mv_ufanisi wrote:VituVingiSana wrote:mv_ufanisi wrote:This is one of those kind of investments where the people running the show will win regardless of whatever happens.
It's a game where at the flip of a coin,
Heads I win, Tails you Lose.
It's actually quite similar to how the guys at Centum were earning huge bonuses while shareholders have lost heavily. The management faces no downside when shit hits the fan but claims bonuses based on unrealized real estate "appreciation". When the real estate takes a hit of course they do not pay back the bonuses and the carry that they earned in the hey days. Lack of skin in the game by the management should be a huge warning signal to any serious investor.
Not defending the huge bonuses at Centum but if you read (not skim) the Annual Report, the compensation is based on "cash returns" not "unrealized gains" though I may be mistaken.
Perhaps with DJ CK's ill-health and death the results have not been released yet but Centum has until 30th June. Let's see what they present.
All I'm saying is that if the returns available to management are materially different from the ones available to shareholders, then DO NOT invest.
In Centum, shareholders have seen a steady drop in the price of their equity while during the same period, management earned huge bonuses.
The only sensible compensation mechanism to do would have been to tie bonuses to the performance of the Centum share so as to ensure that management and shareholders are always in the same boat.
It's that simple.
Even better would be to ensure that management takes a cut when the share goes into loss territory just like shareholders do.
That way, management and shareholders are truly in the same boat.
But there's a lot of suckers out there who can't keep their eye on the ball i.e. shareholders returns. Everything else is noise.
The problem with with compensation schemes/plans is determining the ideal structure. The price of the shares may not reflect value of the shares. This could go either way i.e. over-priced or under-priced.
The price could outrun intrinsic value (think Tesla) or lag (think of numerous firms including Berkshire Hathaway) the value.
Warren Buffett on executive compensation
https://www.gurufocus.co...utive-compensation-pt-2
For Cytonn, as a private firm, we do not know how the compensation of the executives works.
It seems clearer for Centum.
For ARM, PP was compensated well, but he also had most of his wealth in ARM shares. He lost all/most of the latter so in a weird way he was sort of aligned with shareholders.
Now to tackle "Shareholder Returns".
The challenge is these depend on the period chosen. Safaricom for a while (2-3 years) has an awful Total Shareholder Return. Then it exploded.
EABL has great shareholder return for a specific period (2002-2007) and then it imploded.
Ultimately, the firm has to perform well financially regardless of the share price and distribute the profits in some form be it via dividends, share buybacks or ultimately a sale of the firm eg KK.
Greedy when others are fearful. Very fearful when others are greedy - to paraphrase Warren Buffett