't screamed bloody murder about this.
It is simply amazing, and generally quite disturbing, what reading company proxies will reveal. I wish investors did more of it -- they might be shocked by how much value they're actually ceding to insiders.
Bill Mann has a short position in Research In Motion. He does not own shares in any other company in this article. The Fool has a disclosure policy . Bill is the guest analyst for a four-month stint for Hidden Gems. The new issue comes out tomorrow! Don't miss it! Afree trialis, well, free.
