Rewarded for failure…

June 1, 2007

images-1.jpegOn May 13, Source Interlink (SORC) announced that it was buying Primedia’s (PRM) Enthusiast Media division for $1.2 billion, prompting Source’s stock, which had already fallen nearly 30% since the start of the year, to decline another 15% once the deal had been announced. The stock has continued to fall over the past three weeks.

So what does Source do? Reward its former Chairman and CEO S. Leslie Flegel with a $1 million bonus on May 25, for the brilliance of the deal, according to the amended K the company filed late yesterday. We last footnoted Source here, when Flegel resigned in mid-November, after managing to ink a three-year deal that pays him $1 million a year for his consulting skills. Presumably, those skills don’t include enhancing shareholder value, since the stock was trading at $9.07 when the deal was announced, compared with today’s $5.50.

The amended K, which essentially provided proxy-related information, also had this interesting tidbit about the corporate aircraft: “All flights were for primarily business purposes. However, companions of the Named Executive Officers did, from time to time, accompany the Named Executive Officers.” Source didn’t attach a value to those flights, since as long as they’re deemed business flights, they don’t count as a perk. But it’s a bit hard to believe, especially given the use of the word companion in the filing, that every single one of those flights were business-related. After all, do most spouses really tag along to sales meetings in Bentonville? As further evidence, the company told investors in April that it had gotten rid of the aircraft because it was “an expensive and unnecessary expense.”

People often ask me what perks have to do with a company’s stock performance. Sometimes, to paraphrase Freud, a perk really is just a perk. But at companies like Source, which we first footnoted back in March 2005, it can often be an indication of a CEO who’s running a publicly traded company as their own personal fiefdom. When that happens, investors need to stay away.

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