Reading Management/Shareholder misalignment in financial markets

Misalignment isn’t a moral category; it’s a math-of-power category. Execs reveal what they optimize: control over fairness; stability of narrative over truth of cash.

Photo by Daniel Dvorský on Unsplash

1) How misalignment actually shows up (reality, not narrative)

A) Pay before performance (PBP)

• Revealed preference: outsized cash compensation and stock-based compensation (SBC) while total shareholder return (TSR) and return on invested capital (ROIC) lag peers.

• Tells:

  • Rising SBC as a percentage of revenue

  • Option repricing and evergreen stock plans

  • “Retention” grants following performance misses

  • “Adjusted” metrics excluding the cost of growth

• Outcome: management insulates its lifestyle; shareholders absorb dilution.

B) Empire-building over Returns

• Revealed preference: serial mergers and acquisitions (M&A) with declining ROIC, ballooning goodwill, and recurring integration charges.

• Tells:

  • “Strategic adjacency” rhetoric

  • Deal metrics highlight revenue, obscure post-tax cash flow

  • Earnouts reset repeatedly

  • “Transformational” acquisitions timed near bonus cycles

• Outcome: a larger organization increases internal prestige and budget control — but reduces per-share value.

C) Metric Gaming (Goodhart’s Law in Practice)

• Revealed preference: vanity key performance indicators (KPIs) such as gross merchandise value (GMV), “bookings”, or “adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA)” drift from economic reality.

• Tells:

  • Daily active users (DAU) / monthly active users (MAU) rise while average revenue per user (ARPU) and cash conversion stagnate

  • Net revenue retention (NRR) polished via discounts

  • Backlog stuffed at quarter-end

• Outcome: Narrative stability is prioritized over cash truth.

D) Cash Starvation / Capital Expenditure (CapEx) Vanity

• Revealed preference: capital expenditure (CapEx) and operating expenditure (OpEx) defend headcount or territory rather than hurdle-based returns.

• Tells:

  • Post-hoc return on investment (ROI) never audited

  • Cloud and software-as-a-service (SaaS) spend rising faster than revenue

  • “Platform rewrites” every 18–24 months

• Outcome: career safety and budget protection override shareholder fairness.

E) Anti-takeover fortifications

• Revealed preference: staggered boards, poison pills, supermajority voting rules, and golden parachutes.

• Tells:

  • Sudden adoption after a price drop

  • “Long-term focus” rhetoric spikes

• Outcome: control preserved regardless of performance.

F) Dual-Class Structures and Founder Worship

• Revealed preference: low-float Class A shares carry governance risk while Class B/C shares lock perpetual control.

• Tells:

  • “Founder control equals stability” narrative

  • Dual-class sunsets never occur

  • Buybacks used to offset SBC optics, not reduce share count

• Outcome: executive stability outweighs fairness to owners.

G) Related-Party Transactions

• Revealed preference: leases, consulting, or intellectual property (IP) licensing with entities tied to insiders.

• Tells:

  • Footnotes use euphemisms

  • “Market rate” claims without comparables

• Outcome: private siphons; public shareholders hold the bag.

H) Compliance Theater

• Revealed preference: “Toned at the top” presentations while restatements, auditor churn, and control deficiencies persist.

• Outcome: truth becomes a public-relations surface; stability becomes the key metric.

2) A hard-scoring rubric you can use (0–100 misalignment score)

Weight each category; higher = worse alignment.

1. SBC/Revenue % (last 12m)

   • <5% = 0, 5–10 = 5, 10–15 = 10, >15 = 15

2. Pay-Before-Performance Delta (CEO comp rank – TSR rank vs peers, 3 yrs)

   • ≤0 = 0, 1–2 deciles = 5, 3–4 = 10, ≥5 = 15

3. ROIC vs Weighted Average Cost of Capital (WACC) (3 yr avg)

   • ROIC ≥ WACC+300bp = 0; flat = 5; −1–3% = 10; <−3% = 15

4. M&A Goodwill % total assets (and rising?)

   • <10% = 0; 10–25 = 5; 25–40 = 10; >40 = 15

5. Metric Quality (Adjusted EBITDA Add-backs / EBITDA)

   • <20% = 0; 20–40 = 5; 40–60 = 10; >60 = 15

6. Anti-Takeover Stack (poison pill, stagger, supermajority, dual-class)

   • none = 0; 1–2 = 5; 3–4 = 10; >4 = 15

7. Buyback Honesty (shares outstanding ↓ while SBC ↑?)

   • OS ↓ >3% p.a. net = 0; flat = 5; ↑ = 10; ↑ while buybacks touted = 15

8. Related-Party Dealings

   • none = 0; minor = 5; recurring/material = 10; multiple = 15

Interpretation

• 0–25 = Aligned

• 26–50 = Caution (“yellow zone”)

• 51–75 = Avoid unless special case

• 76–100 = Short / Underweight

3) Field Diagnostics (Fast “Reveal” Tests)

• Capital allocation interview: Ask investor relations or CFO to rank buybacks, dividends, M&A, and organic reinvestment with explicit hurdle rates. No ROIC hurdle → red flag.

• Post-mortem discipline: Request deal scorecards for last three acquisitions (promised vs delivered net present value). None = empire-building.

• SBC truth test: “When will SBC / Revenue fall below X%?” If the answer cites “industry standard”, expect misalignment.

• Buyback math: Is share count shrinking net of SBC? If not, it’s optics.

• Board independence check: Count genuinely independent directors with capital-allocation expertise.

• CEO compensation: ≥50% tied to relative TSR over 3–5 yrs with clawbacks? If not, expect pay-before-performance.

4) Patterns by archetype (so you can pre-judge)

• Founder-king + dual-class: Pros — speed, long horizon. Cons — no governance recourse; watch for mission creep and cult KPIs.

• Private-Equity Roll-Up: Pros — discipline early. Cons — fee extraction, goodwill bloat, maintenance CapEx under-reported.

• Consultancy-Heavy Systems Integrator: Pros — revenue visibility. Cons — body-count growth incentives; productization lip-service; poor per-share math.

• State-embedded platform: Pros — sticky, policy-aligned cash flows. Cons — optics risk around surveillance; watch SBC and buyback honesty.

5) Edge Cases (Avoid These Traps)

• “We’re pre-profit; ignore ROIC.” Then SBC must fall and unit economics (customer-acquisition-cost payback, NRR, gross margin) must improve.

• “Buybacks show confidence.” Not if they ignore valuation — then they destroy per-share value.

• “It’s mission-driven.” Mission talk ≠ accountability. Real missions publish unit-level returns and clawbacks.

6) What “Good” Looks Like

• ROIC ≥ WACC + 300 bp through cycles; hurdle rates disclosed

• SBC / Revenue on a visible glidepath down; no repricing

• TSR-weighted pay (3–5 yr TSR + ROIC / free-cash-flow per share), clawbacks, post-vest holding

• Anti-cyclical buybacks with accretion math disclosed; shares outstanding declining net of SBC

• Governance: no poison pill, de-staggered board, dual-class sunset ≤ 7 yrs, insider cash buys

• Transparency: quarterly capital-allocation letters with deal scorecards

7) One-pager: The Alignment Quick Test

If management had to choose, would they pick:

• Their control or your fairness? Check anti-takeover + dual-class structure.

• Narrative stability or truth of cash? Examine add-backs + cash conversion.

• Their pay or your total shareholder return? Assess PBP, SBC, and buyback honesty.

If two answers favor management → pass or short.

TL;DR

Misalignment isn’t a moral category; it’s a math-of-power category. Execs reveal what they optimize: control over fairness; stability of narrative over truth of cash. Your job is to read the reveal, not the rhetoric. Score it, and remember: when incentives and ideals conflict, incentives win 10/10.

None of this should be considered investment advice.

Other articles I’ve written on investing:

• State-Embedded Investment Thesis (SEIT)

• Public-Facing Elites: using Myth-Making Avatars in Investing

• Investing in Stanford Graduates/Dropouts (Pattern Recognition)

• Short Selling: Weaponized against some companies but not others

• Why most investment advisors miss the forest for the trees

• Revealed preference (what systems do, not what they say)

• How people and systems handle complexity (investment implications)

• Filtering State-Embedded companies (how to pick)

• Overton Window Management in Investing

• Bitcoin vs. Palantir: A Two-Asset Hedge on Control

• Scandals often lead to grants for State-Embedded companies

• What inflation/real-rate band maximizes system stability with minimal consent drawdown

• Why Mainstream Media is pushing the debasement trade (Gold, Bitcoin)

• Investing lessons to be drawn from “Tower of Basel”

• Investing lessons to be drawn from “Princes of the Yen”

• What the financial system is designed to do (First Principles)

• Constrained Efficient Market Hypothesis (how Prices get made)

• Analyzing The Great Taking (systematic, global seizure of assets)

• How to exploit Portfolio Managers’ Soft Rules

• The Purpose of Mainstream Financial Media (read them like a book)

• Inept Public Officials vs “Genius” Private Avatars (Investment Implications)

• How speechwriters engineer consent (spot the tricks)

• Politics to Plain English: a decoder

• Current rails -> Regulated Stablecoins -> phased CBDCs (Investment Implications)

• Concrete Duopoly (faux-choice): Investment implications

• Predictive Programming: Product Roadmaps for Control Tech

• AI is the new School, but worse

Other articles I’ve written on Bitcoin & Gold:

• What most Bitcoiners are wrong about

• Why MicroStrategy’s best days are behind it & Saylor’s role in Bitcoin

• Why Mainstream Media is pushing the debasement trade (Gold, Bitcoin)

• Why Gold has been allowed to run (incentive-based analysis)

• Controlled Opposition Assets (to Bitcoin as MoE)

• How governments and institutions are domesticating Bitcoin

• How the Bitcoin cycle changes in the post-ETF era

• Why governments won’t attempt to ban Bitcoin

• My Bitcoin 5-Year Price Model (Containment Regime)

• Permissionless technology ≠ permissionless adoption (implications for Bitcoin)

• The fate of Bitcoin Treasury Companies (BTC-TCs)

• Bitcoin vs. Palantir: A Two-Asset Hedge on Control

• Game Theory: How Governments could delegitimize Bitcoin Maximalism