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 dividends.
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.
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 detail.
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 relevant place.
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 regulations.
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 above.
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 compensation).
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 invested;
- 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 principles
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 facts.
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 rights.
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