Friday, September 11, 2009

Cato's Proxy Gems

Reading through Cato's (CTR) proxy, I came across this interesting tidbit:
Mr. Cato has pledged 1,740,525 of the Class B Stock to Branch Banking & Trust as collateral under a loan agreement.
So while Cato (the company) is dramatically unleveraged, it appears Cato (the man) isn't. The 1.74 million shares pledged to BB&T represents all but 3,000 of the Class B supervoting shares outstanding and 92% of Mr. Cato's equity in the company.

It must be one heck of a loan!?! The shares have a $32 million market value. This kind of arrangement has led to some interesting fireworks at other companies. Chesapeake Energy (CHK) comes to mind. Here's hoping ;-)

Perhaps this will be an incentive for management to consider a special dividend. John Cato owns approximately 6.5% of the actual equity in Cato, but he enjoys a 39% share of all voting rights thanks to the B shares. Even so, his relatively tiny equity stake entitles him to over $11 million of Cato's cash. That said, he may just opt to take it (or more) out in salary.

He's been trying very hard in recent years. John P. D. Cato's compensation over the last 3 years totals $6,641,416. For such a small company, that's ridiculous.

It amazes me how CEO/owners don't realize these practices ultimately hurt them where it counts. Supervoting shares, multiple classes of stock, hording cash, and an excessive compensation only hurt equity values. Mr. Cato should be more concerned with increasing the value of his ownership stake. After all, this is the surest way to ensure his wealth, leadership position, and enormous compensation. The passive aggressive means currently employed will backfire.

If you think having your name on the door or founding a company gives you the right to milk a company, then don't go public. Now there's a idea! Take Cato private. I know where you can get some of the money. But as it stands now, Mr. Cato gets the "benefit" of a private company, while only owning 6% of the equity.

This is wrong.

Cato has a classified board as well. They know all the tricks. A good CEO doesn't need such gimmickry to keep their job.

If Cato remains a public company, the "to do" list should include, but not be limited to:

1. Conversion (and cancellation) of all B shares to A shares
2. Declassification of the board of directors
3. Reduction of CEO pay
4. Payment of a special dividend not less than $100 million (or around $3.50 per share)

It's time John Cato quits playing games, aligns his interests directly with shareholders, and starts sharing the wealth.

If he refuses to realize the ethical quandary, perhaps the board should wake up and do its job! Do they have the guts? We'll see.

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