10 February 2012 at 9:30 GMT
Although many CEOs and executives have been failures in the past few years, I have listed 3 who are probably among the most hurtful to shareholder interests.
The reasons vary, but to get on my list an executive had to be proficient at squandering shareholders wealth, show a lack of leadership, or pathetically misunderstand the company's market. I have left out investment banks and the debacle of 2008 since I considered those a bit too easy.
I'll start at number 3 and work my way up to the top - or the bottom.
3) The RIM co-CEOs : Mike Lazaridis and Jim Balsillie
The pick of the Research in Motion CEOs is self-explanatory, since the company has managed a complete destruction of its market share in the United States. Its global share of the smartphone market is now down 4% in the past year to 11%, and its US mobile market share is down to a paltry 6.5%, which has largely moved to the Android platform. Add to this the failed launched of the Playbook tablet and you have a recipe for disaster.
Result: RIM shares are now down 89% from their 2008 peak, pretty impressive!
2) Vestas’ Ditlev Engel
The Danish wind energy company has been slashing jobs, issuing earnings warnings, and is being beaten by lower cost producers in China. A good CEO should take the brunt of the responsibility for what happens in his or her company, but instead Engel has refused to quit and let Vestas' CFO take the brunt of the blame for the missed earnings estimates. It seems Engel doesn’t understand the market for his products.
Result: Vestas shares are down 92% from their euphoric 2008 peak.
1) DELL Executives
The company has been unable to escape the PC market, which was a good business 10 years ago. Since then the commoditization and decline of the PC market, which is rife with low-cost Asian competition, have left this company with minimal growth.
The worst is not the complacency or the lack of vision of the company. In this case, the worst is the mistreatment of shareholders. The company has a massive cash hoard of USD 14bn with respect to its market capitalization of USD 32bn, but it doesn’t pay dividends and instead chooses to buy back shares. In most companies this is not a big deal, but in Dell it is important since the executives’ bonus structure is dependent on earnings per share. Therefore the best way to get paid as an executive is for the company to buy back stock which artificially boosts EPS, increasing management’s bonuses.
Unlike a dividend, which executives and shareholders can both benefit from, Dell’s buyback primarily benefits executives. We can see the result of this executive bonus structure as most executives receive their in-the-money stock options and exercise them right away. Furthermore, we can see that the company seems to indiscriminately initiate its buyback when the stock has been historically expensive, furthering hurting shareholders.
What does this say to potential investor? Would a normal executive sell the stock of a company it truly believed in? Probably not! The only bright spot in Dell is actually CEO Michael Dell, who is buying stock through normal means. While many executives are competent and do care about shareholders, Dell executives appear not to be either.
Result: Dell shares are now down 57% from their 2005 highs while management has been benefiting from a falling share price, pretty ridiculous.
The worrying thing is that this happens in a lot of companies, and Dell is not just the exception.
Here's a tip to investors who believe that corporate governance is a 20 page waste in an Annual Report: think again and pay close attention to senior management’s actions.