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Understanding Financial Statements Income Statement Analysis Balance Sheet Analysis Cash Flow Analysis Shareholders' Equity Analysis Ratios and Definitions


Shareholders’ Equity Analysis

 - Are the stockholders really
    owners?


  - Do you know where your
    equity dollars are?

 - How comprehensive income
    can affect stock values

 - Watch out for your Dividends
 
 - Stock splits, dividends
    and reverse splits

 - Spin-offs, tracking stocks
    and determining new cost
    basis

 - Stock rights give board of
    directors more power then
    they are entitled to

 

 


Are the stockholders really owners?

During my youth, every May and June, when the annual reports and proxy statements were published, my father and I would read and discuss every company he owned. I loved to look at the pictures of the companies’ products and facilities; it helped me understand what the companies did, and gave me a sense of ownership. We actually read the proxy statements and voted for the directors and issues accordingly. One of the companies he owned was SCM. One year, they were in a proxy fight; one of the directors called our house and asked my father to vote his 400 shares a certain way. At the time, the director was also the Chairman of RCA! That was the way it was years ago; from a youth’s perspective, even the small shareholders felt as if they were company owners.

When proxy statements are mailed to me these days, I usually throw them out with the junk mail. Most investors spend around ten minutes reading their annual reports. I’m not even sure that “non-financial” type investors know what a 10K is.

Some companies, in their annual reports, don’t even show pictures anymore; moreover, some CEO’s feel they are doing the shareholders a favor by sending out hard copies of the annual reports. It seems that management has forgotten that the shareholders are the owners.  

Today many investors no longer feel a sense of ownership, and some even distrust the managers stewarding their assets.  

Corporate governance starts with shareholder involvement. In the recent past, I listened to a shareholder meeting of Elan in Dublin Ireland. I believe the turnaround of the company was the direct result of the blunt conversations shareholders had with management. Those shareholders were ready to spar. Their management team knows exactly how their investors feel. These types of active and vocal meetings are needed in the United States.

A few years ago, I was the CFO of a small public company listed on the American Stock Exchange. For a few weeks prior to the annual shareholder meeting, I prepared all my materials, memorized all the figures and rehearsed the script that the attorneys gave me to read. The meeting was held in a nice hotel a few blocks from the office. I was dressed in my best Hickey Freeman suit and Hermes tie. Everyone showed up: the management team, the auditors, and the attorneys; everyone but the investors. Almost no outside investors attended. To put salt on the wounds, the auditors had us do the entire script with practically no investors. This highlights one of the major problems with corporate governance in the United States: shareholders are not actively overseeing their investments.

Corporate governance is now coming to America from Europe, but not because of the corporate scandals and legislation publicized in the news. It’s being driven by a population that is getting older,   realizing for the first time that stocks are worth real money. The stocks are paying for their kids’ college education. The dividends received are being used to go out to dinner. This is the first time that the post World War II generation sees, for itself, the value of securities. Buying and trading stocks is one element of investing, but understanding their value is another aspect of owning stocks. It is like if one receives a large inheritance, it’s a good practice to take out a small amount and buy something. It makes one understand the value of what they have. This generation is just beginning to understand the value of wealth, and that stocks have real purchasing power. With the Internet bubble behind us, investors are starting to appreciate the monetary value of the stocks they have, and are paying more attention to the companies they own, and how they are managed. The emphasis has now shifted from trading stocks, to owning companies.

Corporate websites, live shareholder meetings available on the Internet, and access to SEC filings, are some of the new technologies that are reconnecting companies with their owners.

Investors, however, need to have an adult perspective on the realities of stock ownership. Shareholders have a financial interest in a company, but they are not “real” owners. Owners get monthly financial statements. Owners regularly review forecast and budgets. Owners tour facilities and meet with customers. Owners get involved in product development. Owners have inside information. They may even get a free T-Shirt or a company pen. Owners can have lunch with their families at the company’s cafeteria. Don’t be fooled by the rhetoric. Most investors have no input whatsoever in how a company is run. Shareholders don’t even have the right to set the CEO’s compensation. Most shareholders would not even be allowed through the doors of the companies they own. Why not open up the company’s corporate cafeteria to shareholders?  The biggest waste of corporate resources is not utilizing the skills, knowledge, and connections of its shareholders.

There is a difference between having a financial interest in a company and being an owner. That said, let’s move forward.

 

 

 

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