Conflictofinterest
Great thought-provoking article, called “The Dumbest Idea In The World: Maximizing Shareholder Value”, sent by our most loyal reader. As the sender himself said, the discussion isn’t new but it’s always interesting. The real point of it is the power of incentives. The “too-simple” conclusion would be that “the road to hell is paved with good intentions” – but that would be wrong.
We continue to learn from the collapse of Jon Corzine’s MF Global. A recent article at NYT’s Dealbook highlights another lesson: ignore your chief risk or compliance officer at your own peril. While we agree that in this case it might have led to different and better decisions, such officers are still prone to all the talent, behavioral and incentives-driven traps and pitfalls. That said, the simple governance, hierarchical and process improvements the author suggests do help, and he also has the merit of recognizing that “Leadership has the right to challenge, disagree or even reject that advice.” Remember: “Culture eats Strategy for breakfast”.
“A catalogue of disastrous decisions”: that’s the title of a story today in the Financial Times about the many failures in the downfall of the Royal Bank of Scotland. More specifically, the author recommends the chapter on “Management, governance and culture” in the FSA’s report about that bank’s failure. In the face of it, the board looked knowledgeable and transparent, and the CEO didn’t look too dominant. And yet the company went bust despite the fact that the “checklist” seemingly gave the “right” answers…
When we commented on share buybacks recently, we alluded to the “bad name” that M&A has received. We mentioned that, on average, M&A “destroys value” as defined by some academic studies and as seen in real life all too often. We’ve now come accross a Strategy & Business article listing “the top-10 M&A fallacies and self-deceptions”, and it’s a good list of reasons why M&A may go wrong, or may not be the best choice. Change a few words and some of the 10 points can be used to consider share buybacks as well.
Share buybacks have an “aura” of shareholder-friendliness. When done right, it’s a very efficient way of rewarding long-term shareholders and reaffirming management’s confidence in the company’s future prospects, usually after the shares have gone down. However, companies can get it wrong and sometimes very much so. Teased by an article, we discuss a few ways things can go wrong.
Two very recent stories on CDSs (credit default swaps) highlight the issue of Risk. Risk has a lot of aspects to it and some get overlooked, such as counterpart risk, process risk, instrument risk (liquidity, clarity of regulations, how tested it was in real-life distressed situation etc.)… Not reading the fine print, for instance, has led more investors astray than they would like to confess. Much has been said about CDO-Squared and complex instruments in general, but the CDS was actually not supposed to be complex. Even so, investors in Greek debt CDSs are finding that “default” may not be what they thought it was… And another side of the debate is counterpart risk: what if the instrument is good, the writing is clear and so on – but the counterparts (whoever they are in this immensely interconnected financial world) just can’t honor their side of the deal?
“Synergy”, “two powerful minds working in unison”, “complementary skills” and so on: all that we try to achieve has to be checked against reality, especially when theory meets the REAL incentives and cultural aspects of a company. As we constantly repeat to ourselves, “culture eats strategy for breakfast”. An article notes that the two co-heads of Morgan Stanley’s Institutional Securities Group can’t stand each other and, more importantly, that this personal dispute is disrupting business. The Epicurean Dealmaker wrote a very interesting analysis of this particular dispute in light of the bigger picture of the natural conflict of interests inside an investment bank. What he finds there can be applied almost anywhere else where such conflicts are, perhaps, less obvious.
A New Yorker article called “The Mark of a Masterpiece” is quite an enjoyable reading, particularly after watching “Who the #$&% Is Jackson Pollock?”. While 99.9% of the articles written on this subject will basically repeat the same story, the author goes a few steps beyond and provides a great example of what investigative work is. The similarities between the job description of an analyst and that of an investigative reporter have always caught our attention. Quotes, comments and links inside.
The issue of conflict of interests is very important to us, as is the issue of information sourcing. As more and more people read the news and research specific topics via Twitter, Facebook and RSS it’s very important to understand that ALL sources have their biases, prejudices and conflicts of interest. The most important reminder is this: “The truth is that, no matter how loudly people protest that they have safeguards in place and will not abuse their power, conflicts of interest lead to abuses as surely as rivers flow to the sea. Even if they are disclosed in disclaimers, as banks now do with investment research, bad things will happen.”
Quick note: interesting video by the Wall Street Journal highlighting executives’ personal use of corporate jets. That said, if it’s part of the compensation package and duly disclosed in Proxy Statements, so be it.
