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Boardroom Power Play Stock Trading Strategy (36)
The stock market plays a big role in molding the board of directors of a public company, especially its membership and decisions. You do not have to be a member of the board to figure out some interesting things happening there. All you need is to assume that money makes the world go round, that people are out there to make a kill, and that a kill is impossible without control and insider information.
When a company is formed, it results either from one person or a small team with similar ideas and complementary expertise. Most new companies do not succeed for various reasons. Only a much smaller number make it to the initial public offering (IPO).
For a company that has a shot at IPO, the turning point arrives when a major investor wants to put down his money with its future. A major investor must be a multi-millionaire. Most likely, he is an established venture capitalist with good connections to Wall Street, investment banks, and mutual fund managers who want to underwrite his investment.
Before IPO, negotiations are reached about the composition of the board of directors. This is the most important decision because it is about money, control, and division of the pie. The following is the likely outcome:
The founder is to be the CEO and Chairman of the Board with a vested interest in company shares that will make his dream come true. A second founder may end up sitting on the board with similar vested interest.
A handful of top staff are promised a vested interest that will make them millionaires after IPO, but no board membership. The rest of the staff is promised unvested interest in company shares, which can only be sold after a certain period of time.
One or more venture capitalists sit on the board with vested interest. The firms that underwrite the IPO install one or more representatives on the board to exercise control. They of course are granted a vested interest.
Vested interest consists of a combination of preferred and common shares. The former are worth more for they represent the controlling rights to the company. Board members trade the common shares for profits while retaining the preferred shares so as to qualify for board membership.
The venture capitalists and underwriters recommend whom to be hired in key positions such as Chief Operating Officer, Chief Financial Officer, Chief Accountant, and Chief Counsel. These people, together with the CEO, will ensure control of the day-to-day business of the company and more importantly, the flow of insider information to the board members.
The number of shares to be issued is determined based on the estimated target prices after IPO. Too many shares will dilute or lower the price. Normally, the number of shares is limited to under 30 millions.
The IPO is an exclusive activity reserved for a handful of individuals and underwriting firms to ensure great profits. At IPO, some other big players may come in to buy up the shares. If not, the shares will be available to the public in the open market. In that case, the price is likely to drop.
As time goes by, board membership will change. A new member must fulfill one or both qualifications as follows: a major shareholder or its designated representative, and an indispensable person to the company.
The scenario just described shows where real power lies to ensure the board members will reap the profits first. In spite of this, human characters play an important part too besides money. The following illustrates:
Some founders have very strong personalities besides being indispensable. The two Google founders were able to make more common shares available to the public at IPO in a unique way. Steve Jobs wins most arm-twisting with the board on many issues because he and the future of Apple have almost become one in the public eye. Warren Buffett runs Berkshire Hathaway like his own private company because he succeeds in keeping the share price high (over $2000) and number low (under 15 million).
On the other hand, Carly Fiorina was sacked from Hewlett Packard for failing to see eye to eye with the board. Steve Jobs was once maneuvered out of the boardroom by John Scully, the CEO he personally hired. The husband and wife founders of Cisco left early and sold all their share holdings, saying that they did not want to work with people they did not like.
Author: stockfessor
Keywords: stock market invest share mutual funds retire finance
Added: February 28, 2009
This entry was posted on Sunday, March 1st, 2009 at 6:02 pm and is filed under value investing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
