On the other hand, one of the things investors should never have to accept is the outright usurpation of company assets from a Machiavellian management with absolutely no sense of stewardship or responsibility to the owners. Sadly, investors usually don’t have to look far to find a company that boasts some degree of self-dealing on management’s part. This past week, I had the unfortunate experience of coming head to head with just such an example after reading the SEC filings for a company called Department 56. (Let me say at the outset that do not have, nor have I ever had, any relationship with or financial interest in the company; as far as I know, I’ve never even purchased one of their products).
According to the company’s most recent 10-K filed with the Securities and Exchange Commission, Department 56 is a “designer, distributor, wholesaler and retailer” of collectable goods, most notably ceramic villages. A quick glance at the financial statement shows that the business, although suffering from declining sales and a shrinking customer base, has managed to generate a substantial amount of cash in past years. In 2002, however, the company posted a net loss of $4.76 per share. At the same time, the CEO and Chairwoman of the Board, Susan Engel, was paid a base salary of $605,000, an additional bonus of $605,000, restricted stock options valued at $185,042 and “other” compensation valued at $128,343. Even more disturbing is the fact that her salary has increased substantially each year for at least the past five years while the company has experienced a severe shrinkage in income.
After discovering this massive (in my opinion) overcompensation of management, I decided to search the web to see if any current shareholders, financial media, or institutional firms had commented on the situation. Within a few moments, I came across an excellent article by Matt Richey at the Motley Fool expressing the same disgust with management's behavior (I highly recommend you take a few minutes to read the piece). In his article, Richey points out that 1.) stock options amount to over 7.6% of outstanding shares, diluting future earnings on a grand scale and 2.) there is a "lavish" golden parachute in place that will line the pockets of current management in the event of a takeover.
What's the figurative bottom line? Investors need to realize that the business world is sometimes full of self-serving individuals who unfairly take more than they deserve. The best choice is to vote with your money; either sell your shares and entrust your funds to a more honest, sensible management, or gather enough support to take the company over and remove those who have been unfairly reaping the benefits that rightfully belong to the owners (shareholders) of the firm. Corporate raiders often serve a useful purpose in a capitalistic society. I believe Department 56 is one of those cases.
