Is the controlling family aligned with the shareholders?

Posted by Marc Hodak on February 14, 2008 under Executive compensation | Be the First to Comment

The Comcast board has decided to cut founder Ralph Roberts’s salary to $1 per year, make him ineligible for bonuses, annual equity grants, as well as certain death benefits that would have accrued to his wife or estate. These changes follow a loss of about a third of the value of the company’s shares in the last year. As a result of that slide, Comcast has been under severe criticism from major shareholders. Besides concern about the founder’s pay, certain large shareholders have generally been critical of management’s apparent lack of focus on value creation, and have asked for more of the cash being returned to shareholders. So, along with the cuts in pay, the company responded yesterday with 25 cent per share dividend, and a commitment to buy back $7 billion of shares by 2009.

All this is evidence that, while the happiness of shareholders is proportional to a rise in share price, the power of outside shareholders increases with a decline in value. In other words, major shareholders seem to live with a balance of happiness or power, depending on the company’s fortunes. When performance falters, just about any board can put enough pressure on a controlling family to make significant strategic changes, and even rein in their compensation. Unfortunately, when things are going well, it’s easy for a controlling family to layer on additional compensation, and the Roberts family took advantage of that. No one I know has found a way around this dynamic.

So, when the company was riding high in prior years, the Roberts family accumulated beneficial ownership of millions of additional shares, including those that were part of about $50 million in compensation for 2006. The family now owns or controls nearly 40 million shares, not counting a couple million more unvested, underwater options. What that means now, however, is that the $1.50 increase that followed yesterday’s changes were worth about $60 million to them. So, in 24 hours the Roberts were able to increase their wealth with some shareholder-friendly moves by more than their total compensation from the firm for all of last year. Now, if they can recover what they had lost from their peak last year, they could make an additional half billion dollars.

For now, this family is completely on the shareholder’s side. The time to watch them again will be when the company makes a spectacular recovery, and management again becomes untouchable.