Annual meeting site could be a clue that trouble is brewing
If you buy stocks on your own but aren’t confident you are proficient enough with financial data to spot threats to your investments, here’s one easy test that even a novice can master: Watch if a company you own schedules its annual meeting far from its headquarters.
The practice often means a company is hiding from its investors by picking a location too far away for critics to show up and vote or ask tough questions at the meeting. This simple test can signal to shareholders when trouble is brewing behind the scenes, according to a study done by finance professors David Yermack of New York University and Yuanzhi Li of Temple University.
They found that companies that leave their home turf and schedule annual meetings more than 150 miles away often end up reporting disappointing profits within six months.And because disappointing earnings, other unexpected bad news or internal strife can’t be hidden indefinitely and can lead to losses for investors, the researchers suggest shareholders pay attention. It’s an early warning device that can help investors look deeper into the possibility of losses in their investments.Firms that held meetings 1,000 miles from their headquarters ended up, on average, with shares underperforming the stock market by16.5 percent over the next 126 trading days or six months, the researchers said.If the meeting was50 miles from a headquarters and more than50 miles from a major airport, the performance was about 22.7 percent below the stock market average over the next six months.Moving meetings far from airports can keep savvy investors, as well as hecklers, from making the trip. It also can control who shows up to vote on decisions like whowill be on the board ofdirectors.Chief executives typically like to have a board that will be on their side.Companies are required by federal and often state regulations to hold annual meetings, where executives update shareholders on how their investments are doing. And it’s common practice at each of those meetings to have a question-and-answer period, when anyone who owns a share of stock in the company can go to the microphone and ask a question.Some gadflies go from meeting to meeting to challenge companies on issues such as environmental policies andexecutive pay.Also, there can be tough questions onbehind-the-scenes issues that will bubble up soon in company operations and be reflected later in the quarterly earningsreport.The media also attend meetings, and questions can embarrass executives.For example, the 2013 McDonald’s Corp. annual meeting received widespread media coverage after Hannah Robertson, then 9, took the microphone and told company Chief Executive Don Thompson, “It would be nice if you stopped trying to trick kids into wanting to eat your food all the time.”“The CEO’s response, that, ‘We don’t sell junk food,’ was ridiculed by commentators,” the researchers said in their study, published by the National Bureau of Economic Research.Companies sometimes try to avoid embarrassment by limiting questions to a short period.The researchers said that in 2013, Wal-Mart allowed only 15 minutes of questions in a four-hour annual meeting when it “also obtained a temporary restraining order against labor unions and others in an attempt to pre-empt picketing at the meeting site. Bank of America at its 2012 annual meeting displayed a running timer on a video screen to limit each questioner to two minutes, after which a chime sounded and the microphone went dead.”But moving to distant locations isn’t just about keeping protesters away.“We find that managers schedule long-distance meetings when the firm is experiencing adverse operating performance that is not already known to the market,” the researchers said.They analyzed 10,000 annual meetings scheduled from 2006 to 2010, watching for those who scheduled their meetings at inconvenient times and locations for shareholders.They began their research after talking with a European activist shareholder who claimed that he could forecast poor performance in a company when executives “behave evasively during their shareholder meetings.”He became suspicious when managers answered questions incompletely, cut short chances for shareholders to speak, refused to recognize certain speakers or excluded controversial items from the agenda.
Gail MarksJarvis is a columnist for the Chicago Tribune.