Zuckerberg Spent Your Money On What???

Why do publicly traded companies have a Board of Directors?

The answer is to represent and protect the interests of the shareholders who collectively own that company.

A key responsibility of the Board is appointing a CEO to run the company for shareholders and then monitoring the job that the CEO does.

Unfortunately, quite often the Boards of our publicly traded companies act as little more than “yes men” to the CEOs that they are supposed to be keeping an eye on.

The result is a massive waste or misappropriation of cash that belongs to shareholders.

Examples of this happening are endless…

Mark Zuckerberg — His Security Is Something He Cares About!

I don’t know if you’ve heard, but apparently Facebook isn’t all that worried about protecting your information.

Approximately 87 million people whose data was illegally used by Cambridge Analytica know all about that…

However, when it comes to CEO Zuckerberg, security is another matter entirely.

Facebook’s proxy statement recently revealed that in 2017 alone, the company spent $8.8 million on Zuckerberg’s security and travel.

I feel like you could hire the entire roster of UFC fighters for a year and spend less.

Compare that $8.8 million to the $317,000 that Apple spent on security and travel for CEO Tim Cook, and you can’t help but think that Facebook’s Board of Directors needs to start asking some questions…

John Thain — Talk About Horrific Timing!

In 2008, the financial world was falling apart and Merrill Lynch was falling apart along with it.

John Thain took over as Merrill Lynch’s CEO early in 2008, well aware that the company was in major trouble.

His first order of business — to remodel his office to suit his specific tastes, of course.

After flipping through a few catalogues he decided what he wanted. The cost of the remodel came in at $1.2 million.

Included in the $1.2 million remodel was:

  • A $1,405 trash can
  • A comfy $87,000 rug
  • A George IV chair for $18,468
  • Curtains for $28,981
  • A pair of guest chairs for $87,784

In any environment, this is obviously a terrible waste of shareholder cash. But in the middle of the financial crisis — when the company’s survival is in question — this is beyond unbelievable.

Merrill eventually was taken out by Bank of America for peanuts at the bottom of the banking collapse, while Thain was released from duty after it was revealed that Merrill had lost $15 billion in Q4 of that year alone.

I hope he got a few naps in on that rug before he left.

Aubrey McClendon — Sure We Will Buy Your Maps

In the past decade, it’s hard to beat the former Board of Chesapeake Energy for negligence in its duty to shareholders.

The Chesapeake Board let CEO Aubrey McClendon do anything that he wanted.1

Let Aubrey use Chesapeake accountants and engineers for $3 million worth of personal work?

No problem.

Spend $108,000 on a private jet that McClendon’s family took for a European vacation?

Sounds reasonable

Buy a $12 million antique map collection from Aubrey because he needs cash to make a margin call?

OK.

McClendon knew what he was doing. He had the Chesapeake Board stacked with his friends and he showered them with compensation and perks. Chesapeake’s bank accounts were there for whatever McClendon wanted to use them for.

As Investors, these are the types of companies we need to stay away from.

Here Is A Company That Is Doing It Right

Sleep Number Corporation (SNBR) isn’t the most exciting business in the world. As you can guess from the name, this is the company that makes the Sleep Number mattresses that many people swear by.

While maybe a little dull, the Sleep Number business is a solid one. The company has generated $50 to $60 million in net income in each of the past three years and it generates considerably more than that in cash flow.

What I especially love about Sleep Number is what the company does with its excess cash — they return it to shareholders by the bucket-load.

Over the past three years alone, Sleep Number has spent $382 million repurchasing shares.

Those repurchases have reduced Sleep Number’s outstanding share count from 54.2 million to 38.8 million — a reduction of an astounding 29 percent!

In just three years, Sleep Number’s Board has reduced the shares outstanding by almost one-third, thereby giving each remaining shareholder a significantly larger interest in the cash flows that the business generates.

This disciplined use of free cash flow is so much better than letting a CEO waste it on unnecessary expenditures or a senseless acquisition.

This is a company that I would be interested in owning…

Now, last night SNBR missed analyst earnings estimates which caused the stock price to tumble after hours. However, the company did increase their planned share repurchases to $75 million — up from $50 million last year — and they also reiterated its earnings guidance for 2018.

Therefore, I do not foresee the stock staying down for long.

For now, let’s keep this company on our short-list, and if it bottoms soon we can hop in for long-term gains.

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley
Financial Analyst, The Daily Edge
EdgeFeedback@AgoraFinancial.com

1Special Report: The lavish and leveraged life of Aubrey McClendon, Reuters

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