Over the last two weeks, I haven’t pulled many punches when it comes to Annaly Capital Management, Inc. (NYSE:NLY) and its executives’ flagrant attempt at maximizing their own fortunes at the expense of transparency and accepted norms of corporate governance. I’m referring here to a proposal up for vote at the upcoming shareholders meeting to externalize Annaly’s management structure. If you’re not familiar with this and you own shares of the high-yielding mortgage REIT, then check out either or both of the following articles: Annaly Has a Credibility Problem and/or How Annaly Is Obfuscating Facts to the Detriment of Shareholders.
In response to these articles, I’ve gotten one of two reactions from readers. Some express gratitude for the information, presumably because they believe being aware of facts is better than being ignorant of them. Others can hardly contain their disdain, question my motivations, and/or suggest that I’m ignorant of what I’m talking about. To those of you in the latter group, I’m writing to address the overarching argument that Annaly’s executives deserve impunity from criticism because of the performance of the company’s shares over the last few years.
Just to make sure we’re all on the same page, the issue here concerns the integrity of the top executives at Annaly Capital Management, Inc. (NYSE:NLY) — and, for that matter, its publically traded subsidiaries Chimera Investment Corporation (NYSE:CIM) and CreXus Investment Corp (NYSE:CXS). Over the last few years, they’ve justified their exorbitant compensation packages by claiming that the payments are predicated on performance. Here’s how Annaly frames it in a recent proxy filing (emphasis mine):
[W]e pay for performance by structuring compensation so that the majority of cash compensation is comprised of discretionary bonuses linked directly to the value of our stockholders’ equity. … However, the growth of our stockholders’ equity is dependent on our ability to regularly access the capital markets. We do not believe we will be able to regularly access the capital markets on favorable terms unless the markets believe our financial performance, and our executives’ management of risk, warrants it.
As you can see, Annaly Capital Management, Inc. (NYSE:NLY) is drawing a direct link between “performance” and the ability to “regularly access the capital markets on favorable terms” — that is, issue new shares. But here’s the problem. Over the past 10 years, Annaly Capital Management, Inc. (NYSE:NLY) ‘s outstanding share count has grown by more than 1,000%. Meanwhile, its total return to shareholders over this same time period is a much more modest 153% compared to the S&P 500’s 122% return. Thus, any claim that Annaly’s executives have earned their patently egregious payouts by dramatically outperforming the market or because they’re merely getting paid for otherwise superior performance, simply isn’t true.