St. Louis Dispatch reporter Tim Logan recently took a look at the myriad disclosures of related-party transactions at embattled multi-level marketer YTB International (OTC BB: YTBLA), which I wrote about here.
Here's a quick sampling of the related-party deals at YTB, all of which are disclosed in the company's SEC filings: The company has hired another company, owned by the three of YTB founders, to build a 130 foot tall styrofoam replica of the Statue of Liberty. Executives have also sold a plane, marketing materials and convention-planning services to the company. This is not illegal -- it's all disclosed and the independent members of the company's board of directors approved the deals.
What should investors make of it? YTB is a small company and appears to be an uncommonly egregious example of self-dealing, but the fact is that you probably have many companies in your portfolio that have disclosed related-party transactions. Here are two tips for evaluating them and deciding whether they should be of concern:
- Is it material? A company that does $200 million per year in sales and pays another company owned by the CEO's son-in-law $25,000 each year for catering services is probably not something to be too worried about.
- But however small the self-dealing may be, it's important to look at it in the context of the company's overall governance. If the CEO routinely sells his old planes to the company, that may be indicative of an executive who treats shareholder equity as a personal fiefdom, and a board that lacks the cajones to stand up to him. At Enron, for example, employees were required to book their corporate travel through a firm owned by a relative of chairman Ken Lay. While that might not have been a big deal in itself, it was indicative of much, much larger issues. If a company you're interested in has related-party transactions, dig deeper into the company's corporate governance: Is the board independent? Is executive pay reasonable?