Reading over the proxy I was sent by EscalaGroup (NASDAQ:ESCL), the coin and stamp collection house, I was surprised to see that management has decided to let shareholders vote on the compensation package it has offered to its new and former CEOs. With salary and benefits oftentimes becoming a way to enrich management to the detriment of shareholders, this seems to be a very shareholder-friendly gesture.
Back in 1992, the Securities and Exchange Commission adopted reforms that required companies to not only prominently disclose executive salaries but also permit shareholders to put executive pay up for a vote. Any shareholder with either $2,000 worth of shares or 1% of company stock could submit a proxy on executive compensation packages. Many companies chafe at the thought of shareholders deciding what executives ought to be paid, believing that is the province of their compensation committees or high-priced consultants.
Over at Motley Fool Hidden Gems, investors are encouraged to become interested participants in the companies they own. It was due in large part to shareholder action supported by Hidden Gems that Flamel Technologies' (NASDAQ:FLML) former board of directors was ousted. The results of such activism are still being measured, but a shareholder taking an active role underscores the thought that we are truly owners of these businesses we invest in. Efforts are under way at another Hidden Gems recommendation, CryptoLogic (NASDAQ:CRYP), to influence executive compensation practices (a 30-day free trial is all that's necessary to check out the dedicated discussion boards where it's being actively discussed).
Though not a recommendation of the newsletter, Escala exhibits many of the traits we look for in mining these treasures: a leading position in a growing industry that the market is ignoring. Stamp and coin collecting is not generally seen as a growth industry, yet the company has grown at an average rate of 84% over the last five years and features hefty returns on both equity and assets. It also sports six times more cash on its balance sheet than debt. While Hidden Gems also looks for a large insider stake in the company, Escala perhaps is too beholden to its insiders, who own more than 75% of the shares.
And it's here that the seeming friendliness of the shareholder vote on executive pay breaks down. Or at least comes up far less than what it otherwise seems. Two years ago, Escala (formerly Greg Manning Auctions) was bought by Spanish collectibles company AfinsaBienes Tangibles in return for a guaranteed contract of purchases. Afinsa is the world's largest stamp dealer and the third-largest collectibles company, behind Sotheby's (NYSE:BID) and Christie's. The arrangement has worked out well for both parties, and the contract has been renegotiated to boost the amount of collectibles purchased by Afinsa. Yet with Afinsa owning 18.8 million shares alone, or 68% of the company, executive pay will essentially be whatever Afinsa says it is. Putting executive compensation to a vote looks good on paper, but in practice it doesn't seem to mean much.
Even so, Escala has adopted some other shareholder-friendly initiatives. For example, it stopped awarding stock options to executives in 2005, granting instead other equity-based incentive programs to align management and shareholder interests. Though some of the incentives seem short-sighted -- like tying bonuses to share price appreciation -- the overall thrust appears to be aimed at increasing the company's value.
Expensing stock options started off with small companies doing it and eventually rolled over to larger corporations. Perhaps it's more symbolic than meaningful at Escala right now, but shareholder votes on executive compensation may yet become a more prevalent practice, too.
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A 30-day free trial to Motley Fool Hidden Gems would let you see how shareholders are taking their roles as business owners seriously. The newsletter's recommendations are beating the market by 20 percentage points on average.
Fool contributor Rich Duprey owns shares of Escala, Flamel, and CryptoLogic but not any of the other stocks mentioned in the article. The Motley Fool has a disclosure policy.
