Common situation: investors fund a new business start,
receive minority stake. Company founder keeps control,
and chief executive position.
Now, imagine the firm makes a steady, substantial operating
profit, after depreciation, etc. Eventually, investors want to
take cash out, one way or another, most likely through
But suppose the president simply pays himself an
exorbitant salary, soaking up those profits. And year
after year, he says ,"Sorry, we broke even, again." He
gets it all, they get squat.
Do they have any recourse? I've never heard of such a
case, but I've wondered about this for a long time.
Yes they do. It's a federal agency known as the SEC.
Publicly traded companies have gery strict rules to follow.
You can't scam your shareholders by gving yourself a huge pay day.
Once a complaint is filed, the SEC will look into the matter and if it is
found the owner too the profits for himself, the owner could face severe
penalties and wind up having to pay the dividends.
SEC=Securities and Exchange Commsision.
Intelligent investors would wsell their swtock in such a company, and the
price of the shares would go to rock bottom. There are organizations on Wall
Street that make their living watching and reporting on things like that. Oh
sure. There are still a few scammers, and when they get away with it, the
newspapers yell about it loudly. But they never say anything about the
thousands of companies that are honest and run by honest people who are just
trying to do their best for the company and the stockholders. I have been
investing my money in the stock market all of my working life, and I have
never lost a dime because of crooked managers. - Stupid managers, yes....
But crooked ones? None as far as I know. The kkey is to sporead your money
around. Don't put all your eggs in one basket. I did it with mutual funds.
These are3 made up of many individual stocks across a broad range of
companies. But ai was too lazy to investigate on my own, so the mutuals were
a nice crutch that made it easy for me. If you are really interested, you
can do your own research and beat the market by investing wisely. Many
others have done so before you.
You are clearly not familiar with the long sad story of Cambridge Capital
Holdings (CCHI), formerly the well known brokerage firm J B Oxford (JBOH).
In 2004 Ameritrade paid J B Oxford $26 million for its 50,000 online
brokerage accounts. Through high salaries and self dealing the CEO has made
all $26 million disappear. Nothing like high salaries, management fees,
special borrowing deals, a private plane, overpriced worthless land deals
and Yukon placer gold mines to make money vanish.
The SEC has done zero over the years to protect the shareholders.
As this was asked on a UK specific news group, even a private company
has to have a board of directors, although it might just be the
"president". The shareholders can force a general meeting and vote out
the directors and replace them with directors of their choice.
I think public companies also have specific rules about shareholders
approving directors' remuneration, but I haven't looked into that in any
Because richard's law related postings almost always reflect his
fantasies rather than actual realistically summarized law, it is
desirable always to presume that what he says is incorrect. But such
a presumption can be rebuttable. And this time and although he
exaggerates what the SEC "will" (and can) do, a "this is wrong"
conclusion is not warranted as usual especially when, as seems to be
so here, such a conclusion is suggested in an unqualified manner.
In addition to what a company's governing documents may (but may not)
provide as a basis for recourse, it is among other things not entirely
uncommon for investors to have recourse as a matter of contract
(whether memorialized in shareholder agreements or, even if they are
not shareholders or if they are but without the benefit of a
shareholder agreement, pursuant to the terms/provisions of the
solicitations as a result of which they invested), or pursuant to a
relevant state's no unfair trade practices or no deceptive business
practices law if there is such, or (at least for closely held not
publicly traded companies) pursuant to other common law principles or
statutory law making minority shareholder oppression remediable in the
Insofar as publicly traded companies subject to U.S. federal
securities laws are concerned, it is true that there is not yet a
fully in place comprehensive SEC regulatory scheme dealing with
excessive executive compensation; and it may also become true that in
light of today's corporatist controlled and otherwise degraded
political climate, it could be unrealistic to expect anything close to
tipping the balance in favor of aggressively shareholder-protective
Even so, HOWEVER, although the blanket nature of deadrat's statement
quoted above including his present tense use of what the SEC presently
"has" makes what he is trying to communicate substantially inexact, IF
what deadrat is trying to suggest is that the SEC has no role to play
"about executive pay" even for companies subject to its jurisdiction ,
then he would be mistaken.
In any event (and while may pain some to acknowledge this), whether in
terms of "a stopped clock is 'right' at least twice a day" terms or
because, at least in this instance, he has some actual knowledge
whereof he speaks, richard is not entirely wrong in what he says
This is so because, re. companies subject to the SEC's jurisdiction,
Sects. 951, et seq. of the so-called "Dodd-Frank Wall Street Reform
and Consumer Protection Act" (H.R. 4173) substantially even if not
completely address these issues.
Dodd-Frank amends the federal Security Exchange Act of 1934 as
previously amended (15 U.S.C. sects. 78a, et seq.) to add new
provisions which, in substance and in part presently include and (in
my opinion: too much) in part by way of regulations that statute
directs the SEC to promulgate but which have not yet been fully
completed but further presumably soon will include:
- Requiring that proxies or other consent or authorization for
company meetings after January 2011 provide for (unfortunately)
non-binding but perhaps nonetheless influential shareholder votes
whether to approve executive compensation including about the approval
or not of "golden parachutes" in case of a company's sale or merger;
- Imposing strict requirements for the independence of a
company's compensation committee including by mandating standards for
listing on a stock exchange that require such a body to be comprised
only of independent directors with such a committee also having the
authority and which would be encouraged to hire outside independent
compensation consultants so as substantially to strengthen a
compensation committee's independence from the executives such a
committee is rewarding or punishing;
- To facilitate shifting a company's management's focus on
short term (again: not always real) profits to long-term growth and
stability, authorizing the SEC to grant shareholders proxy access to
nominate directors while also requiring directors to win by a majority
vote in uncontested elections;
- Imposing relatedly strict disclosure requirements regarding
the use of consultants in relation to compensation more generally
including by requiring companies to provide readily understandable
charts (i.e., not relegate an interested person to having to find then
gloss text buried in obscurely worded small-print financial statement
footnotes) that clearly compare their executives' compensation with
stock performance over a five-year period; and
- Requiring such companies to establish subject to SEC approval
then actually implement policies to recover (a/k/a, "claw back")
executive compensation based on inaccurate even if not outright
fraudulent financial statements including requiring (e.g., in cases
churning that results in unrealistic even if also not outright
fraudulent manipulation of a company's financial status that in turn
is invoked by insiders to generate exorbitant but only short term
returns which then are claimed to justify exorbitant executive
It would be an understatement but a regrettably required one to say
that the SEC's performance especially since the mid-1980s has been
continually and increasingly worse than hapless and otherwise (at
best) lackluster. And from the perspective of a shareholder or other
investor who is not in a controlling position, the "Dodd-Frank"
amendments to the federal SEC Act are far from perfect.
Even so, it is not wrong to say that the SEC's authority has been
substantially enhanced and that, at least notably less unrealistically
than until passage of Dodd-Frank, the SEC's role now in serious part
addresses and increasingly in the future will include being "about
executive pay" (unless, of course, Dodd-Frank is repealed).
Given the nature of present day Real Politick, of who mostly
influences (purchases?) the passage of law and most influences
judicial elections and/or appointments, there may not be widely
liberally construed remedial provisions of law.
Nevertheless, some federal and (maybe more relevantly) various state
to state provisions of law often can be invoked and applied under
color of which meaningful recourse may and can be ordered and which,
even if short of that as a matter of formal law enforcement or
administrative agency ruling or (also less uncommonly) judicial
rulings, may and often do provide the context for not otherwise
achievable mutually agreeable compromise.*
* Most governmental administrative proceedings,
criminal prosecutions, and private party civil lawsuits
of all kinds are resolved by settlement and not tried.
Examples of underpinnings for recourse which may apply at either or
both the federal or state level include the following:
- A company's governing document (e.g., a corporate
certificate/charter and it by-laws) may provide the law theoretical
underpinnings for recourse;
- Even if not always, there may be a contractual basis for
recourse, e.g., pursuant to a shareholder agreement or, even if
investors are not corporate shareholders or, if they are but without
the benefit of a shareholder agreement, maybe pursuant to the
terms/provisions of the solicitations as a result of which they
- Some states whose courts or administrative agencies (e.g., an
Attorney General) would have jurisdiction over the company and its
controlling officer or group of controlling insiders have laws that
deal with these sort of matters;
- On a private-party/individually suable basis, a relevant
state may have a "[no] unfair trade practices" or "[no] deceptive
business practices" statute that would apply; and
- For closely held not publicly traded corporations or
partnerships, there may be state remedies for minority shareholders or
(even in some cases "limited") partners based on "no 'oppression' of
the minority" statutory provisions or, in some instances, common law
And while, again, this is not to say that such law enabled bases for
recourse are easy (much less only nominally expensive in dollars,
effort, and time) to invoke and apply, it would be a mistake to
assume that no recourse resulting from the sorts of scenarios you
posit for the sorts of persons you hypothesize would never be
available, albeit that what if any recourse will be realistically
obtainable ALWAYS will DEPENDS on which jurisdiction's (or
jurisdictions') law will apply (the answer to the "Where?" question)
and also on the SPECIFIC realistically provable relevant/operative
To clarify this. This does depend on the shareholders having more
voting rights than the "president", but they would have been very unwise
to have put in a major investment if they didn't have significant voting