Despite their advanced degrees and lavish compensation structures, execs sitting in corporate suites could actually be wealth destroyers, not creators. In many respects, that's because they are delusional about the world outside their Uber car pickups and catered lunches. Insulated by a cast of "yes" men and women and hiding behind corporate jargon passed down by generations before, CEOs, CFOs and COOs could easily forget one crucial thing: They were put in prominent posts at public companies to drive value for shareholders.
That duty doesn't mean adhering to some sort of buzzy restructuring plan for five years hoping it leads to juicy profits, when in truth the numbers each quarter suggest the initiatives are failing. It also doesn't mean blowing hot air at stock analysts and investors on earnings calls, voicing smug answers designed to dress down analysts trying to do right by their firm's clients or to prevent a portfolio meltdown. Investors deserve better since they are paying a premium for "top leadership."
At public companies with market values of more than $1 billion and that had filed proxies by April 30, the average pay package for the top 200 chief executives was about $22.6 million last year, According to research by Equilar. In 2013, the number was an equally jaw-dropping $20.7 million. The total from 2014 was the highest amount since the firm began tracking compensation in 2006. Where does this type of coin come from? Salary is an operating expense that bites into precious operating income. Exercised stock options eat into net profits -- and the thirst to receive more options often leads to the creation of suspect business practices buried in proxies.
Want to know why execs at leading companies are petrified by the sheer existence of activist investors like Carl Icahn and Bill Ackman? It's because they are being called out on their country club excesses and suspect turnaround plans that are usually endless in time and useless to the bottom line. Obviously, you are unlikely to have Icahn money handy to inflict changes at the executive and board levels. But, what is at your disposal is the power to identity delusional management that could go onto rain down serious pain to your net worth. I think department store retailer Kohl's presents a lovely case study.
Sign #1: Ridiculous, Self-Serving Turnaround Plans
Right from the start, if a company has a restructuring plan it's a red flag. It implies that the company's cost structure has gotten out of hand likely due to, yes, delusional management. Or it suggests that, yes, delusional management has been incapable of meeting the needs of customers. Subsequently, market share is lost, requiring more money to be spent on research and development. Restructuring plans that project lofty five-year cost savings goals and big sales improvements are nothing more than execs trying to show shareholders they have areas to enhance, which could yield stronger earnings. They want the benefit of the doubt of investors.
As silly as this may sound, my experience has taught me that a pompous-sounding restructuring plan hints at delusional management, or an inept group of highly paid people that need to be tossed aside.
At Kohl's (KSS), which for years has over-promised and under delivered on sales and earnings guidance under existing management, its turnaround plan is called the "Greatness Agenda." For real? I think it's worth seeing how this turnaround plan was discussed on the latest earnings call.
"Number of transactions were flat to last year, but that is a significant improvement over our longer-term trend, as our Greatness Agenda initiative gained traction."
- My Take: if this plan were so great, why didn't more people buy more items in the store?
"It's been more than a year since we introduced the Greatness Agenda, our multi-year plan to be the most engaging retailer in America. The Greatness Agenda was built on five pillars. Amazing product, incredible savings, easy experience, personalized connections, and winning teams. These concepts are fundamental to the way we do business and we're continuing to approach them in new ways, ways that are inspirational, customer-centric, disruptive and often surprising."
- My Take: Kohl's first quarter same-store sales badly lagged J.C. Penney's (JCP). If Macy's was able to remove the currency effect at its flagship stores, it would have showed stronger comps in regional areas than Kohl's in the quarter. So, a year into this "Greatness Agenda," Kohl's is still not producing any great sales.
Sign #2: Execs Are Blind to the Fact Their Stock Is Publicly Traded
Sometimes the stock market overreacts to events. A company beats on earnings by a nickel, lifts full-year guidance and yet the stock falls by 5% on the session on one squishy comment by an executive -- that may be an overreaction. But the stock market is truth in my eyes, a pure form of value determination. So when a company posts a 1.4% comp increase, and estimates were for 2.6%, and the stock tanks 13% on the day (which happened to Kohl's Thursday), chances are the market has a darn good reason for its discontent. Delusional management will naturally try to disagree instead of taking responsibility and moving on.
Here is an example of Kohl's execs being blinded by their own hubris.
"Just in listening to the questions, I get the sense that there is some disappointment in our results and to be totally honest with you the management team, I think we had a great quarter. We were basically right in line with our expectations on sales.
So we're actually pretty excited about the quarter we had, and I think I would just reinforce again what Wes said, which is the bold moves in the Greatness Agenda are working, and if anything we're getting more excited about them as we look forward over the course of the next three years."
Sign #3: Smug Toward Stock Analysts
The primary role of a well-paid stock analyst at an investment bank is this: Take the 10 companies in their coverage universe and imagine they are running them day to day. By pretending to be CEOs at 10 companies, it equates to knowing every itty-bitty piece of an operation and how changes in sectors and the economy could alter the performances of those itty-bitty business pieces. Although the stock analyst often writes concise research notes for clients, don't think for a second they haven't worked through complex details of a business behind the scenes. Research teams are pretty substantial in size, and robust in sharing ideas.
When execs forget they aren't the only ones good at assessing their business (note: analysts will tend to go on to work at the companies they cover because they know them so well), they tend to take shots at analysts just trying to uncover the truth. The antics, many times, are execs seeking to sound very technical as to divert the analysts (and investors') attention from a hot-button issue.
Here is Kohl's doing this:
"Sometimes you guys have the tendency to oversimplify things with the two- and three-year stack comp. We have a lot of marketing tools in our arsenal to try to drive business even if the comp comparisons are difficult. That's what we get paid to do. So I think we'll come up with a good marketing calendar that will allow us to get that comp for the 1.5%, 2.5% for the entire year."
- My Take: Avoid Kohl's shares.
What to Watch this Week
The market is on fire again as a confluence of sour macro news has pushed out the expected timing of Fed rate increases. I would be looking for any upbeat data, as it would probably upset this "bad news is good news" trade that Fed chief Janet Yellen set in motion weeks ago with her valuation comment. Home Depot's (HD) earnings call tomorrow morning is a must-listen; if management tells us May has started well, it could be an early indication of better housing and consumption data in June.
At the time of publication, Sozzi had no positions in the stocks mentioned.