Office Hours is back! 7/30, 2-3pm EST. Check the Forum for more details.

When Was I Radicalized? (Boeing edition)


To receive a free full-text email of The Zeitgeist whenever we publish to the website, please sign up here. You’ll get two or three of these emails every week, and your email will not be shared with anyone. Ever.


Dick Fuld

That’s Dick “Gorilla” Fuld, former CEO of Lehman Brothers, who oversaw a criminal fraud conspiracy that went by the name of Repo 105.

Dick Fuld never saw a courtroom, much less a jail cell.

When was I radicalized?

When Dick Fuld walked away scot-free from Lehman with half a billion dollars in cash comp and stock sales during his tenure.

I thought of Dick Fuld today when I saw this picture and read this article.


Prosecutors Face Complex Path to Charging Boeing Over 737 MAX   [Wall Street Journal]

To bring a successful criminal case against Boeing itself, prosecutors would have to show that executives repeatedly concealed or ignored the 737 MAX’s engineering problems, experts said.

And there is a larger economic and political component: A corporate indictment and potentially huge sanctions must be balanced against the economic and national-security risks of incapacitating the country’s second-biggest defense contractor.


That’s Boeing CEO Dennis Muilenburg, about to testify before Congress about the 737 MAX.

The article is correct, of course. There’s no way that the Justice Dept. will ever bring a criminal case against Boeing, not one that hits top management or really shackles the company.

And I know that Boeing said today that Muilenburg won’t get a bonus or (more) stock grants until the 737 MAX is flying again, but this article got Radical Me thinking …

I wonder how much money Muilenburg and his management team and his board of directors have pocketed since he took over as CEO in 2015 and Chairman in 2016?

I wonder if executive compensation practices have changed over that span since … you know … Boeing started buying back nine billion dollars of stock every year?

Tell you what, I’ll make it easy and I won’t even count the cash compensation of Boeing management since 2016. I’ll just stick to the direct value of the sterilized stock options they exercised and the restricted stock units they were vested. And I won’t count any compensation of any sort here in 2019.

Over the 3-year period 2016 through 2018, Boeing employees received newly issued stock that’s worth $4.9 billion today. There was another $3.5 billion worth of stock issued to the Boeing pension plan, which was immediately sold into the open market.

As a result, $5.4 billion of the $25.2 billion in stock buybacks that you thought was a “return of capital” over that span was actually a USE OF CASH to either buy shares directly from management or mask the dilution of non-management shareholders.

In 2017 alone, the one good stock-performance year Boeing has had in a decade, $3.8 billion in buyback activity went to sterilize new stock issuance. That’s 29% of cashflow from operations for the year. The board totally reconfigured their stock compensation system to accomplish that. You know, the board that Muilenburg took over the year before.

And as they say on Wheel of Fortune, once you buy a prize, it’s yours to keep. There’s no clawback here. There’s no repercussion over the 737 MAX, either civil or criminal, for Muilenburg and crew. The only thing the 737 MAX debacle is going to make more difficult is for these same guys to pocket ANOTHER fortune.

And yes, some portion of this stock-based comp went to rank-and-file Boeing employees … I figure 5-10% is a good rule of thumb for most S&P 500 companies and their employee stock ownership programs (ESOPs). The balance went to employees as part of whatever employment agreement they might have, and the Boeing 10-Ks are silent on the distribution profile of that. But remember, I’m not even counting cash comp here. This is three years of stock comp for the management of an American icon of a company that had two so-so years and one really good year.

Is Muilenburg a billionaire from being a Boeing management lifer?

A guy who says his top management “insights” are:

“React quickly. Events can change everything. So must you.”

“Know your team. What really matters to them, on every scale?”

“Chart the course. What should the next 100 years look like?”

No, he’s not a billionaire. He’s just a centimillionaire CEO of a Too Big To Fail company.

LOL.

Yeah, It’s Still Water.

It’s the greatest transfer of wealth in 100 years. Not to founders. Not to visionaries. Not to inventors. Not to entrepreneurs. Nope … to managers.

This is the story of every S&P 500 company over the past five years.

Oh yeah, one more thing for the “Yay, Stock Buybacks!” crowd.

Over the past 20 years, Boeing has NOT bought back stock in two of those years. That was way back in 2002 and 2003, back when the top management and board jobs were just a twinkle in Dennis Muilenburg’s eyes.

Wanna guess what the total value of exercised stock options by Boeing management was in the years where they did NOT have stock buybacks to sterilize the issuance and so had straight shareholder dilution?

In 2002, with zero stock buybacks, the total value of exercised stock options was $31 million.

In 2003, with zero stock buybacks, the total value of exercised stock options was $19 million.

It was hundreds of millions in the years before that, when they had stock buybacks.

It was hundreds of millions in the years after that, when they had stock buybacks.

It is BILLIONS of dollars today, as Dennis Muilenburg cranks up the buyback machine to its current record levels.

I believe it is impossible to separate the modern management practice of self-enrichment through massive levels of stock-based comp from the modern management practice of investor placation through massive levels of stock buybacks … without regulating one or the other practice.

But I’m all ears for any ideas.


To learn more about Epsilon Theory and be notified when we release new content sign up here. You’ll receive an email every week and your information will never be shared with anyone else.

Comments

  1. When do the marches start? Yellow Vests? Tires burning in the streets? Oh yeah they do that in Argentina, not Murica! Yay Capitalism!

  2. Avatar for jlmh jlmh says:

    Really, buyouts fail on a simple question: Why is it better to give company money to share sellers rather than to shareholders?

  3. Go Ralph Tnader!!

  4. Slap top management with serious prison time. After a trial of course. That is more likely to change company behavior than levying huge corporate fines while letting senior management off with scant punishment. “Privatizing gains and socializing losses” reeks of well, sadly post-modern capitalism/plutocracy.

  5. IMO share buybacks should be prohibited, for just this reason. The grant sterilization issue is probably why so many buybacks are done near stock price peaks. Also, share based compensation (which might become less attractive) should have a long vesting period, at least 5 years (if not the 100 years that Muilenburg claims to be his planning horizon lol).

  6. Absolutely drives me nuts when companies BORROW money for stock buybacks to reduce share counts to drive up EPS. Everyone knows that everyone knows that debt (esp non-productive debt) in lieu of equity weakens companies…right? If I were king for a day, the C-suite would not be judged for comp on EPS but Earnings as a Percentage of Enterprise Value (equity plus debt). You borrow $1b for a $1b stock buy-back, share count drops, but Enterprise Value remains the same…no smoke and mirrors financial engineering. Just sayin’.

  7. Agree. And they were illegal, up until 1982 (SEC Rule 10b-18). I’ve heard the (weak) argument that halting stock buybacks would prevent a public company from working towards eventually going private. If a company wants to take itself private, let them reverse the process and do an LBO. Stock buybacks have been weaponized, and there are now more cons than pros in this type of compensation.

  8. But Ben - I think even you’d admit that this is absolutely rational behavior by private sector actors in response to terrible public sector policy. Why should we regulate private sector behavior? Why not “regulate” this horrible government (read Fed QE/balance sheet expansion) policy to eliminate the incentives for this type of activity. Regulating the private sector on exec comp/share buybacks without getting to the root problem will only result in the excess liquidity making its way into another sector, which you’ll then advocate regulating…rinse/repeat.

  9. Stock buy backs used in this way are just a symptom.

    There are two problems.

    1. There’s no way that the Justice Dept. will ever bring a criminal case against Boeing, not one that hits top management or really shackles the company.

    2. Boards which are supposed to be there in order to represent owner interest, does nothing of the sort and has become part of the management.

    Without addressing 1, you will continue to get management that does bullshit things.

    Without addressing 2, you will continue to get management that does bullshit things.

    Killing buy backs would just cause management to get more creative, and even less transparent. At least you can see the bullshit now.

  10. Avatar for bhunt bhunt says:

    I think we can walk and chew gum at the same time. Yes, we should work to fix “the root problem”, which I agree is a flood of too-easy money for corporations and the super-wealthy. I ALSO think we should do what we can to stop this egregious real-world repercussion of the root problem, what I would nicely describe as legal embezzlement and less nicely describe as legal looting.

    There is no permanent fix to the agency problem! All we can do is see its new forms with clear eyes and redress it as best we can with full hearts.

  11. Avatar for bhunt bhunt says:

    Yes, buybacks used to mask executive comp are a symptom. They are a fever, not the underlying disease. But a fever can kill you, too.

    I am NOT happy to even contemplate banning buybacks, which I would compare to dumping a feverish patient in an ice bath, and I am TOTALLY willing to consider alternative therapies. And maybe I’m way too worked up about all this. And maybe the shock of this therapy will give the patient a heart attack.

    But in my view, we’ve got to break the fever. AND we keep looking to treat the underlying disease.

  12. Thank you for the thoughtful reply Ben!

  13. I tend to agree with M P on this. It is very hard to make the case for more rules if the prospects for enforcement of those rules is not good. If enforcement authorities are not going to do their job (and there are countless other examples), why should we believe new rules will help? If anything, it could make things worse by deflating the outrage without changing outcomes. We would simply be saying “yay rules!”

    I also have a problem with prohibiting an activity like stock repurchase that is not inherently bad. If a company has strong cash flows but limited near term growth prospects, and the stock happens to be weak, repurchasing shares is a perfectly sensible option for deploying cash. Further, restricting activities that are not inherently bad would create a horrible precedent for all kinds of other activities. Should we reinstate prohibition simply because alcohol can be used to excess? I don’t think so.

    Perhaps a hybrid solution could be to prohibit only buybacks that are used to immunize shares related to executive compensation. I wouldn’t have a big problem with that, but I’m not sure it would change much.

    One core problem is that the proliferation of shares used in executive compensation is essentially a tax arbitrage, right? If all non-cash compensation were also taxed at the same rate as cash compensation I’m guessing there would be a big re-think about exactly how much shares really “align interests”.

    Ultimately, I think shareholders need to force these issues themselves which I suspect they will only do after they have been burned so badly that they will come out with pitchforks and torches.

    All of that said, I completely agree that it is a sad thing that so many people are being rewarded so hugely for behavior that is marginal at best and criminal at worst.

  14. Avatar for jlmh jlmh says:

    To quote the article above:
    In 2002, with zero stock buybacks, the total value of exercised stock options was $31 million.

    In 2003, with zero stock buybacks, the total value of exercised stock options was $19 million.

    It was hundreds of millions in the years before that, when they had stock buybacks.

    It was hundreds of millions in the years after that, when they had stock buybacks.

    So it would seem that stopping buybacks cures quite a lot of the problem.

    Besides, it is not managment’s business to manipulate the share price. It is not their business to decide the investor’s asset allocation, and it is crazy to think that legitimate investors should have to compete with the company to buy shares in the market. It is also crazy to think that a company should use its’ cash to give sellers a better exit price. Is a company supposed to be loyal to it’s owners or to those who want nothing to do with it?

  15. I think I am missing something. I am not sure what party was harmed that had no recourse.

    There are few things as curious to me as shareholder lawsuits. I own your stock, and Mr. CEO, you did something stupid, or you’re an idiot, or you’re selfish. Now I am going to sue you. I am going to pay for my lawyer as Plaintiff, while your company that I OWN, uses my money to defend your actions. And if I win, you are going to pay me, but not out of management’s personal bank account. No, you are going to give me my own money. Yes–our local school district suing the state for taxes the state took in from us residents but withheld from the school–that’s worse, but still…

    If you own a company and you believe the person running it isn’t acting in your best interest, isn’t the solution obvious? And in a liquid traded stock, isn’t it easy?-- especially compared to a small private company where you have to fire them and find a new manager.

    If we are saying the harmed are those who died in a plane crash, that’s not going to be fixed by forcing ISOs to be fully taxed as ordinary income, or permitting dividends to be expensed like buy-backs instead of taxed first as profits. Sure the ‘not even pretending’ expected impunity by the 1% today, even from criminal acts, is astounding. But again, much different than an exec comp, C-corp capital allocation, or tax policy issue.

    If we are saying that the voting mechanism has been taken from shareholders, then I can get with that, and have plenty of thoughts. None include attempting to tie the hands of sociopath CEOs and expecting them to comply. From personal experience, the more rules / obstructions you put in front of a sociopath, the more exciting the ‘game’ becomes and the harder they try.

Continue the discussion at the Epsilon Theory Forum

Participants

The Latest From Epsilon Theory

DISCLOSURES

This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.

Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Epsilon Theory disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. This commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Epsilon Theory recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.