Rebuilding Trust: Wall Street to Main Street

30 March 2009
by Robert L. McMahon

One of the first things that needs to happen in rebuilding trust from Wall Street to Main Street is to get the brokerage and investment banking industry out from under the political dysfunction of our Federal government; not because of any real or imagined notions of supporting “Wall Street greed”, but because our congress has publicly demonstrated itself to be more aligned with Cuba, Venezuela, and North Korea than with our own free-enterprise economy. The House of Representatives recent confiscatory ex post facto tax proposals regarding retention bonus payments to employees of AIG was not only craven political bloviating in the extreme, but ran directly counter to our Constitutional principles; enter Ayn Rand and John Galt stage right.

Another avenue for rebuilding trust is the complete separation between the traditional “Broker-Dealer/Investment Banking” (BD/IB) and “Investment/Asset Management” functions within some of these firms; you do one or the other, period. Buy-side fund managers do not need the self-evident conflict(s) of their IB unit doing business with an issuer the fund manager is selling or BD research that’s touting an issuer in a report, while the fund manager has publicly issued a contrary opinion.

However, perhaps the most effective way for Wall Street investment managers to regain Main Street’s trust is to act as genuine fiduciaries when investing their money; act more like professional skeptics and owners rather than opportunists and traders when it comes to researching companies and disclose potential areas of “governance risk”.

Governance risk can be assessed by examining six key areas of an issuer:

· Board Accountability
· Compensation Schemes
· Financial Transparency & Controls
· Shareholders Rights
· Ownership & the Market for Control
· Corporate Citizenship (CSR issues)

And today, within the governance and compliance field, there is growing consensus that “Enterprise Risk Management” (ERM) practices will become a seventh point for examination. By then quantifying and qualifying these specific areas for risk factors, an investment professional can gain a more accurate and comprehensive perspective of an issuer than merely what is presented by the commonly examined "magic-show" of financial metrics: free-cash flow, EBITDA, debt to equity ratio, and all that stuff they restate months later in financial foot-notes. Only by assessing these underlying governance metrics will an investment professional get a clear picture into the “character” of the issuer; previously unseen and under-quantified risks will be fleshed out in this process.

If being forewarned is being forearmed, investment managers will have more information with which to question corporate managements and their boards. And by getting the investment managers of America – the overwhelming majority of equity shareholders today – engaged in remediating governance weaknesses, we’ll have the “intended consequence” of strengthening our financial services and wealth management industries; thereby leading from the front in rebuilding trust with Main Street, but without all the overbearing, over-regulated, over-bloviated Congressional oversight.