Does your company have enough cash to survive the crunch? Kohler

We have now reached the point at which independent directors in companies with one or two large management shareholders have to stand up and be counted.

Those manager/shareholders usually want to avoid dilution. Meanwhile, the banks are pulling back and demanding that shareholders put more cash in. Independent directors are caught in the middle, but they must put the interests of the company first.

This is a time when the “alignment of interests” between owner/managers and the rest of the shareholders doesn’t necessarily work to everyone’s advantage.

Asciano and Transpacific Industries didn’t raise capital last year, but should have. One of the factors in their reluctance to tap the markets may have been the fact that owner/managers Mark Rowsthorne and Terry Peabody didn’t want to be diluted.

They are just the most obvious examples of firms that have now been caught with their capital pants down at the worst possible time and are now struggling to raise cash by selling assets.

Every day more companies are announcing share issues. In the past two weeks alone $11 billion has been raised, and since January the figure is $26 billion. For an equity market still down 45% from the peak, despite a two-month rally, there is an extraordinary amount of capital raising going on.

It is getting a little more desperate though; last year the equity raisings were generally renounceable rights issues, now the issuers have toughened up, so they are typically non-renounceable these days.

If the stock you own is not putting out its hand for your money, fear may be a more appropriate emotion than relief. Does the company really have enough cashflow to service its debts if things get worse?

The good news is that fund managers aren’t asking too many questions, such as what the money is going to be used for, and what the return on equity will be.

That’s because there is no such thing as long term investing at the moment, only the next quarterly return, so discounted new shares that might produce a quick turn are being snapped up without a second thought.

So directors have very little choice. With debt markets closed but equity markets open for the moment, the wails of shareholders worried about dilution have to be ignored – even if those wails emanate from around the board table.

This article first appeared on Business Spectator.