Corporategovernance
Goldman Sachs spent considerable resources and 8 months in an internal review of its business standards and practices, and this culminated in a 63-page report released on January 11th. In it, it highlights areas for improvements and lists some of the 39 recommendations that were approved and are being implemented. Leaving aside the obvious quip about their motivation for releasing this 63-page report (trying to stop the unending flak from the general opinion, politicians and even some customers since the crisis in 2008), we seldom see documents like these. We comment on a few items.
New Blogroll inductee Farnam Street blog ran a link to a corporate governance nightmare story, told by an independent director. The story’s focus on the often too-close personal ties between directors and management is key: it’s not as easy to pinpoint as a compensation number, or the percentage of so-called independent directors, or whatever item an analyst picks out from the Proxy statements (in fact, assuming that most investors actually read that is probably too optimistic). One must have a demanding moral filter with all partners, and when investing for the long term this includes a company’s Board of Directors.
In our Q2 2010 report, we said that there was growing evidence that “the governance structure in which we live is defective.” After a description of what was wrong, we said: “There is a clue, a glimpse of something that may bring changes in this scenario when one studies initiatives such as WikiLeaks and Propublica, which are very specific examples of how technology can and will enable change by introducing transparency.” We wonder how long before such initiatives find a vehicle in Brazil…
Long interview with two of IP’s partners, Cristiano Fonseca Filho and Fred Trigueiro. Quite informal, the interview goes through IP’s pioneering history in the Brazilian capital market and shows how we apply some of the most important aspects of our culture in the day to day: Ethics, Discipline and Patience, Independence… We’ve obtained permission from Exame to translate and publish the interview and here it is.
We love to get good reader suggestions, and this one is top-notch. Background: Columbia University released an interesting study around January 2010 saying that people in power lie much more easily than “the average”, and are less likely to get caught in the lie. Since then there have been stories floating about how to spot liars and our friend sent us the most recent on NPR. It’s very valuable because it links to another study, this time by Stanford professors, who “think they’ve come up with a way to tell when senior executives are fibbing” after “studying thousands of corporate earnings calls”. More links inside.
Nothing new, but always nice to emphasize. Booz & Co.’s Strategy & Business has a summary of a recent paper on CEO compensation. It’s public knowledge that it has skyrocketed in the last 20 years or so, but this paper searches for a driver – and finds it in “compensation benchmarking”. You could also call it “The grass is always greener” effect.
The August 2010 issue of Capital Aberto magazine has an article (in English) about the new UK Stewardship Code, designed to (take a deep breath) “enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities by setting out good practice on engagement with investee companies to which the FRC believes institutional investors should aspire.” Our partner and Head of Investor Relations, Elsen Carvalho, was interviewed and shared our take on the code.
This 2008 article discusses red flags for Board members trying to detect fraud. For our tastes and frameworks, the article doesn’t give nearly enough emphasis to the incentives issue. It’s vital to remember that one shouldn’t rely on checklist approaches to CG, fraud, stock research and pretty much anything else involving “systems” that are far from simple.
A Harvard researcher says that Brazilian CG of about 100 years ago could teach the current-day US (and others) many lessons. What’s perhaps most interesting and thought-provoking: the provisions came from the companies themselves and surpassed – by far – the legal requirements at the time. We’re reminded of Saraiva, which instituted a tag-along provision long before the law demanded it.
A Moody’s study shows that bank Boards have seen some shuffling and that more “financial expertise” was added. The FT argues that some banks with the “worst” boards in terms of financial experience actually did pretty well, and notes other apparently strange occurrences – for instance, Goldman Sachs has a CEO who’s also chairman and yet the bank has done pretty well in the crisis… We’ll never get tired of saying this: dump the checklist approach to CG. Actually, dump the checklist approach to anything.
