NY Times business columnist Gretchen Morgenson has done investing America another great service! Her “Fair Game” column this week, July 26th, uncovers a compensation scheme so sweet, the executives benefiting from it are probably taking daily insulin shots.
Here Gretchen has uncovered, and remember, this is in a post Sarbanes-Oxley America, a company that is adding to its cash-earnings an amortized dollar amount of what it has expensed to acquire additional assets to grow its business. Likewise, they are also adding back to its cash-earnings what it expenses in stock awards to its executives. Would you like to go back and read that again? I thought so.
Alliance Data Systems (ADS) has created an alternate reality that gooses its earnings and makes it easier to hit earnings targets that then make it much more beneficial and lucrative for their C-suite executives to profit from their targeted stock awards via an accounting alchemy that can turn costs into earnings.
This only proves to me the futility of legislating regulatory fixes on American business that dances around aggressive, unseemly, and shareholder unfriendly accounting practices. It also demonstrates to me just how disinterested professional investment managers are by this type of behavior. If the institutional investor community are OK with this, then they’re essentially saying that it’s OK to lie to them as well. They’re the agency shareholders for America and by accepting this type of compensation practice they’re enabling management to undermine the financial health of the company within which they’re investing other people’s money.
According to the Times piece the firm awarded an additional 710,303 stock units the first quarter of 2009. If certain, as yet, unspecified “cash-earnings” growth targets are met for this year, a third of these stock units will vest by early 2010. In addition to that caveat, if the target is met in 2009, the balance of the stock units will vest by February 2012. Well guess what? On July 24th The Wall Street Journal reported a stock buyback by ADS worth $225 million dollars – roughly 4.5 million shares. By reducing shares outstanding they’ll be able to further inflate their “cash-earnings” more easily! So much for how well Sarbanes-Oxley protects the investor from sleazy accounting practices.
For the benefit of you the investor – the American handing your 401(K), kid’s college fund, or company pension plan to an institution – here are the top five institutional investment and mutual fund companies holding ADS on your behalf for your benefit. If you want, let them know that you don’t like being lied to.
Here Gretchen has uncovered, and remember, this is in a post Sarbanes-Oxley America, a company that is adding to its cash-earnings an amortized dollar amount of what it has expensed to acquire additional assets to grow its business. Likewise, they are also adding back to its cash-earnings what it expenses in stock awards to its executives. Would you like to go back and read that again? I thought so.
Alliance Data Systems (ADS) has created an alternate reality that gooses its earnings and makes it easier to hit earnings targets that then make it much more beneficial and lucrative for their C-suite executives to profit from their targeted stock awards via an accounting alchemy that can turn costs into earnings.
This only proves to me the futility of legislating regulatory fixes on American business that dances around aggressive, unseemly, and shareholder unfriendly accounting practices. It also demonstrates to me just how disinterested professional investment managers are by this type of behavior. If the institutional investor community are OK with this, then they’re essentially saying that it’s OK to lie to them as well. They’re the agency shareholders for America and by accepting this type of compensation practice they’re enabling management to undermine the financial health of the company within which they’re investing other people’s money.
According to the Times piece the firm awarded an additional 710,303 stock units the first quarter of 2009. If certain, as yet, unspecified “cash-earnings” growth targets are met for this year, a third of these stock units will vest by early 2010. In addition to that caveat, if the target is met in 2009, the balance of the stock units will vest by February 2012. Well guess what? On July 24th The Wall Street Journal reported a stock buyback by ADS worth $225 million dollars – roughly 4.5 million shares. By reducing shares outstanding they’ll be able to further inflate their “cash-earnings” more easily! So much for how well Sarbanes-Oxley protects the investor from sleazy accounting practices.
For the benefit of you the investor – the American handing your 401(K), kid’s college fund, or company pension plan to an institution – here are the top five institutional investment and mutual fund companies holding ADS on your behalf for your benefit. If you want, let them know that you don’t like being lied to.
Top 5 Institutional Holdings:
Franklin Mutual - 4.5 million shares
Wellington Management - 4.4 million shares
Fidelity Management - 4.2 million shares
Putnam - 3.7 million shares
ValueAct Capital Partners - 3.7 million shares
Top 5 Mutual Funds
Fidelity Small Cap - 2.4 million shares
Mutual Shares Fund - 2.1 million shares
Putnam Voyager - 1.3 million shares
Waddell Reed - 1.1 million shares
Mutual Beacon Trust - 1.1 million shares
Source: Wall Street Journal, Company Research, 26 July 2009
