I have written to Steven G. Farris, Apache's (APA) CEO, in order to request feedback regarding the strategic direction he is taking the company. So far, I have gotten no response.
According to Forbes, Mr. Farris was compensated $17.36 million in 2012, and he received nearly $70 million in compensation over the 5 year period ending 12/31/12.
During this same five year period, according to Apache's 2012 annual report, $100 invested in APA stock on 12/31/07 including dividends was worth $75.45 on 12/31/12. The same $100 invested in the S&P composite 500 stock index on 12/31/07 including dividends was worth $108.59 on 12/31/12.
APA stock underperformed the S&P 500 composite by nearly 44%, and Mr. Farris received $70 million in total compensation during this period of underperformance.
This is WRONG. I don't have anything against bountiful compensation. To the contrary, I believe that outsized compensation facilitates the American dream. But when an individual receives extreme compensation for gross underperformance, he or she needs to be called out.
No wonder Mr. Farris won't respond.
All I asked for was a brief reply covering a strategy for how he plans to get the stock higher, and Mr. Farris failed to respond. I believe this inability to communicate is symptomatic of other problems at Apache.
It has been my experience that excellent executives find the time for each and every necessary task (whether handling directly or delegating).
A portion of CEO compensation is derived from the CEO's responsibility to communicate with shareholders and other stakeholders. While I recognize that running the business is the CEO's primary function, and I agree that some shareholder/stakeholder requests can be disruptive, distracting and costly to the business. However, outlining and/or communicating a strategy for shareholder value creation is the polar opposite of distracting and costly, it is absolutely necessary, and it is the first thing that needs to be done in order for APA stock to move higher.
At over $17 million in total compensation last year, Mr. Farris is certainly compensated well enough to take a few minutes explaining the company's strategy to shareholders.
To the credit of Mr. Farris, following an email request for information from BigRiverReport.com on March 5, 2013, Mr. Farris purchased 2500 shares of APA at $72.92 on March 6, 2013 ($182,300). I don't know whether or not the purchase was pure coincidence or perhaps the purchase was a form of response to the article titled Apache, Show Us The Money which was sent Mr. Farris on March 5, 2013, prior to publication.
I sent another email communication to Mr. Farris on Thursday, March 14, 2013 requesting an explanation of the company's strategy. In this email, I offered that I would interpret a 'no response' in conjunction with his recent APA stock purchase as "what we are doing is working, so we are going to keep doing what we've been doing".
Clearly, the only people that the "what we've been doing" strategy is working for, is a few executives at the top. During the past five years, Mr. Farris has gotten richer while the shareholders have gotten poorer, and the Apache employee's jobs and benefits have become much less secure.
American business ought to reward excellence to fullest extent imaginable, but it is egregious for any company to reward failure in such an extreme form. The board has a duty to the shareholders and the employees.
When a business like Apache is growing, it is hiring employees, drilling new wells, creating a long list of offshoot jobs in transportation, lodging, food service, oil field services, oil field tools and equipment service and manufacturing, ect. When a large company like Apache is creating shareholder value, everyone in the economic circle is benefiting, and the CEO is earning his compensation.
Here is a hypothetical example used to demonstrate the value of CEO compensation: let's use the performance of the S&P 500 composite during the five year period 12/31/07 - 12/31/12. If Apache would have matched the S&P 500 composite and returned only 8.6% during that very difficult five year period, the stock would have added roughly $3.6 billion in shareholder value. The $70 million Mr. Farris received would have been less than 2% of the value he created, probably a bit over compensated, but it was a very difficult economic period, and it would be very palatable for all of the stakeholders to consider the compensation earned.
In reality, Mr. Farris lost shareholders roughly $11.4 billion during the period from 12/31/07 - 12/31/12, and he further punished all of the stakeholders by taking nearly $70 million in total compensation. How is this even possible!
When shareholder value is being destroyed, employee jobs are in jeopardy, employee benefits are in jeopardy and the shareholding public is losing money which could otherwise be used to stimulate the economy through the purchase goods and services.
Mr. Farris does not deserve extreme compensation, he deserves the opportunity to right the ship immediately or be replaced.
The American economic system is built on business success and sustained through shareholder value creation. During the great recession in 2009, we saw what can happen when the majority of businesses in the S&P 500 are losing value: jobs are lost in mass; the Federal, state and local governments no longer have sufficient receipts to meet obligations; deficits soar; savings and retirement funds are lost; company benefit plans are jeopardized; fear becomes all consuming; economic activity slows to a crawl; and the entire American system is exposed to total devastation.
Yes, the S&P 500 CEO's have an enormous responsibility to create value, not only for the sake of the shareholders and the immediate stakeholders, but American businesses must create value in order for America itself to continue to exist as it does today.
Let's give CEO's their due compensation when they earn it, but it is essential that we call them out when they don't.
Disclosure: I am long APA.