Some CEOs are bad because they spend way too much time and effort figuring out how to enrich themselves. Inevitably, they will siphon money from the company from taking an excessive salary, expensing “travel and entertainment” costs to the company, etc. etc. These CEOs tend to fill the board of directors with their cronies. What sometimes happens is that the board of directors has interlocking relationships with other boards, CEOs, etc. All the shady people know each other. It becomes a network of people giving each other favours and returning them. What ultimately happens is that the directors and CEOs want to maintain a status quo of insiders profiting from the company.
Of course, this won’t happen at every bad business. Some CEOs and board of directors are honestly trying to make money for shareholders. Unfortunately, the CEO simply doesn’t have the talent to run the company well. If the board of directors is honest, then there may be a reasonable chance that a replacement CEO will turnaround the company.
To figure out if insiders are trying to make money for shareholders, you simply need to look at insiders’ actions:
- How much insiders are paying themselves?
- Has the company purchased directors and officers’ insurance?
- Do insiders have a special defined benefit pension plan while rank and file employees have a defined contribution plan?
- Is the CEO and board of directors flying around on private aircraft paid for by the company?
In general, this is one of the reasons why I dislike companies with shady insiders. They tend to be bad companies that will (more often than not) stay bad. The worst insider networks tend to be found in junior miners, “chop stocks”, and stocks that start off as nanocaps.