Annaly Capital Management, Inc. (NLY)’s Bloodless Coup

How do we know this? We know this because under the Securities Exchange Act of 1934, a company is obligated to disclose the salaries of its highest-paid executives.

Now, admittedly, this wouldn’t typically be a problem. A company can and should be allowed to pay its executives what its board of directors (which purportedly represents shareholders) determines to be appropriate.

But there’s a catch.

Following the wave of corporate fraud that led to the downfall of Enron and Worldcom, among others, the Sarbanes-Oxley Act began requiring companies to hold so-called “say-on-pay” votes every one to three years. The point was to give shareholders a nonbinding vote on whether or not they agreed with executive compensation levels. The frequency of the votes, moreover, would be decided in a separate nonbinding vote.

To get back to Annaly Capital Management, Inc. (NYSE:NLY), at its 2011 annual meeting, the company’s shareholders voted overwhelmingly in favor of holding annual say-on-pay votes. But in direct contradiction of this, Annaly’s board, which is chaired by its CEO, voted instead to hold the votes every three years. (As a side note, its shareholders also voted against reelecting two board members, who were subsequently reappointed by the company anyway.)

Why would Annaly contradict the expressed desire of its stockholders? While it’s impossible to read their minds, the results of this year’s say-on-pay vote offers a hint: 113 million shares voted in favor of 2012 executive compensation levels while 289 million voted against them. Thus, a full 72% of the votes cast objected to how much its executives earn.

So, what’s this have to do with the management externalization proposal? Under the new structure, Annaly will no longer be obligated to disclose how much its executives get paid, as that will be the responsibility of the management company, which, in turn, is privately owned and under no obligation to do so.

Even though I’ve written about Annaly a lot over the last two years, I still continue to be surprised by its executives’ efforts to usurp a larger piece of the corporate pie than they would otherwise be entitled to if they took their fiduciary duties and disclosure responsibilities seriously. To anyone that holds this stock, I encourage you to think long and hard about continuing to do so. And for those of you considering an investment in Annaly, take this as a warning. You may make money from this investment (or you may not), but it won’t be because of its executives, rather it will be in spite of them.

The article Annaly Capital Management’s Bloodless Coup originally appeared on Fool.com is written by John Maxfield.

John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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