by Robert L. McMahon
21 March 2009
Here’s a question for you; do you believe investment firms, including mutual funds, have adopted any kind of active screening or research tools that would alert them to potential failures in corporate governance? At this point are you asking, why is assessing “corporate governance” important? Unfortunately you aren’t alone in asking that question. Incredibly, many professional investment managers are asking the very same thing.
Who would think that seven years after the Enron, Tyco, and Worldcom debacles corporate governance risk would still be something that is treated with benign neglect by professional investment managers? For those of you who have been marooned on a desert island the past year, corporate governance failures have been part and parcel of today’s headlines regarding the meltdown of our financial system – albeit aided and abetted by congress, government sponsored enterprises (GSE’s), and regulatory oversight that would make for a wonderful Joseph Heller novel, “Bernie Madoff was the best at avoiding the SEC’s radar, because Bernie knew they didn’t hire qualified people…”
Corporate governance failures were rampant in this financial meltdown in one of the most regulated parts of our economy – Banking. The board of Citigroup is only now undergoing a makeover, but for the last fifteen years it was nothing more than a rubber-stamp for management and their “supermarket model” for marketing financial services to the masses. Merrill Lynch, Bear Stearns, Lehman Brothers, and Bank of America had much the same board issues – unqualified, unquestioning, go-along to get-along, friends of corporate management. The board’s job is to oversee management and be accountable to the shareholders; not be a lap-dog to over-egoed managers.
Although everyone is in agreement that the root cause of this meltdown was driven by a “housing bubble” the sheer lack of understanding and questioning of “risk” in the securitization and derivatives portfolios of these banking behemoths I find overwhelmingly stunning. And this is why corporate governance quality is so vitally important to assess when investment managers make investment selections on our behalf. These assessments will lead the investment manager to have a much more complete picture of a company beyond the usual financial information, key ratios and PR spin. A governance assessment will offer direct insight into, not only the quality of management, but also the accountability, knowledgability, and independence of the board.
Investors have been brutalized by failures at nearly every turn in this meltdown, but one area where their investment managers should be turning for help is to research that can arm them in uncovering potential governance weaknesses. So as investors we should all start questioning our investment managers about the assessments they actively perform with regard to governance quality; starting right now.
Who would think that seven years after the Enron, Tyco, and Worldcom debacles corporate governance risk would still be something that is treated with benign neglect by professional investment managers? For those of you who have been marooned on a desert island the past year, corporate governance failures have been part and parcel of today’s headlines regarding the meltdown of our financial system – albeit aided and abetted by congress, government sponsored enterprises (GSE’s), and regulatory oversight that would make for a wonderful Joseph Heller novel, “Bernie Madoff was the best at avoiding the SEC’s radar, because Bernie knew they didn’t hire qualified people…”
Corporate governance failures were rampant in this financial meltdown in one of the most regulated parts of our economy – Banking. The board of Citigroup is only now undergoing a makeover, but for the last fifteen years it was nothing more than a rubber-stamp for management and their “supermarket model” for marketing financial services to the masses. Merrill Lynch, Bear Stearns, Lehman Brothers, and Bank of America had much the same board issues – unqualified, unquestioning, go-along to get-along, friends of corporate management. The board’s job is to oversee management and be accountable to the shareholders; not be a lap-dog to over-egoed managers.
Although everyone is in agreement that the root cause of this meltdown was driven by a “housing bubble” the sheer lack of understanding and questioning of “risk” in the securitization and derivatives portfolios of these banking behemoths I find overwhelmingly stunning. And this is why corporate governance quality is so vitally important to assess when investment managers make investment selections on our behalf. These assessments will lead the investment manager to have a much more complete picture of a company beyond the usual financial information, key ratios and PR spin. A governance assessment will offer direct insight into, not only the quality of management, but also the accountability, knowledgability, and independence of the board.
Investors have been brutalized by failures at nearly every turn in this meltdown, but one area where their investment managers should be turning for help is to research that can arm them in uncovering potential governance weaknesses. So as investors we should all start questioning our investment managers about the assessments they actively perform with regard to governance quality; starting right now.
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