There was recently an interesting debate on Twitter about director expenses. This includes shooting jollies and five figure bottles of wine, which is disgraceful and has prompted the question: Should director expenses be in the annual report?
My opinion is yes. But it will not make any difference.
It seems bizarre that management are allowed to hide their expenses from shareholders. How are shareholders meant to know where their money is going?
There is recent anger with Sirius Minerals – who were still giving to charity even after the bonds failed back in September last year. Shareholders were displeased that their cash was being spend elsewhere on charitable ventures, when the business clearly needed funding otherwise shareholders were – and now are – at risk of losing all their cash.
They would be even more displeased if they knew that the board they had backed with their cash were having meetings in plush Mayfair clubs, quaffing expensive wine with their buddies.
Meanwhile, although business class flights are a lot more expensive than economy flights, it makes zero sense to have a chief executive take an economy flight where they will get absolutely no work done, and if they are flying at night get no sleep. It is not an effective use of executive time.
But shareholders do have a right to know what is being spent. There is a difference between a good-enough Premier Inn and a five-star spa hotel. Shareholders are not paying for their executives to relax and unwind with a massage and chai tea.
However, it still does not matter.
One argument from Jonathan Curry (@jpsc01) is that “If you think the Director will fiddle his expenses do not invest in the company”.
The problem is – these directors are professional sales person. How do you know who you can trust?
Well, one way of finding out is to check the annual report.
The remuneration report
Most investors do not check the annual report. This is odd, because management put everything they do not want shareholders to see in the annual report. They know that nobody is going to check it.
But by checking the report on remuneration, you can often see how the directors really think. Check what they pay themselves. Check any options structure. Whilst options are supposed to motivate – are these options at nil-cost or are they exercisable at prices much higher?
You can also check their shareholdings. How many shares have they actually bought in the business? And even then – shareholdings that are too large can be dangerous. One only has to look at a certain brick business to see how the executive chairman keeps trying to come up with creative ways to funnel company cash into his back pocket.
Why disclosure is necessary
Management will always downplay any expenses. They are hardly going to be objective about this.
One fund manager (@james1071) mentioned that he was in a management meeting once when the meeting was interrupted with a call from the chauffeur, wanting to know where to pick up the chairman’s wife – Bond Street or the suite at the Dorchester.
Well-known private investor and runner of the popular Mello Events David Stredder also recalled one FTSE company that had twice the number of chauffer driven cars than directors on the board to ensure partners had one available too!
In my opinion, disclosure is necessary – but it will noy matter.
Most private investors do not even bother to check the remuneration report. When you see a director taking a huge salary that increases every year and the share price keeps falling, with no equity in the business, it is a sign that perhaps he is not running the business in the interests of shareholders.
You do not need an expenses report to tell you that.
Author Michael Taylor’s website www.shiftingshares.com contains a number of tutorials on how to trade and invest as well as his free book – ‘How to Make Six Figures in Stocks’.