Much has been claimed in the corporate world about the benefits of advancing the interests of all stakeholders: customers, society, employees and investors. We have also advocated Quality Financial Reporting as a way to benefit stockholders and others by challenging management to voluntarily communicate openly and completely with capital markets.The rewards offered by these behaviors are lower capital costs and higher stock prices. A key to making any progressive corporate governance strategy work is a reputation that builds trust and reduces risk.
At the heart of QFR is the premise that managers have only two things to offer the markets: prospective future cash flows and information about those cash flows. It does not matter how good the real prospects are if the information is so tainted and lacking credibility that no one trusts it. Further, following generally accepted accounting principles isn't enough to gain that trust and meet those needs because it consists of politically compromised minimum standards.
Of course, transparent reporting (whether inspired by QFR or not) won't accomplish its benefits if management is up to no good. Fortunately, current regulatory disclosures spotlight many forms of self-serving or otherwise malevolent management behavior, including situations where managers have ascended to thrones and act like monarchs, instead of dutiful stewards pledged to preserve and enhance shareholders' interests. In these firms, value can be boosted only through real governance change. Once that trust is built, better reporting can do its part.
Poster child for abuse
Well, what prompted this diatribe? Like others, we are both direct and indirect shareholders in Comcast, and one of us recently received its annual report and proxy solicitation. Included in the latter were several shareholder proposals, all panned by the board. Because each of them challenged outrageously imperial governance schemes, we want to bring sunshine to bear on what's going on with this outfit. (Like most shareholder-sponsored proposals, these are unlikely to pass, especially in this situation, as you'll see in a moment.)
One calls for a moratorium on new stock options and amendments that reprice options or accelerate vesting. Even though much has been recently written about the ineffectiveness of options as incentives, Comcast's board brushes the shareholder's points aside.
The imperial scepter goes Whack!
Another proposes creating more accountability to shareholders by separating the board chairman's position from the chief executive's job. The directors replied, "Our board believes that we and our shareholders are best served by having Brian L. Roberts serve as chairman and CEO," and condescendingly claimed that they are independent and watching over owners' interests.
Whack!
A third dreamily calls for limiting any manager's annual compensation to $500,000. Fat chance; in fact, the proxy presents management's own proposal authorizing bonuses to Roberts as high as $12 million.
Whack!
A recapitalization?
The next proposal really boiled our water because of the frustration behind it, the egregious scale of the problem and the lame brush-off that was offered. This issue is in the neighborhood we were just talking about, where trust in management is so weak that it doesn't matter how good the financial statements are.
The proposal was introduced by an arm of the Communication Workers of America, the union that represents many Comcast employees. Their frustration is splendidly evident - as both employees and shareholders, they are immensely tired of the situation.
What they propose is simple: "a recapitalization plan that would provide for all of the company's outstanding stock to have one vote per share." Specifically, they complained that Roberts has a lock on the company because he owns "all of Comcast's 9.44 million shares of Class B common stock, which has 15 votes per share."
Further, the company's arrangement is that Roberts must retain 33-1/3 percent voting control at all times. To get this outcome, the voting power of each Class A share must be reduced whenever their quantity is increased. Based on the 2005 annual report, his Class B stock has 141.7 million votes; because the Class A shares must provide two-thirds of the voting power, they can't have more than 283.4 million votes. Since there were 1.36 billion of them, each carries about 0.2 of a vote.
It's clear that Roberts has a huge personal sandbox and he's saying: "Everything is mine, and aren't you lucky I'm letting you play with me?"
The CWA observed that the arrangement gives "Roberts one third of the votes with stock that represents less than 1 percent of the company's total market value," and rightly concluded that having two classes of shares chills the market's demand for the stock.
The board's inane reply gallingly harks back to when Roberts used to have 87 percent control, prior to the acquisition of AT&T Broadband in 2002, at which point the current one-third voting control agreement was put into effect.
Their pallid defense is predictable: "Our board believes that our historical success is owed in large part to the respected and stable leadership provided by" Roberts, and his father before him.
They cited accounting measures as achievements, but when it comes to stock performance, they compare Comcast stock with the S&P 500, but starting in 1972. With a few mouse clicks, we accessed a chart of stock performance since 2001. The S&P has struggled to a net 10 percent increase. And Comcast? It has fallen by 35 percent. Over the last year, the S&P is up 10 percent, while Comcast is down 18 percent.
For good measure, the Comcast board delivered this final point: "Under Pennsylvania law and our Articles of Incorporation, no recapitalization that affects the voting rights of our Class B common stock can be effected without the separate approval of Mr. Roberts, as beneficial owner of our Class B common stock."
One can imagine him sticking out his tongue and then raising his scepter to go Whack, whack, whack, whack, whack ... .
The accounting angle
You may be wondering what this muckraking stuff is doing in our column, so here's the angle - better financial reporting cannot cure all ills. In most cases, more fundamental reforms must be implemented before higher-quality reporting can work its magic.
If Roberts can't trust the markets to keep him on the throne to the point that he has to blatantly rig the voting, what would make him think the markets will ever trust him to make any decisions that don't benefit himself first and foremost? Instead of the credo "All for one and one for all," Comcast is operating under the motto of "All for one and all for one."
All stakeholders, including Roberts, would be so much better off if the playing field were not just level, but free of barriers and traps. Without a fair governance structure, Comcast's stock price will never reach a level consistent with its fundamentals. It's simply a matter of risk. When risk is present, whether from contemptible management schemes or reporting deficiencies, the stock price suffers. Contrary to the board's facile rationale, management dominance is putting a very heavy lid on value that keeps it from going higher.
The irony is that Roberts would be better off (economically and ethically) if he were to just let go and eliminate the uncertainty and other friction created by his selfish schoolboy attitude. Will he give up? Of course not. That would take much more courage and foresight than he's got.
In the meantime, his obvious selfishness makes the market use its own heavy scepter to go Whack! to Comcast's stock.
Paul B.W. Miller is a professor at the University of Colorado at Colorado Springs, and Paul R. Bahnson is a professor at Boise State University. The authors' views are not necessarily those of their institutions. Reach them at paulandpaul@qfr.biz.
