Unfair I plan on writing a series of posts explaining how unfair dual class shares are for small shareholders.
Part A Reitmans 2014 – 2019
A couple of weeks ago there was a press release from Concerned Shareholders of Reitmans. I bought a few thousand RET.A shares from some nameless faceless people who were selling them. Every day nameless faceless people are buying and selling. It simply shows up as Volume. I could easily imagine over a decade ago, there was a retail investor who scrimped and saved for his childrens education named David. He was a hard working husband and father of 2 children. He read and applied Peter Lynch's Beating the Street - How to Use What You Already Know to Make Money in the Market. His wife shopped at Reitmans so he began researching the company.
David was not a sophisticated investor but he had a couple of “Rules of Thumb”.
1st was stay away from the dodgy Venture Exchange. Buy TSX listed stocks.
2nd Buy established companies that pay a dividend.
In 2014 Reitmans was listed on the TSX as RET and RET.A which was traded much more often. The company had been around for decades weathering all sorts markets like the Great Depression, WW11, Oil Crisis, Sky high interest rates, Quebec radical politics and paid a $0.65 cent dividend. He bought 2,000 shares of RET.A at $12 per share as there was trading volume. RET did not trade much. He figured this $24,000 investment would help pay his children's future university tuition.
Unfortunately the dividend was cut in 2015 to $0.20 a share then on December 4, 2019, the Board decided to suspend the quarterly cash dividend and RET.A traded down to $1.20. It felt like without a dividend his non voting shares were a scam and there was nothing he could do about it or the performance of the company. He could not vote nor attend meetings. It felt wrong that there were more non voting shares than voting shares. The 2015 to 2019 cumulative EPS was negative, David was down 90% and there was no longer a dividend. He figured things couldn't get any worse so he held the shares. Little did he know what was around the corner as things were about to get even worse...
Part B 2020 onwards will be a separate post.
My goal in Part A was to try and paint a picture of a minority shareholder. People who work hard to save money and invest in Canadian companies.
Dickerson famously wrote “The importance of the corporation in the economic system can scarcely be exaggerated. It has been and remains the chief vehicle of economic advance, and its influence in the society in which we live is pervasive.”
While public corporations are vital to our economic system they do have their challenges. Investors often worry about management. In economics this is called the Principal Agent problem.
For example, a company's stock investors are principals who rely on the CEO as their agent to carry out the business in their best interests. That is, they want the company to be profitable, stock to be bought back when it is below intrinsic value and a dividend paid. If the CEO opts instead to plow all the profits into expansion or pay big bonuses to managers, the principals may feel they have been let down by their agent.
Shareholders elect and delegate decision making rights to a board of directors who, in turn, appoint corporate managers responsible for the firm’s day-to-day operations. The managers are accountable to the board of directors, and the directors are accountable to the shareholders. What happens when management controls the shareholder votes but that does not align with the economic interests?
Every quarter from 2015 to 2019 Management got a report card that the Board of Directors should have looked at and acted on. Management was not successful during that 5 year period having lost money. They kept their very well paid jobs, fancy cars and gold plated pension while David lost his dividend and was down 90% on his investment.