Summary
Finlay has given a $1 million retention bonus to its CEO Arthur Reiner despite its recent financial woes. Finlay liquidity difficulties have forced closure of its department stores to concentrate on its jewelry stores.
Analysis
Finlay's recent decision to give a $1 million retention bonus to a CEO who has watched its share price drop from $9.54 to .02 cents in 2 years is certainly not going to foster confidence in its shareholders or bondholders. The fact that Mr. Reiner would accept a bonus under these circumstances shows his lack of concern for his most important financial asset, his shareholders.
His actions contrast with other top executives who have chosen to cut their own salaries under such circumstances, or to work without bonus or salary living instead off of the share price of their company performance. Finlay's expects to develop its jewelry outlets. The first lesson of the gold related industries they must learn is that gold is foremost a currency, and those who are successful in this industry thrive on competition. Perhaps Performance Shares would be a better incentive for Mr. Reiner. If the share price of Finlay drops Mr Reiner should be forced to live with his performance. The perfect examples are Robert McEwen founder of Goldcorp and present owner of US Gold who refuses salary choosing to live on his companies share price, and James Sinclair of Tanzania Royalty Corporation who not only refuses to take salary, but will only issue common shares, that all shareholders are treated equally including himself.
Mr Reiner is committing a fraud that is part of the problem, companies and executives that should be left to fail, expecting to receive personal and government hand-outs at taxpayer, or in this case shareholder expense. By taking this bonus Mr Reiner is violating his fiduciary duties to his shareholders, and by offering it Finlay's is not creating an environment conducive to high performance, but one of fraud, hand-outs, insider favoritism, and possible complicity.
As for Finlay's chance of survival, I would not think it is very good. In the words of Martin Armstrong of Princeton Economics, the stock market is not a mirror of the economy, rather the collapse of the stock market precedes he economic depression to follow. The present collapse of financial institutions will continue for some time. Financial institutions are the first industry segment to fall. The collapse of the nations financial institutions will cause the decline of other industries that are dependant on their financing. As banks and financial institutions tighten credit, consumers will be left with less ability to spend. Loans and other types of financing will not be forthcoming, and the nations retailers will be plunged into the deepening economic malaise. As the fortunes of the retailers decline the companies that manufacture their goods will begin to suffer. This ripple effect will continue through the cycle, itself causing higher unemployment, and higher taxes. Government response has been expedient for politicians, quantitative easing which will cause inflation, leading to higher interest rates. Thus retailers are caught in the cycle. Not a good theme for Finlays.
The jewelry industry has recently been in a tailspin due to higher gold prices. Even in places such as Dubai where jewelry sales are traditionally used for investment purposes jewelry sales have been very low due to higher gold prices. Will this continue as gold moves into the mania stage of public attention, I can not foretell the future. But if the markup on jewelry in the western nations, sometimes as high as 300% compared to the 5% markup in Islamic countries, is forced to a lower markup as sales decrease it may foster the use of jewelry as both a luxury item and an investment, as has been the historical case in the Islamic world and in India. This could happen especially if gold becomes so scarce that jewelry becomes a practical source of obtaining it. One side effect has been that costume jewelry is doing very well.
As for Finlays it has followed the pattern of a company being victimized by illegal shorting, also known as FTD's. At his stage, when share price is lower than liquidation value, it becomes beneficial for those issuing the FTD's to force liquidation or to recapitalize, which will usually result in their taking over the company or bankruptcy, at the expense of shareholders, who in my view have a good case for litigation, due to Mr Reiner, who should not have been rehired as a result of Finlay's poor performance, being given an undeserved bonus at shareholder expense, when performance shares dependant on the companies survival and performance, should have been issued.
